This article is written by Bruce Sutherland, a regular SuperGuide reader, a self-funded retiree and now ex-SMSF trustee. Bruce is a former CEO, and a former strategy consultant, and he holds a degree in Economics. Bruce has closed his SMSF because he believes that a SMSF is no longer tax-effective or cost-effective for his wife and himself because of the positive impact of the new income tax rates that took effect from 1 July 2012. The combined tax benefits of the Senior Australians and Pensioners Tax Offset and the Low Income Tax Offset meant that he could not justify his SMSF. It’s a great read, and if you have your own story to share, add your comments in the comments section at the bottom of this article.
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 pension phase and created an allocated or account based pension to be paid by your SMSF to you as the sole member. Your wife and yourself, as Trustees of the fund were delighted to find that not only was the pension tax- free, but also the earnings of the super fund attracted zero tax, and capital gains were also exempt from tax. Whoever said this was ‘The Lucky Country,’ must surely have been thinking of Australian Seniors with SMSFs and their enviable tax status!
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 investment strategy of your SMSF and, as you age, you have increased the ratio of cash and fixed interest in the fund. Despite your best endeavours, your super fund’s performance has been ‘fair’ at best. In fact your balance, after payment of your account-based pension for 5 years, has marginally shrunk despite the zero tax on earnings and the receipt of healthy imputation tax credits as part of your share investment dividends.
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 Age Pension, they qualify, at that income level, for the very valuable Australian Seniors Health Card. It slowly dawns on you that the $900,000 in your SMSF is earning less than $57,948 per annum and you ask yourself why, in my circumstances, do I need to maintain my SMSF with all the responsibilities and costs that go with it?
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 Centrelink payments should be undertaken. Not all super pension income is counted by Centrelink when it conducts your income tests a deduction is allowed for the purchase cost of the pension. This deduction is lost when you commute your account-based pension and may reduce the amount of age pension you receive.
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 trust deeds, compliance issues, nomination of beneficiaries, SMSF tax returns and audit etc. My estate planning now relies on my will, as was the case before I started my SMSF.
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 low income tax offset (LITO) of $445, which raises the effective tax free threshold per person to $20,542.
- 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.