Seniors tax and moving money outside super

Not sure about the current tax rules with super? You are not alone. We sort facts from fiction and look at the probabilities.

Generally, we assume any current tax regulation will not stay the same forever.

Indeed, the Seniors and Pensioners Tax Offset (SAPTO) rules are suddenly in the news, after the Grattan Institute published a paper called ‘Age of entitlement: age-based tax breaks’.

Grattan noted that seniors pay less tax due to the combination of SAPTO, a higher Medicare levy threshold and higher rebates on private health insurance. These age-based tax breaks mean that the proportion of people over 65 paying tax has halved in the last 20 years, placing strains on the Commonwealth Budget.

One of the difficulties in planning and saving for retirement is there is no certainty about future amendments. The superannuation regulations are notorious for constant tinkering, despite government assurances otherwise.

While many despair at the recent superannuation changes which will increase taxes on large super balances from 1 July 2017, this new debate on SAPTO, levies and rebates shows far more budget outcomes are on the table for review.

The Australian Taxation Office issues a guidance on qualification for SAPTO. Eligibility for this tax offset requires meeting conditions relating to income and age. A qualifying couple can earn up to $28,974 each (or a combined income of $57,948) without paying income tax, while the amount for a single person is $32,279. Above these amounts, usual income tax rates apply.

The tax-free income potential is important when considering the merits of leaving money in superannuation. During the ‘accumulation stage’, super funds (including public and self managed super funds) pay income tax at 15 per cent. It is only when the money is in ‘pension stage’ that the income tax rate drops to zero.

These relatively low rates make superannuation an efficient savings vehicle for anyone on higher marginal tax rates. For example, a person earning $100,000 will pay a tax rate of 39 per cent (including Medicare Levy of 2 per cent) on each extra dollar. If this person can salary sacrifice (up to defined limits) into super rather than the money going into personal income, the tax saving is significant at 24 per cent (39 per cent minus 15 per cent). This is the best option for many people, insulating income from higher personal tax rates.

Retirees who satisfy the ‘condition of release’ rules and can access their super face a decision. They can leave their money in the pension phase of super and not be subject to tax, but the super system is subject to the vagaries of rule changes. More problematic, their estate may need to pay a 17 per cent death tax on the taxable component of super paid to non-dependants (such as their adult children). This is a potentially large and avoidable tax.

Alternatively, they could take their money out of super, and invest in their own names and pay no income tax if they stay below the limits including the benefit of the SAPTO thresholds. At the moment, there are no death taxes outside super.

Every person’s circumstances are different, but there should not be an automatic assumption that money should be left in superannuation when a retiree has a choice to access the money. It’s worth obtaining professional financial advice to check personal calculations.

Unfortunately, as the latest debate on the SAPTO rules indicates, the only sacred cow remaining in the Australian taxation system is probably the exemption of the family home from various social security and capital gains tests. And no doubt, even this is somewhere on the list.

What questions would you like answered about your superannuation? Let us know in the comments below.

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