Superannuation, the ultimate government cash cow?

Ves · 15 February 2013

Interestingly I had a client call me this week (after they spoke to their financial planner) asking what paperwork was necessary for them to pull their $800k out of their SMSF. They are 60, retired and do not want the leglislative risk of further taxation, when they can get the money now tax-free.

Just goes to show, as soon as you start talking about $800k - $1 mil limits to super taxation concessions, people start assuming it is certain to come into play. This client wanted the money out before the May budget. The government should be providing more clarity as soon as this kind of thing leaks to the media. It is then the responsibility of the media to report in correctly IMO.

Bill M · 15 February 2013

What did you advise them Ves? I reckon they might be jumping the gun a bit, really I don't think anything will come out the May budget and it won't be immediate even if it did.

There is nothing worse than continual rule changes and it is this reason my wife will be taking a transition to retirement pension this year, we just don't trust the Guvnuts, none of them.

sydboy007 · 15 February 2013

WilkensOne said:
Yeah I definetly agree I'm already getting the vibe that it seems to be a BYO retirement for my generation. I just wonder that if I am going to be depositing soon 12% of my income into super I would rather invest my money elsewhere and control it how I please but with the goal of it being part of my retirement fund.

A lot of people seem to think super is the only way to fund their retirement. At least you've realised that isn't the case.

Partly because it's going to be so long before I can tap into super I'm not too keen to add to much more at present. Depending on what tax bracket you're in, buying shares that pay 5-6% fully franked dividends means you may not have much tax to pay on the income. My goal is to buy 3 * 10K parcel of shares each year and slowly build up a portfolio that will give me a reliable passive income that should also increase at least as fast as inflation over time. Just have to look at quite a few of the dividend increase this reporting season.

Ves · 15 February 2013

Bill M said:
What did you advise them Ves? I reckon they might be jumping the gun a bit, really I don't think anything will come out the May budget and it won't be immediate even if it did.

There is nothing worse than continual rule changes and it is this reason my wife will be taking a transition to retirement pension this year, we just don't trust the Guvnuts, none of them.

We don't give advice, per se, I'm a Fund accountant specialising in SMSF, I can answer compliance issues, and tell the client that the changes are not set in stone, but at the end of the day, if the client wants to pull it out it is their choice. I'm not sure what the financial planner said, mind you. But I don't think a planner could do much if the client has already made up their mind.

I think they're jumping the gun too. But some people just get scared when a little bit of uncertainty comes their way and rightfully want to protect what they have.

WilkensOne · 15 February 2013

sydboy007 said:
A lot of people seem to think super is the only way to fund their retirement. At least you've realised that isn't the case.

Partly because it's going to be so long before I can tap into super I'm not too keen to add to much more at present. Depending on what tax bracket you're in, buying shares that pay 5-6% fully franked dividends means you may not have much tax to pay on the income. My goal is to buy 3 * 10K parcel of shares each year and slowly build up a portfolio that will give me a reliable passive income that should also increase at least as fast as inflation over time. Just have to look at quite a few of the dividend increase this reporting season.

That is definitely something that I really need to look into. I love the idea of having an income generated from shares especially with the benefit of franking credits when you are at retirement age. I am unfortunately not in a position to spend that much each year of investments as I am still studying at university. In my head the current goal is to purchase a house and pay it off fully, meanwhile buying dividend generating shares and also trading my small capital base.

So many options, so much time!

.. guess I could have worse problems :

sptrawler · 15 February 2013

Ves said:
Interestingly I had a client call me this week (after they spoke to their financial planner) asking what paperwork was necessary for them to pull their $800k out of their SMSF. They are 60, retired and do not want the leglislative risk of further taxation, when they can get the money now tax-free.

Just goes to show, as soon as you start talking about $800k - $1 mil limits to super taxation concessions, people start assuming it is certain to come into play. This client wanted the money out before the May budget. The government should be providing more clarity as soon as this kind of thing leaks to the media. It is then the responsibility of the media to report in correctly IMO.

As we said on the earlier, $800k invested in both names i.e $400k each, will give them a tax free income now the lowest rate starts at $18,200.
No point in keeping that amount in super, IMO
As was also said earlier, if the government brought in that sort of cap, the only money left in super would be the taxable component.
Which by percentage wouldn't be a lot.

Ves · 15 February 2013

sptrawler said:
As we said on the earlier, $800k invested in both names i.e $400k each, will give them a tax free income now the lowest rate starts at $18,200.
No point in keeping that amount in super, IMO

I should have specified. Client was single.

sptrawler · 15 February 2013

Ves said:
I should have specified. Client was single.

Even then, if the person bought $600k of bank shares returning say 5% + franking and put the remaining $200k in term deposit.
The franking would probably cover the tax owing.

Again as has been pointed out earlier, the major loss at the moment is contributions tax and accumulation earning tax.IMO

At the moment the 15% contribution and earnings tax needs to be taken up to 19%, in line with the lowest tax rate.IMO

Julia · 15 February 2013

sptrawler said:
As we said on the earlier, $800k invested in both names i.e $400k each, will give them a tax free income now the lowest rate starts at $18,200.
No point in keeping that amount in super, IMO
As was also said earlier, if the government brought in that sort of cap, the only money left in super would be the taxable component.
Which by percentage wouldn't be a lot.

