By John Wasiliev Australian Financial Review 3 May 2018
Q: I am 65 and receive two super pensions that pay me an annual combined $45,100, one of which is a State Super Scheme defined pension of $14,805. With annual salary from part-time employment of $30,450, my total income of $75,550 exceeds the current income needs to support myself and my partner. As well as compulsory super contributions from my employer, I’m sacrificing 55 per cent of my salary (or $16,900) back into a super accumulation account. My other super pension, from which I am withdrawing the minimum 5 percent, has a balance of $610,000. When you multiply the government pension income of $14,805 by the required factor of 16 times, the $236,880 values my total super at about $847,000, which is well within my transfer balance limit of $1.6 million. While my intention is to keep working to maximise the funds in super, am I better off continuing to sacrifice that amount back into super or should I change the deductions to after-tax contributions? One point worth making is that at some point, I expect to receive an inheritance of around $1.6 million from a parent who is in their late 90s. Martin
A: To understand the options available, says a private client adviser from South Australia, it is useful to review the reasons why superannuation can be an effective savings vehicle for retirement. Salary-sacrifice contributions are taxed at 15 percent in the super fund, whereas the lowest rate of tax on salary income is 19 percent plus the Medicare levy. This rate of tax applies on salary income above $18,200 and continues until income exceeds $37,000. Salary income above $37,000 is taxed at 32.5 percent plus the 2 per cent Medicare levy.
The contributions plus the tax saving makes salary-sacrificing at this income level much more effective. In the reader’s circumstances, his taxable income is his $30,450 salary income plus his State Super pension of $14,805, giving taxable income of $45,259. Salary-sacrificing $16,900 per annum would result in some of the contribution being deductible at the 32.5 percent tax rate and the majority deductible at the 19 percent tax rate (plus Medicare levy).
Electing to convert ongoing salary into super by a regular salary-packaging process will produce higher longer-term retirement wealth than receiving this as taxable salary because the investment earnings these contributions generate will be tax-exempt when transferred into his fund’s pension account.
In this case, the reader Martin is over 65, which means the contributions can be withdrawn at any time without incurring additional tax, making the salary-sacrifice process not only tax-effective but one that does not disturb access to funds.
This year, the maximum amount that can be made as employer contributions plus salary-sacrifice contributions is $25,000. It means care needs to be exercised in the amount of salary-sacrifice contributions to ensure the $25,000 limit is not exceeded. If the limit is exceeded, any excess will be taxed as income and penalty interest is applied.
One concession that is a new entitlement this year is an employed person being able to make contributions to super and subsequently claim them as tax-deductible, or concessional, contributions.
These contributions are subject to the overall $25,000 limit.
There is an extra step required to claim these contributions as tax-deductible, a requirement to lodge a notice of intention to claim the contribution with the fund trustee and have this acknowledged by the trustee.
It is not possible to draw against these contributions until these notices have been lodged and acknowledged, while the salary-sacrifice contributions are not subject to this notification process and are immediately available to be drawn against.
Unfortunately the $25,000 contributions limit does not provide a great deal of room to make additional salary-sacrifice contributions, which restricts the potential wealth creation opportunities available through tax savings that could be made this way.
Making personal contributions which will not be claimed as a tax deduction, known as “non-concessional contributions” provides an additional opportunity to add to an existing superannuation balance. A source of such contributions, is any money received as an inheritance such as that mentioned by the reader.
These contributions are subject to annual limits – currently $100,000, provided the overall superannuation balance is valued at no greater than $1.6 million at the start of the financial year.
In the reader’s case, the overall superannuation valuation appears to be around $836,000, which does not present a problem for making these additional contributions. From a tax-effectiveness perspective, additional contributions could be made to super if a better tax position arises on the investment income.
Initially, the investment income of those superannuation contributions is taxed at 15 percent, and this tax rate could be reduced to nil if the contributions were transferred to pension status.
Since the reader is over 65, any contributions can be reclaimed if the contribution payment turns out to be too much or he doesn’t have enough funds to support either lifestyle or capital requirements.
By making extra contributions to superannuation while still working, an additional amount is being maintained in the super account with the intention of providing support in retirement.
Superannuation provides a tax-effective vehicle for this, and there is a potentially limited time in which these contributions can be made for people over age 65, since they need to be employed and even then super contributions must stop at age 75.
These answers must be taken as general advice only.
Original article here