14
Dec 2017

Updated Age Pension Information

Updated Age Pension Information

Assets test for home owner couples (Min & Max)

Combined Assets

Pension Rate (each) per Fortnight

$380,500

$674.20

$830,000

$0.00

Assets test for couples who do not own their home (Min & Max)

Combined Assets

Pension Rate (each) per Fortnight

$583,500

$674.20

$1,033,000

$0.00

Income test for couples (Min & Max)

Combined Income Per Fortnight

Pension Rate (each) per Fortnight

$300.00

$674.20

$2,996.80

$0.00

Assets test for home owner singles (Min & Max)

Total Assets

Pension Rate  per Fortnight

$253,750

$894.40

$552,000

$0.00

Assets test for singles who do not own their home (Min & Max)

Total Assets

Pension Rate per Fortnight

$456,750

$894.40

$755,000

$0.00

Income test for singles (Min & Max)

Income per Fortnight 

Pension Rate per Fortnight

$168.00

$894.40

$1,956.80

$0.00






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14
Dec 2017

NEWSFLASH - Retiree Home Downsizers

NEWSFLASH - Retiree Home Downsizers

This is an issue that was raised in the May 2017 Budget announcements and we addressed its potential in the September Hudson Report.  We can now confirm the legislation has been passed by both sides of parliament.  The bill itself is titled: 

Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No. 1) Bill 2017

We will provide some updates on the particulars in the new year, but for now we have a very short update on some key aspects.

 In it’s simplicity, it is allowing retirees (above age 65) who downsize their home to contribute the surplus funds to superannuation that were not previously possible.  There will be a lot more detail to come to light on this as the experts have not yet summarised and gone to print.  For now we are simply highlighting some key aspects.  Most importantly you have to hold off on selling your home until 1 July 2018.    

The most Critical Criteria  

       The property must be sold after 30 June 2018

       The contribution must go into super within 90 days of the property settlement.

Other Criteria

       The property must have been owned for at least 10 years

       The property must  be a current or former Principal place of residence. 

(For ‘former residence’ you will need to qualify for at least a part PPR - CGT exemption).

       You must be over age 65 to qualify for this contribution

 Other Attributes of the Downsizer Contribution.

       The Contribution maximum is $300,000 per person ($600,000 for a couple jointly owning their home).

       The Contribution will not be subject to the Work Test

       The Contribution will not be restricted by the non-concessional Contribution CAP

       The Contribution will not be restricted by the new $1.6 Million Balance Limit.

       This contribution can only apply in relation to the sale of one property (not multiple properties).

 Negatives

       The surplus from a downsize will be Centrelink assessed and therefore cause a reduction in entitlement (or no entitlement at all).  

This is a positive step for retirement planning for those who have been contemplating a move to a smaller property.  You can now at least get a large portion (if not all) of the surplus funds into the tax free environment of an Allocated Pensions.

We will be writing more on this subject in the new year as more details come to light.  IF this is something you are considering, we recommend contacting your adviser to discuss the applicability of this new legislation to your circumstances.

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14
Dec 2017

Tax Protection After Age 60 - via Super Re-Contribution Strategy

Tax Protection After Age 60 - via Super Re-Contribution Strategy

Written by Hudson Adviser Ivan Fletcher (02/11/17)

You would be forgiven for thinking there will never be tax on your retirement pensions after age 60, but this is far from guaranteed (especially for any non-spousal beneficiaries in your estate planning).

“Re-contribution” is a strategy whereby you withdraw a large Lump Sum from heavily weighted ‘Taxable’ component in your existing super/ pension balance and contribute back to super as a ‘Tax Free’ component. The criteria for qualifying for this strategy are quite stringent and as such is not available to all. It is particularly relevant but not exclusive to young retirees (55 to 65) and older retirees (over age 65) who still satisfy the work test.

This has the effect of reducing ‘taxable’ components associated with your previous ‘concessional’ based contributions and will ultimately increase the tax effectiveness (including estate planning) of your super and/or pension accounts.

