In This Issue
Tax and retirement savings – the Yin and Yang of ageing
After an enjoyable conversation with a new client, it dawned on me that what really energises many people (me included) is being able to legally reduce the tax liability on our super and pensions – while we still have the option.
Reducing the liability now is a future-proofing strategy which will help an estate (by 17% of unused super) as well as removing our clients from the target zone in the event that future governments, decide, as they have in the past, to have another ‘tax-bite’ at retirement savings.
Having been around this industry for more than 35 years, I’ve seen successive governments wind back the Howard and Costello ‘Simple Super’ changes of 2008. It is not hard to imagine a non ‘Boomer’ political advisor looking at the pensions of retirees and posing the question “should we tax them, or their children?” And the choice is obvious.
Remember, under the present rules, a well-funded couple can take home $200,000+ per annum tax-free, although the trade-off might mean having to pay some tax now – although this might seem a bitter pill.
Consider for example, the case of a member of a public sector super fund with a balance containing a significant ‘Untaxed’ component. (This is the component on which no contributions tax has been paid and therefore subject to tax of 15% on rollover). This represents a growing tax impost as the super balance increases over time.
In addition to this tax liability, when the Untaxed amount exceeds the Untaxed Plan Cap Threshold ($1.705m from 1 July 2023) the benefit amount in excess of the cap will be taxed at 45% (+ 2% Medicare levy if not rolled over to another fund).
Assuming this final Untaxed component grows to $2m in today’s dollars, there would be a 17% liability for Death Benefits tax on the first $1.705m plus 47% on the balance of $295,000 – resulting in a total bill of $428,500 before any money is paid to this member’s estate.
The best strategy? Address the immediate tax liability now, by transferring the full retirement balance comprising of approximately $1,167,000 untaxed component, out of the public sector super fund. The obvious downside here means paying 15% on the Untaxed component – which in this example, amounts to approximately $175,000 – now.
Paying $175,000 in tax is no fun, but it is so much better than $428,500 in future tax.
Retaining a balance in an Untaxed Fund means deferring (not eliminating) a growing tax liability. In this case it would have allowed a further ‘untaxed’ lump sum tax to accrue as the benefit accumulated, with at the very least, 15% tax on the income and capital growth to be paid later – probably by the member’s estate.
Furthermore, the payment of 17% in Death Benefits tax on the net super balance tax can be eliminated (at least for now)!
As many eGrow readers would already be aware, full mitigation of Death Benefit taxes can currently be achieved via a series of ‘cash-out and recontribution’ strategies. Completion of this process can result in your tax-free retirement savings held in an Account Based pension, which is 100% investment and income tax exempt, without future death benefits tax liability.
As previously mentioned, the recent Federal Budget contained no new changes to superannuation – signalling a pause on super tinkering for now. This is mainly because the significant changes have already been announced.
The lack of outrage over the $3m cap to be applied to the concessionally taxed rate of 15% on super earnings means that it will come into force as announced on 1 July 2025 (after the next election) with the Greens poised to fall over themselves to support Labor as it punishes those with higher superannuation savings. Note that the additional tax of 15% which will apply to balances over $3m also applies to unrealised capital gains, but NOT pensions up to the Transfer Balance Cap.
On the good news side, the Super Transfer Balance Cap (TBC) increased to $1.9m on 1 July 2023.
Unfortunately, the caps for Concessional and Non-Concessional Contributions ($27,500 and $110,000 pa respectively) are not due for indexation increases until 1 July 2024 – although it is worth bearing in mind that these limits are per person. Therefore, for a couple they are still quite generous when you consider that the median Australian employee earned $65,000 in 2022 according to the Australian Bureau of statistics.
And One More Thing:
Please be on complete alert for scams. There seems to be no end to what scammers will do to mine our personal and financial data.
You may have seen a recent TV show which told the story of a 95-year-old conned out of her life savings of $500,000 by a criminal pretending to be the police, who convinced her to “trust nobody….”
I urge you to trust no unsolicited contact; you should end the call, block the caller, the texts and/or the emails. If you are unsure about any approach pertaining to your dealings with the Marinis Financial Group, feel free always to contact our team immediately, before you send anyone money.
If you would like to read my latest contribution to the national retirement and wealth creation debate, please click here.
As always, if I or any of the staff can be of assistance, please don’t hesitate to contact us on (08) 8130 5130 or via firstname.lastname@example.org
Theo Marinis B.A., B.Ec., CPA., FPA®