Question 1: I am 56 years old, my wife 51 years, and we both earn $100,000. Our employer contributes 9.5 per cent super and we each salary sacrifice 5.5 per cent on top, making it 15 per cent ($15,000).
We own an investment property equally. Assuming the property fetches a capital gain of $500,000 before our retirement and fetches a capital gain of $700,000 after we both retire and are not working:
- Is it wise to sell the property before retirement, and salary sacrifice concessional contribution (carry forward past five years) and save CGT by incurring only 15 per cent tax, or
- Sell the property after retirement when we are not working and save CGT because that will be our only income?
It appears you are planning well for your retirement by making additional super contributions and having an investment property that is achieving some significant capital gains.
With option 1, selling the property before retirement, this would mean a capital gain of $250,000 each. But assuming you have held the property for more than 12 months, you would then receive a 50 per cent discount on this capital gain, and only pay tax on $125,000 each.
The $125,000 would then be added to your other assessable income, in this case $100,000 of salary, giving you both a total assessable income of $225,000 each.
To reduce the taxable income in that year, as you have pointed out, you could increase your salary sacrifice amounts and utilise the ‘carry forward’ concessional cap.
For 2021-22, the concessional cap is $27,500, and all employer contributions, salary sacrifice and tax-deductible contributions are counted within this cap.
However, if you have not fully utilised the concessional cap in previous years, the unused amount can be ‘carried forward’ for up to five years.
The first year from which you could start accruing concessional contributions was 2018-19.
One important consideration is that you can only use the carry forward provision if your total super balance was less than $500,000 on the previous June 30.
And so, if you wanted to use carry forward provisions in 2021-22 then your total super balance must have been below $500,000 as at June 30, 2021.
Also bear in mind that as you have been salary sacrificing you will have less carry forward available. The below is an example of how this could work:
In this example, you could salary sacrifice $34,000 to reduce your taxable income from $225,000 to $191,000 each (note your personal situation will be different and this is for illustrative purposes only).
Option 2 simply involves waiting to sell the investment until the financial year after you retire, when you will have zero salary income.
It’s unclear when you plan to retire and how many years away that is, but you have assumed that the capital growth will be an additional $200,000 over that period.
So, in this example, you each have a capital gain of $350,000, but after the 50 per cent exemption, an assessable gain of $175,000.
This appears to be a fairly good result given the much bigger capital gain expected, and a lower overall assessable income.
However, you may wish to consider option 3, which is a combination of option 1 and 2.
That is, you continue to accrue carry forward contributions until you retire, then after retirement, when you have zero employment income, sell your property and make a personal tax-deductible contribution to super.
For income tax purposes, salary sacrifice contributions and personal tax-deductible contributions have the same effect, i.e. they lower your taxable income and they are both counted under the concessional cap.
This strategy may be beneficial if you retire before the age of 67, as there is no work test rules to meet in order to contribute to super below that age.
If you were 67 or older at the time of the contribution, then you must meet a work test before contributing.
We have concentrated a lot on the tax consequences. However, you also need to weigh up the future income and growth prospects of your property investment.
As you have a number of options available, I suggest seeking personalised financial advice.
Question 2: I am retired and have a superannuation account which is in accumulation phase. As I have sufficient other income I am keeping this account for a ‘rainy day’.
If I make a one-off withdrawal for home maintenance, does the account remain in the accumulation phase or change to the pension phase?
If you have retired and met a condition of release, then you can make a lump sum withdrawal from super at any time.
Making withdrawals will not alter the super account and it will remain in accumulation phase. It can stay in accumulation phase for as long as you want.
As you have indicated, if you move the funds into pension phase then you are required to draw down a minimum amount, depending on your account balance and age at the start of each financial year.
The minimum amount you must draw down gets bigger as you get older, as per the below table:
As you can see from the above table, the ‘normal’ minimum drawdowns have been halved, and this has been extended to include the 2021-22 financial year.
One thing you should consider is that when funds are in the accumulation stage of super, earnings within the fund are taxed at 15 per cent, whereas if you did convert them to pensions stage then all earnings would be tax free.
I have previously covered what superannuation options are available to people when they retire.
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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