Super
Strategies.
15 ways to retire with more.
FOURTH EDITION, FEBRUARY 2011
1
The Retirement Revolution.
This book has been written to help you understand the key changes for
superannuation and provide you with 15 strategies for taking advantage of them.
By making the right moves, you could use super to get more cash in retirement,
save tax, semi-retire, turn your house into a retirement cash cow, sell your business
without the Capital Gains Tax headache – and more.
If, after reading this book, you believe that your super could be working harder for
you, then don’t delay in taking one vital next step: seek financial advice. You’ll find
information and contact details for Westpac Retirement Specialists at the back of
this book. They know the potential benefits and pitfalls, they’re up to date on the
rules and they can help you devise a plan that works for your exact situation.
Please Note: The information and strategies in this book have been prepared
without taking into account your objectives, financial situation and needs.
You should, before implementing any strategy, consider its appropriateness to
your objectives, financial situation and needs. Also note that any taxation position
described should be used as a guide only and is not tax advice. It is recommended
that you read the chapter titled ‘Things you should know’ and seek professional
financial and taxation advice before acting on any of the strategies contained
within this book.
How to use this book.
To make it easy for you to find out which strategies best apply to you, we’ve separated
them according to the scenarios for which they are designed. Just select which scenarios
are most relevant to your situation and you’ll find clear strategies that could help you
retire with more.
We’ve also created a series of helpful icons to look out for:
1.
2
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2.
!
3.
1. Benefit.
2. Take note – important information.
3. Hot tip.
Contents.
The big changes to super.
4
1.
“All my money goes into mortgage repayments.”
STRATEGY: Switch your focus from the mortgage to super.
6
2.
“I have an investment property I was intending to fund my retirement with.”
STRATEGY: Turn an investment property into super savings.
9
3.
“I’m over 55 and want to cut down my working hours.”
STRATEGY: Cut your hours, not your income.
11
4.
“I’m over 55 and want to boost my super without sacrificing my lifestyle.”
STRATEGY: Supercharge your super without the sacrifice.
13
5.
“I’m ready to focus on building my wealth and want to know the best way how.”
STRATEGY: Discover the newly enhanced power of salary sacrifice.
15
6.
“My partner’s retired but I’m still working: how can we use super to save tax?”
STRATEGY: Use a number of super rules to save tax and boost your combined super.
17
7.
“I’m retiring and don’t know what to do with my super.”
STRATEGY: Take a pension after age 60 tax-free.
19
8.
“I need insurance but it’s hard to cover the premiums.”
STRATEGY: Get the government to help pay for your insurance through super.
21
9.
“My largest asset is my business.”
STRATEGY: Save more super, pay less tax.
22
“I’m selling my business to fund my retirement.”
STRATEGY: Use super to maximise tax on the sale of your business.
23
11.
“I’m selling my business to retire and want to maximise my super.”
STRATEGY: Use the small business CGT concessions to save tax and boost your super.
25
12.
“I don’t know if my business is the best place for my key assets.”
STRATEGY: Structure your business for maximum benefit.
27
13.
“I’m self-employed and want to optimise my super tax benefits.”
STRATEGY: Take advantage of the full tax deductions on super you’re entitled to.
29
14.
“I’m self-employed and selling an asset to help fund my retirement.”
STRATEGY: Use super to offset Capital Gains Tax.
30
15.
“I’m self-employed and want to save tax while boosting my super.”
STRATEGY: Borrow to invest in super.
31
10.
Seeing a Westpac Retirement Specialist.
33
Things you should know.
34
3
The big changes to super.
In July 2007 some radical changes to superannuation were introduced which could benefit
almost everybody. Some of these changes were adjusted by the current government with
effect from 1 July 2009.
There are greater tax breaks to take advantage of. You could pay no tax at all on your super
payout simply by staying at work a little longer. Or you can leave your money in super after
you retire. These and the other changes listed below could revolutionise your financial future
– but only if you have the right strategies in place to take full advantage of them. As a whole,
the changes tighten the flow of ‘money in’ to super but loosen the flow of ‘money out’ – as
explained in the diagram below.
Top-level view from 1 July 2010
MONEY
INTO SUPER
AFTER-TAX
(NON-CONCESSIONAL)
CONTRIBUTIONS
MONEY
OUT OF SUPER
$150K p.a. or
$450K
over 3 yrs A
SUPER
BEFORE-TAX B
(CONCESSIONAL)
CONTRIBUTIONS
ANY
amount
tax-free
AFTER
AGE 60
$25K p.a.C
A. You can contribute $150K p.a. (or up to $450K over a three-financial-year period, if under 65).
B. Before-tax (concessional) contributions include Super Guarantee, salary sacrifice and self-employed or personal
contributions where a tax deduction is claimed.
C. Age 50 and over will receive a higher limit of $50K p.a. for the financial years up to June 2012. The Government intends
to retain this $50K p.a. limit beyond 2012 for persons over 50 with superannuation assets of less than $500K. At the
time of writing however, this measure has not yet been legislated.
4
The main changes at a glance
General
Changes
●●
No limits on the amount accumulated in super.
●●
Leave your money in super after retirement.
●●
●●
●●
Under
age 50
●●
Over age 50
●●
Over age 55
●●
Over age 60
●●
Age 65–74
●●
Small business owners can contribute the sale proceeds of a business
– up to $1.155 million – into their super with no contributions tax.
New limits introduced as to how much you can put into your super
each year as after-tax (non-concessional) contributions.
An Employment Termination Payment from a redundancy can no
longer be rolled over into super.**
A $25,000* p.a. limit on concessional treatment of before-tax
contributions.
A $50,000 p.a. limit on concessional treatment of before-tax
contributions. Available until 30 June 2012 when the limit becomes
$25,000* p.a.
