Ask ClearView's Technical Manager answers your financial questions
ClearView’s Technical Manager, Melinda Bendeich answers your financial questions.
Leave but no super
Q. I recently retired and in my final pay I received an amount for 20 weeks of long service leave and 5 weeks of annual leave. I have since noticed that my employer has not paid the 9% superannuation I usually receive on the leave payments. Is this correct or should I ask for more superannuation?
A. When annual or long service leave is taken as an ongoing salary, it forms part of your ordinary wages and therefore your employer is required to contribute 9% superannuation guarantee for those leave payments. For example, if in the past you took two weeks of annual leave, your employer would continue to pay 9% superannuation for those two weeks. In contrast, if you receive your leave entitlements as a lump sum when you terminate employment, your employer is not required to pay the Superannuation Guarantee amount on those lump sum payments. So, in your case, as you have received your annual leave and long service leave as a lump sum when you retired, there is no obligation on your employer to pay superannuation on your behalf.
Super still super for non-residents
Q. I am about to move overseas and plan to work there for at least the next five years. Can I still contribute to my superannuation fund in Australia as it is likely that I will move back sometime?
A.Yes you can. As you are moving overseas for an extended period of time, you will become what is classed as a tax “non-resident”. Non-residents are still able to contribute to complying Australian superannuation funds, just the same as Australian tax residents, if they satisfy the standard rules allowing the fund to accept super contributions. For example, contributions can be accepted any time if you are under 65 years of age but a work test must be met if between 65 and 75. Additionally, a non-resident must have an Australian Tax File Number to make personal contributions to superannuation which you would likely have if you have an existing Australian fund. With regard to accessing your Australian superannuation if you remain overseas, it’s important to be aware that the same preservation rules apply to non-residents as residents unless an eligible temporary visa is held. In your case, if you decide to stay overseas permanently, you cannot transfer your Australian super to your new country of residence until you have met what is known as a condition of release (eg turn 65 or reach preservation age and retire). One of the benefits of continuing to accumulate superannuation in Australia is that irrespective of whether you move back to Australia or remain a non-resident, the same tax rates apply when you access the funds. So, after 60, pension payments will be fully tax free within Australia. Tax may be payable however on these payments in the country of residence.
How much is too much for a Pension?
Q. I am 72 and my wife is 69. We are both still working full time in our own business.The business is on the market and we plan to retire when it is sold. We both enjoy good health. We own our home and business, all are debt free. Our private superannuation fund has property, cash and security holdings. From this fund we drawan allocated pension and pay 100% of our combined salary from our company into thesuperannuation fund. We are wondering about our eligibility for the pension and the Pension Bonus Scheme and what “means test” criteria is applicable in our situation.
A. Eligibility for the Age Pension is governed by both an Income Test and an Assets Test. The test that provides the lowest rate of pension is the one that applies. From 20 March 2011, the income and asset thresholds for a homeowner couple will be:
• Total combined income must be less than $2,454.80 per fortnight for a part pension.
• Total combined assets (excluding your family home) must be less than $991,000 for a part pension.
How Centrelink assess different types of income and assets can be confusing and professional advice in this area is essential. For example, while your family home is exempt from the Assets Test, most other assets such as allocated pensions are counted. However, the income assessment of an allocated pension is very different to the income assessment of any superannuation that is still accumulating.
As you may have noted in the Summer edition of Viewpoint, the Pension Bonus is not available unless you are eligible for at least a part Age Pension. The amount of bonus is directly related to the amount of Age Pension you are entitled to as well as the number of bonus years you have accrued.
If you believe you may be eligible for a pension, it’s important to visit your local Centrelink office as soon as possible to register for the Pension Bonus Scheme as only registered members can claim a bonus.Additionally, Centrelink will advise you of the documents you will need to provide as evidence of your work history.
Why you need TPD Insurance
Q. I recently noticed on my superannuation statement that I have both life insurance and Total and Permanent Disablement (TPD) insurance. I knew I had insurance cover for my family if I die but I’m not sure about the TPD component. I already have income protection in case I can’t work. Can you please explain what the TPD part is and whether you need TPD if you already have life insurance and income protection?
A. TPD insurance provides a lump sum payment to protect you and your family in the event of you being permanently disabled.
