Case study: TTR strategy

Report
Top tax tips for end of financial
year planning
Presented by
General advice warning
[If this presentation is not presented exactly as issued by IOOF, or is represented as the financial adviser’s own presentation, the financial adviser
must insert their own General Advice Warning and disclaimers in the place of those provided by IOOF]
This presentation has been prepared by IOOF Investment Management Limited (IIML), ABN 53 006 695 021, AFS Licence No. 230524, Australian
Executor Trustees Limited (AET) ABN 84 007 869 794, AFSL 240023 and IOOF Ltd ABN 21 087 649 625, AFSL 230522. IIML, AET and IOOF Ltd
are members of the IOOF group of companies consisting of IOOF Holdings Ltd, ABN 49 100 103 722, and its related bodies corporate. IIML's
contact details can be found on www.ioof.com.au , AET’s contact details can be found on www.aetlimited.com.au and IOOF Ltd’s contact details
can be found on www.ioof.com.au.
This is general advice only and does not take into account your financial circumstances, needs and objectives. Before making any decision based
on this document, you should assess your own circumstances or seek advice from a financial adviser. You should obtain and consider a copy of
the Product Disclosure Statement available from us or your financial adviser, before you acquire a financial product. Neither IIML nor IOOF Ltd are
registered Tax Agents. You should consider the appropriateness of this information having regard to your individual situation and seek taxation
advice from a registered tax agent before making any decision based on the content of this presentation.
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Agenda
• Personal tax rates – some interesting
changes
• Investing in a spouses name or splitting
income
• A tax deductible way to manage risk
• The Medicare levy and private health
rebate
• Reducing capital gains on growth assets
• Don’t forget about the little things
• Consider insurance bonds
• Access opportunities with superannuation
• Investment gearing
3
Personal tax rates – some
interesting changes
2011/12
2012/13 and onwards
2015/16
Threshold
MTR
Threshold
MTR
Threshold
MTR
1st rate
$6,001
15%
$18,201
19%
$19,401
19%
2nd rate
$37,001
30%
$37,001
32.5%
$37,001
33%
3rd rate
$80,001
37%
$80,001
37%
$80,001
37%
4th rate
$180,001
45%
$180,001
45%
$180,001
45%
Up to $1,500
4%
withdrawal
rate on
income over
$30,000
Up to $445
1.5%
withdrawal
rate on
income over
$37,000
Up to $300
1.5%
withdrawal
rate on
income over
$30,000
Low income
tax offset
Effective
tax-free
threshold
$16,000
$20,542
$20,979
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Investing in your spouses name
or splitting income
You investing
by your self
You investing with
your…
Spouse
$150,000+
$150,000
-
Interest
$10,000
-
$10,000
Tax on interest
$3,850
-
Nil
Salary
Tax saving
$3,850
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A tax deductible way to manage
risk
• Income protection is a monthly benefit that pays you up to 75% of your
income until you return to work*
• Covers you for accidents, illnesses or major traumas
• If you can’t return to work, it is payable until age 65**
• Is designed to ensure that you can continue to pay the mortgage, put
food on the table and carry on financially until you return to work
• Income protection premiums may be tax deductible
* Commencement subject to a waiting period up to a specified age (eg age 65)
** Depending on your occupation
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Medicare levy and private health
rebate
Base tier
(no change)
Tier 1
Tier 2
Tier 3
Singles
$84,000 or less
$84,001-97,000
$97,001-130,000
$130,001 or more
Families*
$168,000 or less $168,001-194,000
$194,001-260,000
$260,001 or more
Private health insurance rebate entitlement
Under 65 years old
30%
20%
10%
0%
65-69 years old
35%
25%
15%
0%
70 years old or over
40%
30%
20%
0%
1.25%
1.5%
Medicare levy surcharge
Rate
0.0%
1.0%
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Reducing capital gains on growth
assets
• Tax on capital profits when assets are sold
• 50% discount if held for more than 12 months
• Strategies to reduce capital gains include:
• sell assets when you have a low MTR
• use excess franking credits to balance CGT
• sell after dividend payment
• offset capital gains against losses
• keep accurate records
• make a deductible contribution to super to offset gains
8
Don’t forget about the little things
•
•
•
•
Delay any income
Pre-paying your investment expenses
Keep your receipts
Claim your uniform
9
Insurance bonds
Tax effectiveness:
• Marginal tax rate greater than 30%?
• Income taxed in the hands of IOOF at 30% (if held for 10 years)
• Benefit from imputation credits and other allowances
• Can’t (or won’t) contribute to superannuation?
• Reached contribution caps
• Over 75 and do not qualify to contribute
• Younger accumulator and saving for pre-retirement expenditure
• Want to benefit from gearing strategies?
