Tax Offsets More Complex Than Ever

Would you please explain how the seniors and pensioners tax offset and the low income tax offset work? SAPTO used to be $1602, now it seems to be $978. Since the Tax Office stopped access to the Tax Pack with worked examples, I have been unable to work out the mathematics. I thought that offsets not used by one of us would flow onto the other, but this no longer seems to happen. Also, the Tax Office no longer allows “foreign tax credits”. In the same way, the ALP’s promise of not allowing franking credits from share dividends to be refunded in full, even if that individual has insufficient other income, is double taxation. M.N.

You ask complex questions. For other readers, anyone eligible for the full SAPTO can reduce their tax by up to $1602 each for couples and $2240 for singles or members of a “couple living apart due to illness” or CLADTI for short. For the 2017-18 year, singles get a full offset if their rebate income is below $32,279, and couples if their combined income is under $57,948 or $62,558 for CLADTI. The offset phases out at 12.5¢ per extra dollar at the upper thresholds of $50,119, $83,580 and $95,198 respectively.

You must be above age pension age and meet an income test, based on your “rebate income”. This latter is the sum of your (i) taxable income plus (ii) adjusted fringe benefits, (iii) deductible super contributions (other than the 9.5 per cent super guarantee contributions) and (iv) your net investment loss, the detailed descriptions of which can found through a Google search.

Having determined what offset you can claim, and if one member of a couple does not use it all, then, yes, the unused portion may be transferred to the other spouse (which is not so with the Low Income Tax Offset or LITO). This is where it gets complicated.

Where your spouse's taxable income (not rebate income) is $6000 or less, the full SAPTO offset or (“rebate amount”) is available for transfer, assuming you are eligible. If greater than $6000, the unused SAPTO amount is calculated as in the following example.

Let’s say your wife’s rebate amount is $1602, and is unused as her taxable income is $10,000 and she pays no tax. The calculation would be: $1602 – 0.15 ($10,000-$6000) = $1002. Thus your tax would be reduced by a further $1002. You can see why the Tax Office works this out automatically.

LITO is simpler. Your tax is reduced by $445 if your taxable income is under $37,000. The offset then reduces by 1.5¢ for every $1 until it phases out at $66,667.

Regarding overseas investments, you should still be able to automatically offset your tax with up to $1000 of foreign tax paid, after declaring the foreign income. Above $1000, you need to calculate a foreign income tax offset or FITO, which I won’t cover here.

Regarding franked dividends, where 100 per cent of a franking credit is unused and paid to a shareholder, the result is zero tax paid i.e. the company whose shares you own has ended up paying no tax on that income. Would you rather have that, or age pensions, hospitals, national security, etc?

In a recent column, you seemed to indicate a binding death nomination could be converted to a reversionary pension after the wife’s death. My perhaps incorrect understanding was that a reversionary pension nomination needed to be in place prior to death for a superannuation pension to revert on death to the spouse. Instead, if a binding death nomination was in place, then the capital supporting the pension had to be paid out of super as cash to the spouse. Could you please clarify this for me? R.W.

You touch on an interesting junction of state and federal law, remembering that the latter can override the former when they conflict. Trust funds and how trust assets are to be treated on the death of a trust beneficiary e.g. death benefit nominations, are dictated by state law (various state Trustee Acts) and super funds are trusts. But federal law (the Tax Act and the Superannuation Industry (Supervision) or SIS Act) dictate the tax treatment of death benefit super pensions and how, and to whom, they can be paid.

However, to the best of my knowledge, no law prevents a death benefit nomination from creating a reversionary pension, even though the Tax Office states: “A binding death benefit nomination, by itself, [my emphasis] does not make a superannuation income stream reversionary. If the governing rules or the agreement/standards under which the superannuation income stream is provided does not expressly provide for reversion then a binding death benefit nomination cannot alter this.” (Law Companion Ruling LCR 2017/3, para 15.)

Obviously, life companies paying a reversionary annuity or pension do their initial calculations on the basis of the longest life expectancy, so their policies prohibit a single person’s income stream become reversionary without a recalculation. But in the case of an SMSF paying an allocated pension, according to Townsend Lawyers (with whom I have no connection), it can be done with an appropriately worded trust deed. If in doubt, get a private ruling.

Regarding your second point, the legal requirement that a death benefit must be cashed out of the super fund is only true in the case of a non-dependant. Dependants such as a spouse, child under 18, financial dependant, can be offered a pension.

When a fund member falls off the twig, then if a binding nomination is in place, it is only effective if a dependant is nominated, otherwise it is ignored. If effective, it can then be paid as a pension or a lump sum. Since July 2017, that dependant must now consider how this affects their $1.6 million transfer balance cap.

I was made redundant in March this year, aged 61, and have decided to retire. I have three superannuation accounts, with a total balance of over $1.6 million, plus other investment income. I intend to continue to contribute $25,000 a year as a tax deductible contribution to my super until 2021-22, which I understand is allowed under current rules. I intend to transfer $1.6 million into pension phase shortly. I believe that only a part of the $25,000 is allowed as a tax deduction in this case. If I leave one super account untouched i.e. not rollover any funds out of it into the pension phase, can I contribute $25,000 fully deductible, to this particular account? M.W.

The fact that you have a “total superannuation balance” or TSB (the sum of your accumulation and pension funds as at June 30) of $1.6 million or more, means you cannot make any more undeductible non-concessional contributions.

You can continue to make a $25,000 concessional contribution each year into an accumulation fund, even with $1.6 million in a pension fund until you turn 65. But because you have a TSB greater than $500,000, you cannot “carry forward” unused deductible contributions, which eligible savers can do for up to five years.

If you have a question for George Cochrane, send it to Personal Investment, PO Box 3001, Tamarama, NSW, 2026. Help lines: Financial Ombudsman, 1800 367 287; pensions, 13 23 00. All letters answered.

By George Cochrane

The Sydney Morning Herald

30 September 2018


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