Tax strategies for retirement in SMSFs presenter Barbara Smith CPA CFP Technical Director Taxpayers Australia Executive Director Superannuation Australia www.taxpayer.com.au June 2001 Tax strategies for retirement TA Workshops

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 Tax strategies for retirement TA Workshops

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 Tax strategies for retirement TA Workshops

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 Tax strategies for retirement TA Workshops

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 Tax strategies for retirement TA Workshops

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 Tax strategies for retirement TA Workshops

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 Tax strategies for retirement TA Workshops

Tax payable on annual AP withdrawal If maximum withdrawn and age = 65 Withdrawn Ded’n Taxable Rebate Male $24690 $12338 $12352 $1852.80 Female $24690 $10060 $14630 $2194.50 If minimum withdrawn age 65 Male $12740 $12338 $402 $60.30 Female $12740 $10060 $2680 $402.00 Tax strategies for retirement TA Workshops

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 Tax strategies for retirement TA Workshops

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 Tax strategies for retirement TA Workshops

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 Tax strategies for retirement TA Workshops

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 Tax strategies for retirement TA Workshops

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 Tax strategies for retirement TA Workshops

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 Tax strategies for retirement TA Workshops

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 65 - 69) Tax strategies for retirement TA Workshops

Personal superannuation claims self employed person’s deduction: $3,000 + 75% of excess up to age based limit eg. 60 yo contributing $33,000 can claim $25,500 ie. lesser of age based limit and $3000 + (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 Tax strategies for retirement TA Workshops

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 Tax strategies for retirement TA Workshops

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 Tax strategies for retirement TA Workshops

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 Tax strategies for retirement TA Workshops

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 .435 = $2,610 tax Post June 83 = ($480,000 - 120,000 - $100,696) x .165 = $42,785 tax Total $45,395 tax Saving over $10,000 in tax! Tax strategies for retirement TA Workshops

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 Tax strategies for retirement TA Workshops

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 = $178,517 6,500 Tax strategies for retirement TA Workshops

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