5 simple tips to save lots of tax using SMSF pensions
1. 5 SIMPLE TIPS
TO SAVE LOTS OF TAX
USING SMSF PENSIONS
November 2014
Greg Einfeld
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2. Tax components
Multiple Pensions
Agenda
Re-Contribution Strategy
Starting Pensions at age 55-59
Starting Pensions at age 60
Maximising Exempt Current Pension Income
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4. Tax Components – how they are taxed
Event Tax Free Taxable
Age 55-59 Age 60+
Death benefit to spouse Nil Nil Nil
Death benefit to adult child Nil 15% 15%
Lump Sum withdrawal Nil 1st $185K: Nil
Balance: 15%
Nil
Regular Pension withdrawal Nil MTR – 15% Nil
Note: excludes Medicare Levy, lump sum withdrawal is a lifetime limit
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5. Tax Components – how they grow
Event Taxable Tax Free
Non-Concessional Contributions
Concessional Contributions
Investment Income - Accumulation
Investment Income - Pension
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6. Tax Components – how they shrink
Account $ Taxable $ Tax Free % Tax Free
John - Accumulation 0 100,000 100%
John - Pension 1 100,000 0 0%
John – Pension 2 40,000 60,000 60%
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8. Tax components
Multiple Pensions
Agenda
Re-Contribution Strategy
Starting Pensions at age 55-59
Starting Pensions at age 60
Maximising Exempt Current Pension Income
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9. Multiple Pensions
Age 61
$500,000 in SMSF (pension) Jul 2013
- $400,000 employer contributions
- $100,000 investment income
SANDRA
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10. Multiple Pensions
MEMBER CASH FLOWS
Pension Accumulation Total
Balance – 1 July 2013 500,000 0 500,000
Non-concessional contribution 0 450,000 450,000
Investment income 20,000 20,000 40,000
Pension payments (50,000) 0 (50,000)
Balance – 30 June 2014 470,000
50%
470,000
50%
940,000
100%
Taxable
Tax free
Taxable
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11. Multiple Pensions
WHAT SHOULD SANDRA DO?
(A) Do nothing
(B) Commute the existing pension, then
Start a single new pension for $940,000
(C) Keep the first pension ($470,000), and
Start a second pension for $470,000
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13. Benefits of Multiple Pensions
Tax components aren’t contaminated
Estate planning: Withdraw Taxable, Leave Tax free to kids
TTR < 60: Withdraw tax free, leave taxable for > 60
What if tax is re-introduced on taxable component >60?
Goes hand in hand with Re-Contribution
Centrelink deeming provisions from 1/1/2015
Failure to meet minimum pension standard
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2
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16. Tax components
Multiple Pensions
Agenda
Re-Contribution Strategy
Starting Pensions at age 55-59
Starting Pensions at age 60
Maximising Exempt Current Pension Income
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18. Recontribution Strategy
Age 66
Divorced
Still working
2 children: Ben (35), Sarah (31)
500,000 in super
– $400,000 employer contributions
– $100,000 investment income
JANE
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19. Recontribution Strategy – Year 1
MEMBER STATEMENT
Member name Jane
Taxable component ($) 500,000
Tax free component ($) 0
Total member balance ($) 500,000
MEMBER STATEMENT
Member name Jane
Taxable component ($) 320,000
Tax free component ($) 180,000
Total member balance ($) 500,000
Death tax = $75,000 Death tax = $48,000
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20. Recontribution Strategy – Year 3
MEMBER STATEMENT
Member name Jane
Taxable component ($) 500,000
Tax free component ($) 0
Total member balance ($) 500,000
MEMBER STATEMENT
Member name Jane
Taxable component ($) 0
Tax free component ($) 500,000
Total member balance ($) 500,000
Death tax = $75,000 Death tax = $0
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22. Tax components
Multiple Pensions
Agenda
Re-Contribution Strategy
Starting Pensions at age 55-59
Starting Pensions at age 60
Maximising Exempt Current Pension Income
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23. Starting Pensions 55-59
Age 56
Retired – man of leisure
Owns properties outside super
Taxable income (rent) $200,000
500,000 in super
– $400,000 employer contributions
– $100,000 investment income
PETER
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24. Starting Pensions 55-59
SHOULD HE START A PENSION?
