This article is written by Bruce Sutherland, a regular SuperGuide reader, a self-funded retiree and now ex-
You set up your SMSF more than 10 years ago when you were still working, to take advantage of the great tax benefits, including the attractive 15% tax on your fund’s earnings. The same investments outside the SMSF in your own name would have attracted a tax rate of 45% or more, depending on your level of taxable income.
When you retired at 60, you moved the fund from the accumulation stage to
You have now turned 65 and have endured a very volatile 5 years in world financial markets, including the Global Financial Crisis in 2008/2009. Volatility and uncertainty surrounding global markets continues today and will undoubtedly continue into the foreseeable future. Each year you have reviewed the
You are starting to notice the burdens of trusteeship as you have aged. What seemed simple enough at 55 does not seem so simple today. The government’s constant changes to superannuation regulations are making the subject ever more complex, requiring you as trustee to increasingly seek professional advice from your accountant and lawyer. This advice comes at a cost which, together with your annual tax return and audit of the SMSF, has pushed your annual administration bill well over $2,000.
In addition, amid all the hype surrounding the Carbon Tax, you notice the government has raised the tax-free threshold from $6,000 to $18,200 per annum for individuals effective 1 July 2012. You also note the government has combined the Senior Australians Tax Offset Scheme (SATO) with the Pensioners Tax Offset Scheme (PTO). The new offset scheme is known as the Senior Australians Pension Tax Offset Scheme (SAPTO). Using calculators available on the Australian Tax Office website, you quickly calculate that you and your partner can receive $57,948* per annum absolutely tax free, provided that your investments producing this income are owned on a 50/50 basis.
Is this a game changer? You bet it is!
You know that a couple owning their own home with no dependants and no debt, other than their monthly credit card repayment, can live very comfortably on $57,948 per annum. Even if they do not qualify for a part
In my case the answer was compelling. I have liquidated all the assets in my SMSF, commuted the tax-free cash balance into my personal bank account and wound up my SMSF. The ATO website has a very useful section that details the necessary steps to be taken which are quite straightforward. June is the most cost effective time to wind up your Fund, as you need to submit only the one final tax return and audit.
Note: For those retirees receiving a part Age Pension, an assessment of the impact of terminating your SMSF on your
By winding up my SMSF, already I feel a weight has been lifted from my mind. I have reinvested the proceeds of the SMSF almost exactly in the diversified way that they were invested in the fund. My income is tax-free as before, but I no longer need to worry about
Everyone’s circumstances are different, but if you are over 65, own your own home and have other assets both personal and within your SMSF worth $1 million or less, then you should question the cost/benefits of maintaining your SMSF.
The taxation changes introduced on 1 July 2012 are major and you need to review your approach to income in retirement. If you have a financial adviser, don’t expect him/her to raise this issue: It may not be in their interest!
Personally, I believe the very generous taxation concessions now available to Australian Seniors makes Australia a very lucky country indeed, for those Seniors who have saved responsibly for their retirement.
*According to Bruce’s calculations, the figure of $57,948 applies to a couple with all investment income shared 50/50. Each member of the couple has a maximum tax free income of $28,974 derived as follows:
- Apart from SAPTO this income level attracts the
- Deduct $20,542 from $28,974 and you get $8,432. $8,432 X 19% tax = $1,602. The tax amount of $1,602 is the maximum SAPTO allowed for each member of a couple.
- The effective tax free threshold for the couple combined is $57,948.
Thanks for the article, Bruce. It does seem to make perfect sense in your situation.
I’ve thought about diverting some of the funds in my SMSF similarly but am wary of the possibility of a new government changing the tax thresholds again.
Might never happen, but if Tony Abbott removes the carbon tax, ditto the mining tax, it’s pretty hard to see how the recently raised tax thresholds can remain in place.
And, of course, once over the magic age we cannot recontribute funds back into Super.
I’d hate to find myself paying tax once again.