Access super even if you’re still working.
All amounts paid out of super, either as a lump sum or a pension, are
tax-free.
Extension of the age at which you and your employers can make
concessional contributions to super up to 74, subject to work tests.
*These limits are subject to indexation in line with Average Weekly Ordinary Time Earnings (AWOTE)
in $5,000 increments.
**If you had a written agreement in place with your employer as at 9 July 2006, you may be entitled to rollover your
termination payment up to 1 july 2012.
Please note that all references to super and superannuation funds in this booklet refer to taxed
superannuation funds. The treatment of untaxed superannuation funds is not considered.
5
1.
SCENARIO “All my money goes into mortgage repayments.”
STRATEGY Switch your focus from the mortgage to super.
You’re supposed to pay off your mortgage first, then hurriedly put money into super before
you retire, right? Not necessarily. You no longer need to pay tax on super withdrawals once
you turn 60. That means doing it the other way around could see you boost your super savings
substantially and pay off your mortgage by the time you retire.
Who does this suit?
This strategy works best if you:
●●
Are on one of the higher marginal tax rates.
●●
Have an outstanding mortgage and are looking to boost your super savings.
●●
●●
Are close to retirement (e. g. 5–10 years away) and will not need to access the money you
are putting into super.
Plan to retire at age 60 or over.
It works like this
If you’re currently paying Principal and Interest on your mortgage, the idea is to switch to
Interest Only repayments for some or all of your loan. That way, your repayments will drop,
leaving you with money that can be redirected into your super.
The beauty is that you can put before-tax dollars into super by salary sacrificing. Remember,
you make home loan repayments from after-tax dollars. So let’s say your mortgage repayments
drop $1,000 per month and your marginal tax rate is 38.5% (including Medicare levy); you can
salary sacrifice $1,626 each month and your take-home salary will still be roughly the same.
The money that usually goes towards your mortgage is only taxed at 15% when it goes into
super. So, in the example above, instead of paying $626 to the government in tax, you’re only
paying $244. That extra $382 is going straight into your personal super.
When you retire at 60 or over, you then pay off your mortgage from your super fund. Under the
previous rules, you would have generally paid lump sum tax on the amount you withdrew from
super. With the new rules, you can do this without paying any tax on the lump sum.
$
6
Benefit: Thanks to tax savings and compound interest, you could
end up with more super to retire on and your mortgage paid off.
!
This strategy works best for investors whose long-term average
investment earnings are over 8% p.a. (usually a result of investing
in growth assets such as shares or property). It also becomes less
attractive if interest rates rise or if marginal tax rates go down.
You should get financial advice about the risks and potential
benefits of this strategy.
How Martin’s and Linda’s super payout increased by $132,777.
Martin and Linda are both aged 50. They have 10 years to go on their home loan and
owe $271,468. When they convert their loan to Interest Only, their monthly repayments
drop from $3,222 to $1,697 per month – a saving of $1,526. For Martin, who pays
a marginal tax rate of 38.5%, this is equal to $2,481 before tax. He contributes this
amount to super on a salary sacrifice basis.
Home Loan
BEFORE
WITH STRATEGY #1
$1,697
Interest Only
$1,697
Interest
$3,222
Monthly
Repayment
$1,526
Principal
$3,222
Monthly
Repayment
$0
Principal
$2,481 Saving
into Super
(before-tax)
!
Not all employers automatically allow you to salary sacrifice, so
you should talk to your current employer if salary sacrifice is
part of your plans.
7
Martin’s monthly savings now look like this:
Amount owing on home loan*
$271,468
Repayments ‘saved’ with
Interest Only loan
$183,120
($1,526 per month over 10 years)
Amount contributed to Martin’s super
(i.e. the before-tax value of
repayments ‘saved’)
$29,770
(amount that Martin salary sacrifices p.a.)
Super balance after 10 years*
$404,245
Gain when retiring at 60
$132,777
Martin and Linda pay off their home loan of $271,468 at age 60 from Martin’s
superannuation proceeds – and are still left with $132,777.
*Assumes home loan interest rate of 7.5% p.a. and investment returns of 3.5% p.a. income (70% franked) and 5% p.a.
growth before fees and taxes.
Only your house to retire on?
There are strategies to make it work
For many Australians, the family home is their main – or only – nest-egg. If this is you,
it’s fantastic that you have such a valuable asset. However, you’re also going to need an
income to live on in retirement.
If you’re still working: The ‘Transition to Retirement’ rules offer some real
opportunities to boost your super savings significantly. The key ones are salary sacrifice
and the ability to access any existing super to supplement your income. Take a look at
Strategy #4 for more on this.
If you plan to sell your home and put some of the money towards your
retirement: You should read Strategy #2. You can now contribute $150,000 per person,
per financial year into super as an after-tax (non-concessional) contribution. Otherwise,
if you are under 65, you can make a one-off contribution of $450,000 and then nothing
for the next two financial years as an after-tax (non-concessional) contribution. This can
be a very tax-effective way to provide for your future.
If you’re on the verge of retiring: You’ll want to read Strategy #7. Even after selling
your home, you may still be eligible for the Age Pension. You’ll also find useful
information on how to keep more of your money for yourself and give less away in tax.
8
2.
SCENARIO “I have an investment property I was intending to
fund my retirement with.”
STRATEGY Turn an investment property into super savings.
Property is a great way to accumulate wealth, but it’s not always the best option for providing
an income in retirement. Rental yields can be low, especially on residential property, and
you may miss out on a number of tax breaks available with super investments. Releasing the
money you have tied up in property and putting it into super may have real benefits.
Who does this suit?
This strategy works best if you:
●●
●●
Have an investment property that you hope to sell to help fund your retirement.
