Riding the market waves
Don’t let share market volatility get you off course with your superannuation investment strategy.
Market volatility
Market downturns can make anyone nervous, but sticking to your investment strategy is key.
If you move your investments to cash or a more conservative option after the market has fallen, you’re effectively locking in your losses. Decisions driven by fear are rarely the right ones, and acting impulsively can be costly. It is also very difficult (if not impossible) to correctly time the market, so if you’re planning to switch back to growth assets before the market recovers, this might see you miss out on the rebound.
A more optimistic view of a falling market is that your regular superannuation contributions are buying assets at a lower price. When the market eventually recovers, those assets purchased during the downturn can significantly increase in value.
Don’t panic and stay the course
Riding the ups and downs of financial markets is an inherent aspect of investing.
Although market volatility can be stressful, particularly for those nearing or in retirement, it’s crucial to keep a long-term perspective and stick to your investment strategy (assuming it still meets your needs). Even those approaching retirement, or already retired, still have many years of investing ahead.
And if like most people your superannuation benefits are invested in a balanced or growth option, diversification plays a key role in shielding your balance from extreme market swings. That in turn allows you to have a diversified position and be confident that your superannuation can stay the course over time.
For those in a large APRA-regulated fund, most funds have pre-mixed diversified options for you to choose from. Otherwise if you have your own SMSF, you’ll need to ensure your investment strategy factors in a range of requirements such as diversification, the risk and return in making investments, and so on. As trustee or director of your fund, you will need to manage this yourself or seek advice from a licensed financial adviser who can assist you in developing a compliant strategy that is tailored to your fund and members’ circumstances.
But if market volatility continues to keep you up at night, it might be wise to check your investments and superannuation balance less often. By focusing on the long-term rather than daily fluctuations, you’ll have a clearer perspective on your financial progress without unnecessary worry.
The last word
As the investment saying goes, “it’s not about timing the market, it’s about time in the market”. The key takeaway is to stay patient, adhere to the fundamental principles of diversification and asset allocation, and as always, don’t hesitate to seek advice if you need it.
Who is a spouse under the tax laws, and why does it matter?
While Australia doesn’t have a joint filing option for married couples, there are some aspects of your individual tax assessment that depend on your spouse’s income.
For example, your eligibility for the private health insurance rebate and your liability for the Medicare Levy Surcharge both take into account your spouse’s income. Other tax attributes affected by your spouse’s income include the senior and pensioner tax offset, the Medicare Levy reduction for families, the zone and overseas forces tax offsets, and the invalid and invalid carer offset.
Under Australian tax law, a spouse is a person (of any gender) with whom you were in a relationship that was registered under a prescribed State or Territory law, or not legally married, but who lived with you on a genuine domestic basis in a partnership as a couple.
So, spouses are either legally married or living in a de facto relationship under the same roof. Note the additional requirement for cohabitation for de facto couples, which is in itself evidence of the relationship.
Sounds simple enough, but here are some commonly asked questions about spouses:
What about overseas marriages?
Many marriages for Australian residents took place in other jurisdictions. The Marriages Act has reciprocal provisions and most overseas marriages are recognised in Australia.
What if my spouse is still a foreign resident?
Sometimes visa requirements prevent both spouses from entering Australia at the same time. Where this occurs and the parties are legally married, the foreign partner is regarded as a spouse. All their global income needs to be disclosed in the Australian tax return of the resident partner. Where the parties are in a de facto relationship they are not cohabiting and the foreign partner will not be treated as a spouse under the tax rules.
What if I don’t know my spouse’s income?
You might need to lodge by 31 October, but your partner runs a business and uses his tax agent’s extension to lodge by the following May. Or you and your partner may be going through a difficult separation and the communication process is far from ideal. Make your best estimate, based on what you know about their affairs. If you have acted in good faith you won’t be penalised for getting it wrong, although the Tax Office might adjust your return down the track.
What if my relationship lasted for less than a year?
Most people don’t start or finish relationships on 1st July. There is space on your tax return to indicate when you have started or finished a spousal relationship part way through the year of income. The Tax Office will pro-rate the various tax rebates or surcharges as necessary.
What if I am separated but not divorced?
