Hot Tips for the End of Financial Year – Part 5 of 5

9. Transfer personal investments to super

Background

Earnings on assets held inside superannuation are taxed at a maximum rate of 15% whereas capital gains for assets held for 12 months or longer are taxed at maximum of 10%. Further, in pension phase earnings and capital gains tax on assets held inside superannuation is 0%.  In contrast, earnings on assets held in personal names are taxed at the marginal tax rate of up to 49% and capital gains on such assets held 12 months or longer attract 50% discount reducing the maximum rate of tax to 24.5%.

This strategy involves transferring personally held investments to superannuation to take advantage of the concessionally taxed environment. Careful planning however is necessary to minimise the impact of resultant capital gains.

Case study

Garry and Tali are self employed farmers age 61 and 62 drawing an annual income of $50,000 each.

They have a joint portfolio of listed shares valued at $350,000 with accumulated capital gains of $140,000 and are seeking advice to optimise their tax position as they approach their retirement at age 65.

As Gary and Tali are under the age of 65 they are eligible to make non-concessional (after tax) contributions of up to $180,000 each per financial year and concessional contributions of $35,000 each per financial year to their superannuation.

Accordingly, they can transfer the shares as a contribution to their superannuation as follows:

— $175,000 each before 30 June 2015

As both Gary and Tali are self-employed, they are also eligible to claim up to $35,000 of their contributions as a tax deduction.

The table below compares the tax position for each of Gary and Tali for the 2015 year before and after implementation of the share transfer.

 

Before  After 
Farming Income   $50,000        $50,000
Dividends @ 4%     $7,000          $7,000
Franking Credits     $3,000          $3,000
Assessable gain        $35,000
Assessable Income   $60,000        $95,000
Personal contribution deduction      ($35,000)
Taxable income

 

  $60,000        $60,000
Income Tax payable   $11,047        $11,047
Medicare Levy     $1,200          $1,200
Low income tax offset      ($100)           ($100)
Franking credits   ($3,000)        ($3,000)
Total tax payable

 

    $9,247          $9,247

 

As illustrated above, Gary and Tali are able to transfer their share portfolio to their superannuation with no impact to their personal tax position in the 2015 year. The personal contribution of $35,000 each will attract 15% tax ($5,250 each) inside superannuation however as explained below, the longer term benefits of the strategy will far outweigh the 15% contributions tax payable.

Further the benefit of transferring the shares to superannuation is that going forward the maximum tax on income will be 15% and capital gains will be 10%. These tax rates compare favourably to tax on earning at their marginal tax rate of 34.5% and capital gains at 17.25%. Once the shares have been transferred, they may commence a non-commutable pension from their superannuation accounts. Since both of them are over the age of 60, pension payments will be tax free. In pension phase tax on earnings and capital gains will be 0%.

 

10. Income protection and deductible contributions

Background

Income protection payments are taxed at individuals marginal tax rate, however the resulting tax liability can often be minimised by making tax deductible superannuation contributions and supplementing the forgone income from other sources such as superannuation.

Case study

Damian, age 49 suffered an accident that left him unable to work. He is in receipt of income protection payments of $90,000 per annum.

In addition, Damian received $500,000 from a Total and Permanent Disability pay out from an insurance policy held through his superannuation fund. His current superannuation balance is as follows:

Component  Amount Proportion
Tax free  $313,000 42%
Taxable  $437,000 58%
Total  $750,000 100%

 

Damian is using his income protection payments and additional ad hoc lump sum withdrawal from his superannuation to meet his medical and living expenses.

Since Damian is under the age of 65 he is eligible to make concessional (deductible) contributions to superannuation. These contributions can assist Damian to reduce his tax liability on income protection payments that are being taxed at his marginal tax rate of 39% as the deductible contributions will be taxed at maximum of 15%.

The reduction in income from making the contributions can be supplemented by drawing an account based pension of $25,000 per annum from his superannuation balance. $10,500 (42%) of the pension payments, will be tax free and the remaining $14,500 (58%) of the pension payments will attract 15% tax offset, meaning the tax on these payments will reduce from his marginal tax rate of 39% to 24%.

The table below compares the tax and cash flow position following implementation of deductible contributions strategy for Damian:

Current Deductible contribution
Income protection    $90,000 $90,000
Taxable Account Based Pension  $14,500
Assessable Income    $90,000 $104,500
Less Deductible contributions ($35,000)
Taxable Income    $90,000  $69,500
Tax payable (including Medicare levy)    $23,047  $15,525
Less 15% tax offset  $2,175
Total tax payable  $13,350
Tax free Account Based Pension  $10,500
Net Disposable Income    $66,953  $66,650

 

As illustrated above, by employing the deductible contributions strategy Damian will end up with approximately the same net cash flow as before however his personal tax liability will be reduced $9,697.

Taking into consideration the 15% tax payable on the concessional (deductible) contributions totalling $5,250 the net benefit of the strategy to Damian will be $4,447 per annum. Further, in pension phase, tax on earnings will be reduced to zero as opposed to 15% tax payable on his current superannuation earnings.