Superannuation Discussion + market volatility

[andye]

The vultures are looming. They say it's fairer. Ah no, not for those already in pension phase having already paid 15% in accumulation.

If tax on growth happened I'm sure there would need to be some relief for those with low or medium balances. If you've planned a budget at retirement its not reasonable to take a chunk away


A question as the article said something that I didn't think was true. My understanding was that even if your pension account exceeded the $1.9m through growth, there is still no tax on growth. Am I correct?

 

[tgh]

Us boomers have had a wonderful run, our fund has grown faster than the draw down and we will leave the kids a nice little earner.
We have also personally managed our assets to live in a minimum tax environment with a lot of freebies thrown in.
It is inevitable that the sword will fall sometime..how and when remains to be seen.

 

[Quickstatus]

there is still no tax on growth. Am I correct?

Currently No tax on investment earnings of assets in pension phase account (providing a superannuation accumulation phase account was used to inject capital intothe pension phase account)

 

[JohnK]

Silly question.

I have around 8 weeks long service leave accrued and for now have used some of it (cashed out annual leave) but would like to leave that in tact. I'll have another 4 weeks long service leave in 3.5 years. I also have around 4 weeks annual leave in the bank for rainy day.

It's not a great deal of money but could be around $40,000-$50,000 gross depending on exactly when I retire.

Can I dump all that amount into super on July 7th 2029 when I retire and pay just 15% contributions tax? I'll more than likely not reach the super threshold in previous years.

 

[SYD]

Silly question.

I have around 8 weeks long service leave accrued and for now have used some of it (cashed out annual leave) but would like to leave that in tact. I'll have another 4 weeks long service leave in 3.5 years. I also have around 4 weeks annual leave in the bank for rainy day.

It's not a great deal of money but could be around $40,000-$50,000 gross depending on exactly when I retire.

Can I dump all that amount into super on July 7th 2029 when I retire and pay just 15% contributions tax? I'll more than likely not reach the super threshold in previous years.

You might be able to arrange a one off Salary Sacrifice up to your concessional limit (currently $30k less any mandatory SGL payable).

Payout of unused leave is taxed at a concessional rate anyway (varies for retirement / resignation v redundancy). Someone else here more knowledgeable might have the specific details.

If you haven’t exceeded the Super TBC, you can also top up with post tax dollars (leftover payout) as non-concessional contribution. Currently $120k pa (up to $360k under a “Bring forward” arrangement).

If you’re over the preservation age, that might a good way to get some extra cash/savings into the better tax regime of super than leaving outside super and subject to marginal tax rates - as applicable.

 

[Quickstatus]

Can I dump all that amount into super on July 7th 2029 when I retire and pay just 15% contributions tax?

Currently you can dump $30k concessional per year total - including what employer puts in. Outside of a one off salary sacrifice you can turn nonconcessional into concessional contribution by sending the super fund a notice of intention to claim a tax deduction and let your accountant know to claim the tax deduction

But if your annual tax rate (not marginal tax rate - ie actual taxable income / actual tax paid) is going to be less than 15% put it in as non concessional

 

[SydneySwan]

Can I dump all that amount into super on July 7th 2029 when I retire and pay just 15% contributions tax? I'll more than likely not reach the super threshold in previous years.

Yes if you have unused concessional contributions cap amounts available from the previous 5 years to accommodate this and your total super balance is less than $500,000 as at 30 June 2029.

Concessional contributions cap | Australian Taxation Office

Keep track of your concessional (before-tax) contributions so you don't exceed the contributions cap.

www.ato.gov.au

This is not financial advice. Laws / limits may change in the meantime.

 

[Kerrodt]

I think change inevitable too but the politics would be hard. As super matures, there will be lots of people with very high pension account balances which are paying zero tax on growth

I would note that the money that has already been taxed at 15% is definitely your money.

The growth in pension phase however, has not been taxed at any stage and the proposal would presumably only apply on dividends and at time of sale of an asset (share/bond/property) etc. I dont think the actuaries are floating a tax on notional growth which was one of the issues holding up the $3M higher rate legislation.

If sonething similar did come to pass, I expect it would push some people to withdraw their super at retirement to avoid paying tax (however financially unwise that might be).

If an individual withdrew all of their super at retirement - and let's assume here that they have a substantial balance - and held the funds and investments in their own name then they would be subject to personal tax rates on earnings and personal CGT on capital gains. I don't think that this would be "avoiding tax" in any way as they would most likely be subject to increased tax in their own name.

Superannuation is by and large a legislated tax shelter for long term mandated savings and long term mandated regular contributions with rules around how it works. Nothing much else.

