Tax with Max: How much super do I have to draw?

Minimum withdrawals from your super and how home ownership affects your pension.

Summary: The minimum pension you draw from super begins at five per cent each year from sixty five to seventy four, then increases in four year increments from your age at July 1 each year. For retirees paying off a mortgage while living in their home, they are considered home owners and the value of the mortgage and property are not taken into account for age pension eligibility.  

Key take out: From January 1, 2015, amounts held in superannuation are counted as a financial investment and have the deeming rules applied to them - if the only assets held are in a super fund, not a bank account, then this will be subject to deeming.

Key beneficiaries: SMSF trustees and superannuation accountholders. Category: Tax and superannuation.

How much do I have to withdraw?

I am 79, manage three family SMSFs and turn 80 on September 6, 2016.  I am currently receiving an Account Based Pension at the minimum pension rate of six per cent per annum. What is the correct pension rate for 2016/2017?  On July 1, 2016 can I use the six per cent for the full year, or do I have to pay myself the six per cent up until I turn 80 and then pay myself an ABP at seven per cent after turning 80, or do I have to pay a pension at seven per cent for the full year?

Answer: Because superannuation is meant to provide an income for a person in retirement, and not be used as a tax-planning vehicle to help reduce tax, there are minimum amounts set down for pensions paid by a super fund.

The minimum pension to be taken starts off at four per cent for people aged between 55 and 64 and then increases as follows:

65 to 74

5%

75 to 79

6%

80 to 84

7%

85 to 89

9%

90 to 94

11%

95 and over

14%

The minimum pension payment rate is set at July 1 each year depending on the member’s age on that date. This means in your situation the minimum pension required to be taken by you for the 2017 financial year will be six per cent. The minimum pension that you will need to take for the 2018 year, as you will be 80 on July 1, 2017, will need to be seven per cent.

Non-concessional contributions and tax?

In your February 3 Eureka Report article “Boosting non concessional contributions” you said “By commencing a pension from the $720,000 of non concessional contributions it will be “almost entirely made up of tax free super benefits”. I was wondering why any of it would be taxable?

Answer: The benefits of a member’s account in a superannuation fund can be made up of either taxable superannuation benefits or tax-free benefits. Taxable superannuation benefits result from super contributions by an employer or a member and a tax deduction has been claimed for the contribution, and from accumulated income credited to the member’s account.

Tax-free super benefits predominantly come from non-concessional after tax contributions by members. They can also result from a member having used the small business retirement exemption and contributed an assessable capital gain made on the sale of the business to a superannuation fund, up to a maximum of $500,000.

Where a member who is 60 or older receives either pension payments or lump sum payments from a super fund, they do not pay tax on the amounts received. When a member dies and the superannuation passes to non-dependants, tax is paid at 17 per cent on any taxable superannuation benefits that they receive. No tax is paid by non-dependants on tax free superannuation that they inherit.

A member that can convert taxable superannuation into tax-free superannuation therefore receives no benefit from the strategy, but by increasing the tax free superannuation benefits reduces the tax payable by the beneficiaries of their will.

How does my home stack up for pension tests?

I am 69, a single female, have $600,000 in super and take an allocated pension. I understand there are upper and lower limits to receive a part or full aged pension but if you ‘own’ your own home but are still paying off a mortgage - what category do you fall into if one does not really own their own home - the bank does? I am paying what would be the equivalent of $350 a week rent under a 30 year mortgage and have no other assets other than a car valued at $28,000. I live off my super but am I entitled to anything else? Am I a homeowner or a non homeowner?

Answer: There are two tests that need to be passed for someone to qualify for the age pension. They are the assets test and the income test. Under the assets test, the net value of the assets that an eligible person owns are counted. An eligible person is someone that has reached age pension age, which in your case would be 65.

The net value of a person’s assets is counted by totalling the value of all of the assets they own, except for the value of their home, less the value of all of their liabilities except any loans secured by their home.

Whether a person is a home owner or not does not depend on whether they have a mortgage relating to their residence. In your situation you would be classed as a homeowner and therefore the value of your home and your mortgage will not be taken into account in assessing your eligibility for the age pension.

Where a person has a home that is used as security for a loan to invest, they can be seriously disadvantaged with regard to the assets test. This is because the value of the investments will be counted under the assets test, but the value of the loan will not be deducted to arrive at the net assets because it is secured by the home.

As it appears you are not receiving the age pension currently the new income test will apply to assess whether you are eligible for the age pension. If your only source of income is the superannuation account based pension you receive no other income will be counted under the test.

From January 1, 2015, amounts held in superannuation are counted as a financial investment and have the deeming rules applied to them. This means if you do not have any funds in a bank account the only financial investment counted would be the $600,000 value of your superannuation.

The current deeming rates applied to financial investments under the income test are 1.75 per cent on the first $48,600 of financial investments, with 3.25 per cent applying to the excess value of financial investments. Under the deeming rules you would be counted as earning $18,771.

The income thresholds applied under the income test for a single person from March 20, 2016 result in a person receiving the full age pension where there annual income is less than $4212, and no age pension is received where the annual income exceeds $49,655. On the basis of your deemed income of $18,771 that means you should be eligible under the income test for some age pension.

Under the assets test a single home owner is eligible for the full pension where their net assets are less than $205,500, but get no age pension when the net value of their assets exceed $788,250. In this case the assets test would result in you receiving the least age pension, but you would still be eligible to receive a small amount.

There is a change being made to the assets test that will apply from January 1, 2017. As a result of this change the threshold at which no age pension for a single person will be received reduces to $547,000.

You should seek professional advice to assess with you will be financially better off by using some of your superannuation to pay off your mortgage, and thus be entitled to receive a higher age pension now and retain it once the rules change.



Max Newnham is a partner with TaxBiz Australia, a chartered accounting firm specialising in small businesses and SMSFs. Also go to www.smsfsurvivalcentre.com.au.

Note: We make every attempt to provide answers to readers’ questions, however, answers are of a general nature only. Subscribers should seek independent professional advice for more in-depth information that is specific to their situation.

Do you have a question for Max? Send an email to askmax@eurekareport.com.au.

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