How to minimise tax and maximise super during EOFY

With the end of the financial year fast approaching, it’s a good time to look at your clients' super strategies.

One of the most complex – but rewarding – parts of your role as an adviser is helping your clients minimise their tax liabilities and maximise their super contributions.

So, let’s see whether your clients are better off making personal deductible contributions (PDCs) this year or waiting until next financial year.

There’s nothing like a case study to bring your strategies to life. So here are a couple of real-life examples.

David’s story | Deferring capital gain to the next FY

First let’s look at David, who’s about to turn 67 in October 2024.

• David is retiring from self-employment in June 2024 and never intends to work again.
• He plans to sell his investment property and anticipates a net capital gain of $200k after discount.
• His total superannuation balance (TSB) was $300k on 30 June 2023 and will be around $320k on 30 June 2024, not including any extra contributions.
• He doesn’t meet the work test exemption in 24/25 FY as he has worked in FY23/24 but his TSB on 30 June 24 is greater than $300k.
• And he hasn’t made any personal contributions into super in the last five years.

Let’s see how David can optimise his tax position by utilising the PDC strategy and carry forward concessional contribution rules.

Table 1:

_{*Including accrued unused amounts and the available cap space for that FY.}

So, should David realise his capital gain this financial year or next? Let’s look at the two scenarios in Table 2.

Table 2:

David’s tax savings come from:

1.      Lower tax rates in FY24/25 due to stage 3 tax cuts

2.      Lower total taxable income as he’s retired in the new FY

3.      No Division 293 tax as income in 24/25 is below the Division 293 income threshold

4.      His tax deduction via PDC is higher in FY24/25 – the earliest $25k un-used amount will drop off but David will accrue new un-used amount of $27,500 from FY23/24 plus $5k from Concessional Contribution (CC) cap indexation, so there’s a net increase of $5k.

You might have noticed that David would have to pay Division 293 tax in the current FY, even though he is not ordinarily in that cohort. This is because the capital gain would tip him over the threshold for Division 293 tax.

Deferring the capital gain is tax effective, as you can see. However, you need to be mindful of the work test. David is turning 67 in October, after which he needs to either meet the work test or satisfy the work test exemption (which he doesn’t). So, in the deferring scenario, he would need to make any contributions into super before his 67^th birthday.

David’s story aside, some clients might be better off maximising their CCs this FY, for example:

• Clients whose total super balance will exceed $500,000 on 30 June 2024 (even without any extra contributions). They won’t be able to apply unused cap amounts in the next financial year.
• Clients who won't be able to make voluntary concessional contributions in FY24/25 because they’re outside the contribution acceptance period (the cut-off for voluntary employer and personal contributions is 28 days following the end of the month in which the client turns 75).
• Clients who will be 67 and over at the time of contribution and won't meet the 40/30 work test or exemption for FY24/25 and so can’t claim a tax deduction for any personal contributions.

Jennifer’s story | Bringing forward tax deductions to the current FY

Let’s look at Jennifer, a 58-year-old full-time teacher.

• Jennifer has a base salary of $100,000 and no other taxable income – we’ve assumed her salary hasn’t changed over the past 5 years.
• She hasn’t made any personal contributions – The only super contributions she received are employer Super Guarantee (SG) contributions.
• Her super balance is well below the $500k threshold for carry-forward CC rules for both this FY and the next.
• Jennifer’s unused amounts of CC is shown in Table 3.

Table 3:

_{*Including accrued unused amounts and the available cap space for that FY.
**The CC cap increases from $27,500 to $30,000 from 1 July 2024.
***The SG rate increases from 11% to 11.5% from 1 July 2024.}

Now Table 4 compares the tax savings that can be achieved by claiming the deduction for personal super contributions in 2023/24 or 2024/25 that reduces Jennifer’s taxable income to the effective tax-free threshold:

Table 4:

^Sources:

• ^{Treasury tax calculator: https://treasury.gov.au/tax-cuts/calculator}
• ^{ATO key super rates and thresholds: https://www.ato.gov.au/tax-rates-and-codes/key-superannuation-rates-and-thresholds/super-guarantee#ato-Superguaranteepercentage}

^Notes:

• ^{^ The effective tax-free threshold (i.e. tax-free threshold after taking into account low-income tax offset) for those under age pension age, in 23/24 is $21,884 FY and $22,575 in 24/25 FY.}
• ^{#The optimal PDC targets the effective tax-free thresholds. The amount is under the maximum PDC possible for that FY. It is not tax efficient to make the PDC to the maximum level, as it would reduce the taxable income below the tax effective threshold. E.g. Although Jen can claim up to $97,500 as PDC in 23/24, the optimal amount of PDC is $78,116.}

Jennifer is better off making PDCs in this financial year as the tax savings from the strategy is higher in 23/24 FY than in 24/25 FY and she gets more bang for the buck. However, tax is only one aspect of holistic financial planning strategy.

So that’s Jennifer’s story. But there are plenty of variables at play and every client is different.

It’s important to do the sums to work out whether it’s more tax-effective to make voluntary concessional contributions this financial year or next financial year…or both.