A person could hold the exact same investments in either their own personal name or via a super fund and the only real differences are (a) timing of access to those investments and (b) tax rates applicable to earnings - lower tax in super; higher tax in personal names.

I'm no fan of the plan proposed by the government on taxing unrealised gain in super for balances over $3M - it stinks. But my view on this is as follows:

• The government actually doesn't want it to work as the government says it will work (taxing unrealised gains etc...).
• The government actually wants superannuation members to look at their superannuation balances, and for those members who hold a balance over $3M to say to themselves (along with their advisors) "Bugger this, it's too hard and the taxes are going to be too high to keep money in here above $3M. Lets just pull it out in lump sum to keep the balance at or below $3M and hold the investments in our own personal name".
• Then, as if by magic, all of these "excess balances" come back into the members personal name and are then taxed in the normal course of business at personal tax rates.
• The aim of the government here is to have large/excess balances removed out of the superannuation system and they are using an abhorrent taxation regime to force people to do it.
• No-one in their right mind would/should keep money in any investment structure (here it is superannuation) and pay higher levels of taxation when there are lower taxed environments available (personal names or some other structure)
• Effectively, this will shift large balances out of what might change from low/no tax super structures to unattractively higher tax super structures and into an already existing tax structure(s) that are more attractive.

 

[tgh]

• Effectively, this will shift large balances out of low/no tax super structures and into an already existing tax structure(s).

This makes no sense in my reality , if a large super balance was drawn down , it could just be added to to a personal share portfolio
where the capital gains are never realised and the dividends are effectively tax free.

 

[andye]

If an individual withdrew all of their super at retirement - and let's assume here that they have a substantial balance - and held the funds and investments in their own name then they would be subject to personal tax rates on earnings and personal CGT on capital gains. I don't think that this would be "avoiding tax" in any way as they would most likely be subject to increased tax in their own name.

Superannuation is by and large a legislated tax shelter for long term mandated savings and long term mandated regular contributions with rules around how it works. Nothing much else.

A person could hold the exact same investments in either their own personal name or via a super fund and the only real differences are (a) timing of access to those investments and (b) tax rates applicable to earnings - lower tax in super; higher tax in personal names.

I'm no fan of the plan proposed by the government on taxing unrealised gain in super for balances over $3M - it stinks. But my view on this is as follows:

• The government actually doesn't want it to work as the government says it will work (taxing unrealised gains etc...).
• The government actually wants superannuation members to look at their superannuation balances, and for those members who hold a balance over $3M to say to themselves (along with their advisors) "Bugger this, it's too hard and the taxes are going to be too high to keep money in here above $3M. Lets just pull it out in lump sum to keep the balance at or below $3M and hold the investments in our own personal name".
• Then, as if by magic, all of these "excess balances" come back into the members personal name and are then taxed in the normal course of business at personal tax rates.
• The aim of the government here is to have large/excess balances removed out of the superannuation system and they are using an abhorrent taxation regime to force people to do it.
• No-one in their right mind would/should keep money in any investment structure (here it is superannuation) and pay higher levels of taxation when there are lower taxed environments available (personal names or some other structure)
• Effectively, this will shift large balances out of low/no tax super structures and into an already existing tax structure(s).

As I said, it would usually be unwise to withdraw but many people do daft things to avoid paying ATO. I was imagining people with low medium balances who are unwilling/unable to get sensible advice.

I agree on the motivations for rhe proposed $3m changes. Whether one views it as abhorrent may vary depending on one's circumstances

 

[33kft]

I think the bandaid will need to come off at some point re no tax on investment earnings on pension accounts.

I have 2 decades until I can benefit from super but I suspect by then I will be paying something on those earnings.

What would be nice, assuming I am correct, would be a gradual ramp up based on preservation date in recognition that until 2025, we have existed under super guarantee rates ranging from 0-11.5% and lack the sort of balances that those starting work today could expect at retirement, and I could see a similar ramp up in pension account taxation to 15% for those who begin work in 2025 under 12% SG being reasonable, if not administratively difficult (but we can make income tax work on an individual basis so I am sure it could be done).

Now, who is the brave soul to sell a change to super taxation to the populace...

 

[Quickstatus]

The government actually wants superannuation members to look at their superannuation balances

If the govt wants me to keep my super fund (accumulation + pension phase accounts) under $3M, or get taxed for unrealised gains, I will just move the balance out and put it into fully franked shares where I will effectively pay Zero tax - as the shares are fully franked, and the capital gains are only realised when I sell them.
The govt gets nothing.....