Are under 65 OR aged 65–74 and have at some point worked at least 40 hours over a
maximum 30 consecutive days in the financial year during which you are contributing (so
you can make super contributions).
It works like this
After you sell your property and pay any Capital Gains Tax, you put the remaining amount into
super as an after-tax (non-concessional) contribution – so you can take advantage of super’s
low tax environment. You can contribute $150,000 per person, per financial year or, if you are
under age 65, make a one-off contribution of $450,000 and then nothing for the next two
financial years.
$
Benefit: With your money in super rather than in an investment
property, you may be in a better position to earn tax-free income
when you retire – and you’ll pay just 15% tax on the investment
earnings in super, instead of the investment earnings being
taxed at up to the top marginal rate. Capital gains are also taxed
concessionally at 15% (or 10% where the asset is held for at least
12 months).
This strategy is just as useful if you have other investments
(like managed funds or a share portfolio) or if you come into
some cash, perhaps an inheritance. Either way, you might be able
to convert this money into tax-effective savings in super.
9
Self-employed? If you’re self-employed and have an investment property you plan to sell, you
may be able to offset your Capital Gains Tax and have even more money left to invest in super.
Check out Strategy #14 to find out more.
MYTH BUSTER:
“I can’t access super until I retire, so I’m better off waiting until I’m older to
accumulate super.”
Like any savings plan, the sooner you start accumulating super, the better.
If you are employed, your employer is currently contributing an amount equivalent to
9% of your salary into your superannuation. Making even the smallest contribution to
your super, as early in life as you can, makes a significant difference. It also means
you may avoid the prospect of approaching retirement and having to make significant
contributions to make up any shortfall.
Generally, from age 55, you may also access super before you retire under the
‘Transition to Retirement’ rules.
10
3.
SCENARIO “I’m over 55 and want to cut down
my working hours.”
STRATEGY Cut your hours, not your income.
If you’re 55 or over, you may be able to reduce your working hours and use your super to
supplement your income. You may even be able to keep contributing to your super while you’re
still working.
Who does this suit?
This strategy generally works best if you:
●●
Are aged 55 or over.
●●
Want to cut down your working hours.
●●
Have accumulated reasonable super savings to provide an income.
It works like this
The ‘Transition to Retirement’ rules allow you to start taking a super pension even if you keep
working. This is intended to allow more Australians to ‘Transition to Retirement’ gradually.
To follow this strategy, you need to invest in a ‘non-commutable’ income stream, which
pays you a regular income but does not allow you to withdraw a lump sum. This is taxed
the same way your salary or other earnings are taxed, at your marginal tax rate with certain
concessions. But if you’re over 60, it’s tax-free.
This strategy may be further enhanced if you salary sacrifice some of the earnings from your
job. Take a look at Strategy #4 to see how this works.
$
Benefit: You can maintain your lifestyle while reducing the hours
you work.
11
How Helen netted $53,030 p.a. for a 2.5 day week.
Helen will celebrate her 55th birthday in November and would like to reduce her hours
to part-time. She’s happy to take the pay cut, but is concerned about what effect her
reduced income may have on her lifestyle.
Helen decides to take advantage of the government’s ‘Transition to Retirement’ rules.
She will reduce her full-time job to 2.5 days per week, reducing her annual employment
income from $100,000 to $50,000. She will then purchase a ‘non-commutable’ Account
Based Pension (ABP) with $350,000 of her superannuation savings to help supplement
her lost income. An Account Based Pension is an income stream where the account
balance is attributable to the individual and satisfies minimum payment rules.
Outcome
Reduced Salary Only
Salary
Total income
Tax*
Net annual income
Reduced Salary with ABP
$50,000
$50,000
$8,100
$41,900
Salary
$50,000
Income from
‘non-commutable’ ABP
$14,000
Total Income
$64,000
Tax*
Net annual income
$10,970
$53,030
*Resident individual tax rates for 2010/11 inclusive of Medicare levy, Mature Age Workers Tax Offset and Low
Income Tax Offset.
!
12
If you’re thinking of following this strategy and you don’t plan to
salary sacrifice, you need to be aware that drawing down on your
super will mean you have less when you retire completely. It’s a
good idea to seek financial advice before deciding if this measure
is right for you.
4.
SCENARIO “I’m over 55 and want to boost my super without
sacrificing my lifestyle.”
STRATEGY Supercharge your super without the sacrifice.
If you’re over 55 and have some super already, the ‘Transition to Retirement’ rules could help
you boost your super savings significantly without cutting back on your lifestyle.
Who does this suit?
This strategy generally works best if you:
●●
Are aged 55 or over.
●●
Are still working full-time.
●●
Have some existing super.
It works like this
The ‘Transition to Retirement’ rules allow people who are 55 or over to access their super
while still working. Basically, they allow you to roll some or all of your current super into a
‘non-commutable’ income stream which pays you a regular income but does not allow you to
withdraw a lump sum.
Now that you have more money coming in, the next part is to salary sacrifice your earnings
into super. Because salary sacrifice uses before-taxdollars, you can actually contribute more to
super than you withdraw, without missing the income.
For example, if you earn $100 and you are on the highest marginal tax rate (including Medicare
levy), you would have to pay $46.50 to the government in tax. If you salary sacrifice the same
amount, you only pay 15% tax on the contribution or $15. That’s an extra $31.50 going into your
super instead of to the government.
$
Benefit: You get the best of both worlds – putting more money
into super without feeling the pinch. And you’ll feel even better
later on when you retire and use your super to draw down a
tax-effective income.
13
At any stage, salary sacrifice is one of the most effective
strategies there is to boost your super savings. Because it uses
pre-tax earnings, you lose less money to tax and get more in your
pocket. Think about ways you can cut back in other areas to
free-up some cash.