Bruce nominates a minimum amount of $2,000 to run an SMSF with a balance of $500,000. I don’t want this to sound like a personal endorsement but I guess it is . I have been using a largely computer based accountancy outfit in Melbourne and their current annual fees for tax return and audit are $699.
Other services like setting up a pension come without further charge.They don’t give advice and you do have to use an ANZ account as well as some other restrictions.
But the bottom line is that it works well for me and I think many people are paying too much, especially if they have a fairly uncomplicated SMSF.
Thanks for you comments Peter. Your accountancy outfit is very competitive, but if your SMSF is in pension phase they charge an additional $500 per annum on top of their base $699 to cover pension compliance issues. Their compulsory ANZ account pays 3.5% against my NAB/Ubank SMSF account that currently pays 5.01% per annum. On a $100,000 account balance that is an additional $1,600 per annum. On those figures their real cost is $699 + $500 + $1600 = $2,799.
It certainly does pay to shop around for SMSF accounting/ audit proposals, but you need to ensure the total package is the best deal in the particular circumstances of your SMSF.
I am not sure that the income needs to be split 50/50 when calculating the effect of SAPTO, as the transfer effect may offset the tax payable on an individual member of a partnered couple. A Senior Australian (i.e. a person over age pension age) may be eligible for a Senior Australian and Pensioner Taxation Offset (SAPTO). For a member of a couple, the offset of $1,602 effectively reduces tax payable to nil where their taxable income is less than $28,974 pa each for 2012/13. If their taxable income is greater than this, the offset is reduced as income increases and ceases completely when their taxable income reaches $41,790. The unused offset of one member of a couple can transfer to the other member to reduce their tax payable. Calculators are available on the Australian Taxation Office website at http://www.ato.gov.au.
Great contribution from Bruce and excellent forum Trish.
I would like to think this option is an unintended consequence of Labor’s recent tax and offset changes but how can we be sure? Has this situation been created deliberately to entice people like Bruce into abandoning the SMSFs which are still the fastest growing sector in the superannuation industry? There are lots of think tanks constantly lobbying Labor to abolish the tax concessions associated with account based SMSFs and the Australia Insitute (one of these “think” tanks) was the main mover behind the ridiculously low concessional contributions caps introduced by Labor this financial year. It is more about class warfare than anything else.
That aside, the one thing that worries me is that once you take the funds out of a SMSF there is no way you can put them back so you are stuck forever with the option Bruce has chosen (if that is chosen)
If a future government has to adjust the tax scales and offsets to repay the massive debt the current government has run up where does this leave you? While there is a lot of pressure from the aforementioned lobby groups it would be highly unlikely that any government will undo the existing tax arrangements applying to a SMSF which like the family home is one of only two tax free things left and I for one, am happy to be in that position.
Bruce’s option will only suit retirees with under $1 million in investment funds and even them a lot of management will be required to ensure the income limits are not breached.
I think the SMSF model would be a lot less stressful.
One item that has not been highlighted or discussed is the possible accumulation of capital losses from previous years. if the existing shares are sold at current prices and there are further losses, which is quite likely considering the current state of the market, then there will likely be no opportunity to use the losses as there will be insufficient or no capital gains. I assume those losses will have no future value if the SMSF is wound up. Also, one needs to ensure the taxable income, which could include income form other super funds and investments outsie the SMSF, do not exceed the $57,948 threshhold. Careful planning is necessary as everyones situation is different.
Thanks for your comments Keith and you raise an interesting question re accumulated tax losses. Our SMSF had a modest accumulated loss and I chose to write it off when winding up the SMSF.My accountant did say that there was a way to use them but that the complexity involved was not justified in our particular case. Everyones’ circumstances are different and some SMSF’s with significant accumulated tax losses would benefit from expert tax advice on this matter well before the SMSF is wound up.
I to have been told by my accountant about the $57k income,my question is what happens if you have a good year on investing and you go over the 57k what will the ATO tax you on.
