A client, Giles, aged 58, has a considerable amount of super and is to retire from work as a full-time employee this financial year. He also has over $900,000 newly available to invest as a result of a property sale. Amongst other things, we were asked to consider his super contribution strategy and pension strategy.
Contribution strategy
The goal decided upon was to contribute as much of the property proceeds as possible to superannuation as soon as possible.
As yet this financial year Giles has not made any non-concessional contributions (NCC). The NCC cap is ordinarily $150,000 a year, but someone (like Giles) who is under the age of 65 at any time during a year can contribute more than $150,000 this financial year.
If he does this, then the three-year NCC cap is invoked, which is three times the annual NCC cap. That is, he could contribute up to a total of $450,000 during this and the following two financial years without penal tax applying.
The problem with contributing the $450,000 this financial year, though, would be that no further NCCs could be contributed without penalty until 2010-11. Instead, the suggestion was for Giles to contribute only $150,000 this financial year, which is within the annual NCC cap and will not invoke the three-year NCC cap. Then he will contribute a further $450,000 of NCCs in July, thus triggering (and using up) the three-year cap for the next three financial years. So $600,000 of NCCs will be contributed by early July 2008.
So far as concessional contributions (CC) are concerned he will be taking full advantage of the transitional CC cap for this financial year by salary sacrificing a full $100,000 of salary. (Incidentally, he has missed out on qualifying to make personal deductible contributions under the “10 per cent test” this financial year even though his assessable capital gains were quite large.)
In 2008-09 he should qualify for a deduction of up to $100,000 of personal contributions under the 10 per cent test, assuming he does not become re-employed. We also flagged the need to ensure that no payments (for example, late employment termination payments or unused annual or long service leave payments) would be made by his current employer after the end of the current financial year, as these could affect the result of the 10 per cent test.
If these circumstances prevail, he should be able to make $100,000 CCs (along with the $450,000 NCCs) in 2008-09 without penalty.
So $700,000 of the $900,000 or so property sale proceeds is expected to be contributed to super within a relatively short space of time. To the extent that he wants to contribute more in 2009-10 and 2010-11, there is the prospect of making a further $100,000 CCs in each of those years without breaching the transitional CC cap, assuming he remains retired.
Pension strategy
Super pension payments from taxed funds become completely income tax free from age 60 so there is an issue about whether Giles should start the pension before his 60th birthday, which is in May, 2009. Even after making his July contributions, he will still have enough liquid funds to draw on to meet living expenses over the next year or so, and in any case before his 60th birthday he could draw a super lump sum tax free up to around $140,000 for living expenses if required without paying tax.
While his 2008-09 income needs could be covered without a super pension, the suggestion was to commence an account-based pension no later than immediately after the July contributions are made.
The advantage of moving into pension phase will be that, once commenced, the income derived on assets backing the pension will not be subject to income tax in the super fund trustee’s hands, saving significant tax at the fund level. Giles should elect to receive his pension as an annual payment in June 2009.
Provided pension payments to Giles during 2008-09 do not occur until after his 60th birthday, they will not be subject to tax. That is, no tax will be incurred by Giles, even though the payment relates to a year in which he was age 59 for most of the time.
