5 simple tips to save lots of tax using smsf pensions

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

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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%

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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

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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

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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

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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

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Avoiding Contamination – pension phase

$35KConcessionalContribution

$180KNon-Concessional

Contribution

StartPension

1 July 30 June

StartPension

StartPension

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Multiple Pensions

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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

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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

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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

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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

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Recontribution Strategy – Consider…

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Tax components

Multiple Pensions

Re-Contribution Strategy

Starting Pensions at age 55-59

Starting Pensions at age 60

Maximising Exempt Current Pension Income

Agenda

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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

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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

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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

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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

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Starting Pensions 55-59: tax saving

500,000 x 7% x (15% - 0%)

X

5 years

=

$26,250

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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

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Tax components

Multiple Pensions

Re-Contribution Strategy

Starting Pensions at age 55-59

Starting Pensions at age 60

Maximising Exempt Current Pension Income

Agenda

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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

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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

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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

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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!

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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

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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)

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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!

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Bonus offer

Free Actuarial CertificateValued at $110.

Email greg@limeactuarial.com.au 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

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greg@limeactuarial.com.au