Question 1: How can I reduce the taxable component of an income/pension account while boosting the tax-free component?
Within super you will have a ‘taxable’ component and potentially a ‘tax free’ component. Note some older-style government or corporate funds may have an ‘untaxed’ component, but we will ignore that for this article.
All your employer SG, salary sacrifice and tax-deductible contributions go into the ‘taxable’ component alongside all earnings and interest.
Generally, you will only have a tax-free component if you have made an after-tax ‘non-concessional’ contribution, or have received a co-contribution or spouse contribution.
The split between taxable and tax-free is rarely shown on your super statement, but your fund can easily provide this information to you.
There are two main reasons why this is important:
- If you access super under the age of 60, you may have to pay tax on the taxable component
- When you die, and depending on who will receive the remaining benefits, there may be tax payable on the taxable component.
In all instances the tax-free component is not taxable.
A ‘cash out and recontribution’ strategy is a popular and potentially effective strategy to reduce the ‘taxable’ components and increase the ‘tax free’ components within your super fund.
But while this strategy provides some potential tax benefits, you need to be aware of several issues and complexities.
- The strategy is only effective if you access benefits before you turn 60, or still have funds within the superannuation environment at death. If you cashed out all of your super before death, or if you exhausted your balance, this tax is not payable
- Funds can only be ‘cashed out’ if you have met a condition of release. This includes reaching age 65, or terminating a gainful employment contract after the age of 60
- The tax-free and taxable components must be drawn out ‘proportionally’. For example, if your taxable and tax-free components are split 50-50, then if you cashed out $300,000 you would have to withdraw $150,000 from each component
- Funds can be cashed out from an accumulation fund or from a super income stream
- To ‘recontribute’ funds back into super you must be under the age of 67 or have met the requirements of a work test
- Please note that the recent federal budget has proposed that the work test for non-concessional contributions be abolished and all individuals under 75 are given the ability to make such contributions without meeting a work test. However, this is not yet legislated
- The maximum that can be contributed as a non-concessional contribution is also dependent on your annual non concessional cap and total super balance. I have seen many individuals breach these contribution caps and incur significant penalties.
Be aware that if this strategy is done incorrectly there may be adverse tax consequences, or you may not be able to recontribute all of your cashed-out funds back into superannuation.
Therefore, I recommend seeking advice from a licensed financial adviser.
Question 2: The principal home has been unoccupied for two years as owner moved into nursing home. Will capital gains tax apply?
Before I answer your question, one very important aspect to address is home insurance.
Many home insurance policies will have a clause that makes the policy invalid if no one is living in the home after a certain period of time.
If the home has not been lived in for two years, it is highly likely it is not insured, so I would look to address this immediately.
In relation to capital gains tax (CGT) on the home, a person can continue to treat the former home as their main residence, as long as they do not own any other home which they elect to be their main residence.
A person who lives in an aged-care facility does not legally own the aged-care facility or nursing home but rather has a right to reside there, so they therefore only ‘own’ one home still.
A nursing home resident can continue to treat their former home as their principal residence indefinitely, provided they do not rent it out, and the home will therefore remain exempt from CGT.
Note that if the home was rented out, then the CGT exemption would end after six years.
Also note that the rules around aged-care fees and Centrelink can be complex, but generally speaking, if the nursing home resident entered the facility after July 1, 2017, then their home would be exempt from the asset test and they would be considered a home owner.
After two years, the home would then be assessed as an asset and the resident treated as a non-home owner.
As indicated in your question, I assume the two years is now up, hence you are now looking to sell the home.
If you have not already done so, I suggest speaking with Centrelink regarding the resident’s new aged-care fees and age pension entitlements and consider obtaining financial advice.
Craig Sankey is a licensed financial adviser and head of Technical Services & Advice Enablement at Industry Fund Services.
Disclaimer: The responses provided are general in nature, and while they are prompted by the questions asked, they have been prepared without taking into consideration all your objectives, financial situation or needs.
Before relying on any of the information, please ensure that you consider the appropriateness of the information for your objectives, financial situation or needs. To the extent that it is permitted by law, no responsibility for errors or omissions is accepted by IFS and its representatives.
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