Couples who are legally married but who subsequently separate continue to be spouses until their divorce is finalised. On the other hand, couples who were in a de facto relationship but who subsequently separate cease to be regarded as spouses from the time they are no longer cohabiting.
Does cohabiting need to be full-time for a couple to be regarded as being in a de facto relationship?
Some couples prefer to maintain their own respective households while engaging in a co-dependent intimate relationship with another person. They might spend a number of nights together at either one of their homes but also spend time apart, which gives them independence and makes their relationship work.
These things are a question of fact and degree. If the couple spend most nights together at one place or the other and conduct themselves as a couple they might be regarded as being in a de facto relationship.
If they were legally married this would not be an issue, as they would be regarded as each other’s spouse regardless of how much time they spend apart. Perhaps not the most romantic reason for popping the question, but marriage would sort out any tax uncertainty there might be.
Inheriting assets other than a home
Most people know that if they inherit a home and it is sold within two years of the deceased’s death, then they won’t pay any capital gains tax (CGT) on it. And there are other ways an inherited home can be sold CGT-free.
But what about other inherited assets – such as a car, shares, vacant land – or even jewellery or artwork.
Well, for a start there is no CGT-free exemption for these assets if they are later sold by the beneficiary who inherits them (or if they are sold by the executor in the course of the administration of the estate).
However, some such assets will be exempt from CGT on any later sale because they are an asset that is not subject to CGT in the first place. Typically, this will include an ordinary car – or even a vintage car.
Otherwise, most inherited assets other than “purely personal” assets (such as ordinary books, furniture and clothing, etc) will be subject to CGT on any later sale. And this includes assets that the deceased may have acquired before 20 September 1985 which would not have been subject to CGT if they had been sold during the deceased’s lifetime.
Nevertheless, where a person is subject to CGT on an inherited asset, they will be deemed to have acquired it for the same cost that the deceased paid for the asset – in the case of assets that the deceased acquired after 20 September 1985. This means they will calculate any capital gain or capital loss by reference to that “deemed” cost.
On the other hand, if the deceased acquired the asset before that date they will get a cost equal to the asset’s market value at the date of death of the deceased – which usually means that there will be less CGT to pay on any sale of the asset.
In either case, the beneficiary gets the advantage of getting a “deemed cost base” for the asset for the purposes of calculating any CGT for an asset they acquire without having to pay anything for!
Furthermore, in the case of assets that the deceased acquired after 20 September 1985, if the combined period of ownership of the asset by the deceased and you as the beneficiary (plus the period when it was held by the executor) is greater than 12 months, then any capital gain you make is also usually entitled to the 50% discount to assess only half of the gain.
But if the deceased acquired the asset before that date, then the asset must have been owned by you (and the executor if relevant) for at least 12 months to be eligible for the CGT discount.
In the case of inherited shares, it will be necessary to work out the specific cost base of every share – and this may be difficult if there have been shares acquired under a dividend reinvestment plan or share splits or amalgamations, etc on any restructure of the company.
It should also be noted that while “purely personal” assets (eg, books, furniture, etc) won’t be subject to CGT on any later sale by a beneficiary (because like cars, they are generally exempt from CGT) there is a special category of personal assets known as “collectables” which are subject to CGT during the lifetime of the deceased and in the hand of the beneficiary.
And these collectibles include such things as artwork, jewellery, antiques and coins or medallions.
But the key thing is that they retain their character as “collectibles” in the hands of someone who inherits – and therefore the special rules that apply to them also applies to a beneficiary who inherits them. For example, they have their own special rules to determine their cost in the hands of the original owner – which carries over to a beneficiary who inherits them.
Whether a person who inherits a “collectible” pays any attention to these rules (or even knows of their existence) is another matter. And the sale of a collectible is a hard thing for the ATO to chase up – as opposed to land.
But suffice to say, these CGT rules exist – and they are the law of the land.
Finally, if a beneficiary is a foreign resident of Australia for tax purposes and they inherit assets from a deceased person who was an Australian resident, then different rules will apply.
Essentially, the deceased person will be deemed to have sold the assets just before their death and will be liable for CGT themselves in their final tax return. However, this rule is subject to important exceptions – such as for inherited land in Australia.
So, dealing with inheritance of assets is not a straightforward matter. But it also affords the opportunity to plan and time things so as to reduce any potential exposure to CGT.
