THE Henry inquiry into the taxation system and the Cooper review of superannuation will greatly increase the chance of higher taxes and reduced superannuation benefits.
Q My wife and I have our super in a self-managed superannuation fund. I am turning 55 in March and my wife will be 48 this year. The SMSF has about $1.85 million in it and apart from about $50,000 cash, the balance is in direct shares, of which about 80 per cent is in AFI. I plan to work part-time for many years and will salary sacrifice the maximum I can into super. I am worried about what changes may be made to superannuation this year. Should I start a pension in March and how should it be structured?
A You have too high an exposure to the Australian share sector and should consider investing in other asset classes. By starting a pension from your SMSF, which would have to be a transition to retirement (TTR) pension as you are still working, any gains made on the sale of shares would not be taxable. In addition, you would protect yourself against the Government changing superannuation by banning TTR pensions.
Q I have read that it is better to start a new pension to preserve the tax-free element instead of combining the new taxable superannuation with the old tax-free pension. Why would it be better to do this, as the combined value of the pensions still has the same percentage of tax-free benefits but there will be higher accounting costs by having two pensions?
A If the original pension is stopped, the taxable and tax-free percentage of the old pension are combined with any amounts in the accumulation account that have been contributed since the pension started. If these contributions were taxable, and a new pension is started, the taxable percentage of the new pension will increase.
Conversely, if the original pension had a high proportion of taxable benefits, and the new contribution is tax-free, it is better to start a pension from the new contribution, resulting in this pension being 100 per cent tax-free. This strategy is about minimising the tax payable upon the death of the member.
When you have two pensions, one primarily made up of tax-free benefits and the other of taxable benefits, minimum pension payments can be taken from the tax-free pension, with the majority coming from the taxable pension. Depending on the balances of the pension accounts, the tax-free pension can be commuted to accumulation stage after the member turns 75 to stop it being run down.
This strategy is really applicable to people with large amounts of tax-free superannuation benefits that would be inherited by non-dependants. There may be a slightly higher accounting cost, but this should be offset by the 16.5 per cent tax saving due to the higher tax-free benefits that will pass to the non-dependant beneficiaries when the member dies.
Q My father is a permanent resident and receives a superannuation pension from his British super fund. He is paying full Australian income tax at the marginal rate. Is there any way he can reduce his tax liability on this?
A He could look at the possibility, if his British super fund allows it, of transferring his super to an Australian fund. Before doing this he should seek professional advice as Australian tax could be payable on the amount transferred, and contribution limits will apply.
Questions can be emailed to max@taxbiz.com.au
Self-Managed Superannuation Funds, a Survival Guide by Max Newnham, is available in bookshops.