The definition of total and permanent disablement varies between insurers and it is essential that you have a clear understanding of when your insurance company will pay a claim.
To illustrate why TPD cover may be important in addition to life insurance and income protection, let’s look at an example. Let’s say you were seriously injured in a car accident, you required years of expensive rehabilitation, your mortgage repayments continue to build up and you still need to find money for everyday living expenses. In this situation, life insurance won’t pay a benefit because you are still alive and income protection payments will only pay a proportion of your income and may expire after a predetermined period. A TPD benefit could ‘fill the gap’ by providing a lump sum to meet medical bills, pay off the mortgage and have funds to invest to generate income - potentially for the rest of your life.
Holding TPD cover within superannuation can be cost effective. However, there are also some traps such as restrictions on accessing a TDP benefit. Professional advice is a must to discuss all your options and to ensure adequate coverage in your specific situation.
Splitting Super with a spouse
Q. For the past two years, my sister has moved some of her super into her husband’s super account because he is older and they wanted to use the money as soon as possible. She said anyone can do this but how can that be possible if she is only 52? I thought access to super was limited until you are at least 55 and finish work.
A. It sounds like your sister is talking about superannuation splitting where you can split up to 85% of concessional contributions for the year (those contributions where a tax deduction has been claimed like super guarantee and salary sacrifice contributions) to an eligible spouse. This is a different concept to superannuation withdrawals which you rightly mentioned generally cannot be accessed until at least the age of 55.
A super splitting strategy’s wisdom will depend on a person’s specific circumstances. Potential benefits include:
• Earlier access – if one member of a couple is able to access their super funds earlier than the other, splitting contributions to that person could mean earlier access to lump sums or a tax effective income from your super.
• Funding insurance premiums – non-working spouses sometimes have little or no super.Instead of funding insurance premiums with after tax dollars outside super, super splitting can be used to fund the spouse’s super account to tax effectively pay for insurance.
• Legislative risk – there is always the risk that superannuation legislation may change to adversely affect couples with uneven super balances. Splitting may also help even up super balances in case tax on super benefits is re-introduced for those over 60.
• Centrelink – splitting superannuation to the younger member of a couple can sometimes assist with Centrelink and DVA entitlements.
Please note a super contribution can only be split to a spouse who is under preservation age,or if between preservation age and 65, they must not have met the retirement condition of release. You are not able to split super contributions to a spouse that is 65 or older.
Protection for your family
Q. My husband and I plan to retire in the next few years and we are looking forward to spending our hard earned money taking holidays and spending time with our 5 grandchildren. My main worry now is about our kids who both have young families but don’t seem to have any plans in place if something happened to them. They say they have other priorities at the moment like paying off the mortgage but I’m concerned that they will quickly run out of money if something happened and they couldn’t work or were hurt. How can I get them to see the importance of protecting their family? Who do they see to find out what insurance is best and how much they need?
A. Thank you for this question. Underinsurance is a huge problem in Australia and (particularly in this case when you are about to retire) this situation is not just about protecting your children, it’s about protecting your retirement savings as well. What would happen if one of your children were to die or become disabled and their family couldn’t afford to meet their living expenses? In many cases like this, not only do the parents (grandparents) help out emotionally, they also provide support financially and this can make a big difference to their retirement position.So what can you do? Seek advice. Recommend that your children speak to a financial planner who specialises in insurance.
They will be able to provide your children with real life examples of what can happen if they don’t have adequate insurance to illustrate the benefit of taking out cover. The planner can go through your children’s current position and goals and help determine the best type of cover to best meet their individual needs.
Finally, if your children are not in a financial position to cover themselves, you may want to consider paying for additional insurance on their behalf. Again, speak with a financial planner to determine the best option for you as you may wish to own any policies taken out for your children to retain control.
Share dividends
Q. I am not working and I don’t have to complete a tax return anymore. I own some shares in BHP and Westpac which sometimes pay franked dividends. Now that I don’t pay any tax or complete a tax return, does this mean I no longer get the benefit of the franking credits?
