technical strategies for the pre- retiree segment rahul singh – anz technical services
TRANSCRIPT
Technical strategies for the pre-retiree segment
Rahul Singh – ANZ Technical Services
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Personal deductible super contributions
Tax deductible contributions involving entities
Timing retirement
Agenda
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For an individual to claim tax deduction, need to meet the “less than 10%” rule
Different to the unsupported person rule prior to 1 July 2007
Less than 10% rule applies if:
holding an office or appointment
performing functions or duties
engaging in work
doing acts or things
as an employee for SG purposes
Personal deductible super contributions - rule
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Questions
John (45) derives:
$100,000 pa from an income protection policy. Is he eligible to claim a tax deduction for contributing to super?
$50,000 pa from worker’s compensation. He is on the books of the employer but not physically working. Is he eligible to claim a tax deduction for contributing to super?
$50,000 from leave payments paid to him in 2015-16. Terminated employment on 30 June 2015. Became a sole trader in 2015-16. Is he eligible to claim a tax deduction for contributing to super?
Personal deductible super contributions - questions
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If the person has not been an employee for SG purposes, then the “less than 10%” test does not apply and the person is automatically eligible
If the person has been an employee for SG purposes, then the less than 10% test applies
Personal deductible super contributions
Income attributable to employment activities
Reportable employer super contributions
Reportable fringe benefits
needs to be less than 10% of
Income from all sources including reportable employer super contributions + reportable fringe benefits
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John (60) works as a casual employee with Coles, earning $20,000 pa (pre salary sacrifice). He has sold an investment property with a capital gain of $500,000. He salary sacrifices $2,000 to super.
Income attributable to employment + RESC = $20,000
Total income including RESC = $270,000
20,000 / 270,000 = 7.41%
What if John’s employment income was $50,000 rather than $20,000?
Personal deductible contributions – example
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Dynamics of personal deductible super contribution & salary sacrifice If the less than 10% rule is not satisfied, due to employment income, then consider:
salary sacrificing but advantage limited by employment income- requires salary sacrifice agreement and potentially requiring planning earlier in
the FY
increasing non-employment income
decreasing employment income
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Worker’s compensation
- TR 2010/1
- Engaged as an employee or not
- If not, then automatically eligible
- If yes, then worker’s compensation is income attributable to employment activities
Income protection
- Engaged as an employee or not
- If not, then automatically eligible
- If yes, then unclear – seek specific tax advice
is it income attributable to employment activities – who paid the premiums, where did the injury happen, who owns the policy
Salary replacement payments & deductible super contributions
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- Notice of intent documentation and timeframes
usual timeframes
earlier timeframes apply if pension commenced, lump sums, roll-overso super consolidation
o using roll-overs to fund insurance premiums
- Incorrect classification of contributions
employer substituted for sole trader and associated issues
- Taking income below the tax-free threshold
unnecessary liability of 15% contributions tax
Personal deductible contributions – some traps to avoid
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Summary
- Look out for clients with non-employment income who are eligible to contribute to super
Rental income
Capital gains
Taxable component - Untaxed element defined benefit schemes
Income protection
- Opportunity to limit tax payable to 15% for contributions within the concessional cap
Personal deductible contributions
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- Being an employee of their controlled entity may not help with less than 10% rule
salary is income attributable to employment activities
- With planning, income pushed out from entity could be manipulated to meet the less than 10% rule
dividends
trust distributions in the capacity of a beneficiary
- Additional employer contributions might be a way to manage the issue
avoids Notice of Intent documentation and timeframes
Tax deductible contributions when client is an employee of their own company or trust
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John (56) is an employee and 100% shareholder of his own company Jimbo Pty Ltd.
Jimbo usually pays him the following income:
$50,000 salary
$10,000 franked dividends
- Is John eligible to claim a tax deduction for contributing to super?
- What are his options?
Salary sacrifice
Additional employer contribution
Tax deductible contributions when client is an employee of their own company or trust
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Can a family investment company claim a deduction for super contributions made for the benefit of the directors of the company where the company derived income solely from passive investments?
- ATO ID 2007/144
- Yes, provided that directors are entitled to payment for their service
company constitution must allow entitlement to payment (Kelly v FCT) [2013]
- Employer contributions in respect of employee are deductible
- Directors are employees for SG purposes
Tax deductible contributions when client is an employee of their own company or trust
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What about a passive investments discretionary trust claiming a tax deduction in respect of director of a corporate trustee?