You can take advantage of other government incentives like cocontributions and spouse contributions to boost your super and
earn tax offsets.
For help with either of the above, seek financial advice.
How Anna increased her super payout by $75,820 without feeling the pinch.
Anna is 55 years old, has $500,000 in super and earns $100,000 p.a. She would like to
boost her super without affecting her current lifestyle. She decides to sacrifice $20,000
of her income to super and commence a ‘non-commutable’ Account Based Pension
(ABP), re-contributing any excess back to super.
Super $20K
Super Fund
Anna’s Salary $80K
Non-commutable ABP
Salary $100K
Net income
year 1
Super balance
after 10 years
Earn $100,000 p.a. and receive Super
Guarantee only.
$73,550
$1,124,862
Salary sacrifice $20K (including Super
Guarantee) start a ‘non-commutable’ ABP
and re-contribute any excess back to super.
$73,550
$1,200,682
Outcome
Assumptions:
Resident individual tax rates for 2010/11 inclusive of Medicare levy.
Individual has private health insurance.
Investment return of 8.5% p.a. before tax.
Salary indexed to 3% p.a.
‘Non-commutable’ ABP not indexed.
●
●
●
●
●
By doing this, in 10 years Anna has increased her overall super benefit by 7% without
sacrificing her lifestyle along the way.
14
5.
SCENARIO “I’m ready to focus on building my wealth
for retirement and want to know the best way how.”
STRATEGY Discover the newly enhanced power of
salary sacrifice.
New rules which make super benefits tax-free after 60 could now make super one of the most
profitable and tax-effective strategies for higher earners – even more so than other popular
strategies.
Who does this suit?
This strategy works best if you:
●●
Are on one of the higher marginal tax rates.
●●
Have a reasonable time frame to build wealth, e.g. more than 10 years.
●●
Plan to retire at age 60 or over.
●●
Have an employer that allows salary sacrifice.
It works like this
Consider the pros and cons of some of the most common wealth-building strategies:
●●
●●
●●
Negatively geared investment
Borrowing to invest enables high-income earners to increase the size of their investment
while claiming a tax deduction for certain expenses such as interest against investment
income. Assuming the investment ultimately makes a capital gain, it can be a tax-effective
way to create wealth. However, unlike salary sacrifice into super, the investment is made
with after-tax money.
Accelerating mortgage repayments
Paying off the mortgage has the advantage of saving you interest, currently around 7.5% p.a.
The more you pay off, the more equity, or wealth, you hold in the property. Of course, the
income you use to pay off the mortgage is after-tax money, and paying off the mortgage
doesn’t save you tax.
Salary sacrificing into super
Salary sacrifice enables you to invest before-tax dollars into super. Contributions within
the allowable limits* are taxed at just 15%, significantly less than the top marginal tax rate.
Income within the fund is only taxed at a maximum of 15% and capital gains at 10% (if the
assets within the fund have been held for more than 12 months), and super benefits are
completely tax-free when taken at age 60 or over. However, investors need to remember that
the money they sacrifice into super is locked away until retirement.
*$25,000 p.a. or $50,000 p.a. if you are aged 50 and over between 1 July 2009 and 30 June 2012.
15
$
Benefit: The tax effectiveness of salary sacrificing into super may
make it one of the most profitable investments you can make for
your retirement.
How the strategies compare:
The following is based on a contribution of $20,000 a year in before-tax terms. It
calculates the after-tax profits of cashing out after 10, 15 and 20 years.
Investment vehicle
10 years
15 years
20 years
Salary sacrifice into super
$273,242
$518,746
$886,867
Negatively geared investment
$221,788
$392,745
$627,033
Mortgage repayments
$141,032
$323,343
$573,190
Assumptions:
●
Income tax rates based on 2010/11 resident individual rates exclusive of Medicare levy.
●
Marginal rate of tax is 37%.
●
●
Super is taken as a tax-free lump sum after age 60.
●
Investment returns for all cases: 3.5% p.a. income (70% franked), 5% p.a. growth before tax.
●
$100,000 outstanding home loan at commencement.
●
Once home loan is paid off, repayments are invested.
●
7.5% p.a. interest and mortgage cost.
●
Negatively geared loan is Interest Only. Mortgage is paid as Principal and Interest.
●
16
The super fund and investors pay any Capital Gains Tax due and repay investment loans in the
case of negatively geared alternatives at the end of the term.
Contributions to super are taxed at 15%; amounts invested in negatively geared and mortgage
repayment strategies are after-tax at marginal rate of tax of 37%.
6.
SCENARIO “My partner’s retired but I’m still working:
how can we use super to save tax?”
STRATEGY Use a number of super rules to save tax and
boost your combined super.
If you’re still working, but your partner is retired and over 60, you may be able to pool your
resources and save tax while potentially increasing your combined super savings.
Who does this suit?
This strategy works best if you:
●●
Are a couple with:
1. One person still working and on one of the higher marginal tax rates.
2. One person aged over 60, retired and with accumulated super from which to draw
an income.
●●
Are comfortable living on the working partner’s income.
It works like this
People over 60 can access their super benefits as a pension or lump sum completely tax-free.
By taking advantage of this in combination with salary sacrifice, couples can benefit significantly.
First, the working partner salary sacrifices part of their income into super, shifting their income
from marginal rates of tax (up to 46.5% including Medicare levy) to concessional tax (just 15%) in
super. If they salary sacrifice enough, they may move to a lower income tax bracket.
Then, to supplement the missing income, the retired partner draws down on their super by
starting an Account Based Pension (ABP). The retired partner is now paying zero tax on their
super benefits instead of the tax they would normally pay in superannuation (15% on income,
10% on capital gains where the asset was held for more than 12 months).