Ves has now clarified that the $800K belongs to one person, so by removing the funds from Super he/she is going to end up paying some tax.

$800K earning just 5% = $40K: Deduct the $18K = $22K taxable.

Even had it been a couple, assessed as having $400K each, at just 6% they're each more than $5000 over the tax free threshold, so it doesn't seem a very well thought out move to me.

If the government does alter the tax it's surely likely to be on amounts over $800K (I'll be surprised if they were to even take that as a lower limit, think it's more likely to be $1M) tax will not be applied to the whole amount.

Ves, is it possible for you to find out from the client what the financial adviser's opinion was? That would be interesting.

sptrawler · 15 February 2013

Julia said:
Ves has now clarified that the $800K belongs to one person, so by removing the funds from Super he/she is going to end up paying some tax.

$800K earning just 5% = $40K: Deduct the $18K = $22K taxable.

Even had it been a couple, assessed as having $400K each, at just 6% they're each more than $5000 over the tax free threshold, so it doesn't seem a very well thought out move to me.

If the government does alter the tax it's surely likely to be on amounts over $800K (I'll be surprised if they were to even take that as a lower limit, think it's more likely to be $1M) tax will not be applied to the whole amount.

Ves, is it possible for you to find out from the client what the financial adviser's opinion was? That would be interesting.

As I said earlier, if a tax was too onerous, people would remove their taxed component out of the super system.
This would leave the taxable component in super, and yes they can tax that any way they like.
However it would leave a big dent in the super system, as the concessional component in percentage terms I would think is relatively low.
I may be wrong, however with concessional caps at $25k and non concessional at $150k, I would think it's a fair assumption. Especially when the system has only been running for 20years and lets not forget average balances are around $150k.

tinhat · 15 February 2013

Ves said:
I should have specified. Client was single.

Good looking?

Seriously though - perhaps that person shouldn't be managing their money if they are going to take fright at every twist and turn.

Which makes me think - what is going to happen when a lot of the SMSF trustees start to go a bit senile. Seriously. People often develop a heubris when the early stages of dementia set in. A classic example is Philip Fisher, author of "Common Stocks and Uncommon Profits". His son writes in the foreword of the edition I have of how his father made dreadful decisions at a senior age after having been a stock market genius for most of his life.

Bill M · 15 February 2013

sptrawler said:
As I said earlier, if a tax was too onerous, people would remove their taxed component out of the super system.
This would leave the taxable component in super, and yes they can tax that any way they like.
However it would leave a big dent in the super system, as the concessional component in percentage terms I would think is relatively low.

Hello sptrawler, can you clarify something for me? I think you have mentioned this about removing the taxed component before, are you sure this is allowed?

Reason I ask is that with my wife's super I am pretty sure you can not do selective allocation of your super.

Lets use a 200K balance. 100K was put in as after tax contributions, the other 100K was concessional contributions.

From what I understand is that if the person wanted to start a 100K transition to retirement pension then you can't cherry pick the after tax contribution and use that for the pension. It says something like, "if the contribution is 50/50 (after tax/concessional) you can not pick the non concessional contribution", it has to be taken as the balance of the contribution, in this case 50/50.

That would mean you would be taxed on the 50% of the payment. You can not just use the non concessional amount on it's own. (This is only for those who want to start a transition to retirement pension, ages 55 to 60). I will see what I can dig up and report back, cheers.

sydboy007 · 15 February 2013

WilkensOne said:
That is definitely something that I really need to look into. I love the idea of having an income generated from shares especially with the benefit of franking credits when you are at retirement age. I am unfortunately not in a position to spend that much each year of investments as I am still studying at university. In my head the current goal is to purchase a house and pay it off fully, meanwhile buying dividend generating shares and also trading my small capital base.

So many options, so much time!

.. guess I could have worse problems :

Check out the thread looking at future house prices.

I'm rather negative against property - it has been a great investment for those who rode the debt fuel boom from the early 90s through to the GFC, but now that mortgage debt in Australia is around 80% of GDP, and household debt is at historical highs, it's very unlikely house prices can do much more than income growth. Why buy when you can rent for half the cost and invest the difference in assets that provide double the yield and I'd argue a better long term capital appreciation.

Nice to see you've started to focus on the future at such a young age

Ves · 15 February 2013

sptrawler said:
Even then, if the person bought $600k of bank shares returning say 5% + franking and put the remaining $200k in term deposit.
The franking would probably cover the tax owing.

Again as has been pointed out earlier, the major loss at the moment is contributions tax and accumulation earning tax.IMO

At the moment the 15% contribution and earnings tax needs to be taken up to 19%, in line with the lowest tax rate.IMO

This client also has substantial income producing assets outside of super. It often pays not to assume that super and the income it produces is the only source an individual may have. Marginal tax rate is at least 30% in some of these cases. You also need to consider any asset protection and estate planning benefits that super may have in the long run. Cheers.

Julia said:
Ves, is it possible for you to find out from the client what the financial adviser's opinion was? That would be interesting.