Advantages

This provides three levels of potential long term tax protection:

  • Under Age 60 - If you are starting a Pension before age 60, it will reduce the tax assessable amount of your pension.
  • Over Age 60 - Increases protection against potential legislation changes – should the government (current or future) introduce a tax on pension incomes for the ‘taxable’ component as currently is the case for persons under age 60.
  • Death Benefits - In the event your Superannuation assets are left to tax non-dependants (e.g. adult children), it will reduce the taxation impact.    Currently ‘non-tax dependants’ are subject to 15% tax + Medicare Levy on the ‘Taxable Component’. 

Disadvantages 

  • If using the 3 year provision, it may preclude you from further contributions from the sale of other assets or windfall gains such as an inheritance. In some cases you may be better served by keeping the 3 year provision up your sleeve to allow NEW funds to be transferred into your super.
  • There may be some cost involved in implementing the strategy.

Example Of Savings To Your Estate Beneficiaries

The Ultimate Beneficiary

If your spouse is your nominated beneficiary, they are considered a ‘tax dependant’ and will not be subject to taxation regardless of the components (under current legislation).  It is also quite likely (especially if you are already retired) that your spouse would elect to keep the monies in Super or Pension for the long term tax benefits and thus the “Taxable Components live on.

This means a surviving spouse would then nominate new beneficiaries. Ultimately your eventual beneficiary is more likely to be a ‘non-tax dependant’ (example adult children or some other relative or friend), which means that eventually tax will apply to your taxable Component (one day).

However, should you and/or your spouse enjoy a long and healthy retirement and utilise all of the funds or withdraw them before both of you have passed, there is no tax issue for your estate planning.   

Example of Tax

A $300,000 super/pension balance with 80% of that ($240,000) as a taxable component would result in tax (in the hands of a non-tax dependant) of $40,800 (15% + Medicare levy 2%). 

However if withdrawn and Recontributed (using the 3 year provisions) under a re-contribution strategy, this would then reclassify the $240,000 as ‘tax Free’ saving your long term beneficiaries that tax of $40,800.

If you qualified for only a $100,000 (1 year) contribution then you could still alter the tax free amount for $100,000 x 80% ($80,000) and thus potential tax saving of $13,600  (17%) for your long term Beneficiaries.

So Do You Qualify to Implement this Strategy?

Sounds simple but there are several criteria to be met to qualify for this strategy to be available and beneficial (tax wise).

Criteria 1  –  Preservation Release

The main condition is accessing your Super/Pension to effect a withdrawal.  For this we need to refer to the preservation components of which there are 3 classifications:

Unrestricted non-preserved – which are fully accessible; 

Restricted non-preserved  - which can be accessed if you have terminated employment with an employer who has contributed to that fund.

Preserved - which can only be reclassified as Unrestricted non-preserved and accessed if you meet one of the three conditions of release – listed as follows :

  • You are Age 65 or older; or
  • You are aged 60 to 64 and have ceased a gainful employment arrangement since turning 60; or
  • You are aged between preservation age and age 64 and have permanently retired and do not intend to ever work again 10 hours or more per week.   This option requires that you have previously terminated some form of employment in your life (at any age).

 Criteria 2  –  Tax Considerations

Age 60 or above

No tax is payable on Lump Sum withdrawals and therefore no limit on the amount you can withdraw from Super tax free.

Under age 60, tax is applicable

There is a ‘Low Rate Cap’ allowing some tax free access.  The first $200,000 taken as a Lump Sum from the ‘taxable component’ of Superannuation (before age 60) is tax free if taken from a ‘Taxed element’. Anything above this level is taxed at 15%.  This is a lifetime limit and therefore would include any previous lump sum payouts from super in your lifetime (that would also form part of this $200,000 limit).   

Caution: Please note that Pension payments are not included in the ‘Low rate Cap’ and are treated very differently to Lump Sum payments for tax purposes. If withdrawing from Super or Pension under the age of 60, this needs to be carefully managed.  Once you have exhausted the ‘Low Rate Cap’ of LUMP SUM withdrawals, taxation impact will start to outweigh the advantages of this strategy.

WARNING: If you have an “Untaxed Element’ there is no tax free level and you will be taxed between 15% and 45% depending upon the level of your withdrawal making this strategy unviable.


Criteria 3 – Contribution Limitations (Non-Concessional)

An essential part of this strategy is to be able to contribute the funds back into super via personal non-concessional contributions.