The beauty is that both partners reduce their tax. Even better, they may also be increasing
their super. Because salary sacrifice uses before-tax dollars, the working partner can actually
contribute more to super than the retired partner needs to withdraw, potentially maintaining
their lifestyle and their super balance at the same time.
$
Benefit: You can save tax and continue growing your combined
super, without cutting back on your lifestyle.
17
How Penny and Dave saved $7,950 in tax and increased their net super by $7,950
in one year.
Dave is 60 and retired with $450,000 in superannuation. Penny is 50 and works
full-time earning $75,000. Dave is not drawing on his super as they are comfortable
living on Penny’s salary.
Without strategy: The couple live on Penny’s net income of $57,825 p.a., after paying
$17,175 in tax and Medicare levy.^
With strategy: Penny salary sacrifices $50,000 p.a. and takes $25,000 p.a. as salary.
Her net income is now $23,275 p.a. after paying $1,725 in tax and Medicare levy.^
●●
●●
She also pays 15% contributions tax on her $50,000 salary sacrifice (an additional
$7,500). Her total tax is now $9,225.
Dave starts an ABP using his super and draws $34,550 p.a. tax-free to cover their
shortfall. Their combined after-tax income is back up to $57,825 p.a.
WITHOUT STRATEGY
In*
$0
Super
WITH STRATEGY #6
Out
$0
In*
$50,000
(Penny)
Super
Out
$34,550
(Dave)
Net income (incl. Medicare levy)
Penny: $57,825 + Dave: $0 = $57,825
Net income (incl. Medicare levy)
Penny: $23,275 + Dave: $34,550 = $57,825
Income Tax: $17,175
Income Tax and Superannuation
Contributions Tax: $9,225
In summary, the results of using this strategy for Penny and Dave are:
Income: No change. Tax: $7,950 saved in Year 1. Super: An extra $7,950 net in Year 1.
!
The minimum pension from the ABP is 4% of the account balance
if you are under 65 years of age (temporarily 2% for 2010/11).
It’s important for the working partner to ensure the salary
sacrifice does not affect their compulsory Superannuation
Guarantee contributions (the 9% paid by their employer) and
other entitlements based on their salary level.
Speak to your employer about ensuring the 9% is calculated on the
gross salary package, not the gross salary after salary sacrifice.
^Assumes no other income or deductions. Resident individual tax rates for 2010/11 inclusive of Medicare levy and
low income tax offset.
*Not including compulsory employer contributions.
18
7.
SCENARIO “I’m retiring and don’t know what to do
with my super.”
STRATEGY Take a pension after age 60 tax-free.
If you’re approaching retirement, no doubt weighing heavily on your mind is what to do with
your super. Until recently, most retirees only needed to decide if they wanted to take their super
as a lump sum or pension. However, retirees also have the option to remain in superannuation.
Because of the tax advantages, taking a pension is generally the better option.
Who does this suit?
This strategy works best if you:
●●
Have some superannuation.
●●
Are aged 60 or over.
It works like this
You have a number of investment options to consider. By selecting wisely, you can minimise
the tax you pay, as shown below:
●●
●●
●●
Term Deposit
Your earnings are taxed at your marginal rate, which could be up to 46.5% (including Medicare
levy). This is generally not the best option if you expect to earn more than $37,000 p.a.
Superannuation
You can keep your money in super for as long as you like and any lump sum payments will
be tax-free if you’re 60 or over. In the fund, income on investments is taxed at 15% maximum
and capital gains at 10% if held for 12 months or more. This is not a bad option if you’re still
thinking about your plans.
Pension
From 1 July 2007, pension payments are tax-free if you’re 60 or over. Within the fund, there is
no tax on investment income or capital gains either. Continuing this strategy usually means
less tax and more income.
19
Type of Tax
Term Deposit
Superannuation
Pension
Tax on income
Marginal Tax Rate
(up to 46.5%)**
15%
0%
Tax on Capital Gain
0%
10%*
0%
*If held for 12 months or more.
**Includes Medicare levy.
$
Benefit: If you use your super to purchase a pension (once you’re
60), you’ll pay absolutely no tax on your income.
MYTH BUSTER:
“Super is one of the most heavily taxed investments, isn’t it?”
In the vast majority of cases, super is one of the most tax-effective investment vehicles
you can have. Very few alternatives allow you to invest from before-tax salary, receive
concessional tax rates on earnings, and enjoy substantial amounts of tax-free income at
retirement.
20
8.
SCENARIO “I need insurance but it’s hard to cover
the premiums.”
STRATEGY Get the government to help pay for your
insurance through super.
Purchasing life insurance through your super fund means you may be able to take advantage
of the government co-contribution rule to cover your insurance premiums.
Who does this suit?
This strategy works best if you:
●●
Earn† less than $61,920 p.a.*
●●
Are aged under 71 at the end of the financial year.
It works like this
If you earn† less than $61,920 p.a.*, you could be eligible for a government co-contribution
when you make after-tax (non-concessional) contributions to your super. If you earn† less than
$31,920*, that amount could be as much as $1.00 for every $1 you add – or up to $1,000 a
year. That may be enough to cover your premiums for Death and Total Permanent Disability
(D&TPD) insurance.
$
Benefit: The government effectively subsidises your insurance
premiums.
How Betty used co-contributions to pay her insurance premium.
Betty is a 40-year-old non-smoker. She earns† $40,000 p.a. and needs $500,000 D&TPD
cover. If she takes out a personal insurance policy using after-tax income, her premium
would be about $1,050.
Betty decides to take the cover out within her super instead,** at the same premium
of $1,050. Because her income is $8,080 above $31,920, her maximum co-contribution
is reduced to $731. To get this, she must make a personal contribution of $731 herself.
Alternatively, she could contribute as little as $525 and be eligible for a $525 co-contribution.
