Contribute to Superannuation
Contributing to superannuation is often the most effective way to accumulate assets for your retirement. Superannuation is a concessionally taxed environment that also offers an element of asset protection.
The retirement planning process may identify it is appropriate to make additional contributions to superannuation. Your Southern Financial Solutions Investment Strategies Financial Planner can determine how much should be contributed and whether the contributions should be made as concessional or non concessional contributions.
Concessional contributions are “pre-tax” contributions and are made up of compulsory employer contributions, salary sacrificed contributions, and personal tax deductible contributions. These contributions have an annual limit which depends on your age. Concessional contributions can be used to reduce your overall level of tax payable as they are taxed at the rate of 15% in your superannuation fund, which may prove to be favourable when compared to your personal marginal tax rate.
Non concessional contributions are made from “post-tax” money, normally from a personal bank account. These contributions are not tax deductible and are not taxed at 15%.
As there are limits on each type of contribution, careful planning is required to maximise your superannuation balance at retirement. The greater your balance in superannuation, the more benefit you will receive from the low rate or nil rate of tax the structure provides.
Non Superannuation Asset Accumulation
Although superannuation is the optimum vehicle for the long term accumulation of retirement assets, care needs to be taken that only an appropriate amount of funds are contributed to superannuation. This is particularly important for individuals who are hoping to retire before their preservation age, which is the age at which you are able to access your superannuation balance.
It is important that a sufficient level of non superannuation asset base is accumulated to ensure that not only are income needs met between the goal retirement date, and the time at which superannuation becomes accessible, but to ensure that you have access to sufficient capital should unexpected expenses arise or a reduction in income be experienced.
When correctly structured, tax can be minimised on non superannuation investments. Consideration needs to be given to which member of a couple should own the asset, or if a trust or company structure is an appropriate non superannuation investment vehicle.
Retirement Income Streams
Often the most effective way to fund retirement is by the commencement of Account Based Pensions from superannuation savings. For most retirees, retirement income streams from superannuation are tax exempt, and the earnings of the assets supporting the pension are tax free to the superannuation fund.
To enjoy a tax free retirement, not all investments need to be held within the superannuation environment. On occasion, it can be beneficial to hold investments personally, particularly from an estate planning perspective.
The planning process will identify when this is appropriate, and to what extent assets should be held out of the superannuation environment.
For many individuals, superannuation income streams are used to supplement Centrelink entitlements to meet their retirement income needs.
Sale of Business and Business Assets
For many self employed people, their business and perhaps the building they own and operate their business from are seen as their superannuation. In this situation it is imperative that business owners are aware of the Small Business Capital Gains Tax Concessions that are available to them on sale of their business and business premises.
The concessions are available on the sale of “Active Assets”. Active assets are assets which are used in the business conducted by the taxpayer, or an entity connected with the taxpayer or their affiliate. Goodwill and business premises are the two most common examples of active assets. Shares in a company and units in a trust can be considered active provided additional criteria are met.
There are restrictions on who is eligible to apply the concessions. Generally speaking, if the business and connected entities have a combined turnover of less than $2 million, or assets of less than $6 million, then it is likely the concessions can be accessed.
The rules surrounding these concessions are complex and a detailed analysis of the business structures would be required to determine eligibility for the concessions, and the ways in which the benefits from the concessions can be maximised. The concessions are as follows:
50% Active Asset Reduction
When an eligible “Active Asset” is sold and a capital gain is realised, the assessable gain can be reduced by 50%. This 50% discount is in addition to the general 50% discount which is available to individuals if they have held an asset for more than 12 months.
Replacement Asset Rollover
This concession is available when the intention is to purchase a replacement active asset. This concession does not result in the gain being exempt, but it essentially defers the gain until the new asset is sold. The above concessions may then be available on the sale of the replacement asset .
Small Business Retirement Exemption
This exemption can be applied either in place of or after the 50% Active Asset Reduction. There is a lifetime limit of $500,000 per individual. If the individual seeking to apply the exemption is under the age of 55 the amount must be contributed to superannuation. If over the age of 55, there is no compulsion to contribute the funds to superannuation but the contribution does not fall under the non concessional limit so it can often be an attractive strategy to make the contribution voluntarily.
15 Year Exemption
The most attractive of the concessions is the 15 Year Exemption. This can become available when an active asset has been owned for 15 years and is being sold in connection with an individual’s retirement.
This concession results in the whole gain being entirely exempt from tax. It also opens up a unique superannuation limit which allows the individual making the gain to contribute a significant amount to superannuation which is not assessed against the concessional or non concessional.
The planning process can identify opportunities to maximise Centrelink entitlements for some individuals. To be able to do this, knowledge of the Centrelink income and assets thresholds and an understanding of what income and assets are assessed by Centrelink is required.
Assets held in accumulation in the superannuation environment are exempt from testing for those under Age Pension age. On occasion, maximising the level of asset held in accumulation can prove to be beneficial.
An analysis of your entire financial situation needs to be conducted to determine if a “sheltering” strategy is appropriate, and to what extent you should shelter assets from Centrelink testing.
Centrelink entitlements form an important part of retirement income streams and it is important to gain an understanding of what you may be entitled to in the future. For many retirement plans, these entitlements have a significant impact on when retirement is achievable.
Transition to Retirement Strategies
Transition to Retirement Strategies can be implemented when an individual reaches their superannuation preservation age, but continues to work. The strategy involves the commencement of an income stream from superannuation which can either be used to supplement a reduced wage if the individual chooses to reduce their work load, or increase their salary sacrificed contributions. The strategy effectively replaces a wage which is fully taxable, with a pension which is concessionally taxed, or possibly tax free. In addition, the commencement of the pension means that the earnings of the investments supporting the pension become tax free.
Your age and the components of your superannuation balance will determine whether or not a Transition to Retirement strategy proves advantageous. A detailed analysis of these components and the effect on your personal taxation position should be assessed prior to the commencement of such a strategy.
This information is of a general nature only and has been prepared without taking into account your particular financial needs, circumstances and objectives. While every effort has been made to ensure the accuracy of the information, it is not guaranteed. You should obtain professional advice before acting on the information contained in this publication. You should also obtain and read a copy of the Product Disclosure Statement before making any decision to acquire a financial product. Jason Ellis of Southern Finance Solutions Pty Ltd, Authorised Representative of Politis Investment Strategies Pty Ltd, ABN 71 106 823 241, AFSL 253125.