(A) Yes – so SMSF investment income is tax exempt
(B) No – because he doesn’t need the cash
(C) No – because he will have to pay > 30% tax on pension
withdrawals
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25. Tax Components – how they are taxed
Event Tax Free Taxable
Age 55-59 Age 60+
Death benefit to spouse Nil Nil Nil
Death benefit to adult child Nil 15% 15%
Lump Sum withdrawal Nil 1st $185K: Nil
Balance: 15%
Note: excludes Medicare Levy, lump sum withdrawal is a lifetime limit
Nil
Regular Pension withdrawal Nil MTR – 15% Nil
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26. Determination SMSFD 2013/2
“A payment made as a result of a partial commutation of an account based
pension (other than a transition to retirement income stream) counts towards
the minimum annual amount required to be paid”
Requirements:
Account Based Pension (not TTR)
Partial Commutation (not full commutation)
Election must be documented before withdrawal is
made
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28. Starting Pensions 55-59: rules of thumb
Retired, OR
Non-preserved funds, OR
Taxable income < 37,000
START A PENSION
Working AND
Only preserved funds AND
Income between 37K-180K
Consider:
Investment income
PAYG administration
Re-contribution strategy
Working AND
Only preserved funds AND
Income >$180,000
ACCUMULATION
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29. Tax components
Multiple Pensions
Agenda
Re-Contribution Strategy
Starting Pensions at age 55-59
Starting Pensions at age 60
Maximising Exempt Current Pension Income
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30. Starting Pensions at 60
Age 58
Turns 60 on 1 April 2016
Still working, earns $200,000 p.a.
Hasn’t commenced a pension yet
$600,000 in super
MICHAEL
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31. Tax Components – how they are taxed
Event Tax Free Taxable
Note: excludes Medicare Levy
Age 55-59 Age 60+
Death benefit to spouse Nil Nil Nil
Death benefit to adult child Nil 15% 15%
Lump Sum withdrawal Nil 1st $185K: Nil
Balance: 15%
Nil
Regular Pension withdrawal Nil MTR – 15% Nil
Levy, lump sum withdrawal is a lifetime limit
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32. Starting Pensions at 60
WHEN SHOULD HIS PENSION START?
(A) 1 June 2015 – 1 mth before the FY when he turns 60
(B) 1 July 2015 – start of the FY when he turns 60
(C) 1 April 2016 – on his 60th birthday
(D) 1 July 2016 – start of the FY after he turns 60
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33. Starting Pensions at 60
Saving = $525 x 10 = $5,250!
1/6/15 1/7/15 1/4/16 30/6/16
60th b’day
Assets $600,000
Annual Income @ 7% $42,000
Monthly income $3,500
Monthly tax @ 15% $525
10 months
Start
Pension
First
payment
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34. Tax components
Multiple Pensions
Agenda
Re-Contribution Strategy
Starting Pensions at age 55-59
Starting Pensions at age 60
Maximising Exempt Current Pension Income
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35. Actuarial Certificate
GENERALLY, AN ACTUARIAL
CERTIFICATE IS REQUIRED IF:
The fund has both a pension
balance and an accumulation
balance at any time in the year
AND
The Fund’s
assets are
unsegregated
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37. Increasing ECPI
Start pensions early in the year
Start pensions often
Make pension payments late in the year
(Make contributions late in the year)
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38. Increasing ECPI - example
Opening fund balance $500,000; 100% pension
Investment income = 35,000 (7%)
Contribution $180,000 on 2 July
New Pension started 2 July
Pension wdl $48K 30 June
No new pension
Pension wdl $4K per mth
ECPI = 72.6%
Tax = $1,441
ECPI = 100%
Tax = $0
Tax free component is also higher! 38
40. Bonus offer
Free Actuarial Certificate
Valued at $110.
Email greg@limeactuarial.com.au today.
Tell me which one (or more) of today’s tips
you will start implementing
Valid until 31 January 2015. Limit 1 per business.
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Good morning and welcome
I’m going to start with 2 short stories. The first story explain why I established Lime Actuarial. I became involved in the SMSF industry because I wanted to help real people get access to better advice on super and retirement. I’m a big believer that every SMSF trustee deserves access to the best possible advice – whether from an accountant or financial adviser. It wasn’t long before I needed to obtain an Actuarial Certificate for a client. I tried out some of the different services available. While they all fulfilled their obligation of delivering Actuarial Certificates, I was surprised about the high fees I was charged and the time it took for me to receive my certificate. I was confident I could do better and therefore help lots of accountants save time and money. The next day I decided to launch Lime Actuarial. That brings me to my second story…
Once we had prepared about 100 certificates I analysed the data being submitted. I could see that there were some simple steps trustees could take to significantly reduce their taxes. I felt that the best way to educate the trustees was through their accountants and financial advisers. Keep in mind my belief which is that every SMSF trustee should have access to the best possible advice. And that’s why we are here today.
I’m excited to have over 120 accountants and financial advisers register for today’s webinar. It says to me there is a huge appetite for SMSF education. What excites me is that if you each share this information with only 10 clients, that is 1,000 funds (and 2,000) people that we can make better off. I’m so passionate about seeing trustees get better advice that I’m going to provide an incentive for you to take on board today’s tips. More about that later.
Finally – I want to thank 2 businesses that have helped me get 120 people here today. One is Dover Financial Advisers. For those of you looking to switch licensees I can thoroughly recommend Dover. They are low cost, genuinely independent and really do act in the best interest of the end clients.
The other person I would like to thank is Jason McGilvray of Accountants Hub which promotes education events for accountants. He delivers a great service and doesn’t charge a cent for it.
Today I’m planning to cover 6 topics which you can see on your screen. The first is a re-cap on tax components in SMSFs and then we’ll get into the 5 tips.
