May is here which means it's time to think about ways to save tax. This has been a most unusual financial year, and your income may be way down.
If that's the case, it may be valuable to postpone personal concessional deductible contributions to superannuation, or repairs and maintenance on investment properties, until a year when your earnings put you in a higher tax bracket, when the deduction would give you a higher refund.
If you have some shares with a capital gain, and some with a capital loss, take advice about whether to sell both before June 30 to offset the gain against the loss. Also, if there is likely to be some CGT payable, if you are in a lower tax bracket this year, the CGT may be charged at a lesser rate.
Making superannuation contributions up to your maximum cap of $25,000 a year is a no-brainer. Once you have reached that cap, consider utilising any unused cap from the last couple of years then consider making a contribution for your spouse.
If they earn less than $37,000 this financial year you may even get a tax offset as a bonus. Get advice on your particular circumstances, as this tax offset is unlikely to be a better option than making a deductible contribution for yourself.
To qualify for the spouse contribution tax offset of $540 all you need to do is make a $3000 non-concessional contribution, on their behalf. Your spouse may also like to consider making a non-deductible super contribution for themselves of $1000, if they are eligible for a $500 government co-contribution.
Voluntary super contributions such as salary sacrificed contributions or personal contributions other than downsizer contributions (which must come from the sale proceeds of a house you have lived in) can only be accepted on or before 28 days after the end of the month in which the contributor turns 75, subject to meeting the work test or work test exemption if above age 67.
Since the start of the current financial year, a person aged 65 or 66 is no longer required to meet the work test to make a voluntary super contribution. However, once they are 67 or over at the time of making a voluntary super contribution, they still need to meet the work test or work test exemption to be able to make a voluntary contribution (except for a downsizer contribution).
The work test requires you to be gainfully employed for at least 40 hours in 30 consecutive days in the financial year. Where required, the work test must be satisfied before the voluntary contribution is made.
A re-contribution strategy is worthwhile if you have access to your superannuation, and are still eligible to make contributions. You could possibly withdraw up to $300,000 tax-free, and re-contribute it as a non-concessional contribution, on which there would be no entry tax.
By doing this you would convert a large chunk of the taxable component of your fund to non-taxable, and so alleviate substantial taxes for your inheritors if you died suddenly, and your superannuation went to a non-dependent.
The key message in regard to contributions is to make sure they are paid on time. If the payment is received after June 30 it will count for next year. This could have serious impact on your financial affairs.
If you are in pension mode now, keep in mind that the minimum drawdown requirements that were halved due to Covid have been restored to take effect from July 1, 2021.
Therefore, when working out your budget for the next financial year make sure your super pension fund has enough liquid funds available to make the pension payments for you.
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Noel answers your money questions
My mother is a self-funded retiree and claims no Centrelink or pensions. She is a widow. Currently her will states that her estate will be divided equally between her three children and two children from her late husband's previous marriage.
She wishes to leave more of her assets to her family as she has an extremely close relationship with them and rarely sees her stepchildren. She is thinking of leaving the will as it is, with equal shares to all five, but giving money to her children and grandchildren before she passes.
Her assets are $50,000 cash, $300,000 in real estate and $1.5 million in shares. She is 90 and still lives very capably in her own home with little intention of moving into a care home at present. She is concerned about the ramifications of gifting?
The rules regarding gifting are only relevant if you are in receipt of some form of income support from the government such as the age pension.
There is a limit of $10,000 a year with a maximum of $30,000 over five years to prevent people giving all their assets away and going on welfare. In your mother's case she is most unlikely to ever be the recipient of the age pension and therefore she can give away whatever she wishes.
However, I note there are children from two families involved and you are flagging a situation where her three children may be seen to be getting preference over the other two. Therefore a good estate solicitor should be involved to ensure her will and other documents are drafted in such a way that the will is unlikely to be challenged.
Is it a good idea to have as much in super as you can by the time you retire?
Super is the perfect investment vehicle for retirees because it enables them to hold a substantial chunk of money in a tax-free area and to draw a tax-free pension from it once they retire after age 60.
Furthermore, it is possible to make contributions from pre-tax dollars, and also grow your superannuation in a low tax environment while you are accumulating sufficient funds to retire.
The cream on the cake for people in business is that superannuation is one of the few assets that can't be touched by the trustee in bankruptcy if you get into financial strife. The current regulations no longer limit the amount you can have in superannuation - they control it by limiting contributions.
My husband and I are in our mid 30s with three young children. We lost our nest egg in a bad investment, are now renting, and live on one income. We have $50,000 in debts and $20,000 in savings. We would love to buy a home but feel overwhelmed at the thought of saving a house deposit again.
Should we use our savings to pay down our debt, or hold onto the savings and try to reduce the debt from earnings?
All our spare funds currently go straight into paying off the debt. Do we have any other options, are we destined to rent for the long haul, and what is the smartest way to use the $20,000?
I would prefer that you use the savings to pay down the debt - this is on the assumption that you are paying a hefty rate of interest on the debt, and it is far more than you are earning on your savings. Then use all the resources you can muster to get rid of the debt as quickly as possible. Once that is out of the way, you can start afresh. Is there any possibility of the non-working partner getting a part time job?
Our family home is worth $800,000. We intend to buy a bigger house for around $1.2 million using our savings plus a loan. If we take the loan against the property we own now, which we intend to rent out, will the interest on that loan be tax deductible?
I paid to consult a financial adviser who told me that it was not possible, and who then tried to sell me another property instead. I am totally confused. Can you help?
For the interest on a loan to be tax deductible that loan must have been taken out for the purpose of acquiring income producing assets such as property and shares.
This does not seem to apply in your case. However, a loan can change character - if the $800,000 property still has a mortgage the interest will become tax-deductible once it's available to rent.
I am most concerned your "adviser" is trying to sell you a property - that is a huge red flag.
- Noel Whittaker is the author of Retirement Made Simple and numerous other books on personal finance. Email: firstname.lastname@example.org