Even with this lower outlay for Betty, the total amount of $1,050 would cover her premium.
!
Check with your super fund to see if it will accept the
co-contribution. From 1 July 2007, eligibility for the
co-contribution has been extended to include the
self-employed. Rules apply, so seek financial advice.
*2010/11 threshold.
†Earnings are defined as assessable income plus reportable fringe benefits plus employee super contributions less
deductions related to carrying on a business.
**Will result in a reduction of superannuation investments.
21
9.
SCENARIO “My largest asset is my business.”
STRATEGY Save more super, pay less tax.
If your business is your main asset, there are some useful strategies you can employ to save
tax now by moving assets from the business to your personal superannuation. Boosting your
personal super will mean a more tax-effective income for you when you stop working.
Who does this suit?
This strategy works best if you:
●●
Are a business owner running your business via a company.
●●
Are looking to sell your business and retire in the next 3–5 years.
●●
Want to build wealth outside your business.
It works like this
Assuming you’re an employee, your business can make super contributions on your behalf and
claim a tax deduction. These before-tax (concessional) contributions within a certain level are
taxed within the super fund at 15% instead of at the 30% company tax rate.
Taking this strategy up another level, your company can borrow money to make a further
contribution to your super fund. The company may be able to claim a tax deduction for the
interest expense and the super contributions.
RULE REMINDER:
For the financial years up to 30 June 2012, you or your business can make before-tax
(concessional) contributions of up to $50,000 p.a. (taxed at a concessional rate) if
you’re age 50 or over (25,000 if you are under 50).
$
Benefit: Instead of holding most of your wealth in the business,
you’ll be building your personal wealth so you’ll have greater
security and flexibility later on. Your business will save tax and
the money you move is also protected against creditors where
the intention was not to defeat them. You could also pay less tax
as an individual.
Business owners may also be able to contribute to super on
behalf of a spouse and potentially take advantage of government
co-contributions. Certain rules apply, so seek financial advice to
find out if this is right for you.
22
10.
SCENARIO “I’m selling my business to fund my
retirement.”
STRATEGY Use super to maximise tax on the sale
of your business.
If you’re a business owner planning to sell your business to help fund your retirement, Capital
Gains Tax (CGT) could wipe out some of your profit. The good news is that new rules now
provide increased CGT concessions for small businesses. This means that, with the right
financial strategies in place, you can reduce, or eliminate altogether, any CGT liability by
contributing to superannuation.
Who does this suit?
This strategy works best if you:
●●
Own a business that you plan to sell to help fund your retirement.
●●
Expect to make a capital gain for tax purposes.
It works like this
When you sell your business assets, you may have the ability to put some of the capital gain
and some of the sale proceeds into superannuation.
For any remaining capital gain, it may be possible to make before-tax (concessional)
contributions to super and claim a tax deduction to offset tax.
If you retire at 60 or over, you can then withdraw your super proceeds completely tax-free.
$
!
Benefit: You get to keep more of the investment you’ve built up
in your small business to help fund your retirement because you
pay less in tax by contributing to super.
To use this strategy, you must be eligible to contribute to super.
That is, you must be under age 65 or, if aged between 65 and 74,
you must have worked for at least 40 hours over a maximum of
30consecutive days in the financial year during which you’re
contributing.
23
How Simon saved $15,750 by investing a capital gain into his super.
Simon, aged 55, has recently sold his florist business, from which he received a
$100,000 capital gain. Simon is ineligible for the small business CGT concessions but,
as a sole trader, he’s eligible for a 50% CGT discount when working out his taxable gain.
Assessable Capital Gain
$100,000
Less 50% CGT Discount
($50,000)
Taxable Capital Gain
$50,000
CGT Payable at 46.5% (including Medicare levy)
$23,250
After getting financial advice, Simon decides to contribute the capital gain from the sale
of the business to his superannuation. By implementing this strategy, he will be able to
offset the capital gain and eliminate the Capital Gains Tax liability.
Assessable Capital Gain
$100,000
Less 50% CGT Discount
($50,000)
Taxable Capital Gain
$50,000
Less tax deduction for super contribution
($50,000)
Net taxable gain
Nil
CGT saved
$23,250
Less 15% super contributions tax
($7,500)
Net tax saving
$15,750
Assumptions:
Simon’s marginal tax rate is 46. 5% including Medicare levy as a result of income from other
sources.
Simon has private health insurance.
No other before-tax (concessional) contributions made in the financial year.
●
●
●
Gain
Without
Strategy
With
Strategy
#10
SOLD
SOLD
Tax payable
Net gain
$100K
$23,250
$76,750
no super
Gain
Tax payable
Net gain
$100K
$7,500
$92,500
in super
Apply concessional contribution strategy
There are some generous changes to Small Business CGT
concessions. You, or you and your spouse, may be able to
contribute up to $1.155 million from the sale of your business
into your super, subject to you meeting certain conditions. Seek
financial advice to see if your business is eligible.
24
11.
SCENARIO “I’m selling my business to retire and want
to maximise my super.”
STRATEGY Use the small business CGT concessions to
save tax and boost your super.
Who does this suit?
The strategy works best if you:
●●
Are selling a small business or assets used in carrying on a business.
●●
Plan to use the proceeds to fund your retirement.
It works like this
The small business CGT concessions allow you to reduce any capital gain on the sale of
your business or assets used in carrying on a business – and you can contribute part of the
proceeds or the capital gain to superannuation.
There are two distinct areas of CGT concessions that you could benefit from, depending on
how long you have been in business:
1. If you have been in business or held the asset for more than 15 years – you may be
able to have the entire capital gain disregarded. You can also contribute up to $1.155m
(indexed lifetime limit) of the sale proceeds to superannuation.
