TREV AND JAMIE
Overview:
Trev (63) and Jamie (61) are retiring and selling an investment property they have held for many years in their own names to help to fund their retirement.
Issues:
The investment Property will have a large Capital gain of $300,000.
They are concerned they don’t have enough in super and whether they have enough to retire and how long their funds will last.
Incomes:
Trev and Jamie will both earn $70,000 this year from employment.
Investable assets
Once existing loans are paid off from the sale of investment, they will be debt free and own their own home which they are happy to stay in moving forward.
They will have $900,000 of investable assets from the sale of the investment property.
Trev has $380,000 in super and Jamie has $345,000.
Retirement expenses
They would like to live off $60,000 per annum in retirement.
STRATEGY ONE – USE UNUSED CONCESSIONAL CONTRIBUTIONS TO REDUCE CAPITAL GAINS TAX
Question:
Can we make tax deductible personal contributions to super and save tax on the Capital Gain that we have made on the investment property?
Solution:
Concessional contributions include personal tax deductible contributions you make to super. The current cap per year is $27,500. Our solution is to make use of the unused concessional contributions from the past 5 years and contribute to super to claim a tax deduction as well as using any room in this years cap. 5 years is the maximum allowable ‘look-back’ period and you must have superannuation balances under $500,000 to be eligible to access this option. ***
Implementation:
Trev has $85,000 of unused contributions and Jamie has $80,000 from previous financial years where they have not made extra contributions up to the Concessional contribution cap to super. This years cap is $27,500, and they have an additional $20,000 of cap space each this year. Trev’s total concessional contributions can potentially be $105,000, and Jamie $100,000.
Outcome:
Between the two of them they will save $68,200 in income tax that would have been payable this financial year by using up their unused concessional contributions from previous years.
Note that tax deductible contributions to super are taxed at 15% on entry to super, therefore the NET tax benefit of these contributions after the 15% tax is paid is $37,450 that would have otherwise had to be paid and they have boosted their super at the same time!
STRATEGY TWO – USE NON CONCESSIONAL CONTRIBUTIONS TO BOOST SUPER
Question:
Can we contribution the excess funds we have from the sale of the property to super? We still have $695,000 of investable funds after the concessional contributions which we will be making.
Solution:
Make use of the the Non-concessional contribution cap of $110,000 per annum and take advantage of the ‘Bring-forward rule’ which allows you to claim an additional two years of contributions in one year. ***
***We will assume you have met eligibilty criteria for these contributions. See the ATO site for more details https://www.ato.gov.au/individuals-and- families/super-for-individuals-and-families/super/growing-and-keeping-track-of-your-super/caps-limits-and-tax-on-super-contributions/understanding- concessional-and-non-concessional-contributions
Implementation:
Trev and Jamie can both make Non-concessional contributions of $330,000 this financial year using the bring forward rule. These are contributions for which you don’t claim a tax deduction.
Outcome:
By using the bring forward rule they will be able to contribute $660,000 ($330k each) of their investable funds into super immediately.
The net effect of the previous concessional contributions (less the contribution tax) and the Non-concessional contributions mean that they have been able to contribute $834,250 into the tax enhanced superannuation environment and have saved $37,450 in tax in the process.
STRATEGY THREE – COMMENCE INCOME STREAM FROM SUPER
Goal:
We want our retirement savings invested tax effectively and be able to draw down an income to support our lifestyle expenses in retirement.
Solution:
As both Trev and Jamie are over 60 and retired, they have met one of the ‘conditions of release’ meaning they can access their super. By choosing to commence an income stream (called a pension) they will be able to draw down funds from their superannuation accounts.
Implementation:
Commencing a pension (commonly called switching to ‘pension phase’) means that any tax on earnings within the fund will now be at zero percent. That is Tax-free earnings on their superannuation savings. Tax on earnings on ‘normal’ ( accumulation phase) super is up to a maximum of 15%.
Outcome:
By commencing pensions on their super and drawing down the minimum required which is 4% (based on their age), they will be taking approximately $62,400 a year between them based on their superannuation balance after the contributions. This is enough to meet their needs of $60,000 per annum in expenses. As they have met a condition of release they are able to access additional lump sums from their super should the need arise such as purchasing a new car or booking an overseas holiday.
BENEFITS OF SEEING A FINANCIAL PLANNER
Save Tax on asset sale – Strategically sell asset and use concessional contributions to minimise tax and boost super.
Boost savings tax effectively – Use Bring forward rule to get maximum amount into concessionally taxed superannuation environment.
Peace of Mind Retirement – Commence account based pension to fund retirement expenses and have investments compounding tax free.
Arrange a meeting, and let’s see how we can help.
Pillar Tailored Wealth Pty Ltd is a Corporate Authorised Representative (No. 1281503) of Capstone Financial Planning Pty Ltd ABN 24 093 733 969. Australian Financial Services Licence No. 223135. Information contained in this document is of general nature only. It does not constitute financial or taxation advice. The information does not take into account your objectives, needs and circumstances. We recommend that you obtain investment and taxation advice specific to your investment objectives, financial situation and particular needs before making any investment decision or acting on any of the information contained in this document. Subject to law, Capstone Financial Planning nor their directors, employees or authorised representatives, do not give any representation or warranty as to the reliability, accuracy or completeness of this information; or accepts any responsibility for any person acting, or refraining from acting, on the bass of the information contained in this document.