Beware of crossing the income threshold
There are attractive tax options outside superannuation.
One of the changes is a cap on how much can be transferred into tax-free pension phase at retirement with $1.6 million for an individual and $3.2m for a couple.
Although the number of people affected by this cap is low, the impact will be felt for many years to come, as people will need to constantly monitor their superannuation balances.
As balances increase, and a desired lifestyle becomes more costly, many more people will find that their super is within reach of the $1.6m cap (which will be indexed annually in $100,000 increments with the rate of inflation).
If the pension fund has more than the capped amount, to avoid an “excess transfer balance tax” that may be applicable, a decision will need to be made regarding the most tax-effective way to manage the surplus.
If money is withdrawn from super it is worth remembering the first $18,200 in personal income — regardless of age — is tax-free (see table).
There are two options available:
● Transferring the balance above the cap into an accumulation account still within the superannuation structure.
● Moving the funds outside of superannuation and invest in the individual’s name.
A self-managed superannuation fund in pension mode can also have a separate accumulation account that attracts the 15 per cent superannuation tax.
Segregating the assets financing the SMSF pension from the assets representing your SMSF accumulation account will require an actuarial certificate. This document will seek to identify tax-exempt earnings from the percentage of earnings that relate to the taxable earnings. The downside of this also includes that retirees will be subject to managing two accounts as well as monitoring the balances for the rest of their lives.
Alternatively, there is the option to invest the surplus in the individual’s or couple’s name outside of superannuation.
An individual at retirement age (which can range from 65 to 67 depending on year of birth, although it also can be from 60 if a condition of release is satisfied, such as retiring from the workforce or starting a transition-to-retirement pension) has an effective tax-exempt threshold of $32,279 and up to $28,974 for each member of a couple or $57,948 in total including the seniors and pensioners tax offset (only eligible if at retirement age).
If the individual is under retirement age and earning an income of $37,000 or less, then the tax-exempt threshold is $20,542, which includes the low income tax offset.
Taxable income earned by someone at retirement age above the tax-exempt threshold levels will be subjected to a tax rate depending on the combination of the Medicare levy (partly payable based on an income test), loss of low income tax offset and reduced seniors and pensioners tax offset, and the marginal income tax rates.
Some new ideas for tax planning
The decision to take money out of super has to be made with some foresight as to how the money will be invested and the return expected.
For example, a fixed-interest investment paying a regular income will provide tax-free income if the income earned is under $32,279 for an individual.
An investment with predictable outcomes such as fixed income can be examined here.
A new idea would be to consider marketplace loans through an online marketplace platform, with an earnings rate of around 7 per cent, will allow an individual in retirement to have over $400,000 invested in their name outside superannuation, and not pay tax.
The annual earnings would be below the tax-exempt threshold, allowing the investor to pocket over $28,000 tax-free.
But if the funds are put into growth assets leading to capital gains in the future, then the tax-exempt threshold may be exceeded, and tax will be payable on the amounts above the threshold.
The challenge for retirement investors is to maximise the effectiveness of the tax-exempt threshold without exceeding it.
If income and capital gains are above the threshold then the tax payable is likely to be prohibitive compared to the superannuation accumulation tax rate of 15 per cent.
As the level of assets held in an individual’s or couple’s name grows, the tax effectiveness decreases if the effective tax-exempt threshold is exceeded.
Rosemary Steinfort is research manager at marketplace lender www.directmoney.com.au
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With the superannuation reforms announced recently by Scott Morrison (subject to legislation), and expected to take effect in July next year, retirees may need to consider other retirement strategies beyond superannuation to boost income returns.