2. If you have been in business or held the asset for fewer than 15 years – you may be able
to reduce the capital gain by applying the CGT concessions. One of these concessions allows
you to contribute up to $500,000 (lifetime limit) of the capital gain to superannuation.
You should be aware that there are a number of conditions you must meet to be eligible for the
gains above.
!
The conditions around the small business CGT concessions
are quite complex, so it’s important that you seek taxation and
financial advice.
25
$
Benefit: More of the proceeds of your business go towards your
super rather than into tax.
Small business or assets
used in carrying on a
business are sold
Does the 15-year
rule apply? 1
No
Yes
Capital gain may
be disregarded
Up to $1.155m of the sale
proceeds can be
contributed to
superannuation2
You may be able
to apply the other small
business CGT concessions
to reduce the capital gain1
Up to $500,000 of the
capital gain may be
able to be contributed
to superannuation2
Assumptions:
1. To qualify for this small Business CGT Concession there are certain conditions that must be met.
It is important you seek taxation and financial advice.
2. If aged between 65 and 74 you must have worked for at least 40 hours over a maximum of 30
consecutive days during the financial year in which you are contributing.
26
12.
SCENARIO “I don’t know if my business is the best
place for my key assets.”
STRATEGY Structure your business for maximum
benefit.
Many business owners struggle with whether to hold their business assets as an individual or
as a company. However, for many reasons, holding assets in super can be a better strategy.
Who does this suit?
This strategy works best if you:
●●
Own a business and have surplus capital.
●●
Want to build assets towards your retirement.
It works like this
●●
●●
●●
As an individual
Holding assets as an individual is simple and allows complete control over business
operations and investment, but your earnings are taxed at the marginal tax rate (up to
46.5% including Medicare levy). On the upside, you receive the 50% Capital Gains Tax (CGT)
discount if you have held an asset for more than 12 months.
As a company
Holding assets as a company limits your liability and earnings are taxed at 30%, which may
be lower than your marginal tax rate. However, the 50% CGT discount is not available so any
capital gains are taxed at the 30% company tax rate.
In super
Holding assets in super can be more tax-effective because earnings are taxed at just 15%
and capital gains at 10% if held for 12 months or more. Your super savings may enjoy better
tax treatment, compared to other forms of savings, due to the low 15% tax rate. Super is also
protected from creditors provided the intention was not to defeat them.
$
Benefit: The tax savings with super mean your assets may be
worth more when you retire.
27
How William was $40,113 better off by investing in super instead of through his company.
Let’s look at it in the case of William, in his 50s, the owner of a local newsagency who’s
planning to retire in 10 years, and has a marginal tax rate of 46.5% (including Medicare
levy). The following table details the tax structure based on each of the options available
to him.
Tax
Structure
Individual
Company
Super
Super when in
pension phase
Tax Rate
46.5%
30%
15%
0%
CGT Rate
46.5% less
50% discount*
30% no
discount
10%*
0%
*If held for 12 months or more.
Now let’s look at it in dollar terms with a $100,000 investment, earmarked for
William’s retirement.
Individual
Company
Super in Pension
(asset sold in
pension phase)
Assets at start
$100,000
$100,000
$100,000
10 years later
$195,245
$205,147
$215,393
CGT
$15,998
$21,170
$0
Net assets
$179,247
$183,976
$215,393
Net proceeds to William
$179,247
$175,280
$215,393
Assumptions:
Income is 3.5% p.a., growth is 5% p.a. before fees and taxes.
Income reinvested.
Resident individual tax rates for 2010/11 inclusive of Medicare levy.
Individual is taxed at 46.5% (including Medicare levy).
Company is taxed at 30%.
Super fund is taxed at 15% on income. Capital gains on the sale of the assets in super is ignored
as the super balance is converted to pension prior to the sale.
Net proceeds to William from the company is as a result of a fully franked dividend from the
company (and assumes company has sufficient franking credits).
Assumes William in receipt of no other income.
●
●
●
●
●
●
●
●
28
13.
SCENARIO “I’m self-employed and want to optimise
my super tax benefits.”
STRATEGY Take advantage of the full tax
deductions on super you’re entitled to.
The rules governing tax deductions for self-employed people have changed for the better. Self
employed people can claim a full tax deduction for all personal super contributions made until
age 75. While contributions above a certain level will not attract the 15% concessional rate, the
news is generally positive for the self-employed.
Who does this suit?
This strategy works best if you:
●●
●●
Are self-employed, substantially self-employed or have less than 10% of your income* from
employment as an employee.
Are under 65 OR aged 65–74 and have worked at least 40 hours over a maximum of
30 consecutive days in the financial year during which you are contributing.
It works like this
Contribute up to $50,000 p.a. to your super ($25,000 p.a.** if you’re under 50).
Up to these amounts, you can claim a full tax deduction on your contributions AND the full
amounts will attract the 15% concessional tax rate.
After 30 June 2012, the amount you can contribute that will be taxed at only 15% will drop to
$25,000 p.a.**
While self-employed people are able to claim a full deduction for all personal super contributions,
be aware that only contributions up to certain limits will attract the concessional 15% tax rate.
Above these limits ($25,000 p.a. or $50,000 p.a. for people aged over 50), contributions will have
further tax applied.
$
Benefit: If you get the balance right, you may have more super
while maximising the tax benefits you can receive as a selfemployed person.
*Income is defined as an assessable income and reportable fringe benefits plus any salary sacrificed super contributions.
**From 1 July 2012, the Government intends to retain the $50,000 limit for persons over 50 with superannuation assets of
less than $500K. At the time of writing, this measure has not yet been legislated.
29
14.
SCENARIO “I’m self-employed and selling an asset
to help fund my retirement.”
STRATEGY Use super to offset Capital Gains Tax.
Property can be a great investment for growing your capital but not necessarily the best way
to earn an income in your retirement.