A. You are still able to get a refund of your franking credits even if you do not have to submit a tax return. To do this, you will need to complete an Australian Tax Office (ATO) form called “Application for refund of franking credits for individuals” which is available on the ATO website at www.ato.gov.au. Please note that you can only use this method to collect your refund if you meet specific criteria including being an Australian tax resident for the whole year and receiving total dividend income of less than $6,000 for the year.
Fixed term deposit
Q. I am 58yrs old and my wife is 56yrs old. We have stopped working. We both have super funds worth a total of $600,000. We have an investment property worth about $260000 (about $230000 after capital gains). We are currently living off our savings and we plan to cash in my wife's super next year and also sell the investment property and put the money into a fixed term deposit.
Drawing enough money on maturity each year to live on (plus extras for a couple of overseas holidays) with the term deposit rate at about 6.5%, this investment should last about 5-6 yrs. By having the term deposit in both names this should minimize the tax payable if any. Hopefully by then the super funds will be back to normal and then we can start drawing down an allocated pension. Do you have any thoughts and comments on this idea?
A.There may be several strategies that would be appropriate in your specific circumstances depending on a range of variables including your specific goals now and in the future, your risk profile and your personal and financial situation. Having seen first hand the value that can be added by seeking advice from a financial planner who specialises in this area, I would encourage you to consider this option.
While I am unable to comment specifically on your overall position, the following general points about superannuation may be helpful.
Firstly, remember that superannuation is an investment vehicle, not a type of asset. You can invest in low risk assets such as cash and term deposit type investments within your superannuation fund as well as outside the super environment.
Placing funds in cash and term deposits to draw on is one option to meet planned expenses. Contributing funds to super and then commencing an account-based superannuation pension (ie an allocated pension) also has its advantages. Within an account-based pension, all earnings are tax free (unlike superannuation where fund earnings are taxed at a maximum of 15%). Additionally, income payments are concessionally taxed. As you mentioned, all payments are tax free from 60 years of age however, tax concessions are also available under 60. Part of each pension payment may be tax-free depending on the specific components of the fund and any taxable pension payments receive a 15% tax offset to further reduce the tax liability.
Finally, making tax deductible contributions to superannuation (known as concessional contributions) can be a very effective way of reducing capital gains tax. You mentioned that you are looking to sell your investment property next year. Seeking professional advice to determine if you are eligible to reduce your capital gains tax liability by making a concessional contribution to super may be beneficial.
Tax benefits of superannuation
Q. What tax rates apply to superannuation withdrawals both before and after I retire?
A. The tax rates depend on your age and your superannuation components, not when you retire.
- If you are aged under 55, the taxable (taxed) component of superannuation is taxed at 20% plus the Medicare Levy of 1.5%.
- If you are aged between 55 and 59, the taxable (taxed) component is tax-free up to the Low Rate Cap (which is $160,000 for 2010-2011) and 15% plus the Medicare Levy for every dollar exceeding the Low Rate Cap.
- If you are aged 60 and over, then the taxable (taxed) component is tax-free.
Receiving two pensions at once
Q. Can I still receive the Government pension if I am receiving an income from my superannuation?
A. Yes, this is possible. The Government Age Pension is means tested. The means test is made up of two tests called the Assets Test and the Income Test. The test that provides the lower Age Pension entitlement is the test that Centrelink will apply to you.
The account balance of an account based superannuation pension is included under the Assets Test. It is also income tested - the amount of income that is assessed is dependent on the income you draw from the superannuation pension less your eligible deductible amount. The deductible amount is an income-free amount that is not assessable under the Income Test. This is calculated by the purchase price of your superannuation pension divided by your life expectancy at the date of commencement. For example, if you take a male age 65 (his life expectancy is 18.54 years as per 2005-07 life tables) who commences a superannuation pension with $300,000, his deductible amount will be $16,181 per annum.
TTR strategy to reduce debt
Q. Is there any way I can use superannuation to help pay off my mortgage?
A. Yes, this is possible for persons aged 55 and over who access a Transition to Retirement (TTR) pension. A TTR pension is available to those aged 55 and over who are still working. Essentially, it is an account-based pension that does not permit cash withdrawals, but allows access to superannuation money in the form of an income stream. The amount of income that can be drawn is generally between 4 per cent and up to a maximum of 10 per cent of the superannuation account balance at 1 July each year. Therefore, you can use the income stream to help increase your mortgage repayments and repay your mortgage quicker. But you need to weight up your options and do the numbers on this strategy as you may be reducing your retirement benefits.
