Undeducted Contributions An Insurance Policy

Sun Herald

Sunday February 18, 2007

George Cochrane

Future events could mean tax on super comes back, George Cochrane writes.

I AM 63 and will start an allocated pension when I retire after July 1, 2007. Is there any benefit from that date in withdrawing all my pre and post super, then reinvesting it as undeducted contributions? R.S.

There is no direct benefit to you since all your withdrawals will be tax-free throughout your life, but there are two reasons why you might still want to do it.

Having 100 per cent undeducted contributions in your super funds is a cautious insurance in case an unexpected event (a world depression, for example) causes a future government to reintroduce a tax on retirement benefits.

Second, in the event that there are still benefits remaining after you and your spouse have both relinquished your perch, these will be taxed at 16.5 per cent before passing to any adult children or other relatives. (I suspect this rule will be abolished soon as it promises to create huge arguments with the ATO a decade or two down the track.) Remember that if you do withdraw, you can only recontribute up to $450,000 next financial year.

Watch property overexposure

WE are a married couple, aged 56 and 51, living off one wage and planning to give up full-time work soon. We have no debts, own our home, have an investment unit worth $500,000, a half share in another unit worth $150,000, some land in the country valued at $100,000, shares worth $170,000, total super of $350,000 and $800,000 in cash. We are considering an investment unit. Should we pay cash, pay a deposit and borrow, or establish a self-managed super fund, deposit $500,000 and have the fund buy the unit? W.E.

If you are going to buy a unit and rent it at arm's length (i.e., with a non-associated seller and an arm's-length renter), then it makes sense to do it through a SMSF, which requires you to do so with cash, as super funds cannot borrow.

Make sure your fund's investment strategy is up to date and takes into account your SMSF's need for cash withdrawals when you retire.

Consider also whether your entire portfolio is not then overexposed to residential property, a sector which is still looking shaky.

House full of cash

IS it true that if you take $10,000 or more to the bank they will want to know where you got it? My husband died a month ago and I have a bit of money around the house. M.M.

That's correct. It is a rule designed to track down drug dealers and other criminals. It doesn't sound as though you are either. Just tell the truth - your husband earned the money and hoarded cash. There's no law against it.

No more inheriting pensions

YOU wrote recently that after July 1, 2007, an allocated pension cannot be left to adult children, as it can until that date. My wife and I have been receiving an allocated pension since April 2006 and December 2002 respectively. The balances held are valued at $400,000 and $750,000 respectively. Our wills are reciprocal with half going to each other and the balance to our four adult children and six non-adult grandchildren. Could you suggest strategies? We do not plan to relinquish our grip on the perch before July 1, 2007. N.A.

At the moment your adult children can inherit your allocated pension as a pension provided you have so instructed the trustee.

From July, they cannot inherit a pension. They can inherit super benefits passed to the estate and then distributed according to your will.

Remember, the trustees of the super pension fund own the assets of the fund and must distribute them according to their perceived duty, unless you have a binding nomination, which removes their freedom of decision.

If, long after July 2007, you predecease your wife, as men are wont to do, the pension fund's trustees will offer your wife (because she is defined as a tax dependant) the option of continuing your pension or cashing it in as a tax-free lump sum.

It will be her choice to cash in half and give it to the children (which I would not advise her to do).

Super benefits are not subject to your will until passed to your estate. After your wife, in turn, shuffles off this mortal coil, the money will be passed to her estate where it will be subject to her will.

I can understand that couples are sometimes concerned that a surviving widow(er) will run off with a gigolo or bimbo (depending on their taste) and deprive the children of their inheritance. But I tend to feel that it is the parent who has worked a lifetime for the money and it is their right to do what they want with it.

If a woman wants to play the role of the merry widow, she's entitled to do so. As I've said before, all you owe your children is love and a good education.

Don't sacrifice small salary

I AM 56, working part-time earning about $22,000 a year, and have about $250,000 in super. I do not need the money for daily living - my husband's income is sufficient to cover that. Will I benefit from salary sacrificing all my income into super and starting a transition to retirement pension (TRAP) while continuing to work? S.K.

I argue that transition to retirement allocated pensions (i.e. pensions begun with preserved benefits while still working) are useful only if you need the money.

I see no tax benefit in starting a TRAP, which is taxable under age 60, even from July 1. If you take the salary as cash, you pay no tax on the first $6000 and 15 per cent on further income up to $25,000. Income above this is taxed at 30 per cent.

So there's no tax benefit in salary sacrificing income below the $25,000 threshold.

You might as well pay standard income tax (which on $22,000 averages 10.9 per cent) and place the money into super as an undeducted contribution, thereby claiming the government co-contribution.

? If you have a question for George Cochrane, forward it to Personal Investment, PO Box 3001, Tamarama, 2026. Help lines: tax 132 861, banking ombudsman 1300 780 808, pensions 132 300.

© 2007 Sun Herald

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