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The end of the financial year is just around the corner. Here are 6 actions for share investors, property investors and superannuants to take before 30 June.
If you are managing a portfolio of shares, you may want to confirm whether the balance across the different industry sectors is right.
The S&P/ASX 200 is divided into 11 industry sectors, which have different weightings according to the market capitalisation of the stocks that make up that sector. Over the course of the year, the weightings change as companies join or leave the index, raise capital, and due to changes in the share price, the market value of each company changes.
Depending on your investment objectives, you will probably target biases in some sectors where you will be overweight relative to the index, and in other sectors, underweight. For example, if your main priority is growth, you may wish to be overweight sectors such as consumer discretionary, industrials, information technology and health-care, and potentially underweight some of the defensive sectors such as utilities and property trusts.
The following table shows the sectors and current S&P/ASX 200 weights as at 31 May 2020.
ASX 200 Weight
Source: S&P Dow Jones
If the actual sector biases in your portfolio are different to how you intend them to be (your target positions), then depending on the materiality, you may want to act to address these.
Next in relation to your share portfolio, do you have any dogs? The hardest part of investing is to acknowledge a mistake and cut a position. There is an old adage that goes “your first loss is your best loss”, and in my experience, this proves right (in hindsight) at least 8 out of 10 times.
In thinking about this, take into account your sector positions and mismatches away from your target position. The other factor that may influence your decision at this time of year is whether you can utilise any capital loss.
If you have sold shares during the year, or disposed of any other investment asset, you may be liable to pay capital gains tax.
Individuals pay tax on a gain at their marginal tax rate (potentially as high as 47%, including the 2% Medicare Levy). Where an asset has been held for more than twelve months, individuals are eligible for a 50% discount and pay tax on half the gain. Superannuation funds (including SMSFs) are eligible for a one-third discount. There is no discount where the assets are held by a company.
Importantly, you can offset capital gains with capital losses, and losses that cannot be used in the tax year can be carried forward to the next tax year.
So, if you have taken capital gains during the year, you may want to consider assets in a loss situation and review whether you should continue to hold them. Of course, tax should never be the primary driver for an investment decision.
One important point to note is that investors who purchased shares in multiple parcels are not required to apply a specific FIFO (first in, first out) or LIFO (last in, first out) allocation method. The ATO regards each share as a separate asset, meaning that you can determine which share purchases are matched with a share sale, potentially allowing you to optimise the tax outcome.
And just because you haven’t set out to sell shares on the ASX doesn’t mean you haven’t taken any gains. For example, takeovers are a disposal for CGT purposes (unless rollover relief is offered).
Can you make additional concessional contributions to super?
Concessional contributions include your employer’s 9.5%, salary sacrifice contributions and any amount you claim as a tax deduction. (You no longer need to be self-employed to claim the tax deduction).
Concessional contributions can’t exceed $25,000 in aggregate.
For example, If you earn $100,000 and your employer has contributed $9,500 in super and you have salary sacrificed a further $10,000, you could potentially make a further contribution of $5,500 and claim a tax deduction for this amount.
The normal age rules apply in regard to eligibility. Up to age 65, anyone can make a contribution. If you are between 65 and 74 years, you must pass the work test, which is defined as working 40 hours over any 30 day consecutive period. If you are 75 or over, only mandated employer contributions (the compulsory 9.5%) can be made. From the start of next financial year (1/7/20), the age limit of 65 is being increased to 67.
Can you make additional personal (after tax) contributions?
The cap on non-concessional (after-tax) contributions is $100,0000. If you access the bring forward rule, which allows you to make up to 3 years’ worth of contributions in one year, then you can potentially contribute $300,000 in one go. A couple could potentially get a combined $600,000 into super. To access the bring forward rule, you must have been aged 64 years or less on 1 July 19 and not already have accessed it in the preceding two years.
There is an important caveat to this. If your total superannuation balance is over $1,600,000, you won’t be able to make any further personal (non-concessional) contributions. Super balances are measured each June 30 (i.e. your balance at 30 June 19 determines whether you can make non-concessional contributions in 2019/20) and include all amounts in accumulation and pension. If your total super balance was between $1,400,000 and $1,500,000 then the maximum amount you can access under the bring-forward rule is $200,000, and if your balance was between $1,500,000 and $1,6000,000, you are limited to $100,000.
Can you access, or can a family member access, the Government Co-Contribution? If eligible, the Government will contribute up to $500 if a personal super contribution of $1,000 is made.
The Government matches a personal contribution on a 50% basis. This means that for each dollar of personal contribution, the Government makes a co-contribution of $0.50, up to an overall maximum of $500.
To be eligible, there are 3 tests. The person’s taxable income must be under $38,564 (it starts to phase out from this level, cutting out completely at $53,564), they must be under 71 at the end of the year, and critically, at least 10% of this income must be earned from an employment source.
While you may not qualify for the co-contribution, this can be a great way to boost a spouse’s super or even an adult child. For example, if your kids are university students and doing some part time work, you could potentially make a personal contribution of $1,000 on their behalf – and the Government will chip in $500!
Can you claim a tax offset for super contributions on behalf of your spouse?
If you have a spouse who earns less than $37,000 and you make a spouse super contribution of $3,000, you can claim a personal tax offset of 18% of the contribution, up to a maximum of $540. The tax offset phases out when your spouse earns $40,000 or more. Your spouse’s income includes their assessable income, reportable fringe benefits and any (though unlikely) reportable employer super contributions.
And don’t leave your super contributions to the last minute. While there is some flexibility around the allocation of contributions to member accounts, they must be received and banked by the super fund (including SMSFs) by 30 June. Allow sufficient time for processing, which most funds say is at least two working days. This year, 30 June falls on a Tuesday, so get your contributions in by Friday 26 June.
If your own an investment property, there should be a number of deductions you can claim to offset your rental income, and potentially, offset other income. While you cannot claim capital costs (these can be used to increase the cost base and reduce any subsequent capital gains tax on disposal), you can claim revenue costs and you can claim depreciation.
Revenue costs are those costs incurred in the process of earning the rental income. They include, but are not limited to:
The list goes on, and your accountant will be able to tell you what’s included as a viable property expense.
You cannot claim:
Depreciation can be divided into two types —depreciation on plant and equipment (also known as Division 40 deductions) and depreciation on the building or capital works deductions (also known as Division 43 deductions).
Plant and equipment includes furniture and fixtures and fittings that are not part of the part of the building’s structure. (As a rule of thumb, if the item can be moved, then it is an item of plant and equipment, otherwise it is capital works). For properties purchased after 9 May 2017, you cannot claim depreciation on “second- hand” plant and equipment assets previously installed by another owner. You can only depreciate assets that you purchase for the property (for example, a new carpet).
Capital works deductions include the cost of the construction of the building apportioned over a 40 year period. You may need a Quantity Surveyor to assess this for you, and of course, your claim is limited to 100% of the cost of the construction. It is calculated at a rate of 2.5% of the cost of the construction.
Capital works deductions can also be claimed on in-ground swimming pools, plumbing and gas fittings, garage doors and skylights, and baths and toilets.