Taxing times – how super can reduce your tax
Q. My wife and I recently sold an investment property and will have to pay about $60,000 in capital gains tax (CGT) for the 2010-11 financial year. Is there any chance of reducing the tax? Can we use superannuation to help offset the CGT?
A. Generally speaking, you should discuss options for reducing CGT on the sale of an investment asset before you sell it, as there may be more options available, especially with the timing of the sale. For example, selling an investment asset in a financial year that you earn little or no income may be more tax effective because capital gains (or profit) are added to your assessable income and then taxed at your marginal tax rate.
Yes, you may be able to use superannuation to help offset your CGT, however you need to consider the following. If you are under 65, you could contribute to super without having to meet the work test. If you are aged 65 or over then you will need to meet the work test (that is you will have to have worked 40 hours in 30 days in the year of contribution) but in order to claim a tax deduction you need to either have received no employment income in the financial year or if you have received such income then this cannot be equal to or greater than 10% of your total assessable income (this is called the 10% rule).
If you are eligible to contribute, you then need to consider the concessional contribution cap of $50,000 (if you are aged 50 and over). Exceeding this cap will result in an excess contributions tax liability. Please note that your financial planner will be able to advise if you are eligible to contribute to super and claim a tax deduction at the same time.
Gift wrapped
Co-contribution conundrum
Q. Over the last few years I have been making a $1,000 personal contribution to my superannuation account and have been receiving a Government Co-contribution. I was recently told by a friend that I wouldn’t get a co-contribution payment for last year because I salary sacrifice some of my wages into superannuation. Could this be true? My circumstances haven’t changed at all.
A. Yes, this may be true although whether you lose the co-contribution all together will depend on your specific circumstances.
Many factors determine a person’s eligibility to the Government co-contribution including their age, whether they are working, if they submit a tax return and importantly the level of their income. From 1 July 2009, the rules around how income is calculated changed.
Total income now includes any salary sacrifice payments your employer makes on your behalf into superannuation. This was not the case in the past when salary sacrifice contributions were ignored when calculating the amount of co-contribution you would receive. So, if your total income including the salary sacrificed amount is more than $61,920 for last year, then a Government co-contribution will not be available.
How much can I contribute into superannuation?
Q. I am 65 and will be retiring soon. I have some cash set aside that I would like to contribute into superannuation before I retire. What is the maximum amount I can contribute?
A. This is a very good question as the superannuation rules relating to people around 65 years of age can be complex and my advice would be to seek professional help from a financial planner.
Generally speaking, if you are 65 or over and wish to make superannuation contributions from funds held in a cash account (known as non-concessional contributions), the maximum amount you can contribute is $150,000. However, if you were 64 at the start of the financial year in which you are contributing, you have the opportunity to use what is known as the ‘bring forward’ rules where you can contribute up to a maximum of $450,000.
Finally, it is important to be aware that anyone 65 years or over who wishes to make a personal contribution into superannuation must meet a work test which means that you must have worked 40 hours in a period of 30 days within the year before the contribution can be made.
Self-funded retirees
Q. My wife and I are self-funded retirees and we receive our income from interest, dividends and allocated pension payments. We have both now reached pension age but will probably not get any Age Pension because of our assets. Are there any other benefits available to us?
A. Firstly, I strongly recommend that you confirm with Centrelink if you are eligible for any Age Pension entitlements. The level of assets that you can own and still receive some Age Pension is continually increasing. Just recently, the cut-off threshold for assets topped the $1 million mark for couples that own their home.
If the Age Pension is not available, you may be entitled to the Commonwealth Seniors Health Card depending on your income. This card helps with the cost of prescription medicines and many other health services. Additionally, holders of this card also receive the Seniors Supplement which is currently $608.40 per year for each member of a couple.
One of the requirements to be eligible for this card is to have income of less than $50,000 for singles and $80,000 combined for couples. Importantly, if you receive payments from a taxed super pension like an allocated pension, these amounts will not be included as income for the Commonwealth Seniors Health Card as they are fully tax-free.
