1. Tax strategies for retirement in SMSFs
presenter
Barbara Smith CPA CFP
Technical Director
Taxpayers Australia
Executive Director
Superannuation Australia
June 2001
Tax strategies for retirement
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2. Need for retirement tax strategies in a SMSF
To ensure desire lifestyle in retirement and:
minimise tax legitimately
Maximise returns from investments
Secure and maximise regular income in retirement
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3. Before starting a pension
As commencing an allocated pension in a SMSF is not a cash withdrawal
cash out the post June 83 ‘low tax threshold’ together with any pre July 83 component and recontribute it as an undeducted contribution
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4. Before starting a pension
Once started a pension cannot be added to, so before commencement:
Roll in any existing moneys from other funds
Make any further deductible and/or undeducted contributions
Decide if there is a reversionary beneficiary
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5. Structuring before starting a pension
Option 1 - if all employer contributions, no cashing means no undeducted contributions
Rollover ETP or commence allocated pension
Undeducted Purchase Price = $0
Annual Deductible Amount = UPP/term = $0
Option 2 - cash $100,696 and required proportion of pre July 83 component
recontribute as undeducted contributions
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6. Features of an Allocated Pension
pension payments must be made at least annually
Deductible amount is tax free each year
15% rebate on taxable part within the lump sum RBL
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7. Calculating DA for an allocated pension
The tax deductible amount =
UCs + Invalidity + CGT exempt
life expectancy (at commencement of allocated pension)
Example if undeducted contributions = $200,000
for a 65 yo male $200,000/16.21 = $12,338
for a 65 yo female $200,000/19.88 = $10,060
The male will get a tax deductible amount of $12,338 each year, the female $10,060 each year
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8. Tax payable on annual AP withdrawal
If maximum withdrawn and age = 65
Withdrawn Ded’n Taxable Rebate
Male $ $ $ $
Female $ $10060 $ $
If minimum withdrawn age 65
Male $ $ $ $60.30
Female $ $ $ $402.00
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9. Imputation credit strategy
Imputation credits, even those from pension assets, offset the fund’s tax liability on taxable income
If the fund has no tax liability excess imputation credits refunded from 2000/01
Funds paying pensions should now maximise their franked dividends as the dividend + imputation credit is now the effective return for the fund
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10. Securities listed on stock exchange
Make as inspecie contributions to a SMSF as:
undeducted contributions,
spouse contributions, or
deductible personal contributions
Benefits
Reduce personal income in future
can result in eligibility for a tax rebate
capital gains or losses crystalised, so if gains are made crystalise losses on other investments
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11. CGT rules small businesses
exemption for active assets held for 15 yrs + or
these concessions (each can be claimed if eligible)
50% CGT exclusion for sole traders/partnerships
50% active assets exemption for balance of CG
Small business rollover relief
CGT retirement exemption
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12. 15 year asset exemption
capital gain from active asset is ignored in working out a taxpayer’s net capital gains
applies if:
an individual, or controlling individual of a company or trust, retires or is permanently incapacitated and has held an active asset continuously for at least 15 years before a CGT event
15 year time is not broken by rollover due to marriage breakdown or a compulsory acquisition
Small business relief basic conditions satisfied
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13. Small business relief basic conditions
net value of assets of the business and connected entities does not exceed the threshold of $5 million
the asset is an active asset
an individual must be a controlling individual if the business structure is a company or trust
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14. Small Business Retirement Exemption
Choice that a gain from a CGT event is exempt if used for retirement
lifetime limit of $500,000 for an individual
Prior year losses must be recouped before a gain is a SBRE
Can be available to an individual and a ‘controller’ in a company or trust
If under age 55, the gain must be rolled over immediately to your fund and preserved
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15. Spouse superannuation contributions
Treat as undeducted contributions in the SMSF
Unlimited amounts can be contributed
18% rebate for $3000 contributions for a spouse with assessable income + reportable fringe benefits less than $10,800, ie max $540
rebatable contributions cut out $ for $, and cease at $13,800
Can contribute for a spouse who is:
not the contributing spouse’s employee; and
under 65 (or working 10 hours per week and )
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16. Personal superannuation claims
self employed person’s deduction:
$3, % of excess up to age based limit
eg. 60 yo contributing $33,000 can claim $25,500
ie. lesser of age based limit and $ (75% x $30,000)
Can claim this deduction if less than 10% of total assessable income + reportable fringe benefits total is assessable and exempt income + reportable fringe benefits is from an employer providing superannuation support even if more than 90% of income is from investments
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17. Strategy to maximise super dedns
Aim: salary sacrifice employment income below10% of total assessable income + reportable fringe benefits total
Can be achieved by a prospective salary sacrifice into:
superannuation and/or
expenses that would be personally deductible
Warning: do not breach industrial law
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18. Aggregating super benefits
Useful if you have 2 or more funds, one with more Pre 7/83 Eligible Service Period
without aggregation tax payable can be higher than with aggregation if cashed
For example 25% pre in one fund, none in the other
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19. Example - no aggregation
Fund with no pre July 83 ESP $280,000
($280,000 - $100,696) x .165 = $29,585 tax
Fund with 25% pre July 83 ESP $200,000
Pre July 83 = $50,000, 5% taxed
If MTR 43.5%, $2,500 x .435 = $1,087 tax
Post June 83 $150,000 x .165 = $24,750 tax
Total $55,422 tax
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20. Example - with aggregation
One fund 25% pre July 83 ESP $480,000
Pre July 83 = $120,000, 5% taxed
If MTR 43.5%, $6,000 x = $2,610 tax
Post June 83 = ($480, ,000 - $100,696) x = $42,785 tax
Total $45,395 tax
Saving over $10,000 in tax!
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21. Topping up
Where there is pre 7/83 service make extra undeducted contributions to:
increase pre 7/83 amount
reduce post 6/83 amount
Of value if age 55 or more for a cash ETP and the Post 6/83 Upper Limit remains
Also increases the tax deductible amount of a pension
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22. Maximising your tax free payout
How to calculate the amount to withdraw to get the $100,696 post June 83 with:
$50,000 undeducted contributions
1200 pre July 83 days
6500 post June 83 days
($100,696 + $50,000 UC) x 7,700 = $178, ,500
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23. Questions?
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