Join our investing community

Pension Phase and Contribution Tax

Discussion in 'Superannuation, SMSF & Personal Insurance' started by DaveA, 8th Jun, 2008.

  1. DaveA

    DaveA Well-Known Member

    Joined:
    19th Feb, 2007
    Posts:
    617
    Location:
    Sydney, NSW
    I know when you convert you super into a pension phase you will no longer pay tax on any earnings and any pension distributed is not taxed...

    My question comes, is there still the contribution tax when salary sacrificing amounts into your super WHILE it is in the pension phase??

    Has anyone got any good links about info of transfering into the pension phase (or even transitional for retirement....)

    Cheers
     
  2. AsxBroker

    AsxBroker Well-Known Member

    Joined:
    8th Sep, 2007
    Posts:
    1,448
    Location:
    Sydney, NSW
    Hi Dave,

    The answer is yes.

    There are three tax structures which you are referring to.

    Your marginal tax rate pays tax up to 46.5%.
    Your super pays between 10% to 15% (depending on capital gains over 12 months or income/capital gains under 12 months)
    Your pension pays tax at 0%

    You cannot salary sacrifice straight into pension accounts, hence you still will pay 15% contributions tax as the salary sacrifice is going into superannuation.

    Distributions from a age based/allocated pension account are taxable if you are under 60 years of age.

    Here's a quick link Transition to Retirement: a new wealth creation strategy - CEO Forum Group

    Cheers,

    Dan

    PS Before making an investment decision speak to your FPA registered Financial Planner.
     
  3. DaveA

    DaveA Well-Known Member

    Joined:
    19th Feb, 2007
    Posts:
    617
    Location:
    Sydney, NSW
    ok, so theoretically im 61 (which im not)

    I have $150k in my super and earn $40k a year, i transfer the $150k into a pension account and start drawing the minimum amount out (which i think is 4% of the balance per year). I then s/s my wage down to ~$16k a year (where the tax free threshold/low income rebate stops) so no income tax is payable by my personal. Therefore i am s/s $24000 a year to super.

    So the 24k i am being charged the contribution tax ($2160). Does the remainder of this ~$22k earnings etc get taxed?

    While everything in the $150k amount does not get taxed as its in the pension phase.

    Have i got it correct (in general terms)?

    Is there anyway i can get that $24k earnings to be tax free? Ie can i set up a pension for that 24k at the end of year 1 and draw the pension amount from it? Or can i (at the end of the year) combine that 24k into the original $150k pension balance???

    Thanks for your help Dan


    Cheers
     
  4. AsxBroker

    AsxBroker Well-Known Member

    Joined:
    8th Sep, 2007
    Posts:
    1,448
    Location:
    Sydney, NSW
    ok, so theoretically im 61 (which im not) Oh, I was going to say Happy Birthday!

    I have $150k in my super and earn $40k a year, i transfer the $150k into a pension account and start drawing the minimum amount out (which i think is 4% of the balance per year). I then s/s my wage down to ~$16k a year (where the tax free threshold/low income rebate stops) Can you live on $22k? ($16k plus (150k x 4%))so no income tax is payable by my personal. Therefore i am s/s $24000 a year to super.

    So the 24k i am being charged the contribution tax ($2160)$24,000 x 15% = $3,600 not $2,160. Does the remainder of this ~$22k earnings etc get taxed? In super yes, in pension no, realistically, how much are you going to make on it 10%? $2,200 is only taxed at 15% for income which is $330 tax

    While everything in the $150k amount does not get taxed as its in the pension phase.Correct

    Have i got it correct (in general terms)?Just figure out your living expenses and keep an eye on your 15% tax on super contributions

    Is there anyway i can get that $24k earnings to be tax free? Ie can i set up a pension for that 24k at the end of year 1 and draw the pension amount from it? Yes Or can i (at the end of the year) combine that 24k into the original $150k pension balance??? No, once an allocated pension is set up you can't add to it, you'd have to rollback your allocated pension back to super, combine the two accounts and then transfer back to the allocated pension phase

    Thanks for your help Dan Your welcome, I hope these superannuation concepts help you and any other forum readers understand it better.


    Cheers
     
  5. DaveA

    DaveA Well-Known Member

    Joined:
    19th Feb, 2007
    Posts:
    617
    Location:
    Sydney, NSW
    Thanks Dan... hopefully this will be a constructive thread for people to review in the future....

