Tax Strategies for Retirement in SMSFs | Presenter: Barbara Smith, CPA, CFP

1. 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 TA Workshops

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 TA Workshops

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 TA Workshops

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 TA Workshops

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 TA Workshops

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 TA Workshops

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 TA Workshops

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 Tax payable on annual AP withdrawal If maximum withdrawn and age = 65 Withdrawn Ded’n Taxable Rebate Male $24690 $12338 $12352 $1852.80 Female $24690 $10060 $14630 $2194.50 If minimum withdrawn age 65 Male $12740 $12338 $402 $60.30 Female $12740 $10060 $2680 $402.00 TA Workshops

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 TA Workshops

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 TA Workshops

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 TA Workshops

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 TA Workshops

13. 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 Small business relief basic conditions TA Workshops

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 TA Workshops

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 65 - 69) TA Workshops

16. 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 TA Workshops

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 TA Workshops

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 TA Workshops

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 TA Workshops

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 .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! TA Workshops

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 TA Workshops

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 = $178,517 6,500 TA Workshops

23. Questions? TA Workshops

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