With the end of the financial year fast approaching, it’s important to review your financial position.
This article may contain general advice. General advice is prepared without taking into account your objectives, financial situation or needs. Please speak to your financial adviser to discuss the strategy right for you.
With global economies still dealing with the impact of COVID-19, it may be easy to forget about the importance of reviewing your financial position before the end of the 2019/20 financial year.
End of financial year (EOFY) planning is an important part for your financial planning strategy, as it can present you with one final opportunity to optimise your financial position and maximise your superannuation contributions. As a result of COVID-19 and the Government’s changes to preserve the pension interests of retirees, this EOFY also presents an opportunity to preserve more capital within superannuation pensions.
Benefits of effective EOFY planning include tax savings, reducing feelings of anxiety or stress which you may develop around EOFY for fear of not utilising all available opportunities, and improving your overall financial wellbeing.
In planning for EOFY however, the problem for some people is either a scarcity of time, or a natural tendency to defer action items until they are due. Often this can be problematic, especially if there is not enough time remaining in the financial year to take advantage of the opportunities.
Superannuation in particular, is an area that continues to be underutilised by those that are either time poor or simply discouraged due to its accessibility restrictions.
Volatility can be uncomfortable but it can also create opportunity, so it is important to undertake a ‘health check’ and review your superannuation options. For example, if you want to move assets into superannuation (such as for asset protection or estate planning strategies), the tax cost (i.e. capital gains) may now be lower due to asset price falls.
Here are some important superannuation related questions to ask yourself before 30 June 2020:
For the 2019/20 financial year, everyone who is of an eligible age or meets the work test, can top up their concessional contributions (subject to the cap) with a lump sum contribution and claim it as a tax deduction through their personal tax return.
The current concessional contribution cap is $25,000. For individuals aged between 65 and 74, a work test must be met prior to making any personal contributions.
Ensure you lodge the tax deduction form with your super fund for the amount you wish to claim as a tax deduction and provide details to your accountant to be included in your tax return.
You must do this before:
lodging your tax return for the income year in which the contribution was made
rolling over your super or starting a pension
the end of the next financial year following the year of the contribution.
Spouse contribution splitting involves transferring concessional contributions, such as employer, salary sacrifice or personal deductible contributions, into your eligible spouse’s super account (the receiving spouse must be under age 65 and not retired).
Transferring super this way can equalise super benefits between spouses, and is particularly attractive for those with a non-working spouse, or high income earners where one member of the couple’s super account is nearing $1.6 million.
The amount that can be split is the lesser of 85% of the concessional contributions, or the member’s concessional contribution cap. Your application to split contributions can be lodged in the financial year immediately after the financial year the contributions were made.
This means you have until 30 June 2020 to request a split/transfer of the 2018/19 contributions where eligible.
The current non-concessional contribution caps are as follows:
Total superannuation balance
$0 to $1,400,000
$1,400,000 to $1,500,000
$1,500,000 to $1,600,000
² Available over three years to those under age 65.
Please note you must check your limits carefully, as past contributions can affect this year’s limits.
For the 2019/20 financial year, your total superannuation balance for the purposes of determining eligibility to make non-concessional contributions will be your superannuation balance as at 30 June 2019, not your superannuation balance at the time of making any contributions.
For example, if you had a total superannuation balance of $1,550,000 as at 30 June 2019 however your current superannuation balance has dropped to $1,300,000 due to market conditions, you would only be able to make a non-concessional contribution of $100,000 during the 2019/20 financial year, not $300,000 (using the bring-forward rules).
Due to the impacts of COVID-19, the Australian Government has temporarily halved the required drawdown rates for account-based pensions and similar products for the 2019/20 and 2020/21 financial years, providing retirees with greater flexibility to manage their retirement assets.
This provides an opportunity for you to reconsider whether scheduled pension payments can be reduced, and make sure that any payment arrangements for next financial year are appropriate.
Ensuring you draw your minimum pension each year is important. If you fail to do so, the pension may revert back to the accumulation (taxable) phase.
Given the market downturn, it is likely that your total super balance could be less than what it was anticipated to be, come 30 June 2020. This could open up the opportunity for you to make additional superannuation contributions in the 2020/21 financial year such as non-concessional contributions and catch-up concessional contributions.
While this may not be for the current financial year, it can help you think ahead and plan for potential contribution opportunities from July onwards.
The end of each financial year presents individuals with an opportunity to optimise their financial position and take advantage of year end strategies which may be available. However, it is a notoriously busy time of the year – which means that for those who are consumed with the stress of EOFY obligations, many of these opportunities are untapped. In the current financial year, this anxiety may have been amplified by the pressures and uncertainty as a result of COVID-19.
If you would like to discuss your financial year end superannuation strategy in more detail with a financial planner or would like to discuss your investments more broadly, please contact your Morgan Stanley financial adviser.
For more on end of financial year strategies, speak to your Morgan Stanley financial adviser. Plus, more Ideas from Morgan Stanley's thought leaders.