    Just a couple of extra points for people in future - between 55 & 64 the min is 4% from the balance and max is 10%. This is taken from the account balance AS AT 1 JULY of the financial year. (Ie think of how super has done over the past financial year, some people may only be able to take out much less next Fin Year)

    Each pension requires a min balance of $10k (for australian super). they charge a $1 admin fee per week + other fees (per pension)

    Couple of Questions - Is there any point in S/S between $16k and the $30k (next year $34k) 30% threshold. Seems to be you pay the same amount of tax (ie the 15%). You can then go and make an after tax contribution to your super fund (which attacts no contribution tax) and you would be in the same overall position?

    Also say if im now 56, and want to start the same approach as above? If i turn it into a pension, no tax is paid on the earnings, and any money i draw gets a 15% tax rebate.

    Now is this a 15% tax rebate of my entire income, of the tax i had to pay on the pension amount drawn or 15%, or it reduces you MTR by 15% (ie from 31.5% down to 16.5%) for the drawn pension amount or something else? This is something i havent found quite clear yet.

    Appreciate the help Dan
     
  6. AsxBroker

    AsxBroker Well-Known Member

    Joined:
    8th Sep, 2007
    Posts:
    1,448
    Location:
    Sydney, NSW
    Thanks Dan... hopefully this will be a constructive thread for people to review in the future....

    Just a couple of extra points for people in future - between 55 & 64 the min is 4% from the balance and max is 10% Maximum only applies while your working between 55 and under 65(. This is taken from the account balance AS AT 1 JULY of the financial year. (Ie think of how super has done over the past financial year, some people may only be able to take out much less next Fin Year)

    Each pension requires a min balance of $10k (for australian super). they charge a $1 admin fee per week + other fees (per pension)

    Couple of Questions - Is there any point in S/S between $16k and the $30k (next year $34k) 30% threshold. Seems to be you pay the same amount of tax (ie the 15%) Actually there is a sliver of difference, called Medicare Levy being 1.5%, though in reality for locking it up is it worth saving the 1.5%?. You can then go and make an after tax contribution to your super fund (which attacts no contribution tax) and you would be in the same overall position?

    Also say if im now 56, and want to start the same approach as above? If i turn it into a pension, no tax is paid on the earnings, and any money i draw gets a 15% tax rebate.

    Now is this a 15% tax rebate of my entire income, of the tax i had to pay on the pension amount drawn or 15%, or it reduces you MTR by 15% (ie from 31.5% down to 16.5%) for the drawn pension amount or something else? This is something i havent found quite clear yet. For persons under age 60, the 15% rebate is attached to the taxable portion of your income stream, if you were drawing $10,000 and 50% of it was taxable, you would receive a tax offset/rebate of 15% on the $5,000 which is taxable.

    Appreciate the help Dan

    PS before making an investment decision speak to your FPA registered Financial Planner.
     
  7. goldfinder

    goldfinder New Member

    Joined:
    11th Oct, 2007
    Posts:
    3
    Location:
    sydney
    Pension Phase Rollback Allocated Pension To Super

    What do you have to do in terms of paperwork and documents to rollback allocated pension to super and combine the two accounts and transfer back to allocated pension phase.
     
  8. AsxBroker

    AsxBroker Well-Known Member

    Joined:
    8th Sep, 2007
    Posts:
    1,448
    Location:
    Sydney, NSW
    A few rollover forms.
     
  9. goldfinder

    goldfinder New Member

    Joined:
    11th Oct, 2007
    Posts:
    3
    Location:
    sydney
    Thks ASX Broker, is there a website that provides information and instruction and the rollover forms
     
  10. AsxBroker

    AsxBroker Well-Known Member

    Joined:
    8th Sep, 2007
    Posts:
    1,448
    Location:
    Sydney, NSW
    Hi GoldFinger,

    Your superfund should be able to supply the forms for you (usually on their website) and they generally have the instructions on the forms.

    Cheers,

    Dan
     
  11. goldfinder

    goldfinder New Member

    Joined:
    11th Oct, 2007
    Posts:
    3
    Location:
    sydney
    Sorry AsxBroker, it is a selfmanaged super fund. I set it up online through TrustDeed.com.au. I note reading the forum that it is easy to set up pension account, so rollback allocated pension may be similiar. Just want to make sure if I do it myself that I get all the necessary forms to satisfy the super legisalation. Is there a govt website that would guid me through the whole process?
     
  12. Superman

    Superman Well-Known Member

    Joined:
    6th Nov, 2007
    Posts:
    343
    Location:
    Gold Coast, QLD
    Goldfinger,

    The first place you need to look is your SMSF trust deed.

    The trust deed should give you some idea in regards to what documentation you need to prepare to do a pension rollback and restart.

