ALTHOUGH the new superannuation system is simpler and better, if you get it wrong it can cost you dearly. Two areas where this is particularly applicable are how superannuation affects the age pension, and what the consequences are of a super fund member dying.
When a pension is paid by a superannuation fund, Centrelink treats it differently than does the Tax Office.
For income-tax purposes, once a person turns 60, all of a superannuation pension is not taxable. The income test used by Centrelink is different. The income amount included by Centrelink is the gross amount received reduced by the purchase price of the pension.
This purchase price is calculated by dividing the value of the superannuation used to fund the pension by a person's life expectancy when they start the pension.
Where a standard account-based pension is received, the calculation is straightforward. If a person chooses to make their super pension reversionary, depending on the age and sex of the reversionary pensioner, they can receive a reduced age pension.
A reversionary pension differs from a standard account-based pension in that, on the death of the member, the pension passes to their spouse or dependent child. When the original pensioner is a male, or the reversionary pensioner is a lot younger, the higher life expectancy is taken.
For example, if a man aged 65 starts a standard pension of $10,000, from a super fund worth $200,000, they have a life expectancy of 18.54 years. Their purchase price is of $10,787 and no superannuation pension income is counted by Centrelink. If instead it was a reversionary pension, with the wife also being 65, her life expectancy is 21.62 years, there is a purchase price of $9251, and super pension income of $749 is counted.
Under the current superannuation system, when a super fund member dies and their taxable superannuation goes to a dependant, such as a spouse, no tax is payable. When the super passes to an independent adult child, tax of 15 per cent is payable on the taxable superannuation received.
Most parents like to see their kids get the maximum amount from the assets they have on their death. Thankfully, not many people know when they are going to die. But, when someone is diagnosed with cancer, a person's mortality, depending on the type of cancer, becomes more predictable.
In this situation, where the only ones who will inherit the superannuation will be adult children, it makes sense for the member to withdraw all their super while they are still living. This will mean for a super member who is 60 or over they will receive the lump sum tax free, and on their death their children will get it also tax free.
To further reduce the impact of tax, all investments in the super fund should be sold while it is in pension mode. By doing this, no tax will be paid by the super fund on any capital gains made. If the investments are sold after the member dies, capital gains tax of 10 per cent is paid by the fund.
When it comes to advice on super, oral advice can often be wrong or misleading, even when its comes from a professional adviser or even the ATO. If you are not sure about the accuracy of the advice you are getting, ask for it in writing. This will force the adviser either to be accountable or to more thoroughly research the topic before providing the advice.
Questions can be emailed to max@taxbiz.com.au
Self-Managed Superannuation Funds: A Survival Guide, by Max Newnham, is available in bookstores.
