|Summary: A lump sum superannuation tax-free limit of $180,000 applies to individuals under the age of 60. This limit increases each year in $5,000 increments in line with increases in average weekly ordinary times earnings.|
|Key take-out: Any payment you receive for redundancy over the maximum limit will be taxed at your normal concessional tax rate. Some tax concessions apply to lump sums for accumulated long service leave.|
|Key beneficiaries: SMSF trustees and superannuation accountholders. Category: Superannuation.|
Calculating tax on redundancy payments
I am over 65 and may get a redundancy in April 2014 of $87,000. In addition, I will receive a substantial amount for long service leave and holiday pay. Can you please advise on how the tax liabilities are calculated for each of these entitlements by the Australian Tax Office. Does the $180,000 limit for 16% tax include the sum of my redundancy plus my salary to date or just the 84 weeks’ redundancy?
Answer: The only $180,000 limit that I know of is the lump sum superannuation tax-free amount that applies to someone who is under 60. This limit increases each year in $5,000 increments in line with increases in average weekly ordinary times earnings.
The various components of the redundancy that you will be receiving are treated differently from an income tax point of view. Where a bona fide redundancy payment is made in accordance with the maximum amount allowable all of the payment received is tax-free. The tax-free redundancy payment is made up of $9,246 plus $4,624 for each year of service.
This would mean for your $87,000 redundancy payment to be totally tax-free you would need to have worked for this employer for at least 17 years. The fact that you are being paid for 84 weeks of normal salary as a redundancy payment does not affect the tax-free treatment of this payment unless it exceeds the maximum limit.
Any payment you receive for redundancy over the maximum will be taxed at your normal concessional tax rate. This tax treatment also applies to any accumulated annual leave related to employment since August, 1993.
Where a lump sum payment is received for accumulated long service leave as a result of redundancy there are some tax concessions. LSL relating to pre August 16, 1978 employment has only 5% of it taxed. The balance of LSL is taxed at no more than 31.5%.
To make sure that you maximise the benefits of this lump sum payment you should seek tax and retirement planning advice from a fee for service adviser that specialises in this area.
Maximising non-concessional contributions pre-retirement.
My wife and I operate an SMSF, which has been in transition to retirement mode for each of us since we turned 55 some five years ago. Pensions are drawn annually and re-contributed as non-concessional contributions. As my income places me in the highest tax bracket I have been drawing the minimum allowable pension; my wife draws the maximum allowable pension as the 15% rebate reduces the tax payable relative to her pension to zero.
We will both turn 60 this year and plan to continue to work for the next five years or so. How should we best adjust our re-contribution strategy in order to maximise the tax-free nature of our fund to pass on the balance of our SMSF upon death so that there is no tax payable by our children?
Answer: As you plan to work for another five years you should ensure that the amount of non-concessional contributions made does not exceed the current yearly limit of $150,000. This is because, if you time your retirement correctly, you should be able to receive a lump sum payment that can be re-contributed over two financial years that results in $600,000 being re-contributed.
The $450,000 non-concessional contribution limit, after allowing for the two-year bring forward rule, can be used in the year you turn 65. Where the $450,000 is made in the financial year after you turn 65 you must meet the work test in that year. There are other tax and financial planning options open to you that could be considered, so should seek professional advice prior to taking any action.
Contribution limits post 65
I’m 68 and only this year set up an SMSF. I have $150,000 in it but have the capacity to put in another $300,000 later this financial year as I pass the work test. I will be able to contribute more early next year with the sale of an investment property. If sold, my normal income from property investing will be around $65,000 after-tax plus whatever I get from SMSF. I thought everything in a SMSF was tax-free on gains if you are retired and over 65, but I think I have it wrong.
If I make 5% gains on my $450,000 investment in my super fund does my SMSF have to pay tax? If the SMSF is receiving dividends, does the franking mean the SMSF doesn’t need to pay tax?
Answer: Unfortunately, as you are over 65, the maximum that you can contribute is limited to the $35,000 concessional contribution limit and the $150,000 non-concessional contribution limit. When a superannuation fund is paying a pension the income generated from the assets to support the pension is tax-free. This means as long as all of your superannuation fund is being used to pay your pension, no tax is payable on regular income or capital gains made.
When a super fund in pension phase receives fully franked dividends, the franking credits received result in a tax refund to the fund.
Tax payable on an endowment policy
I am currently looking at an old life insurance policy that was converted to an endowment policy some 15 years ago. I understand that the payout in six weeks’ time will be tax-free, but I also understand that third party traders will buy that policy for a small premium (say up to 5%). I was wondering if the sale of this policy to the third party will then be liable to tax (either the additional amount, or worse, the whole payout)?
Answer: The type of life insurance policy that you hold, including endowment policies and insurance bonds that are held for a period of 10 years or more, result in the proceeds of the policy being tax-free. This means if you sell the policy to a third-party trader the proceeds will still be tax-free in your hands.
Finding a way around the 6% minimum pension rule
I turned 75 in February 2013. I receive a pension from my SMSF calculated at 6% of my account balance as at July 1, 2013. The amount is far more than I require and may deplete the fund’s assets over time. As 75% of the assets are in commercial and industrial property, which I would like to retain for my children’s inheritance, is there a way around the 6% minimum pension rule?
The tax-free proportion of my account balance is 83%. My wife would receive a reversionary pension should I die first and I would also want to retain the assets for our children’s inheritance. Will drawing such a large pension change the ratio of the tax-free and taxable proportions over time, as I can no longer make contributions to my fund?
Answer: The only way to avoid paying the minimum pension payment rate is if you die. One of the downsides of having a superannuation account in pension phase is the minimum amount that must be taken as a pension. On the upside is the fact that the tax-free and taxable proportions of a superannuation account are set at the start of when a pension commences to be paid. The taxable and tax-free components of a pension account remain the same for the entire period that it is paid.
This means you do not have to worry about some of the capital being depleted over time to meet your minimum pension payment. As long as your pension account remains in pension phase, and if you die before your wife and the account is a reversionary pension so that it immediately passes to your wife, the 83% tax-free portion of the fund will remain.
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.
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