There has been much in the press recently about the government proposal to introduce a new $3m cap for super balances. The reasoning behind this is to reduce the tax advantages of the very wealthy who are lucky enough to have more than $3m in their superfund in the first place. There are estimated to be 80,000 individuals in this position, mostly older individuals who managed to put lots into super before the contribution caps were introduced.

Although we do not yet know the details of the proposal, I thought it would be a good time to revise the existing tax benefits of superannuation. Because, for most people, super continues to be tax utopia and this is not really a proposal to worry about. The goal continues to be reach retirement with the house paid off and $1.7m each in your superfund. That way you will potentially never pay tax again and have a lovely comfy independent retirement.

The current tax position – ACCUMULATION PHASE

In the accumulation phase, that is when you have not yet commenced a pension,. the earnings of all investments in your superfund are taxed at 15%. This includes for example dividends, rental income and interest. As many Australian shares pay dividends with franking attached of 30%, this means that your superfund may actually receive a tax refund as the franking credits are more than the tax being charged.

Self managed superfunds get this refund credited to their SMSF bank account when they lodge the fund annual tax return. Retail funds generally credit member accounts once a year with a tax refund which may be just prorated across all account holders, and some industry funds keep the refund for themselves – using it they say to reduce admin fees. If you do not have an SMSF why not check your annual statement to see how much tax refund was passed on to you last year.

The second concession occurs when your superfund sells shares or investments. It pays capital gains tax on any profits, however once again this is at a much reduced rate of 15% for assets held for less than 12 months and only 10% for assets held for longer.

You can therefore see from the rates above that the superannuation environment is a great place to build wealth in preparation for retirement. This is especially the case where your personal tax rate is over 15% ie your taxable income is more than c$18k.

The current utopian position – PENSION PHASE

It is in retirement that even greater tax benefits of super kick in. Once a pension has been commenced the assets supporting that pension pay no tax on their earnings, therefore receiving all franking credits back as cash from the ATO. In addition there is no tax at all on capital gains. This later point is very generous. Consider for example a fund that purchased a share or a property years ago. Assume that over the years the asset has increased in value. If the superfund then goes into pension phase and the asset is sold, the ENTIRE gain of that asset is tax free – not just the bit relating to the time in pension phase. That’s amazing!

Any pension from an Australian superfund is tax free in the hands of the individual once they are over age 60. It does not even appear anywhere on their tax return,

In recent years the tax benefits of being in pension phase have been reduced so that only $1.7m of assets can be converted into a pension. Any balance over this remains in accumulation phase and continues to be taxed at the accumulation rates above. Where individuals have an SMSF with both a pension and an accumulation balance, income and gains are normally apportioned between the two phases by way of an actuarial certificate and taxed accordingly.

In Summary

Super continues to be a great place to hold your investments for tax purposes. Most people will not reach the $1.7m cap and will therefore be able to convert their entire super balance into a tax free pension. For those over the cap it looks like you will still be able to hold an additional $1.3m in the accumulation phase and anything else will probably end up being best held in a family trust.

As ever we will keep you updated with any future announcements as they are confirmed.

Lindsay 0413 952 180