• Consider using WealthBuilder as security
• Competitive rates
Insurance bonds
Options for traditional tax effective investments:
• Contributing to superannuation
• Tax paid at 15% vs investor’s MTR
• Cannot access funds until retirement /preservation age
• Annual limits for contributions
• Other traditional income producing, tax effective investments
• Australian equities portfolio
• Margin lending/negative gearing – cost of borrowing v capital growth,
margin calls, fees and charges
Access salary sacrificing into
super
• Foregoing a portion of your gross salary for contributions into
contributions
• Especially effective for those on higher marginal tax rates
• Maximum 15% contributions tax versus maximum marginal tax rate of
46.5%
12
Case study: salary sacrifice
No salary sacrifice
Salary sacrifice
$80,000
$62,400
($18,747)
($12,699)
Disposable net income (A)
$61,253
$49,701
Employer contribution
$7,400
$7,400
Salary sacrifice contribution
N/A
$17,600
Less contributions tax (15%)
$1,110
$3,750
Net super contribution (B)
$6,290
$21,250
Total net benefits (A+ B)
$67,543
$70,951
Taxable income
Tax payable*
Difference
$3,408
* The 2013/14 tax scales include the Medicare Levy and low income tax offset.
Mary (age 49) earns a package of $80,000 and wishes to use
$17,800 of her package to contribute into super.
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Getting a 50 per cent return on
your investment
• Maximum co-contribution of $500 if make a $1,000 non concessional
contribution
• Minimum income to receive maximum co-contribution - $33,516
• Threshold at which no co-contribution is received - $48,516
• Every dollar of income earned above $33,516 reduces co-contribution
entitlement by $0.03333
.
14
A return of contributions tax for
low income earners
Low income
contribution
=
Concessional
contribution
x
15 per cent
• Applies from 1 July 2012 to employees and self-employed people
• Maximum payment of $500
• For example: $37,000 x 9% x 15% = $500
• Can be paid in addition to the co-contribution
• Paid by the ATO into your super account after you complete your tax
return for that financial year
• Opportunity: pay for insurance premiums within super (such as income
protection)
Individuals earning up to $37,000 will receive a refund of contributions tax
15
Consider a spouse contributions
to obtain a tax rebate
• Contribute superannuation on behalf of spouse:
• receiving spouse does not have to be working if under age 65
• if receiving spouse between ages 65 and 69 (inclusive) must satisfy
work test*
• Tax rebate of 18 per cent applies, capped at $540 on contributions of
$3,000 per annum
• full rebate available if spouse earns $10,800 or less
• rebate cuts out when spouse earns $13,800 or more
• No limit on level of contribution, except included in receiving spouse’s
non-concessional cap
* Must be gainfully employed for at least 40 hours in a period of not more than 30 consecutive days in the financial year in which the contribution is
made.
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Make a personal deductible
contribution
• Personal contributions into superannuation can be claimed as a
deduction
• Applies to people who are self-employed, non-working and retired
• Especially effective for those on higher marginal tax rates
• Maximum 15 per cent contributions tax versus maximum marginal tax
rate of 46.5 per cent
• Contribution cap and age restrictions apply
17
Transition to retirement (TTR)
• TTR strategy has been well publicised and promoted over the last few
years
• The strategy combines:
• concessional contributions such as salary sacrifice and personal
deductible contributions
• pre-retirement pension
• Applies to people aged 55 to 65
• Depends on your age, superannuation make-up, account balance and
taxable income
Note:
• Employed persons will maximise the benefit of a TTR by commencing
their TTR strategy at 1 July
• Self employed people can start it at any time during the year
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Case study: TTR strategy
•
•
•
•
Joe is 55 and earns $80,000 pa
$7,400 is currently paid pa into super as employer contributions
His current superannuation balance is $250,000*
He requires approximately $60,000 pa for living expenses
• Joe will continue working full time
• He wishes to maintain the same level of income after-tax
• Joe commences a pre-retirement pension
* Contains 100% taxable component
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Case study: TTR strategy
Without TTR
strategy
(age 55 – 64)
With TTR strategy
(age 55 –59)
With TTR strategy
(age 60 – 64)
$80,000
$80,000
$80,000
Pension income (maximum)
-
$14,341
-
Salary sacrifice amount
-
($17,600)
($17,600)
($18,747)
($15,487)
($12,699)
$61,253
$61,253
$49,701
-
-
$11,552
$61,253
$61,253
$61,253
Salary income
Tax payable*
Income after tax
Tax-free pension payment
Total net income
* 2013/14 tax scales including Medicare Levy, low income tax offset and mature age workers tax offset
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Case study: TTR strategy
Contribution position
Full time
employment
(55 to 64)
Full time
employment
+ pension
(55 to 59)
Full time
employment
+ pension
(60 to 65)
9.25% SG contribution
$7,400
$7,400
$7,400
Salary sacrifice amount
-
$17,600
$17,600
Less contributions tax
($1,110)
($3,750)
($3,750)
Net contributions
$6,290
$21,250
$21,250
-
$14,341
$11,552
Net super position
$6,290
$6,909
$9,698
Total tax paid
$19,857
$19,237
$16,449
Personal income tax
$18,747
$15,487
$12,699
$1,110
$3,750
$3,750
Less pension payment
Contributions tax
Net super position
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Case study: TTR strategy
Employer
Salary income
$80,000 pa
Employer SGC
• $7,400
• taxed at 15%
Salary sacrifice
• $17,600
• taxed at 15%
Superannuation fund
Accumulation fund
• Net contribution
$21,250 pa
• Earnings taxed at
max. 15%
• CGT rate 10-15%
Pension fund
• Start balance $250,000
• Rolled over from
accumulation fund
• Earnings and capital
gains are tax-free
$17,600 net of salary
sacrifice
Taxed at MTR
Net income (est)
$61,253 pa
• Taxed at MTR
• Less 15% rebate
• If over age 60, pension
income would be tax-free
Pension payments
$11,552 / $14,341 pa
- Paid monthly
Investment gearing
• Borrowing to invest
• Enables acquisition of larger investments than possible with own funds
alone
• Negative gearing - expenses exceed income
• Magnifies positive returns, but equally magnifies losses
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Who could benefit from
investment gearing?