And, we are to help in any stage of the process.
SMSF record keeping requirements
A key responsibility that SMSF trustees must adhere to is to keep accurate tax and superannuation records.
The benefits of good record keeping
As a SMSF trustee, the benefits of good record keeping will:
- Make it easier for you to administer and manage your superannuation
- Help when you are getting ready to lodge the SMSF annual return and other SMSF reports, and
- Help ensure the fund’s accounts and audit are completed in a timely manner
Even if you use a superannuation or tax professional to administer your SMSF, each trustee is responsible for good record keeping. This means each trustee could be fined if the appointed auditor tells the ATO that you as trustee have not been keeping proper records.
Minimum record keeping requirements
The ATO requires you to keep the following records for a minimum of five years:
- Accurate and accessible accounting records that explain the transactions and financial position of your SMSF
- An annual operating statement and an annual statement of your SMSF’s financial position
- Documentation showing decisions made about what benefit payment type was paid (pension, lump sum or a combination of both) and the account the payment was paid from
- Copies of all SMSF annual returns lodged
- Copies of transfer balance account reports lodged
- Copies of any other statements you are required to lodge with the ATO or provide to other superannuation funds.
You are also required to keep the following records for a minimum of ten years:
- Minutes of trustee meetings and decisions if matters affecting your fund were discussed, for example, you reviewed the fund’s investment strategy, or the commencement or commutation (in part or in full) of an income stream
- Records of all changes of trustees
- Trustee declarations recognising the obligations and responsibilities for any trustee, or director of a corporate trustee, appointed after 30 June 2007
- Members’ written consent to be appointed as trustees
- Copies of all reports given to members
- Documented decisions about storage of collectables and personal use assets.
Information resources are available
If trustees or directors of a SMSF are unsure about what kind of things they should be recording, they can:
- Watch the ATO’s short video on record-keeping requirements, or
- Take an education course to improve their understanding and knowledge of their obligations as an SMSF trustee or director. The ATO has also recently released two new interactive educational courses for SMSF trustees to build their knowledge on setting up (and winding up) an SMSF. In particular, the ‘setting up a SMSF’ course covers all that you need to know about being a SMSF trustee and also explains the record keeping requirements that must be met (which we have touched on in this article).
As always, we are here to help if you need any further information about your SMSF reporting and record keeping requirements.
The importance of Tax Residency
Whether you are a resident of Australia or non-resident of Australia for tax purposes has significant consequences for you.
Primarily, if you are a resident of Australia for tax purposes you will be liable for tax in Australia on income you derive from all sources – including of course from overseas (eg, an overseas bank account, rental property, an interest in a foreign business etc).
On the other hand, if you are a non-resident of Australia for tax purposes, you will only be liable for tax on income that is sourced in Australia (including capital gains on certain property such as real estate in Australia).
And while there may be difficulty in determining the source of income in some cases, if you are a resident for tax purposes, the principle of liability for tax in Australia on income from all sources remains clear.
Resident of Australia for tax purposes
So, what does it mean to be a resident of Australia for tax purposes?
Well, broadly, it means you “reside” in Australia (as commonly understood), unless the Commissioner is satisfied that your permanent place of abode is outside Australia.
However, a recent decision of the Federal Court has shed some light on this matter – especially the often-misunderstood presumption that “connections with Australia” is all that counts.
“Connections with Australia”
The Federal Court case involved a mechanical engineer who was posted to Dubai for a period of six years, followed by a posting to Thailand, but who had continuous family ties to Australia (in that he financially supported his wife and daughters who were living in Perth).
Originally, the taxpayer was found to be a resident of Australia for tax purposes essentially because of his continuous ties to Australia and the fact that he did not establish personal ties overseas while he was living there (other than via his work commitments).
However, the Court found that “connections with Australia” was not the key test but rather the key matter was where one intended to treat as home for the time being, but not necessarily forever, ie, not necessarily “permanently”.
Likewise, it said that the matter of residency is worked out on income year by income year basis (ie, one particular year of income at a time) and it doesn’t mean a person has to have the intention of living in a particular location forever.
Among other things, the case may have implications for people who work overseas on a contract basis for periods of time, but still maintain family ties to Australia.
