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 How does zero tax sound? - Eureka Report article 

How does zero tax sound?

By Scott Francis July 25, 2011

PORTFOLIO POINT: Inside or outside of superannuation, here’s a handy tax break.

One of the biggest selling points of superannuation is that once a fund enters pension mode the investments and their earnings become tax-free.

But what you might not know is that a couple of pension age can have up to $1 million in assets outside super without paying tax and that a single person can have about $600,000 of assets outside super without paying tax.

This is achieved through a little-known and under-appreciated rebate known as the Senior Australians Tax Offset, which is provided to all Australian men aged 65 and over and women aged 64 and over regardless of whether they are self-funded or receiving an age pension.

Given the emphasis that is placed on the importance of superannuation in retirement planning, it is important that you understand how the Senior Australians Tax Offset works as it may allow you even more flexibility than you have thought possible.

How it works

This offset is provided as a tax amount that reduces or eliminates an eligible person's tax. In 2011-12 a single person of age pension age earning less than $30,685 receives a tax offset of $2230 that effectively eliminates any income tax that is payable. If they earn $30,685 of income or less, they also do not pay any Medicare levy; in other words, they have a completely tax-free existence.

What this means in plain language this means that for 2011-12 a single person of age pension age can earn $30,685 of income and pay no income tax. Working backwards and assuming a relatively conservative portfolio yielding a little over 5.1%, we arrive at the figure of $600,000 invested.

For a couple in 2011-12, each member of the couple that are of age pension age can earn $26,680 each and receive a tax offset of $1602, which reduces their tax liability to $0. This means that a couple is able to earn a combined $53,360 of income – or, by using the same assumptions as above, a yield of a little over 5.3% on a lump sum of $1 million.

The income that is used to calculate eligibility for the Senior Australians Tax Offset is known as the “rebate income”, and is the sum of:

  • Taxable income.
  • Reportable fringe benefits.
  • Reportable superannuation contributions.
  • Total net investment losses for the financial year.

Now, in reality, the average person in retirement is unlikely to have any fringe benefits, superannuation contributions or investment losses – leaving taxable income as the sole input into their “rebate income”.

Once an individual ($30,685) or couple ($53,360) pass these income thresholds, the Senior Australians Tax Offset starts to decrease by 12.5¢ for every extra dollar earned. For a single, this means it phases out completely as the rebate income reaches $48,525; for a couple it phases out completely when combined income reaches $78,992 (see below).

Applying the SATO

Circumstance

Max tax offset

Max tax offset applies up to threshold

Cuts off above this threshold (12.5¢ per $1)

Single, widowed, separated

$2,230

$30,685

$48,525

Married or de facto

$1,602

$26,680

$39,496

Spouse - illness separated

$2,040

$29,600

$45,920

 

 

It is worth noting that the Senior Australians Tax Offset can only reduce a person's tax to $0. Unfortunately, having an excess of the offset is not like excess franking credits, which can mean a person actually gets a tax refund.

So what might that mean for a person's financial strategy in retirement?

The obvious answer is that people are likely to feel more comfortable about having assets invested outside superannuation – which is a good thing as I have discussed in previous articles (see Eight reasons to invest outside super). I think that there are three areas where understanding how the Senior Australian Tax Offset is likely to provide people with more flexibility:

By holding existing investment assets

Over a lifetime many people make various opportunistic investments that aren’t necessarily part of a broader strategy. A string of demutualisations, privatisations and IPOs in the 1980s and 1990s meant that many now have parcels of good dividend-paying shares in Commonwealth Bank, Woolworths or Telstra that we may be reluctant to sell.

We also might like the idea of continuing to own them rather than paying capital gains tax on the sale or indeed trading them for a position in a managed fund. The Senior Australians Tax Offset makes this a completely viable tax free option.

By keeping cash holdings outside of superannuation

If the Senior Australians Tax Offset allows a person to have a tax-free investment environment, there is a case to keep cash investments outside of superannuation (see Eight reasons to invest outside super).

Cash investments outside super are easier to access and to transfer cash between investment opportunities, avoiding the hassle of opening new cash accounts or term deposits through a superannuation fund.

It is also worth considering that death benefits from a superannuation fund paid to a non-dependent may attract tax, where cash investments held outside superannuation may be more tax-effective from an estate planning perspective (for more on this click here and here).

Gearing

Borrowing to invest is a popular, if risky, strategy. An aspect of borrowing that is often overlooked is the capital gains tax bill that is due when the investments are finally sold. The Senior Australians T ax Offset might help solve this: a person might never sell the property or shares bought with borrowed money, rather pay the debt off over time and then use the income from the property or share investments to help fund their retirement.


There remains no doubt that superannuation, with its tax advantages, provides a great environment to build investment wealth. That said, the Senior Australians Tax Offset also allows people to think about using non-superannuation assets as part of their tax-free retirement strategy, providing them with greater flexibility in how they plan to fund the longest holiday they’ll ever take.

Scott Francis' articles in the Eureka Report 

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