Personally I think the transfer balance cap is too low. I dont know if the actuaries have considered the possibility that asset value could significantly drop. It should be IMO about $3M now.

 

[andye]

Silly question.

I have around 8 weeks long service leave accrued and for now have used some of it (cashed out annual leave) but would like to leave that in tact. I'll have another 4 weeks long service leave in 3.5 years. I also have around 4 weeks annual leave in the bank for rainy day.

It's not a great deal of money but could be around $40,000-$50,000 gross depending on exactly when I retire.

Can I dump all that amount into super on July 7th 2029 when I retire and pay just 15% contributions tax? I'll more than likely not reach the super threshold in previous years.

Not the questions you are asking but my plan is not to cash out leave. The reason being is that you accumulate more leave while you are on leave and also if you get sick, you can take that leave instead.

Employers may vary on what they allow however. Some employers even allow LSL to be taken at half-pay which can amplify the sick leave safety-net as well as being tax-efficient

Others may suggest differently, but I would imagine that early July is not the optimum time to retire. You could work another couple of months effectively tax free

 

[Quickstatus]

You could work another couple of months effectively tax free

Correct
Or work less over the year and pay little tax

Dont forget that annual leave (but not LSL) comes with leave loading but I think this only applies if the leave is not cashed out?

 

[andye]

@JohnK To answer your real question and this is not tax advice (I'm a doctor not a financial professional) but my understanding is:

You will receive the money from your employer net of tax

1. You can put it in as a concessional contribution (after informing your fund) up to the (grossed up value) concessional contributions cap (currently $30k) remaining after any compulsory employer contributions and then claim the tax less 15% as a personal tax deuction.

This still only gets the net amount into super and with a low income for that tax-year, the tax rebate would be low.

Or

2. You could put in the net amount as a non-concessional contribution and pay no contributions tax

Or

3. Don't do the lump sum thing and salary sacrifice an equivalent amount* the previous tax-years. Then take the annual and LSL as an extension of your employment with your official retirement when it runs out.

(The third would be what I would go for but obviously, dont know your circumstances and full tax situation, reasons for date of retirement, or even age etc)

* if the salary sacrifice would leave you short for day to day expenses, you could consider a transition to retirement pension

 

[Quickstatus]

You could put in the net amount as a non-concessional contribution and pay no contributions tax

Potentially that would not be tax effective depending on JohnK's tax rate.

 

[andye]

Potentially that would not be tax effective depending on JohnK's tax rate.

Agreed its likely to be the "wrong" thing (likely worst of the 3) to do but it is possible to do

 

[Kerrodt]

• Effectively, this will shift large balances out of low/no tax super structures and into an already existing tax structure(s).

This makes no sense in my reality , if a large super balance was drawn down , it could just be added to to a personal share portfolio
where the capital gains are never realised and the dividends are effectively tax free.

That's right - thats the whole point of what I am saying. The balances will be shifted to where the lowest/most efficient tax outcome is.

(I have cleaned up that last dot point in my original post to make it better state the intent that I was after. Apologies for the clumsy wording in the original version).

 

[JohnK]

Thanks @SYD @Quickstatus

I have a feeling if I was to take leave payout without redundancy it would be full marginal rate tax and I don't want to wait to do tax return.

If I take leave on 01 July for say 16 weeks and get paid as per normal I'll accrue another week Annual leave in that time. So a third of annual salary could be around $5000-$6000 compulsory super contributions.

As I have no intention of working again I can instruct employer to salary sacrifice $2000-$2500/week into super for those 17 weeks and worry about tax due at later stage when I do tax return.

I think thats possible. If not possible then I can salary sacrifice $1400/week for 17 weeks and I'll have close to the $30000 limit.

I can also start salary sacrificing early before retiring and top-up to $30000 each year. Although I may work more than another 4 years. We shall see.

 

[Kerrodt]

If the govt wants me to keep my super fund (accumulation + pension phase accounts) under $3M, or get taxed for unrealised gains, I will just move the balance out and put it into fully franked shares where I will effectively pay Zero tax - as the shares are fully franked, and the capital gains are only realised when I sell them.
The govt gets nothing.....

Personally I think the transfer balance cap is too low. I dont know if the actuaries have considered the possibility that asset value could significantly drop. It should be IMO about $3M now.

This will depend on how the numbers turn out. It will be different for every single situation.

If you have a super fund with (say) $3.1M in it held in mostly low growth and conservative type products then it's probably not worth making any changes.

If you have a super fund with (say) $5M in it and has solid (unrealised) annual capital growth then it may very well be worth making lump sum withdrawals.