It may also mean that closer scrutiny will have to be paid to determine a person’s residency on a year-by-year basis and not just “locking” them into a residency or non-residency status from the beginning of any relevant change in their circumstances.
And of course, there is also the key issue of when in fact your residency status may change!
We are here to help
Suffice to say, if you find yourself in any such circumstances (eg, you undertake a foreign posting for a period or you decide to move overseas for some time but still maintain connections here), you will need to speak to us about your residency status – and the tax implications thereof.
Spouse contributions splitting
Splitting superannuation contributions to your spouse can be a great way to boost your combined superannuation balances which can benefit you both in retirement.
What is contribution splitting?
Spouse contribution splitting allows a couple to optimise their superannuation balances by splitting up to 85% of concessional contributions (CCs) they made or received in one financial year (ie, 2023/24) into their spouse’s account the next financial year (ie, 2024/25).
Remember, CCs are before-tax contributions and are generally taxed at 15% within your fund. This is the most common type of contribution individuals receive as it includes superannuation guarantee (SG) payments your employer makes into your fund on your behalf. Other types of CCs include salary sacrifice contributions and tax-deductible personal contributions.
The maximum amount that can be split to your spouse is the lesser of:
- 85% of CCs made in the previous financial year (ie, 2023/24), and
- The CC cap for that financial year (ie, $27,500 in 2023/24).
Example
Alex and Kat are parents to three young children. Kat has taken time off work to care for their children and has much less superannuation than Alex.
After speaking to their financial adviser, they decide to split the $20,000 in SG contributions that Alex received from his employer last financial year (2023/24). In August 2024, Alex applies to his superannuation fund to transfer as much of his CCs as he can to Kat.
Alex is able to split 85% of his CCs which provides a much-needed boost of $17,000 to Kat’s retirement savings.
Rules for the receiving spouse
An individual can apply to split their CCs at any age, but the receiving spouse must be either:
- Under preservation age (currently age 60 if born on 1 July 1964 or later), or
- Aged between their preservation age and 65 years, and not retired at the time of the split request.
In other words, if the receiving spouse has reached their preservation age and is retired, or they are 65 years and over, the application to split your CCs will be invalid.
Benefits of contribution splitting
Contribution splitting is an effective way of building superannuation for your spouse and can manage your total superannuation balance (TSB) which can have several advantages, including:
- Equalising your superannuation balances to make best use of both of your “transfer balance caps” (TBC) which can maximise the amount you both have invested in tax-free retirement phase pensions. Note, the TBC limits the amount that a person can transfer to retirement phase pensions in their lifetime – this limit is currently $1.9 million in 2024/25.
- Optimising both of your TSBs to:
- Boosting your Centrelink entitlements by transferring funds into a younger spouse’s accumulation account if your spouse is under Age Pension age
Last word
As always, there are eligibility requirements that must be met and deciding what is best for you will depend on your personal circumstances. For this reason, you may want to seek personal financial advice to determine whether contribution splitting is right for you and your spouse.
High Income Earners Div 293 Tax
If you’re a high income earner, you may soon be asked to pay an extra 15% tax on the amount of concessional contributions that exceed the $250,000 threshold.
What is Division 293 tax?
Division 293 tax is an additional 15% tax that is payable when your income and concessional contributions exceed $250,000 in 2023/24.
To recap, concessional contributions are before-tax contributions and are generally taxed at 15% within your fund. This is the most common type of contribution individuals receive as it includes superannuation guarantee payments your employer makes into your fund on your behalf. Other types of concessional contributions include salary sacrifice contributions and tax-deductible personal contributions.
It’s worth noting that the extra 15% Division 293 tax is payable in addition to the standard 15% tax that is paid on concessional contributions.
How does Division 293 tax work?
You will be liable for Division 293 tax on either your concessional contributions, or the amount of income that is over the $250,000 threshold – whichever amount is lower. Income for the purposes of Division 293 includes taxable income from a range of sources, such as:
– Employment and business income
– Reportable fringe benefits
– Investment income
– Net financial investment losses, such as negative gearing losses where deductions attributable to an investment property exceed rental income
– Income you may receive due to a one-off event, such as making a capital gain, receiving a work bonus, or a redundancy or termination payment.
Purpose of Division 293 tax
The purpose of this extra tax is reduce the tax benefits that high income earners receive from the superannuation system and to level the tax playing field for average income earners.