    Alternatively contact your accountant / SMSF adviser and they should be able to prepare all the necessary forms for a reasonable fee.

    I hope this helps

    SM
     
  13. Dolfinwise

    Dolfinwise Well-Known Member

    Joined:
    30th Sep, 2009
    Posts:
    47
    Location:
    Brisbane
    SMSF and pension recasting

    There are numerous traps when considering recasting a pension (rolling back to Super and then starting a new pension usually with a larger balance). Not mentioned so far in this thread are estate planning considerations (including taxation) and social security considerations. However when it comes to Self Managed Superannuation funds even more important is fully understanding the compliance implications.

    Not only is it important to ensure compliance with SIS (Superannuation legislations rules) but compliance with the individual Trust deed, and any other governing documents of the fund. The paperwork required to complete the rollback in Super needs to take into account the individual Trust deed i.e there is no generic form that can be downloaded off the net.

    Unless the trustees are skilled and experienced in Superannuation I would suggest they are mad not to get some professional advice from a professional fund administrator, a SMSF lawyer, a licenced financial advicer with extensive SMSF experience or a member of SPAA before trying to recast in a SMSF.

    The consequences for making a mistake can be very expensive and the likelihood of producing non compliant documents are high.

    One simple example is the need for a member to lodge with the trustee a notice of intent to claim a deduction for any contributions made to Super before starting the new pension. Otherwise the tax to be taken out will not be considered and affect the component mix of the new pension. This in turn could impact on contribution cap limit breaches.

    Getting advice may well produce a better tax out come too as there are often numerous way to recast a pension to obtain better tax, social security, investment and estate planning outcomes, both now and in the future by making smart choices.

    SMSF's are extremely complex vehicles and trustees have to be prepared to pay for advice or spend time and money educating themselves extensively.
     
  14. Rob G.

    Rob G. Well-Known Member

    Joined:
    6th Jun, 2007
    Posts:
    717
    Location:
    Melbourne, VIC
    Yep ... the GFC could have a big impact on your "tax-free amount" if you commute & restart.

    For instance, you start an account based income stream with $100k non-concessional and $100k taxed elements. The mix is 50%.

    If your total investments supporting the pension have halved in the GFC and you commute, your tax-free amount is now only $25k.

    This especially matters for death benefits.

    Given that a SMSF can only have a single account UNLESS you have both an income stream account and an accumulation account, you need to consider whether to terminate and combine or else roll over the accumulation account to another super fund etc.

    It could pay to get some advice on your specific situation and intentions.

    Cheers,

    Rob
     
  15. Superman

    Superman Well-Known Member

    Joined:
    6th Nov, 2007
    Posts:
    343
    Location:
    Gold Coast, QLD
    Rob G. is correct - the proportions of taxable and tax free components within a account based pension are locked in.

    This means at the date the earnings / losses are allocated to the member, if they are in pension phase, then those losses are allocated proportionately.

    Using Rob G.'s example, if the proportion is 50/50, then the losses would be allocated 50/50 to the taxable (bad) and tax free (good) components.

    However, if your accountant know what they are doing, there is a way to get a benefit from the negative returns - try to think of it as a silver lining on the dark cloud of negative investment returns.

    How it works
    If the member rolls their account based pension back to accumulation phase as at the 29th of June, and then allocates losses on the 30th of June, those losses will then be allocated 100% to the taxable component.

    As we want to reduce the taxable component - this is a good thing as it reduces the bad component and preserves the good (tax free) component.

    A new account based pension can then be commenced 1 July with the higher tax free component %.

    Technically, even though the member was only on accumulation phase for 1 day out of 365, an actuarial certificate will be required - but the exempt income % (tax free %) of the SMSF as a whole (assuming only 1 member) will still be around 99.73%.

    An actuarial certificate would be required anyway if there are contributions / accumulation account / non-pension members etc.

    For this strategy to work, the correct documentation needs to be in place in regards to the commutation of the pension, and the trust deed needs to give the trustees flexibility in regards to how and when the earnings / losses are allocated (not all SMSF trust deeds have this flexibility).

    I hope this provides value -although I apologise if it is off topic from the original questions that were asked.

    SM
     
  16. Rob G.

    Rob G. Well-Known Member

    Joined:
    6th Jun, 2007
    Posts:
    717
    Location:
    Melbourne, VIC
    You mean realised capital losses carried.

    Allocating unrealised losses on market-to-market reporting from past periods erodes the tax-free component.

    You need to weigh up realised vs unrealised effects.

    Cheers,

    Rob