A reader looking at contribution options may be better off starting an account-based pension, writes Sam Henderson who answers your super questions.
Q: Sam, I am 68, retired, but am working more than 40 hours per month. I earn about $15,000 a year and receive about $2000 in super which goes into my self-managed superannuation fund (SMSF) accumulation account. I have monies coming to me from a trust account. I am required to declare this as income in my name. As I work, can I put this money into my SMSF before tax (ie, $23,000 as $2000 already goes in from my employer), or am I required to put it in after tax? I want to buy fully franked shares for the franking credits and to withdraw at my leisure. John
A: John, as of July 1, 2017, everybody has a concessional (or pre-tax) contribution limit of $25,000 per annum until you turn 75. Once 75, you're only able to receive your employer-mandated contributions and no salary-sacrifice or further concessional contributions are permitted.
Once you are 65 or up until you're 74, you may make the $25,000 concessional contribution but you have to meet a work test of 40 hours in any 30 consecutive days, which you appear to have done.
So the answer is yes, you can make additional super concessional contributions up to your maximum – which will include your employer super guarantee amount of 9.5 per cent if you earn over $450 per month as required by law and any additional amounts you choose to classify as concessional. It's important to tell your super fund provider or accountant/administrator what type of contribution you are making.
You may want to do your numbers. though, because the first $18,200 you earn is free from income tax.
There's no point in paying 15 per cent contributions tax if you're not going to pay tax anyway in your own name, and you can make a non-concessional contribution (free of contributions tax) of up to $100,000 a year. Because you're over 65 you can't use the three-year "bring forward" provision of $300,000.
You may want to also consider the impact of SAPTO ( seniors and pensioners tax offset) which allows recipients a "rebate income" of around $29,000 each or $58,000 as a couple before paying tax.
You can certainly buy fully franked shares and enjoy the franking benefits to withdraw at your leisure. But that also raises the issue of whether you're better off drawing an account-based pension where you would pay no tax on income, earnings or capital gains. You could receive 100 per cent of your franking credits back and re-contribute all your drawdowns as non-concessional contributions (up to $100,000 a year) back into the fund.
Hopefully you see the benefit of seeking professional advice around exploring a number of scenarios to achieve the most efficient and tax-effective outcome.
Q: If a pension member needs to roll some of a pension account back into accumulation phase, is there an age limit? Take as an example a husband and wife who were already in pension phase on July 1, 2017 and had each utilised their respective $1.6 million cap. Say one of them dies later (when both are 80), leaving the other as a reversionary beneficiary. Can the survivor transfer his/her full pension account balance back to accumulation phase (with earnings taxed at 15 per cent) and then draw the tax-free pension from the reversionary account? If there is no age limit on this, and assuming that both accounts have grown from $1.6 million on July 1, 2017, how much of the deceased's account balance is the survivor allowed to have in pension mode? Will it be the full account balance (regardless of amount) or will it be only the transfer balance cap amount at that time? Would the surviving spouse need to move all of his/her own balance back into accumulation phase, or would only $1.6 million be necessary? John
A: The answer to the reversionary beneficiary question is yes. A reversionary beneficiary will be required to withdraw an amount from their original pension and place it into accumulation phase so that their total super pension balance does not exceed the $1.6 million balance transfer cap.
Incidentally, one of the advantages now of a reversionary pension versus a binding death nomination is that there is a 12-month "grace period" where the reversionary beneficiary continues to receive both pensions free of tax to allow them to work out how to proceed.
The balances are allowed to grow from the $1.6 million limit once that limit is set at July 1, 2017 or at the time the pension is started. However a deceased transfer balance cap is said to be set at death.
Subsequently, if the beneficiary receives a reversionary pension, that pension counts as a credit against their transfer balance cap and amounts exceeding that level will be required to be moved into accumulation phase within 12 months. Amounts in accumulation phase or not covered by a reversionary pension will not be given the 12-month grace period.
Section 294 of the 1997 Tax Act details the complexities of these processes and advice is essential to ensure you're well-placed in the event of a partner passing.
By Sam Henderson
21 February 2018