Even though high income earners may pay tax on their concessional contributions at 30%, this is still less than the top marginal tax rate of 47% (including Medicare levy) that generally applies to high income earners who are liable for Division 293 tax. As such, making and receiving concessional contributions are still tax effective.
Liability to pay Division 293 tax
The ATO will determine if you need to pay Division 293 tax based on information in your tax return and data they receive from your superannuation fund(s). As a result, there is usually a delay between when the contribution is made and when Division 293 tax is payable.
The ATO will issue you with a notice of assessment stating the amount of tax payable and provide an
authority to enable your superannuation fund to release the money. You also have the choice to pay the tax personally. Note that the tax is due within 21 days of the assessment being issued to you, and certain timeframes also apply if you elect to pay the amount from your superannuation fund.
Protecting your child’s inheritance
Are you concerned about protecting your child’s inheritance from a future divorce or relationship breakdown? The truth is that you are not alone – many parents share the same concern.
Tough times
Many young people struggle to save a deposit to buy a home. By contrast, parents may be in better position to give their children a bequest during their lives to help their children when they need it most, typically as they are looking to purchase a property or when they are paying off a mortgage and raising their own children. For those parents wanting to help their children get started on the property ladder, many are taking legal precautions to ensure their child’s inheritance does not end up in the hands of a former spouse/de facto if they split up. The reality is many marriages and relationships break down so parents must be on the front foot to ensure their hard-earned wealth remains within their family unit.
Tips to protect your wealth
The following tips can help protect your wealth from your child’s future spouse/partner:
- Ensure your child signs a prenup – a binding financial agreement (BFA), otherwise known as a “prenuptial agreement” is a legal document signed by couples either before or during marriage or living together in a de facto relationship. It sets out the way some or all of a couple’s assets, superannuation, gifts, inheritances and potential debts will be divided in the event that their relationship breaks down. As such it can prevent arguments around the splitting of assets and can also help save time and money when a couple separates. For example, a BFA could provide that any inheritance received during the relationship would remain the property of the person who received it if a couple were to go their separate ways.
- Establish a testamentary trust – for those looking to provide an inheritance to their children after their death, setting up a testamentary trust (TT) is another option to consider. A TT is a trust created by a will that does not come into force until the death of the will maker. Rather than providing an inheritance outright, assets are transferred into a trust and held on behalf of an individual or group of beneficiaries. As such, your child’s inheritance will remain in the legal hands of a trust and therefore be less likely to be claimed by their spouse/partner if their relationship breaks down.
- Sign a written loan agreement if helping children buys a home – another option is for parents to give the money under a properly documented loan agreement to ensure that they could be paid back should anything go wrong. Parents can either register the loan as a mortgage or as a caveat against the title of the property. The benefit of this is that the loan must ultimately be repaid and is a liability that reduces the total assets that are available for division in the financial settlement if the couple separates.
- Tenants in common – another option is for your child to purchase their property as tenants in common (TIC) with their spouse/partner so the title is held in proportion to their contributions to the purchase cost. This is different to buying a property as joint owners (or ‘joint tenants’) as TIC ownership does not have to be a 50/50 split. Instead the percentages could reflect each party’s contribution to the property. It also means that when one of the owners passes away, their share is subject to their will rather than going directly to the other owner. Although this ownership structure may be beneficial from an asset protection viewpoint, there are other pros and cons that must be considered.
Seek legal advice
If you’re thinking about helping your children out, make sure you seek professional legal advice from an expert who specialises in estate planning or family law to help protect your assets from others. It may come at a higher cost now, but it will be worth it and work out cheaper in the long run if the relationship goes awry.
Not ‘income’ by the ATO?
It is possible to receive amounts that are not expected by the ATO to be included as income in your tax return. However some of these amounts may be used in other calculations and may therefore need to be included elsewhere in your tax return.
The ATO classifies the amounts that it doesn’t count as assessable into three different categories: exempt income; non-assessable non-exempt income; and other amounts that are not taxable.
Exempt income
As the name may suggest, exempt income doesn’t have tax levied on it. The thing to remember here however is that certain exempt income may be taken into account for other adjustments or calculations — for example, when calculating the tax losses of earlier income years that you can deduct, and perhaps “adjusted taxable income” of your dependants.