The new rules for self-employed people could make it a good time to consider bringing money
into your super from the sale of an asset (like an investment property or shares) – as there
may be new opportunities to minimise the Capital Gains Tax (CGT) and other tax you pay.
Who does this suit?
This strategy works best if you:
●●
Are self-employed, substantially self-employed or have less than 10% of your income*
from employment as an employee.
●●
Have an asset which you have purchased to help fund your retirement.
●●
Are likely to make a net capital gain in the tax year.
●●
Are under 65 OR aged 65–74 and have worked at least 40 hours over a maximum of
30 consecutive days in the financial year during which you’re contributing.
It works like this
Once you’ve sold the asset, contribute part of the sale proceeds to your super fund. You can
claim a tax deduction for this contribution, which could offset your capital gain.
The amount claimed as a tax deduction will be taxed at 15% (within certain limits) within the
super fund instead of your marginal tax rate.
From 1 July 2007, the full amount contributed to super may be claimed as a tax deduction.
$
Benefit: You keep more of your investment and less gets eaten up
in Capital Gains Tax.
*Income is defined as an assessable income and reportable fringe benefits plus any salary sacrificed super contributions.
30
15.
SCENARIO “I’m self-employed and want to save tax
while boosting my super.”
STRATEGY Borrow to invest in super.
With the right business structure, you may be able to use debt to maximise the amount you
invest in super’s concessionally taxed environment.
Who does this suit?
This strategy works best if:
●●
You are an employee and shareholder of your company, and the company has significant
assessable income.
It works like this
Your company borrows an amount of money and contributes this to super on your behalf. Your
company may be able to claim a tax deduction for the contribution and the interest expense
on the amount borrowed.
Using this strategy, you are moving money from the 30% company tax environment into the
super fund environment where it is taxed at a maximum of 15%. While the company benefits
from the tax savings, your individual super is boosted by the contributions. You or your
business can make before-tax (concessional) contributions of up to $50,000 p.a. (taxed at a
concessional rate) if you’re over 50 – or up to $25,000 p.a. if you’re under 50.
$
!
Benefit: Your company enjoys a tax deduction on the contribution
and the interest expenses, while you boost your individual super
significantly.
As with any gearing strategy, this approach needs to be carefully
assessed and tailored to meet your individual needs, risk profile,
cash flow and situation.
31
How Kevin used his business for a super booster.
Kevin, aged 54, is employed by his own landscaping company, which has assessable
income of $500,000. The company borrows $50,000 at an interest rate of 7.50% p.a. to
contribute to Kevin’s super. The following table shows the benefit of this strategy:
Without super
contribution
With super
contribution
Assessable income
$500,000
$500,000
Before-tax (concessional)
super contributions
Nil
$50,000*
Deductible interest
expense (7.50% p.a.)
Nil
$3,750
Taxable income
$500,000
$446,250
Company Tax (30%)
$150,000
$133,875
Tax on super contribution
(15%)
Nil
$7,500
Total tax payable by super
fund and company
$150,000
$141,375
Net company proceeds
$350,000
$362,735**
*No other deductible contributions made for the financial year.
**$500,000 less $3,750 interest expense and $133,875 in company tax.
32
Seeing a Westpac
Retirement Specialist.
A study by the ‘Association of Superannuation Funds of Australia’ showed that the vast
majority of Australians don’t start doing anything proactive or strategic about their super until
retirement is virtually upon them – a finding which indicates a massive missed opportunity.
At the start of this guide, we offered a piece of advice that stands above all: to seek financial
advice. Your situation is different from anyone else’s and no book – not this or any other – can
provide you with strategies that account adequately for your personal objectives, financial
situation and needs. One person who can though, is a Westpac Retirement Specialist, sitting
across the table from you, listening, looking at your individual situation and putting together a
personalised plan for your future.
Westpac Retirement Specialists can also:
●●
●●
Provide strategies designed specifically to help you maximise the financial opportunities in
the new super environment.
Do the calculations on whether you’re currently heading for a ‘gap’ between your desired
retirement lifestyle and what your savings will afford you.
To make an appointment, call 131 817.
33
Things you should know.
While you’re reading ‘Super Strategies – 15 Ways to Retire With More’ and absorbing the
strategies, you should be aware of this background information about the book.
●●
●●
●●
●●
●●
●●
●●
●●
●●
This book is published by Westpac Banking Corporation (ABN 33 007 457 141, ASFL 233714).
Westpac Retirement Specialists are representatives of Westpac and are not qualified to give
tax advice.
The content is based on information available at February 2011.
This information has been prepared without taking into account your objectives, financial
situation or needs – which means it may or may not be appropriate to your circumstances.
This information is not meant to provide investment or taxation advice.
This information may contain material provided directly by third parties. While this has
been published with the necessary permission, no company in the Westpac Group accepts
responsibility for the accuracy or completeness of this material.
This book contains examples that are hypothetical only, and do not illustrate exactly how tax
or superannuation laws apply to you individually.
Assumptions about investment returns and interest rates are illustrative only and do not
reflect actual rates or returns for any product.
Any information about tax mentioned is a general statement and should be used as a
guide only. It does not constitute tax advice and is based on current tax laws and their
interpretation. Your individual tax position may differ and you should seek independent
professional advice on any taxation matters.
Whilst every effort has been made to ensure the information is free from error, no company
in the Westpac Group warrants the accuracy, adequacy or completeness of the content.
●●
The information in this book is subject to change without notice.
●●
No part of the information in this book may be reproduced without prior approval by Westpac.
●●
This notice excludes Westpac of any liability for the information in this book (except where
contrary to law).
34
35
© 2011 Westpac Banking Corporation ABN 33 007 457 141.
36
ASB100 (02/11) 219988