These are personal after-tax contributions.  There is no contributions tax applied to non-concessional contributions. The maximum amount for this category is $100,000 for this financial year (2017/18)

Caution if Over Age 65  - You cannot make a contribution unless you have satisfied the Work Test of working 40 hours within a 30 day period.

Bring forward provision:  $300,000 over 3 years  

three year aggregation rule applies (under age 65 only) to allow you to contribute above the annual amount.

  •  Persons under age 65  at any time during the financial year may effectively bring forward two years worth of non-concessional contributions, allowing them to contribute up to $300,000 in one transaction. This would of course mean you would not be able to contribute to super again for the following two years.

Tip : You can make the re-contribution to your spouse or yourself or a combination of both which may provide other benefits such as a levelling of balances between you.  At maximum effectiveness this strategy  allows a couple up to $600,000 (combined) to be re-contributed if both spouse qualify under Criteria 3.  

WARNING - CONSEQUENCE OF CONTRIBUTION CAP BREACH 

If you do breach the non-concessional Cap then you will be liable to pay the maximum tax of up to 48.5% (including Medicare Levy/surcharge) on the excess contribution. This is a significant penalty.  Therefore if you are utilising the 3 Year rule, it is imperative that your check (with the ATO and your Super funds) that:

1.  You have no other payments to super funds or insurance companies that could count as a non-concessional contribution this financial year 2017/18 and thus counting towards the 3 year Cap of $300,000.  

2.   You have not previously triggered the 3 year bring forward provision by contributing more than $180,000  (previous Contribution Limit) to super in your name in the financial years  2015/16 or 2016/17. 

3. You have not breached your ‘Concessional Cap’ in this year or the previous two years, as any excess will be allocated as ‘non-concessional contributions. 

If unsure it can be a good idea to leave some space and contribute only $95,000 or $280,000 using the 3 year rule, to allow for some room for error in your calculations, better still consult with the ATO, your super fund and your adviser. 

ATO Contact  Phone Number designated for this purpose is 131020

Window of opportunity

The combination of the 3 criteria for this strategy usually results in a limited window of opportunity  to be put to maximum effect  (using the 3 year rule).  For example if you are still working at age 65,  (and have not previously met a condition of release), your opportunity to recontribute is limited to the time between your 65th birthday and the next 30 June.

FINAL WORD – SEEK ADVICE

This strategy can provide significant tax sheltering for your estate planning where the ultimate beneficiaries (past beyond the death of both you and your spouse) is going to be a non tax dependant’ such as adult children. This strategy is complex and will have some form of cost and also with potentially significant tax penalties should you falter and should not be attempted without consulting your adviser.  

 
DISCLAIMER
This article is for educational purposes only and cannot be taken as personal advice. It does not take into account any individual’s objectives, financial situation or needs. Any examples are for illustrative purposes only and actual risks and benefits will vary depending on each individual's circumstances. You should consult with a financial adviser to discuss your personal situation.

  

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16
Jun 2017

Restructuring Assets For Improved Incomes

Restructuring Assets For Improved Incomes

Written by Hudson Adviser Michal Park.

It’s not widely advertised, but there is a strategy out there that can provide one access to a Centrelink age pension.  That got your attention, now for the fine print: you must be a part of a couple, and you must have a reasonable gap in your ages (with one member obviously having reached age pension age).

The main crux of the strategy is moving assets into the superannuation fund of the younger member of the couple, effectively sheltering them from Centrelink assessment.  There is a minefield of rules and regulations to bear in mind though, so best not to try this at home.  Contact your Hudson financial planner to see if it is a good fit for you!

Following are three real life examples of Hudson members that have made significant financial gains, simply by rearranging their asset base. 

1. Zero Centrelink eligibility, or so they thought

Bob 65.5 and his wife Mary 60 years. Both retired. Homeowners.
Income generated all from their own asset base.

Asset are:
$109,500 in shares
$750,000 Allocated Pension (Bob)
$200,000 Superannuation (Mary) - not assessable as Mary is under age pension age
$859,500

The first hurdle is the asset test.  Current assets test limits for couple homeowners state that Bob and Mary’s assets need to be within $375,000 and $821,500 for them to be considered for a part age pension (to qualify for a full age pension using the assets test, assets need to be below this lower threshold).  Given that Bob’s Allocated Pension and their shares total $870K, they are not eligible for any age pension entitlements from Centrelink.  Or are they?

