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Why would this be of benefit?
1. Supplement income
The first reason a client may consider this course of action is to supplement their income. The intention of the Government is to provide people an easier transition into retirement, and if clients are working part time and this is not providing sufficient income (and they have not met a condition of release), they can use this measure to convert some or all of their benefits to a non-commutable pension.
However, this may prevent the client from accessing Centrelink entitlements and cause them to utilise their retirement capital at an earlier age than perhaps was anticipated.
2. Reasonable Benefit Limits (RBL)
RBL issues may also be a reason for accessing this measure. For example, a client with superannuation approaching their pension RBL can use this measure to lock in his or her RBL reporting to ensure they remain within the RBL.
This strategy may also be of benefit for someone approaching their lump sum RBL who wishes to lock in their RBL assessment at this point in time.
3. Salary Sacrifice
One of the primary strategies that is available is for a client to salary sacrifice a substantial portion of their income, and commence a non-commutable allocated pension to provide for their living expenses.
The rationale behind this strategy is that income from an allocated pension is eligible for a 15% rebate, thus proving an immediate tax saving as opposed to taking salary, which is taxed at the client’s marginal tax rate. For example if a client pays tax at 48.5%, utilising an income stream will result in income taxed at 33.5%.
Factors to be considered:
• Contributions tax on the salary sacrificed income
• Nil tax on earnings of the non-commutable allocated pension
This is best illustrated with an example.
Example
John is 55 years of age, and working full time on a salary of $63,000 pa (i.e. a typical taxpayer in the 30% tax bracket). He has accumulated $600,000 in super, none of which is undeducted.
John’s tax position at present is:
|
Salary |
$63,000 |
|
Tax |
$14,760 |
|
Medicare |
$945 |
|
Earnings tax in super (7% return) |
$6,300 |
|
Total tax payable |
$22,005 |
|
Net income |
$47,295 |
If John salary sacrifices $36,939 per annum, and converts his superannuation balance into pension phase, the result would be:
|
Salary |
$63,000 |
|
Less Salary sacrifice |
$36,939 |
|
Allocated pension income |
$30,303 |
|
Taxable income |
$56,364 |
|
Tax |
$12,769 |
|
Medicare |
$845 |
|
Rebate |
$4,545 |
|
Contributions tax |
$5,541 |
|
Earnings tax (on salary sacrifice) |
$210 |
|
Total tax payable |
$14,820 |
|
Net Income |
$47,295 |
Assumptions:
• Minimum PVF is 19.8
• Proposed tax rates for 2005/06 have been used
• Surcharge has been assumed to have been abolished
There is tax saving of $7,185 under this scenario, largely due to the saving of earnings tax in pension phase.
His income and expense position will be:
|
Salary |
Tax Saving |
|
$21,600 * |
$2,574 |
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$63,000 |
$7,185 |
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$95,000 |
$8,375 |
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$150,000 |
$9,034 |
* Based on a superannuation balance of $250,000 and salary sacrifice of $14,895. Remaining examples assume superannuation balance of $600,000
4. Protect capital growth
When funds are converted to pension phase, subsequent capital growth on the section of the fund used to fund the pension is protected from RBL reporting and from tax, as asset sales in pension phase are tax free.
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THIS MONTH’S QUOTE:
It is not how much you make that counts, but how much money you keep.
Robert Kiyosaki, Author of Rich Dad, Poor Dad
Speak to us about keeping more of what you earn whether by legal tax structuring or appropriate financial planning.
Against this theme, we have dedicated this month’s newsletter to a great opportunity to access your super while still working.
Super whilst still working
New regulations now allow a person attaining preservation age (55 if born before 1960 increasing to 60 if born in 1964 or later) can access their super as a non-commutable income stream (including a non-commutable allocated pension) without retiring from the work force.
Savings in Interest
We have a great relationship with some lenders. This means we can often provide clients with access to a loan facility that is not generally available in the open market. Please follow the link to the loans page of our website by clicking here to see how we may be able to help you.
Superfund Beneficiaries
In 2004, the Government increased the range of potential beneficiaries of tax-free superannuation death benefit to include what it called interdependent relationships. Up to that time super death benefits could be paid to spouses, children under 18 and those who could establish a financial dependency on the deceased. The Government said people in an interdependent relationship (which it defined as “one of continuing mutual commitment to financial and emotional support between two people who reside together”) would also be eligible. The definition would cover siblings who lived together, an adult child who resides with and cares of an elderly parent, and same sex couples.
Effect: More equitable distribution of tax-free death benefits.
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