‘Of course I am minimising my tax. And if anybody in this country doesn’t minimise their tax, they want their heads read, because as a government, I can tell you you’re not spending it that well that we should be donating extra!‘ – Kerry Packer, comments to the House of Representatives Select Committee on Print Media, 1991
If the big fella thought the Government wasn’t spending your taxes too well in 1991, he would be horrified with the waste taking place today.
Politicians splash around billions of taxpayer dollars on quick fixes. This and the interest costs only add to the mounting federal debt.
If you’re fed up with your taxes going to waste, fortunately for retirees, there is a way to earn up to $257,948 (after July 1, 2014) without having to pay tax. That means you get to keep more of your hard-earned dollars.
Don’t Ignore This Asset Class
Superannuation – in spite of the constant meddling by cash strapped governments – is still the most tax effective method of saving and generating a retirement income in Australia.
But the very thing that makes super attractive – tax savings – is the reason many people think it’s complex.
The government wants to encourage people to save and build a nest egg to reduce reliance on the welfare system. In theory it’s a worthy aim.
Unfortunately the old rule of what the ‘Government giveth, the Government can taketh away’ applies to super. That’s especially so when they’re in search of some much-needed dollars.
The constant fiddling with the contribution rules (to minimise the amount claimed as a tax deduction) and withdrawal taxes, leaves most people scratching their heads on whether super is really that super after all.
But with the huge potential tax break on offer, you shouldn’t ignore it. So if you’re near retirement or you’ve retired let’s start with the basics. (Even if you’re not near retirement, take note so you can plan in advance.)
Obviously the best tax to pay is no tax. Here is where super comes into its own – especially if you’re 60 or older.
When you switch a super account from accumulation (savings mode) to pension phase, the earnings within the fund are currently TAX FREE.
From 1 July 2014 investment earnings in account-based (formerly known as allocated) pensions will be tax-free up to $100,000 a year for each member. Any earnings over $100,000 per member will attract a 15% tax.
In the world of financial theory, a couple with equal account balances (after 1 July 2014) can earn up to $200,000 per annum TAX FREE.
(NOTE: During the 2013/14 financial year there is no limit on the tax free income earned within an account based pension.)
In reality, individuals often have different super account balances – however there are strategies of withdrawal and re-contribution that members can use to even up the balances between two people. But we won’t get into that today.
In principle, super is a great vehicle for retirement income. But depending on your age there are rules around the tax treatment of earnings, accessibility to lump sum and contribution eligibility.
Now, before you rush out to put in place a strategy to keep the taxman’s hands off your funds, check with your accountant or financial planner on how the rules apply to you.
How to Keep the Tax Man Away From Your Wealth
So back to our hypothetical case of the boomer retiree couple.
Assuming they are over 65, we know they can earn up to $100k each in their account-based pension.
That means for tax purposes their account-based pension payment doesn’t register on the taxman’s radar. In effect they have a completely clean slate for income tax reporting requirements.
In addition to their tax-free super income they can also earn other sources of income that have concessions for income tax purposes. This is courtesy of Senior Australians & Pensioners Tax Offset (SAPTO) rules.
Members can earn (from employment, interest, dividends, rents, royalties etc.) a further $28,974 each. Thanks to the SAPTO, they won’t pay tax on those earnings. That’s another $57,948 TAX FREE for the retiree couple.
If the members are over 60, but under 65, they can earn up to $20,542 each before paying any tax. That’s thanks to the Low Income Tax Offset – LITO.
There you have it – up to $257,948 per annum without the taxman getting a sniff of your money.
If you’re a single retiree over 65, the number is $132,279 TAX FREE ($100,000 tax free from the account based pension and $32,279 due to SAPTO).
If you do the math, with say a 5% return, our hypothetical couple could have just over $5 million invested and not pay a cent in tax (for a single retiree it’s $2.6 million).
Now, 98% of retirees don’t have this much retirement capital. So it goes to show how much scope there is for pending retirees and current retirees (based on certain age criteria) to minimise their personal tax to zip, zero, nothing.
But will this tax regime last? Who knows? Governments around the world are looking under every rock for a dollar.
However there is a big retiree and pending retiree demographic. Politicians of all stripes will tread carefully before inflicting more tax pain…or you’d think so anyway.
My personal view is there are a few more years before the loss of boomer tax revenue starts to really bite on the budget’s bottom line.
So each year you can legally avoid making a donation to Canberra is a good year.
You may as well make the most of these tax laws until Gen X&Y takes over the Treasury reins.
The big fella would be very proud of you.
Vern Gowdie
Editor, Gowdie Family Wealth
Ed Note: Vern Gowdie has been involved in financial planning in Australia since 1986. In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners. His previous firm, Gowdie Financial Planning, was recognized in 2004, 2005, 2006 & 2007, by Independent Financial Adviser (IFA) magazine as one of the top 5 financial planning firms in Australia. He is currently working with Port Phillip Publishing on the creation of a Family Wealth financial strategy for the challenging years ahead.
From the Archives…
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26-07-2013 – Kris Sayce
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25-07-2013 – Vern Gowdie
Why You Must Avoid This Big Investing Mistake…
24-07-2013 – Kris Sayce
The Dark Side of Technology: Part 2
23-07-2013 – Sam Volkering
The Dark Side of Technology: Part 1
22-07-2013 – Sam Volkering