Exempt income includes:
- certain government pensions, including the disability support pension paid by Centrelink to a person who is younger than age-pension age
- certain government allowances and payments, including the carer allowance and the child care subsidy
- certain overseas pay and allowances for Australian Defence Force and Federal Police personnel
- government education payments, such as allowances for students under 16 years old
- some scholarships, bursaries, grants and awards
- a lump sum payment you received on surrender of an insurance policy where you are the original beneficial owner of the policy – generally these payments are not earned, expected, relied upon or occur regularly (examples include payments for mortgage protection, terminal illness, and permanent injury occurring at work).
Non-assessable, non-exempt income
Non-assessable, non-exempt income is income you don’t pay tax on and that also does not count towards other tax adjustments or calculations such as tax losses.
Non-assessable, non-exempt income includes:
- the tax-free component of an employment termination payment (ETP)
- genuine redundancy payments and early retirement scheme payments
- super co-contributions
- various disaster recovery assistance packages (although these need to assessed on a case-by-case basis).
Mortgage vs super – where should I put my extra cash?
Many of us wonder about the best vehicle to use for our extra savings. Is it better to direct extra savings to your mortgage or superannuation? As with most financial decisions, there is no one-size-fits-all approach as it depends on a number of factors for each individual.
Paying extra off the mortgage
The priority for most people is to pay extra off their mortgage. This is because extra repayments can reduce the amount of interest payable and will help you pay off your loan sooner, freeing you up from mortgage repayment commitments.
Furthermore, if your home loan has a redraw or offset facility, you can still access your money if your circumstances change. However paying extra off your mortgage involves using after-tax money which is less advantageous than using pre-tax income to invest into superannuation which will eventually be used to pay off your mortgage.
Paying extra into superannuation
Paying extra to superannuation will usually involve pre-tax money by making salary sacrifice contributions. An effective salary sacrifice agreement involves an employee agreeing in writing to forgo part of their future entitlement to salary or wages in return for the employer providing them with benefits of a similar value, such as increased employer superannuation contributions.
As salary sacrifice contributions are made with pre-tax dollars and do not form part of your assessable income, this means these contributions are not taxed at your marginal tax rate and will instead be taxed at a maximum of 15% when received by your superannuation fund.
It is also worth noting that making pre-tax contributions such as salary sacrifice contributions count towards the concessional contribution (CC) cap which is currently $27,500 pa in 2023/24 (or $30,000 in 2024/25). As your employer superannuation guarantee (SG) contributions also count towards this cap, you will need to determine how much room you have left within your cap before you start salary sacrificing to superannuation. There is the ability to make larger CCs by utilising the carry forward concessional contribution rules if you meet certain eligibility criteria.
In a nutshell, once the money is in superannuation it is invested and will grow. The power of compounding returns along with the concessional tax nature of superannuation means that even small contributions can boost your retirement savings in the future. When the time is right and you are ready to retire, you can either withdraw a tax-free lump sum to clear your remaining mortgage or commence a superannuation pension and draw tax-free pension payments to meet your mortgage repayments from the age of 60 onwards.
Example – pre vs post tax money
Bill earns $150,000 per year and has a savings capacity of around $1,000 – $1,500 per month. Bill can either:
- Direct this amount to his mortgage, or
- Salary sacrifice $1,587 into superannuation as this contribution occurs before tax (ie, the after tax cost of $1,000 is $1,587).
Bill decides to salary sacrifice to superannuation. Bill’s contribution is taxed at 15% when it is received by his fund so his end contribution is $1,349. For the same out-of-pocket cost to Bill, his superannuation fund receives an extra $349 each month.
This example shows the difference between Bill’s marginal tax rate (37%) and the tax rate on contributions (15%) constitutes the benefit of salary sacrifice contributions. As mentioned above, Bill will need to ensure he does not exceed his CC cap by making extra salary sacrifice contributions to superannuation.
Final thoughts
So which option is better? Well it depends. The answer boils down to a number of factors that need to be considered, such as your mortgage interest rate, your income and marginal tax rate, your superannuation investment strategy, and your age to retirement. If you need extra information or advice on what you should do, make sure you speak to a financial adviser before you make any financial decisions when it comes to your mortgage or superannuation.