Ask the Expert: Building super makes sense, even at high incomes
Question 1
I’m 57 and about to start a new job on $300,000. I have $300,000 in superannuation and my property is paid off. My workplace will max out my annual superannuation limits so what happens if I put more money in on top?
I know I pay Div 293 but from what I can see, I’m still better off putting extra money into super than into my share portfolio due to the tax benefits. Any help is appreciated as I’m finding this very confusing.
That’s a very nice salary and paying extra tax can be a nice problem to have, as opposed to earning very little money.
The annual concessional cap is $30,000. This is the amount of pre-tax contributions you can contribute. This includes employer superannuation guarantee and salary sacrifice contributions.
However, as you have a total super balance below $500,000, you can take advantage of the “carry-forward rule” if you have unused concessional cap amounts from previous years. You can carry forward unused cap amounts from up to five previous financial years. MyGov or the ATO can let you know how much cap space you have under these rules.
As you have pointed out, you will be liable for Division 293 tax. This is an additional tax on super contributions for individuals whose combined income and concessional contributions are more than $250,000. Division 293 tax is charged at 15 per cent, in addition to the regular 15 per cent contributions tax.
Keeping it simple, your concessional contributions will be taxed at 30 per cent (15 per cent regular contributions tax plus 15 per cent Division 293 tax). This is still lower than your marginal income tax rate of 47 per cent (including Medicare).
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Another benefit is that once money is in super, the earnings are only taxed at 15 per cent, whereas earnings outside of super would be taxed at 47 per cent.
Finally, once you attain age 60 and retire, all payments from super (income or lump sums) will be tax free.
Yes, it’s confusing and you will have to pay more tax. However, the benefits of contributing to superannuation still make a lot of sense.
Question 2
I am a single carer (on a carer pension) aged 66. I am a homeowner with money in the bank and some super. I know so little about superannuation and the more I find out the less I know.
I have little understanding on how it affects the pension, and whether a term deposit or super investment is the better choice – and am long overdue to gain assistance from a financial adviser.
Where do I find an adviser I can trust, and what sort of time/cost commitment is involved in consulting one? Many thanks.
Once you turn 67, you will have the choice of staying on the carer payment or moving to the age pension.
While the rate of payment, income and assets test are the same, with the carer payment you also receive the annual $600 carer supplement per – although you also have to be subject to ongoing reviews in relation to your caring. There are also other small differences that you should discuss with Centrelink before deciding which payment to receive (you can’t get both).
The other change at 67 is that your superannuation will start to be assessed under the assets test and deemed under the income test.
Depending on how complicated your situation is, your super fund may be able to provide you some personal advice about your situation and, combined with Centrelink, this may be enough.
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However, a financial planner/adviser can also make a very positive impact on someone’s retirement. In a recent article I went through the steps to choose an adviser.
Question 3
I receive a singles part-age pension from Centrelink. Every year I update and report my assets online to Centrelink, and report to them the gifts I have made to church/charities/friends etc.
As you would know, the Centrelink gifting guidelines allow $10,000 a year, with a total of $30,000 over five years (i.e. $6000 a year), before any excess to this reduces the pension accordingly. As far as I know, this amount ($30,000) has not been indexed nor increased for more than 20 years.
In past years I have reported the full total of the gifts I have made during the year to Centrelink, and have had my pension reduced in accordance with the excess amount over $30,000 for the previous five years.
This year, however, it occurred to me that I could possibly report only the gifting amount to Centrelink, in proportion to the income from it compared to my total income ( i.e. about 53 per cent). Can you advise if this is a legitimate approach to reporting my gifts to Centrelink?
Yes, gifts over $10,000 in any one year, or $30,000 over five years may be counted under Centrelink’s deprivation rules.
Deprivation may arise when a person disposes, destroys or diminishes the value of an asset or income without receiving adequate financial consideration. Under social security legislation, amounts exceeding the above amounts are treated as a deprived asset.
These assets are assessed for five years from the date of the relevant disposal and are subject to deeming during that time.
People get confused by this – you don’t lose age pension as a result, you receive the same amount as you would have if you still had the asset. What you do lose is the asset itself and any interest it would have earned.
Another way of looking at it is you can’t give away money to get a bigger age pension. You will still get the same age pension for five years.
You are correct in that these amounts are not indexed. The $30,000 limit over five years came in on July 1, 2002, and has never changed. You have to report all amounts that are gifted, regardless of what proportion to your income that represents.
Craig Sankey is a licensed financial adviser and head of Technical Services and 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.
