5 simple tips to save lots of tax using smsf pensions
TRANSCRIPT
November 2014Greg Einfeld
5 SIMPLE TIPSTO SAVE LOTS OF TAX
USING SMSF PENSIONS
1
Tax components
Multiple Pensions
Re-Contribution Strategy
Starting Pensions at age 55-59
Starting Pensions at age 60
Maximising Exempt Current Pension Income
Agenda
2
Tax Components – an example
3
Tax Components – how they are taxed
Event Tax Free Taxable
Age 55-59 Age 60+
Death benefit to spouse Nil Nil Nil
Death benefit to adult child Nil 15% 15%
Lump Sum withdrawal Nil 1st $185K: NilBalance: 15%
Nil
Regular Pension withdrawal Nil MTR – 15% Nil
Note: excludes Medicare LevyNote: excludes Medicare Levy, lump sum withdrawal is a lifetime limit
4
Tax Components – how they grow
Event Taxable Tax Free
Non-Concessional Contributions
Concessional Contributions
Investment Income - Accumulation
Investment Income - Pension
5
Tax Components – how they shrink
Account $ Taxable $ Tax Free % Tax Free
John - Accumulation 0 100,000 100%
John - Pension 1 100,000 0 0%
John – Pension 2 40,000 60,000 60%
6
Tax Components – an example
7
Tax components
Multiple Pensions
Re-Contribution Strategy
Starting Pensions at age 55-59
Starting Pensions at age 60
Maximising Exempt Current Pension Income
Agenda
8
Age 61
$500,000 in SMSF (pension) Jul 2013- $400,000 employer contributions
- $100,000 investment income
Multiple Pensions
SANDRA
9
Multiple Pensions
MEMBER CASH FLOWS
Pension Accumulation Total
Balance – 1 July 2013 500,000 0 500,000
Non-concessional contribution 0 450,000 450,000
Investment income 20,000 20,000 40,000
Pension payments (50,000) 0 (50,000)
Balance – 30 June 2014 470,00050%
470,00050%
940,000100%
Taxable
Tax free
Taxable
10
Multiple Pensions
WHAT SHOULD SANDRA DO?
(A) Do nothing
(B) Commute the existing pension, thenStart a single new pension for $940,000
(C) Keep the first pension ($470,000), andStart a second pension for $470,000
11
Multiple pensions - components
Scenario B: 1 Big Pension Scenario C: 2 Small Pensions
1st Pension Taxable: 490,000Tax Free: 450,000 (48%)
Taxable: 470,000Tax Free: 0 (0%)
2nd Pension N/A Taxable: 20,000Tax Free: 450,000 (96%)
Total Taxable: 490,000Tax Free: 450,000 (48%)
Taxable: 490,000Tax Free: 450,000 (48%)
$100,000 Withdrawal
1st Pension Taxable: 438,000Tax Free: 402,000 (48%)
Taxable: 370,000Tax Free: 0 (0%)
2nd Pension N/A Taxable: 20,000Tax Free: 450,000 (96%)
Total Taxable: 438,000Tax Free: 402,000 (48%)
Taxable: 390,000Tax Free: 450,000 (54%)
Death tax reduced by > $7,000 in scenario C 12
Benefits of Multiple Pensions
Tax components aren’t contaminatedEstate planning: Withdraw Taxable, Leave Tax free to kidsTTR < 60: Withdraw tax free, leave taxable for > 60What if tax is re-introduced on taxable component >60?Goes hand in hand with Re-Contribution
Centrelink deeming provisions from 1/1/2015
Failure to meet minimum pension standard
1
2
3
13
Avoiding Contamination – pension phase
$35KConcessionalContribution
$180KNon-Concessional
Contribution
StartPension
1 July 30 June
StartPension
StartPension
14
Multiple Pensions
15
Implementation
Tax components
Multiple Pensions
Re-Contribution Strategy
Starting Pensions at age 55-59
Starting Pensions at age 60
Maximising Exempt Current Pension Income
Agenda
16
Recontribution Strategy
PERSONALBANK
ACCOUNT
Pension payment
Contribution
SMSF
17
Age 66
Divorced
Still working
2 children: Ben (35), Sarah (31)
500,000 in super– $400,000 employer contributions
– $100,000 investment income
Recontribution Strategy
JANE
18
MEMBER STATEMENT
Member name Jane
Taxable component ($) 500,000
Tax free component ($) 0
Total member balance ($) 500,000
Recontribution Strategy – Year 1
MEMBER STATEMENT
Member name Jane
Taxable component ($) 320,000
Tax free component ($) 180,000
Total member balance ($) 500,000
Death tax = $75,000 Death tax = $48,000
19
MEMBER STATEMENT
Member name Jane
Taxable component ($) 500,000
Tax free component ($) 0
Total member balance ($) 500,000
Recontribution Strategy – Year 3
MEMBER STATEMENT
Member name Jane
Taxable component ($) 0
Tax free component ($) 500,000
Total member balance ($) 500,000
Death tax = $75,000 Death tax = $0
20
Recontribution Strategy – Consider…
21
Tax components
Multiple Pensions
Re-Contribution Strategy
Starting Pensions at age 55-59
Starting Pensions at age 60
Maximising Exempt Current Pension Income
Agenda
22
Age 56
Retired – man of leisure
Owns properties outside super
Taxable income (rent) $200,000
500,000 in super
– $400,000 employer contributions
– $100,000 investment income
Starting Pensions 55-59
PETER
23
Starting Pensions 55-59
SHOULD HE START A PENSION?
