Like most pharmacy owners, a great deal of your wealth is held within your business. This is necessary for most business owners as the business builds and there are debts to repay.
Acknowledging of course the low interest rate environment we are in that will assist many small business owners and the recent budget announcement, decreasing company tax for small businesses who turnover $2Mil or less from 30c in the $ to 28.5c in the $. There are of course many other pressures offsetting the good news above and making your business less profitable than it has been in the past.
This is why some diversification outside of pharmacy is a good idea with your wealth, especially when there are tax benefits.
Now it is decision time for a number of end of financial year strategies. Here are three ways you may be able to make the most of tax time and build your wealth outside of what you have invested in your pharmacy.
Every year around this time, a window of opportunity opens to help maximise your end of financial year tax strategies. And if you leave it too late, the chance to improve your financial position could go begging. If you are overcommitted, consider these strategies for the 2015/16 financial year.
So what are some of the strategies you might want to consider?
1. Manage your contributions caps
What’s the goal?
If you are say 45/50 years of age or over and say 10+ years out to retirement – maximise your super contributions.
How does it work?
There are limits on how much you can contribute to super tax-effectively each financial year. These limits (referred to as ‘caps’) are important for two reasons:
- If you’ve already commenced a super contribution strategy, you need to monitor your contribution levels to help maximise your opportunities without unintended penalties.
- If you’re not using your caps, there’s an opportunity to increase your super contributions.
The following table shows what the two types of super contributions are, and what limits and penalties relate to each.
What are your contributions caps?
| Concessional (before-tax) contributions cap |
Non-concessional (after-tax) contributions cap |
|
|---|---|---|
| Types of contributions included |
Superannuation Guarantee (SG) Salary sacrifice – possibly for senior staff(see strategy 2) Personal deductible (if self-employed) |
Personal super contributions you’ve made from your after-tax income (see strategy 3) |
| Maximum allowed (2014-15) | $30,000 if < 49 $35,000 if 49 + |
$180,000 or option to utilise the 3 year bring forward rule if < 65 years old. (See below) |
| Tax on amounts over the cap | From 1/7/2013 taxed at marginal rate less 15% offset. Interest charge payable on increased tax liability. Individual can withdraw excess amount from super (net of 15% fund tax). | Excess NCC’s from 1/7/2013 – individuals have option to withdraw plus 85% of associated earnings. Election to ATO must be made within 60 days of the notice. If not withdrawn highest marginal tax applies to the excess |
| Important information | Any concessional contributions in excess of the cap will also count towards your non-concessional contributions cap. | If you are under age 65* at any time during the financial year, you may be able to bring forward the next two years’ worth of contributions. This effectively allows you to contribute up to $540,000 at once, or at any time during the next three financial years. |
if you are over age 65 when you make the contribution you must meet the work test and if you are intending to make a contribution about the non concessional cap this will need to be done as multiple contributions as the fund can only accept contributions of up to $180K.
If you have room under your caps, the next two strategies explore how you may be able to use that room to your advantage.
2. If employed: Start a salary sacrifice arrangement (using before-tax contributions) or If you are a Pharmacy Owner: Make a deductible contribution into superannuation.
What’s the goal?
To increase your super balance in a tax effectively.
How does it work?
You may be able to enter into a salary sacrifice arrangement with your employer, provided you have room in your concessional contributions cap. This may allow you to contribute some of your before-tax salary directly into your super account. If an owner you can put funds in up to your concessional contributions cap any time prior to 30th June.
The benefit of this strategy is that your before-tax super contributions are taxed at 15% – compared to your marginal tax rate of up to 46.5% (including Medicare Levy) if you took this money as cash.
An added benefit is that these potential savings are going towards your super balance, so they can compound over time and make a significant difference to your retirement savings.
Salary sacrifice arrangements differ depending on your place of work, and you may need to check what rules are in place for you. It’s a good idea to have this conversation with your employer well before 30 June as you can’t salary sacrifice income (including year-end bonuses and commission payments) to which you are already entitled – it must relate to employment income that you will earn in the future.
Remember, if you have a salary sacrifice arrangement in place, it’s important to review the strategy annually to ensure it remains appropriate for your circumstances or any changes in legislation.
3. For Pharmacy Owners: Move assets into super (using after-tax contributions)
What’s the goal?
Place your long term investments in a tax effective environment.
How does it work?
When you hold investments like shares or managed funds outside super, you pay tax on these investments at your marginal tax rate – which could be as high as 46.5% (including Medicare levy).
However, if you held these assets inside super, those same investments would be taxed at 15% or less. Assuming your marginal tax rate is higher than 15%, these tax savings could help your investments grow faster inside super than outside super.
Once you’ve started accessing your super in the form of a pension, this strategy may become even more attractive. That’s because:
- Any earnings on the investments supporting the pension are tax-free.
- Up to age 60, the tax you pay on pension income you draw may be reduced by tax offsets, and/or you may receive some income tax-free if you’ve made after-tax super contributions.
- After age 60, any income or benefits you withdraw from super are tax-free.
This strategy is best suited to investments you’re putting aside for retirement, as you won’t be able to access them until you reach your preservation age (currently age 55) and you are permanently retired from the workforce. Your financial adviser may assist you in identifying any issues to be aware of with in specie transfers including capital gains tax (CGT) considerations, contribution rules and caps.
Know where you stand before 30 June
The best year-end tax strategies for you depend on your personal circumstances and goals – which may change from year to year. Likewise, the strategies can vary over time with changes to rules and regulations.
To make sure you know where you stand before 30 June, speak with your tax and financial advisers as soon as possible.
Could protecting your family also save you tax?
Income protection is a popular type of insurance that replaces a percentage of your income (usually up to 75%) if you can’t work because of sickness or injury. For pharmacy owners the insurers do tend to look at a locum being able to come in a run the business. They will insure you for income protection but in determining your income those type of factors come into play.
This insurance may be an effective way to protect your family’s lifestyle as it can give you the money you need to keep up with your financial commitments – such as your household bills and mortgage repayments – while you focus on your recovery.
Another benefit of income protection is that premiums are generally tax-deductible. And if you pay your premium in advance before 30 June, you may be able to bring forward the tax-deduction to this financial year. Talk to your financial adviser to find out more.
Disclaimer
Past performance is not a reliable indicator of future performance. The information and any advice in this publication does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it. This article may contain material provided directly by third parties and is given in good faith and has been derived from sources believed to be reliable but has not been independently verified. It is important that your personal circumstances are taken into account before making any financial decision and we recommend you seek detailed and specific advice from a suitably qualified adviser before acting on any information or advice in this publication. Any taxation position described in this publication is general and should only be used as a guide. It does not constitute tax advice and is based on current laws and our interpretation. You should consult a registered tax agent for specific tax advice on your circumstances.
by Michelle Summers, Senior Financial Advisor