It pays to know your offsets

I AM 69 and have an investment property with a net income of $7400 a year. Currently I am self-employed and earning about $42,000 for this financial year. The $42,000 includes my salary and before-tax super. How much concessional super should I make to maximise my tax benefits? Is it true that a senior aged 65 or over does not need to pay income tax if their taxable income is less than $22,000? P.L.

As a rule of thumb, I recommend reducing assessable income down to $34,000 through concessional (deductible) super contributions, this being the threshold between the 15 per cent and 30 per cent tax brackets.

Remember that, to be defined as a self-employed person, you need to earn less than 10 per cent of your assessable income from employment in this financial year. Note that this figure would include, in 2008-09, any salary, reportable fringe benefits attributable to employment plus any commissions and any assessable employment termination payments taken as cash. From July 1, it will include salary sacrificed amounts (as part of reportable employer super contributions) but not personal deductible contributions.

Regarding tax offsets, being older than age 55 and with a net working income of less than $53,000, you are eligible for the $500 mature-age workers' tax offset or MAWTO.

Being older than 65 (age pension age for men), you are also eligible for the senior Australians' tax offset (SATO), the maximum offset being $1602 each for marrieds earning under $24,680 ($2230 for singles earning under $28,867) in 2008-09. Then there's the low income tax offset (LITO) of $1200 for anyone earning below $30,000. The three offsets phase out at different rates.

Thus a married person older than 65 who is eligible for the full MAWTO, SATO and LITO that is, is earning under $24,680 will get total tax offsets of $3302. This allows him or her to earn about $28,000 before paying any tax ($32,200 for a single taxpayer), given that the first $6000 is untaxed.

Health card conditions

AS THE recipient of a State Super pension my last taxable income was considerably reduced and the Commonwealth Seniors Health Card (CSHC) was within easy reach. However, I understand that the gross income stream is to be included from July 1 next, which means that the now-untaxed pension could lift my income over the $80,000 safety net, causing the loss of the CSHC, particularly if the State Super pension remains tax-free. Could this be so? R.A.

The income test for the CSHC has always been based on the measurement of adjusted taxable income or ATI. At present, this includes taxable income (which excludes tax-free pensions such as yours), net rental property losses, fringe benefits and target foreign income. From July 1, the card's ATI will also include gross super pensions such as yours. However, I would imagine that, with income over $80,000, you don't really need taxpayer-funded welfare.

To go into further detail, the ATI will also include reportable superannuation contributions and total net investment losses. Reportable superannuation contributions (RSC) will include personal deductible contributions (made by self-employed people or those not working) plus reportable employer superannuation contributions or RESC.

RESCs are those where the individual has been able to influence the size of the contributions or the reduction in his or her assessable income. Examples include a straightforward salary sacrifice and also cases where the employee has negotiated a package where bonuses go straight into super. The standard 9 per cent statutory guarantee contributions continue to be excluded.

For some years, net losses from rental properties have been added to the ATI for the CHSC and other government benefits. From July onwards, net losses from financial investments such as shares and managed funds will also be added to the total ATI.

Reportable super contributions and total net investment losses will also be included in family tax benefits, baby bonus, child-care support and child support, higher education loan support and youth allowance as well as the senior Australian tax offset and Medicare levy surcharge.

RESCs will be added to the income tests for the co-contribution and the (less than) 10 per cent salary test for personal deductible super contributions, as well as the mature age and spouse contribution tax offsets.

Frankly, it's a mess.

If you have a question for George Cochrane, send it to Personal Investment, PO Box 3001, Tamarama, NSW, 2026. Helplines: bank ombudsman 1300 780 808 pensions 13 28 00.