(A) Yes – so SMSF investment income is tax exempt
(B) No – because he doesn’t need the cash
(C) No – because he will have to pay > 30% tax on pensionwithdrawals
24
Tax Components – how they are taxed
Note: excludes Medicare Levy, lump sum withdrawal is a lifetime limit
Event Tax Free Taxable
Age 55-59 Age 60+
Death benefit to spouse Nil Nil Nil
Death benefit to adult child Nil 15% 15%
Lump Sum withdrawal Nil 1st $185K: NilBalance: 15%
Nil
Regular Pension withdrawal Nil MTR – 15% Nil
25
Determination SMSFD 2013/2
“A payment made as a result of a partial commutation of an account based pension (other than a transition to retirement income stream) counts towards the minimum annual amount required to be paid”
Requirements:Account Based Pension (not TTR)Partial Commutation (not full commutation)Election must be documented before withdrawal is made
26
Starting Pensions 55-59: tax saving
500,000 x 7% x (15% - 0%)
X
5 years
=
$26,250
27
Starting Pensions 55-59: rules of thumb
Retired, ORNon-preserved funds, ORTaxable income < 37,000
START A PENSION
Working ANDOnly preserved funds ANDIncome between 37K-180K
Consider:Investment incomePAYG administrationRe-contribution strategy
Working ANDOnly preserved funds ANDIncome >$180,000
ACCUMULATION
28
Tax components
Multiple Pensions
Re-Contribution Strategy
Starting Pensions at age 55-59
Starting Pensions at age 60
Maximising Exempt Current Pension Income
Agenda
29
Age 58
Turns 60 on 1 April 2016
Still working, earns $200,000 p.a.
Hasn’t commenced a pension yet
$600,000 in super
Starting Pensions at 60
MICHAEL
30
Tax Components – how they are taxed
Note: excludes Medicare Levy
Event Tax Free Taxable
Age 55-59 Age 60+
Death benefit to spouse Nil Nil Nil
Death benefit to adult child Nil 15% 15%
Lump Sum withdrawal Nil 1st $185K: NilBalance: 15%
Nil
Regular Pension withdrawal Nil MTR – 15% Nil
Note: excludes Medicare Levy, lump sum withdrawal is a lifetime limit
31
Starting Pensions at 60
WHEN SHOULD HIS PENSION START?
(A) 1 June 2015 – 1 mth before the FY when he turns 60
(B) 1 July 2015 – start of the FY when he turns 60
(C) 1 April 2016 – on his 60th birthday
(D) 1 July 2016 – start of the FY after he turns 60
32
Starting Pensions at 60
1/6/15 30/6/161/7/15 1/4/1660th b’day
Assets $600,000Annual Income @ 7% $42,000Monthly income $3,500Monthly tax @ 15% $525
10 months
StartPension
Firstpayment
Saving = $525 x 10 = $5,250!
33
Tax components
Multiple Pensions
Re-Contribution Strategy
Starting Pensions at age 55-59
Starting Pensions at age 60
Maximising Exempt Current Pension Income
Agenda
34
Actuarial Certificate
GENERALLY, AN ACTUARIAL CERTIFICATE IS REQUIRED IF:
The fund has both a pension balance and an accumulation
balance at any time in the year
The Fund’s assets are
unsegregated
AND
35
Exempt Current Pension Income
ECPI(%) = Average pension balance
Average SMSF balance
36
Increasing ECPI
Start pensions early in the year
Start pensions often
Make pension payments late in the year
(Make contributions late in the year)
37
Increasing ECPI - example
Opening fund balance $500,000; 100% pensionInvestment income = 35,000 (7%)Contribution $180,000 on 2 July
New Pension started 2 JulyPension wdl $48K 30 June
No new pensionPension wdl $4K per mth
ECPI = 72.6%Tax = $1,441
ECPI = 100%Tax = $0
Tax free component is also higher! 38
Summary
Tax savings > $100,000!
39
Bonus offer
Free Actuarial CertificateValued at $110.
Email [email protected] today.Tell me which one (or more) of today’s tips
you will start implementing
Valid until 31 January 2015. Limit 1 per business.40
