CFS flags planning opportunities ahead of stage 3 tax cuts

Tax professionals and advisers should start considering what deductions could be brought forward or what income could be delayed for clients whose marginal tax rates are likely to be lower next financial year, according to Colonial First State senior technical manager Linda Bruce.

Ms Bruce said the stage three tax cuts, which are set to commence on 1 July this year, will implement changes to the personal income tax rates and thresholds and provide tax relief for higher income earners.

From 1 July 2024, the tax rate for taxable income between $45,000 and $120,000 will reduce from 32.5 per cent to 30 per cent. For taxable income between $120,000 and $180,000 it will reduce from 37 per cent to 30 per cent.

Those earning between $180,000 and $200,000 will see the largest reduction in tax, with the tax rate falling from 45 per cent to 30 per cent.

The commencement of the stage three tax cuts from 1 July means that personal income tax rates are higher in the current financial year compared with 2024–25 or later financial years, Ms Bruce said speaking in a recent CFS FirstTech podcast.

“As a result, it can be more tax effective if a client has less taxable income in the current financial year and higher taxable income in the 2024–25 or later financial years,” she said.

“Where possible and appropriate, it may be tax effective for certain clients with a higher level of income to bring forward eligible future tax deductions into the current year to reduce their taxable income in the current year.”

If a client has a total super balance below $500,000 and are expected to have a stable income of between $120,000 and $200,000 across both 2023–24 and 2024-25, they may want to use their carry-forward unused concessional contributions cap amounts this financial year, for example, she said.

“Utilising any carry-forward concessional contributions in the current financial year, by making additional personal deductible contributions or salary sacrificing additional amounts to super, can be more tax effective due to their higher marginal tax rate, said Ms Bruce in a recent CFS article.

Clients may also want to consider bringing forward personal deductible contributions that they intend to make in 2024–25 into the 2023–24 financial year through a reserving strategy.

“If a client is a sole trader, a partner in a partnership or derives income from passive investments only, they generally don’t receive super guarantee (SG) contributions. As an alternative, they may make personal deductible contributions to reduce their taxable income and to accumulate retirement savings,” said Ms Bruce.

These types of clients may look to adopt a reserving strategy if their marginal tax rate is higher in 2023–24, she said.

A reserving strategy involves a client making an additional personal super contribution in June 2024 and lodging a valid notice of intent (NOI) with the super fund. The fund then acknowledges the receipt of the valid NOI.

Ms Bruce said the client then claims the additional personal contribution as a tax deduction in their 2023–24 tax return to reduce the current year’s taxable income.

“The trustee of the super fund, subject to the fund’s governing rules, allocates this additional contribution made in June 2024 to the member’s account in the new financial year before 28 July 2024. This amount allocated in the new financial year will count towards the client’s concessional contributions cap in the 2024–25 financial year,” she said.

“The client needs to lodge a Request to Adjust Concessional Contributions form with the ATO, so that the ATO can allocate the amount in the client’s concessional contributions cap in 2024–25.

“It’s important to note that the contribution reserving strategy is generally only possible if the client is a member of an SMSF, and the SMSF’s governing rules allow such a strategy to be implemented.”

Accountants may also want to consider whether it may be tax effective to bring forward certain future expenses into 2023–24 to achieve a higher amount of tax deduction where the client’s marginal tax rate will be higher.

For example, clients with an investment property that are planning to do repair and maintenance work in the future may want to do so this financial year.

“Bringing forward certain repairs or maintenance costs to the current financial year may allow the client to claim these expenses as a tax deduction in 2023–24 where the client’s marginal tax rate is higher,” said Ms Bruce.

If a client owns a rental property, it may also be tax effective for the client to arrange to pre-pay up to 12 month’s deductible expenses towards the end of the current financial year, such as interest on the outstanding investment loan, so that the pre-paid expenses can be deductible in 2023–24.

“However, there may be practical issues with pre-paying interest expenses,” said Ms Bruce.

“The lender may only allow the client to pay interest expenses in advance under very limited circumstances, for example, the investment loan may need to be on fixed rate and the prepayment can only be made on the anniversary date of the loan.”

Clients may also want to delay events that lead to increased taxable income until 2024–25 or later, when their marginal tax rate may be lower, she added.

“A client may want to retire in 2023–24, for example. When they resign, their accrued annual leave and long service leave will generally be cashed out and taxed at the client’s marginal tax rate (MTR) in the year they are paid,” she explained.

“However, if the client’s MTR is lower in 2024–25, postponing their retirement date can mean that the payment of unused leave entitlements will be subject to less tax.”

Where they are planning to sell a CGT asset such as an investment property, they will also need to think about the impact of the stage three tax cuts.

“The client may be retired and have no other taxable income in 2023–24 or 2024–25, however, due to the tax cuts commencing next year, the client may pay less tax if they defer the CGT event to 2024–25 when their MTR is lower,” she said.

“On the other hand, some clients may need the sale proceeds urgently and may not be able to postpone the sale.”

Given that many clients will also have more disposable income next year due to the stage three tax cuts, Ms Bruce said it’s also important to explore how best to use or invest these tax savings such as making additional contributions to super.

Colonial First State also warned that while the stage three tax cuts have already been legislated, there is still a small risk the government could introduce changes to scale back or abandon the changes before 1 July 2024.

“Advisers may want to consider any appropriate strategies for clients to leverage the stage three tax cuts as soon as possible, however, it may be prudent to delay the implementation of these strategies until after the May 2024 federal budget when any potential changes would likely be announced,” CFS stated.