Stage 3 tax cuts offer opportunity for tax-efficient strategies

“The state 3 tax cuts will commence on 1 July 2024. It's important for advisers to look at what's happening next year, as it can affect strategy recommendations for not only this year, and what they should be doing to get the most tax efficiency out of these tax cuts and tax deductions, but also what they should be doing in future years,” she said.

Ms Bruce said it can be more tax-effective to minimise taxable income in the current financial year and anticipate higher taxable income in the years to come. To achieve this, advisers might explore strategies aimed at enhancing or advancing eligible tax deductions into the current financial year, ultimately aiming to minimise taxable income to the greatest extent possible.

“On the other hand, where possible, the client should delay any events that can lead to an increase in their taxable income into the future financial years, where a client’s marginal tax rate might be lower,” she said.

One way to do this is to consider the carry-forward concessional contributions.

“If we have a client who is on a stable income of between $120,000-$200,000 per year, their current year’s marginal tax rate is either 37 per cent or 45 per cent,” she said.

“When the stage 3 tax cuts start from 1 July 2024, the marginal tax rate of this client will reduce to 30 per cent plus a two per cent Medicare levy based on the taxable income in both years.

“Let's assume this client’s super balance will reach the $500,000 threshold very soon, and this year and the next year may be the last two financial years this client is able to use the carry-forward, unused concessional contributions cap amount. It may be more tax effective for the client to use the carry-forward concessional contributions amount in this financial year by making additional personal super contributions and claiming that amount as a tax deduction, or by salary sacrificing an additional amount to reduce the current year’s taxable income, compared with using these carry forward amounts in the next financial year”.

She noted this is because the marginal tax rate based on this level of income is much higher in this financial year for this client.

“Further, we heard a lot of noises the government may consider dropping the Division 293 tax threshold in future years. Of course, this is something that is quite uncertain, however, it may be something worth considering, depending on the government policy, using the carry-forward concessional contributions amount in future years may be subject to division 293 tax, which can make this strategy less tax effective,” Ms Bruce said.

“The idea of potentially utilising the carry forward concessional contributions rule this year instead of next, allows us to get more bang for our buck, essentially, because we're getting deductions that are worth more.”

In regards to SMSFs, Ms Bruce said advisers should consider the contribution reserving strategy.

“A client who is a member of an SMSF can make an additional personal deductible contribution in June 2024, and can claim this additional contribution as a tax deduction in the current financial year,” she said.

“The SMSF, subject to the fund’s governing rules, can have until 28 July 2024 to allocate these additional contributions to members’ accumulation accounts so these contributions, although claimed as a tax deduction in the current financial year, will count towards the member’s next financial year's concessional contribution cap.

“In summary, effectively, the client can bring forward next year's tax deduction for personal contributions into this year without breaching their concessional contribution cap.”

Another tax-reduction strategy revolves around the timing of a client's retirement, she added.

“When a client retires, very often they have accrued annual leave or long service leave entitlements and those will be paid out,” she said.

“This leave payout is taxed at a client's marginal tax rate in the event that the client retires or resigns, so if the client's marginal tax rate is much lower in the new financial year, postponing the retirement date can mean that less tax is payable for these leaving entitlements.

“This strategy is something advisers commonly discuss with their clients, however, with the stage 3 tax cuts it makes it even more attractive.”

An important consideration for future financial years, Ms Bruce added, is that many clients will enjoy more disposable income as a result of the stage 3 tax cuts.

“This means that some clients can afford to salary sacrifice higher amounts to super to build their retirement savings.

“Other clients who have used up their CC cap may be able to put the extra disposable income in super as after-tax contributions”.

Further, she added, the marginal tax rate will be on par with the tax rate of an investment company once the stage 3 tax cuts take effect.

“Investing under an individual’s name may be an alternative investment structure to a company or super. This may be relevant due to the $3 million super cap proposal, that is, some clients may consider building up wealth outside super.

“However, investing in super or a company may have asset protection and estate planning advantages. These benefits, as well as tax consequences, all need to be taken into consideration.”