Tax with Max: Understanding the opposition’s super tax plan

Calculating the potential tax on super earnings, selling an investment property and paying off a home loan.

Summary: If the Labor party wins the next federal election and its super tax policy passes both houses of Parliament, income earned in a pension account that exceeds $75,000 would be taxed at 15 per cent. The changes relate to income that the account earns, not to the pension a member takes. It has not yet been announced whether the tax applies to unrealised gains.

Key take-out: If this policy becomes law, possible strategies will include realising capital gains before the new policy applies, and evening out balances between members.

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

Labor’s super tax plan

You are going to be inundated following Shorten’s policy announcement about taxing super accounts in pension phase that earn more than $75,000 in income each year. My SMSF account has about $1.75 million in it now, but started with $1.3 million in February 2012. I have been in pension mode from day one.

Next financial year I will have to draw a minimum pension of close to $90,000.  I do not mind the idea of paying 15 per cent tax on the pension component between $75,000 and $90,000, but what about the capital gains?  

Answer: The changes to superannuation announced by Bill Shorten do not relate to the pension you take from your SMSF, but relate to the income that your superannuation pension account earns each year. Currently no tax is payable on income earned by a superannuation account in pension phase.

If the policy is passed by both houses of Parliament, should the Labor party win the next federal election, income earned in a pension account that exceeds $75,000 would be taxed at 15 per cent. There is much about the policy that has not been announced, such as whether it is the accounting income distributed to a member’s pension account each year that will be taxed, or whether it will be the taxable income distributed to the account.

If the 15 per cent tax is imposed on accounting income, which would include increases in the value of a super fund’s investments that have not resulted in a taxable capital gain, this tax will not only be retrospective that incredibly unfair. It could result in members paying extra tax on unrealised gains that they will not be compensated for if there is a major market correction and capital gains are never realised.

There are a number of strategies that will be developed should this bad policy become law. One of these will be to even up superannuation accounts between members when one has a much higher balance than the other. Another option will be to realise any capital gains currently sitting in a super fund’s investment portfolio, while the account is still in pension phase, before the new policy applies.

The level of administration that will be required across the whole superannuation system, when a person holds multiple pension accounts, is another problem with this policy. In this situation would only one superannuation account bear the burden of the tax on the income earned across all accounts, or would the tax have to be applied in proportion across all accounts?

Of greatest concern will be the fact that if this policy were implemented it would be the first retrospective change made to the taxation of superannuation in Australia’s history. If the policy did become law every superannuation member in Australia could be rightfully scared about what other retrospective changes could be made to the taxation of superannuation benefits in the future.

Selling an investment property

I am 70 and sick of dealing with tenants and thinking of selling an investment property. I am on an account-based pension of $2,500 per month from a super account valued at $470,000. The rent from the property is around $16,000 after all expenses. The property is tired and needs refreshing which would be an added expense. I believe the capital gain would be around $65,000 as the purchase price 20 years ago was $165,000 and is presently value at around $520,000 to $540,000. Would I be more disadvantaged tax wise if I sell?

Answer: Firstly it is important to establish what your capital gain would be if you sold the property. On the basis of the property having cost you $165,000, and you receiving after all selling costs $515,000, the profit made on the sale would be $350,000. This means your assessable capital gain for income tax purposes would be $175,000 and not $65,000.

If your only other income, apart from the net rent you are currently receiving, is the account-based pension it would be important for you to time the selling of the property to reduce the income tax payable. If you sold the property partway through a financial year the assessable capital gain would be added to your rent for that year and tax would be payable on the combined amount.

If you instead signed the contract to sell the property at the start of a financial year, when there will be little to no assessable rental income, less tax will be payable on the gain. If you sold the property and there was no other assessable income apart from the capital gain your income tax payable would be approximately $53,000.

The only way that the tax payable on the sale of your rental property could be reduced is if you can satisfy the 40 hour work test. By passing the work test you could make a self-employed super contribution up to the deductible limit, currently $35,000, and reduce the tax payable on your gain.

Making a self employed tax-deductible super contribution of $35,000 would reduce the tax payable on the gain by $8400. Also passing the work test would allow you to contribute up to $180,000 as a non-concessional super contribution.

Despite the tax payable from selling the property the decision on whether to sell or keep the investment property will depend on a number of other factors. The net rent of $16,000 a year, on the value of the property at $520,000, is producing an income return of 3.1 per cent.

After paying the tax on the net selling value of $515,000, it would be necessary to find an investment that produces an income return of at least 3.5 per cent to break even. In addition to producing that level of income return the new investments would also need to have the potential to increase in value.

The decision about whether to sell the rental property really comes down to how sick and tired you are of dealing with tenants, the possibility of the income produced being reduced due to the property not being tenanted at certain times, and the return on other investments available to invest the after-tax proceeds.

Super vs the mortgage

I am 70 with no super, but have pensions from various sources. My wife is 65 next September and has $370,000 in superannuation. We have no other assets outside the family home on which we have a mortgage. Would it be best if she took the super and put it on the house, or should she leave it where it is?

Answer: From an income tax and investment point of view it makes the most sense for someone in this situation to pay off the home loan. This is because the interest is not tax-deductible, and even if the interest rate paid is low, there is no guarantee that the income and growth return in a superannuation fund will exceed the interest rate.

In addition your wife’s eligibility for an age pension will be less by having more money in superannuation, while still having the loan on your home, because loans on homes are not deducted under the assets test. You should seek professional advice so that all factors can be taken into account to work out what you should do with regard to the mortgage. 


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