Simple Super Tax-Free Amount

Hi, just seeing if I understand the estate planning issues.

The tax-free amount is fixed (crystallised) at June 30 2007.

If an income stream is commenced, this tax-free amount is now a fixed percentage of any remaining balance.

Supposing a 60 yo contributes $1m by June 30 and starts an income stream on July 1st by drawing the minimum amount of 4% of the balance paid annually at the following June.

It is not hard for a conservative (tax-free) income fund to earn higher than 4% and so the balance will be increasing.

Does this mean that the tax-free amount is growing with associated advantages for a death benefit ETP paid to non-dependants ?

Also, if the taxpayer is on a moderate tax rate from other income then taking this income stream and investing in their own name will give better overall results than holding the money in the accumulation phase where the fund pays 15% on earnings.

This whole scenario rests on the assumption that the tax-free amount is a fixed percentage of the balance for an fund paying an income stream, and the minimum amount is being calculated on the opening balance.

Any thoughts/corrections very welcome.

Regards,

Rob

Hi Rob,

The tax-free amount is crystalised on an event such as rolling to an income stream after 1st July 2007.

For existing income streams this is crystalised by commuting an amount to the owner (eg, $1 lump sum).

If your contribution is non-concessional it is all tax free, if I had $1m and over 60 I'd be bunging it to super over two financial years and in the second one using the bring forward rule plus doing the same for my wife (getting $1.2m into super in 2 days all tax free).

If your money is in an income stream it is crystalised and the growth is also crystalised, whereas in the accumulation phase the growth and interest is all taxable.

Rob, the first $6,000 is tax free, then the next $24,000 is taxed at 16.5% incl medicare levy, your superfund doesn't pay medicare levy. If you meet a condition of release your superfund may be better for you (marginally less tax).

The minimum amount is recalculated at the 1st July every year by your pension fund administrator.

Warm regards,

Dan

The above email is not a recommendation to invest in any structure or investment and you should go and see a FPA registered financial planner, accountant or tax adviser to discuss further.

Hi Dan,

Thanks for the info.

As I read s.307-125 and the example in the Explanatory Memorandum, the tax-free component for an income stream is calculated on a percentage when the income stream is commenced.

This means that (60 yrs or over) if by drawing the minimum amount of income stream that the balance is increasing, then so will the absolute value of the tax-free amount.

Given that the fund grows in the income stream phase tax-free then you could get a double bonus for estate planning as the tax-free amount to non-dependents is growing.

Also, given a large number of people have just made substantial undeducted contributions, then (depending on their circumstances) they could start an income stream and leave just about all the balance to a non-dependant tax-free.

Just a thought, and I am not planning on retiring soon or receiving a large death benefit ETP.

This may be wrong information or inappropriate to some people's circumstances.

Cheers,

Rob

Hi Rob,

This is correct. I wouldn't get too hung up about age 60, the taxation rules for death benefits are the same whether your 20, 50, 65, etc...

After you, me or anyone says goodbye to this wonderful world we live in, the trustee has to figure out to whom the death benefits are to be paid. If it goes to a financial dependent, eg, spouse, minor, disabled child, financial dependent, it will be tax-free (same as you being over 60 and receiving it yourself).

The tricky bit kicks in when you want to leave the money to a non-financial dependent, eg, adult child, sibling, charity and anyone else who doesn't depend on you to live.

The tax-free component is always tax-free, it doesn't matter who it goes to it is always tax-free, whether it's your spouse or your sibling who lives in another city.

The taxable component is tax-free to your financial dependents but is taxable to your non-financial dependents at 16.5% (including medicare levy) if it was taxed as a contribution (eg, SGC).

A really good page from the ATO is at Paying a lump sum death benefit

It's a little long but explains the full ins and outs of the estate planning ramifications.

Cheers,

Dan

Disclaimer, all of the above is purely general information from the tax office and not personal advice to any person. Speak to an FPA registered financial planner, solictor, accountant or tax adviser before making any decisions about estate planning.