Making plans for the new financial year will help set you up for the next 12 months and beyond.
As this financial year draws to a close, now is the perfect time to take stock of your finances before the next one starts. And whether you’re still wrapping things up for FY18 or getting ready to launch into FY19 with a bang, there are plenty of ways to make tax time easier the next time around.
But more importantly, remember that each financial year brings you one step closer to retirement. That’s why it’s essential to make the most of your finances during your final years of employment.
Here’s four simple strategies to get your money working harder for you in the next 12 months.
1. Take care of your tax
The deadline for lodging your tax return each year is 31 October. But, if you get a tax agent or accountant to lodge it for you, a later deadline may apply. Rather than put it off until the last minute, why not get it out of the way earlier? That way, you can take your time to make sure you’re meeting your tax obligations and claiming all the deductions you’re eligible for.
If you usually have trouble tracking down all your paperwork, then why not make a financial new year’s resolution to keep better records throughout the next 12 months. By documenting your income and work-related expenses and storing your receipts and invoices in one easy-to-find-place, you’ll breeze through your next tax return.
2. Make the most of your money
Your super will probably be one of your most valuable income streams when you retire, so it can make sense to use your current earnings to maximise it as much as possible. Even if you can only contribute a little bit extra now, it could make a difference to the retirement lifestyle you’re able to afford.
An option is to contribute some of your before-tax pay directly into your super (known as salary sacrifice). Not only will you boost your super, you’ll potentially save on tax, with before-tax contributions in most cases attracting a tax rate of just 15%, instead of your usual marginal rate. Every financial year, you can deposit up to a maximum of $25,000 in before-tax (concessional) contributions before extra tax applies. This amount includes your employer’s compulsory Super Guarantee payments, any additional amounts you salary sacrificed and your personal tax-deductible contributions.
3. Increase your savings
If you’ve come into some extra cash in the current financial year – such as a work bonus or an inheritance – consider using this money to increase your retirement savings even further.
Each financial year, you may be able to make after-tax super contributions of up to $100,000 (or up to $300,000 during a three-year period, if you met the requirements of the ‘bring-forward’ rule). So, if you haven’t yet hit these caps and you have some money available, there’s still time to put it towards your super before 30 June.
Keep in mind that a ‘transfer balance cap’ was introduced from 1 July 2017 limiting the amount that could be transferred to a retirement phase income stream, such as an account-based pension, to $1.6 million. The balances of existing retirement phase income streams held at 30 June 2017, and the starting values of any commenced since then, counts towards this.
Any amounts over $1.6 million need to be transferred back to an accumulation phase super account or withdrawn from super. Otherwise a penalty tax will be applied, effectively removing the tax advantage of leaving the funds in the pension phase and in some cases providing further penalty.
Also from 1 July 2017, if you have a total super balance of $1.6m or more just prior to the start of a financial year, your after tax contributions cap will reduce to Nil. The amount you can contribute under the bring forward rule will also be reduced once your total super balance is $1.4 million or more.
4. Consider a TTR strategy
If you’ve reached your preservation age but aren’t yet 65, you might consider a transition-to-retirement (TTR) strategy. This allows you to draw a pension from your super before you retire.
You can use this strategy in three ways:
- to get extra income before retirement – for example, to help pay off your mortgage
- to ease back on your work hours, without taking a cut in pay
- to boost your super, by salary sacrificing more of your income into super at the 15% tax rate (instead of your marginal rate), while drawing enough from your super to live on.
Before you start a TTR strategy, however, there are a few important things to consider. For instance:
- if cutting back your work hours means you receive a lower income from your employer, this may also mean your employer’s compulsory Super Guarantee payments (valued at 9.5% of your income) are reduced as well
- if you decide to enter a salary sacrifice arrangement, the combined total from your employee’s compulsory Super Guarantee payments, your salary sacrificed amounts and any other voluntary concessional contributions (eg, personal tax-deductible contributions) you make mustn’t exceed the $25,000 concessional contributions cap in any financial year
- since July 2017, the earnings on assets that support TTR income streams are now taxed at 15%, instead of being tax-free.
A financial adviser can help you decide what option is right for you. They’ll work closely with you to tailor a financial plan for the coming year that will help put you on track to a comfortable retirement.
Taxation considerations are general and based on present taxation laws and may be subject to change. You should seek independent, professional tax advice before making any decision based on this information. Colonial First State is also not a registered tax (financial) adviser under the Tax Agent Services Act 2009 and you should seek tax advice from a registered tax agent or a registered tax (financial) adviser if you intend to rely on this information to satisfy the liabilities or obligations or claim entitlements that arise, or could arise, under a taxation law.