It is important to note that the total amount moved to Mary’s superannuation is $540K.  This is the maximum allowed under the bring forward limits for non-concessional contributions for the 2016/2017 financial year.  If we had waited until the 2017/2018 financial year, Mary  would be limited to contributing only a maximum $300K into her superannuation fund via the bring forward rules.

All Bob needs to do is withdraw up to $540K of his Allocated Pension and contribute it to Mary’s superannuation fund by 30 June, and voila, suddenly their asset pool looks a whole lot different:

$109,500 in shares

$210,000 Allocated pension (Bob)

$740,000 Superannuation (Mary) – not assessable as Mary is under age pension age.

$319,500

With assessable assets of $319,500, they have passed the assets test for age pension eligibility! Woohoo!  However, they are not out of the woods yet.  The second hurdle is the income test.  Centrelink will deem these financial assets to be generating a certain rate of return.  The deeming rates are as follows:

$81,600 @ 1.75%

    • $81,600 @ 3.25%     
So in Bob and Mary's case, Centrelink are deeming them to be earning $352.30 per fortnight. ($81,600 @ 1.75% and $237,900 @ 3.25%).  Whilst this deeming means that Bob is definitely not eligible for the full age pension, he is certainly entitled to something in the vicinity of $590 per fortnight or in excess of $15,000 per annum.  Good result, I’d say.


2. Increase in existing part age pension

Richard 65, retired and his wife  Jane 57 and still working.  Homeowners.
Income $44,000 from Jane’s employment and Richard currently receives approximately $6,000 per annum via his Centrelink part age pension.

Asset are:
$130,000 cash
$215,000 Superannuation (Richard)
$285,000 Superannuation (Jane) - not assessable as Jane is under age pension age.$345,000

Whilst Richard and Jane’s assets are under the $375,000 threshold, the income that Jane earns and the income that is deemed from their financial assets (cash and Richard’s super) is both assessed and reducing Richard’s age pension entitlements.  However, simply by restructuring some assets, we can improve Richard’s age pension amount.  All we need to do is move $100,000 Cash + 100% of Richard’s super to Jane’s superannuation, as follows:

$30,000 cash
$600,000 Superannuation (Jane) - not assessable as Jane is under age pension age.
$30,000

It is important to note that the total amount moved to Jane’s superannuation is $315K.  This is within the bring forward limits for non-concessional contributions for the 2016/2017 financial year (the maximum being $540,000), however, if we waited until the 2017/2018 financial year, Jane would be limited to contributing only a maximum $300K into her superannuation fund via the bring forward rules.

End result for this couple is an improvement in Richard’s age pension as Centrelink are effectively no longer deeming the financial assets to be generating a return.  This shelters income of $9,988 per annum ($81,600 @ 1.75% and $263,400 @ 3.25%) which translates into an increase of the age pension   of approximately $80 per fortnight.  Richard’s age pension is now closer to $8,000 per annum – money for jam.


3. Access to Centrelink age pension despite already receiving an alternative pension

Jack, 68, retired and his wife Lola, 59 and pending retirement.  Homeowners.

Jack receives income of $24K per annum via a Defence Pension, $14K per annum net rent from an investment property and Lola assumes she will be drawing an income from her superannuation balance via an Allocated Pension.

Assets are:
$100,000 cash
$500,000 unencumbered real estate investment
$585,000 Allocated Pension (Lola)
$1,185,000

In this example, Jack and Lola’s assets exceed the higher threshold of the Assets test, and their income is borderline.  Simply converting Lola’s Allocated Pension back to the superannuation environment will mean Jack unlocks accessibility for some part age pension.

Assets:
$100,000 cash
$500,000 unencumbered real estate investment
$585,000 Superannuation (Lola) – not assessable as Lola is under age pension age
$600,000 

And just like that, Jack and Lola’s assessable assets now lie within the assets test thresholds. 

Their annual assessable income now consists of the $24,000 defence pension, $14,000 net rent and $2,026 deemed from their cash holdings ($81,600 @ 1.75% and $18,400 @ 3.25%).  They will be assessed under both the assets and income test and Jack’s entitlement will be the lower of the two outcomes.  This all means that Jack is now eligible for an age pension entitlement of around $270 per fortnight or $7,000 per year.

  


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