- TR 2010/1
- Need to be common law employee of the discretionary trust
is generally difficult for passive investment trust to have a trustee as a common law employee
Suggestion in seeking further tax advice
- family trust distributes to a corporate beneficiary
- director(s) of the corporate beneficiary are entitled to payment for their director services
- corporate beneficiary makes the super contributions and claims a deductible for employer contributions
Tax deductible contributions when client is an employee of their own company or trust
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Will Part IVA of the Income Tax Assessment Act 1936 always apply if a taxpayer who carries on a business (including a personal services business) pays superannuation contributions that do not exceed the age-based limits but are considerably in excess of the value of the services provided by the employee?
- TD 2005/29
- Is a reference case to illustrate that as long as the business is not affected by alienation of personal service income regime and is a personal services business, superannuation contribution not limited to the remuneration of the associate
- Existence of the entity needs to be commercially justifiable or existence of unusual circumstances
- Genuine employer / employee relationship
Tax deductible contributions when client is an employee of their own company or trust
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Summary
- With planning and tax advice - income can be manipulated
- Additional employer contributions generally require less paperwork
complication of NOI documentation and process alleviated
Personal deductible contributions
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John (60) is looking to retire. He has $50,000 (equivalent to 1 years salary) worth of annual and long service leave entitlements and wants to know when is a good time to retire?
- Timing retirement can be significant decision
- Cashing of leave entitlements require analysis
- Various issues to contend with
tax
social security
defined benefit membership
work test for superannuation
When is a good time to retire?
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Superannuation guarantee
Not payable on termination payments, including leave, received as a lump sum
Payable if go on leave and taken as salary – net 8.075% benefit
When is a good time to retire?
$50,000 leave taken as…
Lump sum upon terminating
As ongoing salary
SG
Nil
$4,750
Contributions tax $712.50
Net $4,037.50
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- Tax
No direct tax concessions when taken as ongoing salary
Termination leave payment depending on service period may attract tax concessions
There could be opportunities to receive payment in lower income years
When is a good time to retire?
Type of leave Accrual period Tax rate when taken as lump sum upon terminating
Leave taken as salary
Annual leave Pre 18/08/1993 Maximum 30%
Taxed at marginal tax rate
Post 17/08/1993 Marginal
Long service leave Pre 16/08/1978 5% included and taxed at marginal
16/08/1978 to 17/08/1993 Maximum 30%
Post 17/08/1993 Marginal
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- Salary sacrifice
lump sum - to salary sacrifice termination payments, must have entered into an effective salary sacrifice agreement prior to entitlement / accrual
ongoing salary - could salary sacrifice leave payments taken as ongoing salary
- Social security
lump sum termination payments assessed as income for most allowances, DSP but not CP & Age Pension
leave payments taken as ongoing salary assessed as employment income
going on leave generally detrimental for Age Pension
o not an issue if not a social security recipient – 1 January 2017 changes or if spouse working
When is a good time to retire?
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- Personal deductible super contributions
Could terminate on 30 June and have leave paid the next FY. If not employee in the next FY, could be eligible to claim a tax deduction for contributing to super offsetting tax on leave
- Condition of release for clients nearing their 60th birthday
Terminating a gainful employment arrangement after turning 60 meets retirement condition of release – without considering future intentions or work status
- Redundancy
Once over 65, tax concessions on leave and severance payment are removed
When is a good time to retire?
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- Defined benefit fund membership
Going on leave could assist with increasing service period
- Accruing leave on leave
Going on leave could assist with further accrual of leave
- Superannuation work test
being on part and full time hours paid leave is considered to be gainfully employed
unpaid leave – SPG 270, also gainful employment
When is a good time to retire?
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When is a good time to retire? Going on leave before retiring
Taking as lump sum upon terminating
Superannuation Guarantee
Yes No
Tax Marginal tax rate Has unique tax rates
Salary sacrifice Yes Generally no
Social security Employment income Depends on payment
- For John, we recommend John going on leave before retiring attracting SG allowing salary sacrifice using leave entitlements to cross over to new FY
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Thanks for your timeYou can contact Technical Services on
o 1800 444 [email protected]
In closing up