•
•
•
•
Understand and accept the increased risks involved
Risk profile suitable for gearing
Minimum seven year investment timeframe
Can benefit from the potential tax advantages
• investors on a high marginal tax rate (if the investment is negatively
geared)
• investors on a low marginal rate of tax (if the investment is positively
geared)
• Gear into growth assets such as shares and property which are
expected to perform well over the longer term
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What are the tax benefits of
gearing?
• Interest may be tax deductible at marginal tax rates
• Consider prepayment of up to 12 months interest to bring forward tax
deductions
• Any franked dividend paid in relation to the shares gives the investor a
franking credit
• Building allowance/depreciation deductions where investment is in
property
• 50 per cent of any capital gain derived from the sale of the investment
will be exempt from tax, provided investment held for at least 12
months
25
Case study: gearing
• Chris chose to invest $100,000 of his own capital and borrow $75,000
against the family home, investing the full amount in Share X
• Over the five years of the loan, Chris’ investment grew from $5.00
(initial share price) to $10.00 (end value of Share X)
• Chris received dividends of $2.00 per share
• The gross borrowing costs can be covered by the dividends received
26
Case study: How margin lending
can increase returns
Without a
margin loan
With a margin
loan
$100,000
$100,000
Nil
$75,000
Total investment
$100,000
$175,000
Dividends received
$40,000
$70,000
Market value at end of year 5
$200,000
$350,000
Total value at end of year 5
$240,000
$420,000
Less borrowing costs @ 9%
Nil
$33,750
Potential tax deduction in borrowing costs @ 46.5%
Nil
$15,694
Less margin loan repayment
Nil
$75,000
$240,000
$326,944
Chris’ own capital
Margin loan
Net portfolio value (end of yr 5)
The example only refers to capital growth and dividends. It is before capital gains tax, fees and any potential franking credits. Assumes a marginal tax
rate of 46.5% (including Medicare levy) and interest of 9% pa and paid annually in arrears.
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Case study: What if share price
halves?
Without a
margin loan
With a margin
loan
$100,000
$100,000
Nil
$75,000
Total investment
$100,000
$175,000
Dividends received
$40,000
$70,000
Market value at end of year 5
$50,000
$87,500
Total value at end of year 5
$90,000
$157,500
Less borrowing costs @ 9.0%
Nil
$33,750
Potential tax deduction in borrowing costs @ 46.5%
Nil
$15,694
Less margin loan repayment
Nil
$75,000
$90,000
$64,444
Chris’ own capital
Margin loan
Net portfolio value (end of yr 5)
The example only refers to capital growth and dividends. It is before capital gains tax, fees and any potential franking credits. Assumes a marginal tax
rate of 46.5% (including Medicare levy) and interest of 9% pa and paid annually in arrears.
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Questions
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Disclaimer
[If this presentation is not presented exactly as issued by IOOF, or is represented as the financial adviser’s own presentation, the financial adviser must insert their
own General Advice Warning and disclaimers in the place of those provided by IOOF]
This presentation is believed to be correct at the time of publication, however to the extent permitted by law, no liability is accepted for any loss or damage as a
result of any reliance on the information it contains.
IIML and AET are Responsible Entities of managed investment schemes, trustees of superannuation entities and operators of Investor Directed Portfolio Services.
IIML is the Trustee of the IOOF Portfolio Service Superannuation Fund ABN 70 815 369 818. AET is the Responsible Entity of IDPS like schemes, the Trustee of
a number of Small APRA Funds and the provider of a number of small and self-managed superannuation fund solutions and estate planning services. IOOF Ltd is
a Friendly Society and the issuer of IOOF Wealth Builder Investment Bonds.
Where you proceed with an investment in an IOOF Group product, IOOF may receive remuneration via fees for that product. If you seek personal financial advice
from a financial adviser, they may receive remuneration via commission payments from IIML, AET or IOOF Ltd. Details of remuneration will be outlined within a
Statement of Advice where personal advice is provided, or can be provided upon request.
All assumptions and examples are based on current laws (as at 1 February 2012) and the continuance of these laws and IOOF’s interpretation of them. IOOF
does not undertake to notify its recipients of changes in the law or its interpretation. All examples are for illustration purposes only and may not apply to your
circumstances.
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