I am on the fringes now and dont know which way to go about SMSF.Iam sure the present Govt are just trying to make things harder for people our age.
Hi
This is nothing new – any good accountant or adviser should tell you this. There has never been a compelling reason to have all your assets in super as there has always been a tax-free threshold and other tax offsets.
However, even with the offsets mentioned you will probably still have to pay the Medicare Levy (as it cannot be offset against rebates – unless the current thresholds are being raised significantly) and you need to make sure the income is evenly split. Also, as others have mentioned capital gains will be an issue if you need $57k to live on as the $900k will not generate enough income outside of super to fund this without selling assets.
The other significant issue is what happens when there is only one of the couple left – it will not be tax-free in their name unless assets have declined significantly, so you may in fact be better off with the SMSF over the longer term, if one partner passes away whilst assets are still generating more income than the single person tax-free threshold.
Also, paying $2000 for accounting and audit fees is not unreasonable and is a small percentage of the total assets.
Great article Bruce, but I have this funny feeling that you are paying way too much for your SMSF to be audited each year. You say that you still invest in the same investments outside of your SMSF. This means you are still doing the same amount of work to work out which investment is good. (i.e. which stock to buy, which term deposit to use etc).
So how much extra work needs to be done to have these same investments inside your SMSF? None. The investment strategy is there…you do your beneficiary statement once. Your SMSF gets audited once a year…and really, if you are paying a lot of money here you should look at the fees here.
So, you are taking your money out of your SMSF to basically save the auditing fee (as you are doing all the other work in choosing the investment). As the person above said, you run the risk of paying capital gains now.
Also, one more point. It could read “an SMSF”, not “a SMSF”. When you say the letter S, you pronounce it “ess”. When do you use an and a? An before a vowel, a before a consonant. However, as you are saying “ess” then there is an e there. It flows of the tongue to say “an eSMSF”. Technically both are correct, it is just a lot easier to say it one way than another. Read it out aloud.
Thanks for your comments John. With regard to fees, the audit is just one element of the annual cost of running the SMSF. The preparation and lodging of the SMSF tax return plus the annual audit and update of the trust deed for a $500.000 SMSF is a minimum $2,000.
The ATO figures show the expense of running a SMSF with a balance between $200,000 and $500,000 is 1.24%, which is $2,480 and upwards.
I can’t comment on the strategy above but I have always wondered about those having and running a SMSF.
ie what happens as you get older ,
as interest in do so declines or
one partner in a couples SMSF dies and the other is left to ‘manage’ the fund, having taken no active role to this point.
or like most older people, memory is not so good any many other factors which may come into play.
Great article!
I too have been wondering if an SMSF is the best vehicle for investments, regardless of age, if you do not have a lot of other taxable income. I am a stay-at-home mum who also looks after the investments of our SMSF which is still in accumulation phase. If my SMSF generates $37,000 of income, I will have to pay $5550 of tax (at 15%). If I earn the same amount under my personal name, I will only need to pay $3127 of tax, which is effectively 8.4% after I take into account the tax free threshold and LITO.
While it is still tax effective for my husband to make pre-tax super contributions, we are not making any post tax contributions as it would be better to invest any excess cash in my name. The income from the investments will be taxed at a lower rate and we do not have to wait until we retire to get access to the income, and not have to worry about compliance with the every changing rules for super.
Interesting and thought provoking article with some ups and downs.
Downs.
Within the SMSF if one partner dies and the other is nominated as a reversionary beneficiary then they will continue to have a tax free income. However, outside of super they would exceed the single person’s tax threshold.
Capital gains can be lumpy and may require careful planning to minimise any tax. An unexpected death could result in a nasty tax bill.
Ups
As you get older or when returns are poor you do not have to pay out the minimum pension amounts.
No death duties by stealth when the SMSF has to pay out to non-dependants.
Thanks Rob, your comments add an extra dimension to the issue. If one partner dies the single tax exempt threshold rises to $32,279 before any tax is payable and then 19 cents in the dollar to $37,000.