2. Technical strategies for the pre- retiree segment Rahul Singh – ANZ Technical Services

3. ­ Personal deductible super contributions ­ Tax deductible contributions involving entities ­ Timing retirement Agenda 2

4. ­ For an individual to claim tax deduction, need to meet the “less than 10%” rule  Different to the unsupported person rule prior to 1 July 2007 ­ Less than 10% rule applies if:  holding an office or appointment  performing functions or duties  engaging in work  doing acts or things as an employee for SG purposes Personal deductible super contributions - rule 3

5. Questions ­ John (45) derives:  $100,000 pa from an income protection policy. Is he eligible to claim a tax deduction for contributing to super?  $50,000 pa from worker’s compensation. He is on the books of the employer but not physically working. Is he eligible to claim a tax deduction for contributing to super?  $50,000 from leave payments paid to him in 2015-16. Terminated employment on 30 June 2015. Became a sole trader in 2015-16. Is he eligible to claim a tax deduction for contributing to super? Personal deductible super contributions - questions 4

6. ­ If the person has not been an employee for SG purposes, then the “less than 10%” test does not apply and the person is automatically eligible ­ If the person has been an employee for SG purposes, then the less than 10% test applies Personal deductible super contributions 5 Income attributable to employment activities Reportable employer super contributions Reportable fringe benefits needs to be less than 10% of Income from all sources including reportable employer super contributions + reportable fringe benefits

7. ­ John (60) works as a casual employee with Coles, earning $20,000 pa (pre salary sacrifice). He has sold an investment property with a capital gain of $500,000. He salary sacrifices $2,000 to super. ­ Income attributable to employment + RESC = $20,000 ­ Total income including RESC = $270,000  20,000 / 270,000 = 7.41% What if John’s employment income was $50,000 rather than $20,000? Personal deductible contributions – example 6

8. Dynamics of personal deductible super contribution & salary sacrifice 7 ­ If the less than 10% rule is not satisfied, due to employment income, then consider:  salary sacrificing but advantage limited by employment income  requires salary sacrifice agreement and potentially requiring planning earlier in the FY  increasing non-employment income  decreasing employment income

9. Worker’s compensation  TR 2010/1  Engaged as an employee or not  If not, then automatically eligible  If yes, then worker’s compensation is income attributable to employment activities Income protection  Engaged as an employee or not  If not, then automatically eligible  If yes, then unclear – seek specific tax advice  is it income attributable to employment activities – who paid the premiums, where did the injury happen, who owns the policy Salary replacement payments & deductible super contributions 8

10.  Notice of intent documentation and timeframes  usual timeframes  earlier timeframes apply if pension commenced, lump sums, roll-overs o super consolidation o using roll-overs to fund insurance premiums  Incorrect classification of contributions  employer substituted for sole trader and associated issues  Taking income below the tax-free threshold  unnecessary liability of 15% contributions tax Personal deductible contributions – some traps to avoid 9

11. Summary  Look out for clients with non-employment income who are eligible to contribute to super  Rental income  Capital gains  Taxable component - Untaxed element defined benefit schemes  Income protection  Opportunity to limit tax payable to 15% for contributions within the concessional cap Personal deductible contributions 10

12.  Being an employee of their controlled entity may not help with less than 10% rule  salary is income attributable to employment activities  With planning, income pushed out from entity could be manipulated to meet the less than 10% rule  dividends  trust distributions in the capacity of a beneficiary  Additional employer contributions might be a way to manage the issue  avoids Notice of Intent documentation and timeframes Tax deductible contributions when client is an employee of their own company or trust 11

13. John (56) is an employee and 100% shareholder of his own company Jimbo Pty Ltd. Jimbo usually pays him the following income:  $50,000 salary  $10,000 franked dividends  Is John eligible to claim a tax deduction for contributing to super?  What are his options?  Salary sacrifice  Additional employer contribution Tax deductible contributions when client is an employee of their own company or trust 12

14. Can a family investment company claim a deduction for super contributions made for the benefit of the directors of the company where the company derived income solely from passive investments?  ATO ID 2007/144  Yes, provided that directors are entitled to payment for their service  company constitution must allow entitlement to payment (Kelly v FCT) [2013]  Employer contributions in respect of employee are deductible  Directors are employees for SG purposes Tax deductible contributions when client is an employee of their own company or trust 13