I agree - but unfortunately I cannot in this case. But my assumption would be that they would have said keep it in super to see if the changes actually get announced. This way they would keep getting those juicey fees (sorry couldn't help but add this bit!!)

sptrawler · 15 February 2013

sydboy007 said:
Check out the thread looking at future house prices.

I'm rather negative against property - it has been a great investment for those who rode the debt fuel boom from the early 90s through to the GFC, but now that mortgage debt in Australia is around 80% of GDP, and household debt is at historical highs, it's very unlikely house prices can do much more than income growth. Why buy when you can rent for half the cost and invest the difference in assets that provide double the yield and I'd argue a better long term capital appreciation.

Nice to see you've started to focus on the future at such a young age

+1, At such a young age, you don't have to speculate widly to make excellent gains in the share market. Post GFC capital raisings have far outstripped the property market e.g Wesfarmers, the banks.

Like Sydboy says there has been a lot of debt taken onboard to push house prices in the last 10 years. The current boom, at least where I live, seems to be driven by Asian investment.

If you start buying good quality shares now and just keep adding to them, you will do just as well, if not better than jumping into a mortgage early in life.

Bill M · 15 February 2013

Bill M said:
Hello sptrawler, can you clarify something for me? I think you have mentioned this about removing the taxed component before, are you sure this is allowed?

Reason I ask is that with my wife's super I am pretty sure you can not do selective allocation of your super.

Lets use a 200K balance. 100K was put in as after tax contributions, the other 100K was concessional contributions.

From what I understand is that if the person wanted to start a 100K transition to retirement pension then you can't cherry pick the after tax contribution and use that for the pension. It says something like, "if the contribution is 50/50 (after tax/concessional) you can not pick the non concessional contribution", it has to be taken as the balance of the contribution, in this case 50/50.

That would mean you would be taxed on the 50% of the payment. You can not just use the non concessional amount on it's own. (This is only for those who want to start a transition to retirement pension, ages 55 to 60). I will see what I can dig up and report back, cheers.

I found this, any comments?

sptrawler · 15 February 2013

Bill M said:
Hello sptrawler, can you clarify something for me? I think you have mentioned this about removing the taxed component before, are you sure this is allowed?

Reason I ask is that with my wife's super I am pretty sure you can not do selective allocation of your super.

Lets use a 200K balance. 100K was put in as after tax contributions, the other 100K was concessional contributions.

From what I understand is that if the person wanted to start a 100K transition to retirement pension then you can't cherry pick the after tax contribution and use that for the pension. It says something like, "if the contribution is 50/50 (after tax/concessional) you can not pick the non concessional contribution", it has to be taken as the balance of the contribution, in this case 50/50.

That would mean you would be taxed on the 50% of the payment. You can not just use the non concessional amount on it's own. (This is only for those who want to start a transition to retirement pension, ages 55 to 60). I will see what I can dig up and report back, cheers.

You are spot on, since 2007, my understanding is when the funds are accessed they are crystalised i.e. they are seperated into taxed and taxable components (expressed as a ratio).

From that time forward funds removed have to be taken as per that ratio, even after 60. By doing so at any given point through the life of the pension the component that was put in after tax and the component the was given a tax concession can be identified.

At the moment the main reason for this is, the concessionally treated component attracts tax, when the funds are distributed out of the fund e.g when drawing a pension under 60 or after passing away.

What I allude to is, if a major change is made to the tax treatment of the funds in the pension phase.

The government would have to include in that tax change, the option for retirees to withdraw that taxed component, which is the funds that they have contributed after tax.
Therefore as per a lot of the thread this is just my speculation as to what would have to be included in the changes if they were ever to be implemented

This is all just my thoughts, as I've said I have no formal accounting experience, just interested in the subject.

Garpal Gumnut · 15 February 2013

May I ask a grounded question.

If one had more than $1m in super atm, how could one withdraw the maximum before the budget in May 2013?

gg

sptrawler · 15 February 2013

Just a further post to clarify where I'm coming from.
If the government said we are going to tax bank deposits at a 50% tax reduction on earnings.eg half your marginal rate.
Then a lot of people start putting money in deposits.
Then the government turns around and says, it's costing too much we are losing too much revenue, from next year we will tax at your marginal rate.

Also, by the way, you can't take your money out of the bank!!! I don't think so.

What you have to remember is, a lot of this thread is about different peoples thoughts on the taxing regime of super.

Therefore a lot of posts are speculation, guestimates and opinions, not current taxing practice.
Do your own research and definately get proffessional advice if you are not sure.

sptrawler · 15 February 2013

Garpal Gumnut said:
May I ask a grounded question.

If one had more than $1m in super atm, how could one withdraw the maximum before the budget in May 2013?

gg

Depends on your age GG

If your over 60, no problems, unless you have untaxed component

If your between 55 and 60, tax will be payable depending on your components i.e taxed, taxable, untaxed.

If your under 55, unless you are permanently dissabled, it won't happen.
However GG if you fall in this age group, refer to the Chinese chainsaw thread.lol you can chose disability if pain isn't an issue.

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