15. What about a passive investments discretionary trust claiming a tax deduction in respect of director of a corporate trustee?  TR 2010/1  Need to be common law employee of the discretionary trust  is generally difficult for passive investment trust to have a trustee as a common law employee Suggestion in seeking further tax advice  family trust distributes to a corporate beneficiary  director(s) of the corporate beneficiary are entitled to payment for their director services  corporate beneficiary makes the super contributions and claims a deductible for employer contributions Tax deductible contributions when client is an employee of their own company or trust 14

16. Will Part IVA of the Income Tax Assessment Act 1936 always apply if a taxpayer who carries on a business (including a personal services business) pays superannuation contributions that do not exceed the age-based limits but are considerably in excess of the value of the services provided by the employee?  TD 2005/29  Is a reference case to illustrate that as long as the business is not affected by alienation of personal service income regime and is a personal services business, superannuation contribution not limited to the remuneration of the associate  Existence of the entity needs to be commercially justifiable or existence of unusual circumstances  Genuine employer / employee relationship Tax deductible contributions when client is an employee of their own company or trust 15

17. Summary  With planning and tax advice - income can be manipulated  Additional employer contributions generally require less paperwork  complication of NOI documentation and process alleviated Personal deductible contributions 16

18. John (60) is looking to retire. He has $50,000 (equivalent to 1 years salary) worth of annual and long service leave entitlements and wants to know when is a good time to retire?  Timing retirement can be significant decision  Cashing of leave entitlements require analysis  Various issues to contend with  tax  social security  defined benefit membership  work test for superannuation When is a good time to retire? 17

19. Superannuation guarantee  Not payable on termination payments, including leave, received as a lump sum  Payable if go on leave and taken as salary – net 8.075% benefit When is a good time to retire? 18 $50,000 leave taken as… Lump sum upon terminating As ongoing salary SG Nil $4,750 Contributions tax$712.50 Net$4,037.50

20.  Tax  No direct tax concessions when taken as ongoing salary  Termination leave payment depending on service period may attract tax concessions  There could be opportunities to receive payment in lower income years When is a good time to retire? 19 Type of leaveAccrual periodTax rate when taken as lump sum upon terminating Leave taken as salary Annual leavePre 18/08/1993Maximum 30% Taxed at marginal tax rate Post 17/08/1993Marginal Long service leavePre 16/08/19785% included and taxed at marginal 16/08/1978 to 17/08/1993Maximum 30% Post 17/08/1993Marginal

21.  Salary sacrifice  lump sum - to salary sacrifice termination payments, must have entered into an effective salary sacrifice agreement prior to entitlement / accrual  ongoing salary - could salary sacrifice leave payments taken as ongoing salary  Social security  lump sum termination payments assessed as income for most allowances, DSP but not CP & Age Pension  leave payments taken as ongoing salary assessed as employment income  going on leave generally detrimental for Age Pension o not an issue if not a social security recipient – 1 January 2017 changes or if spouse working When is a good time to retire? 20

22.  Personal deductible super contributions  Could terminate on 30 June and have leave paid the next FY. If not employee in the next FY, could be eligible to claim a tax deduction for contributing to super offsetting tax on leave  Condition of release for clients nearing their 60 th birthday  Terminating a gainful employment arrangement after turning 60 meets retirement condition of release – without considering future intentions or work status  Redundancy  Once over 65, tax concessions on leave and severance payment are removed When is a good time to retire? 21

23.  Defined benefit fund membership  Going on leave could assist with increasing service period  Accruing leave on leave  Going on leave could assist with further accrual of leave  Superannuation work test  being on part and full time hours paid leave is considered to be gainfully employed  unpaid leave – SPG 270, also gainful employment When is a good time to retire? 22

24. When is a good time to retire? 23 Going on leave before retiring Taking as lump sum upon terminating Superannuation Guarantee YesNo TaxMarginal tax rateHas unique tax rates Salary sacrificeYesGenerally no Social securityEmployment incomeDepends on payment  For John, we recommend John going on leave before retiring  attracting SG  allowing salary sacrifice  using leave entitlements to cross over to new FY

25. ­ Thanks for your time ­ You can contact Technical Services on o 1800 444 019 o Technical@onepath.com.au In closing up 24