Michael Forer
Technical

Is the tax exempt status of superannuation pension income (post age 60) at risk?

By Michael Forer, Technical Services Consultant

Calls are growing for the unlimited tax-exempt pension status of superannuation to be re-examined.

Perhaps this belongs in the Rumour File, but given the potential consequences it is something to consider when reviewing your client’s superannuation funds.

Many people within the industry believe that the generous tax concession encourages people to spend their super before falling back on the age pension.

As a result, there is a very real risk that the Government may reintroduce taxes on superannuation withdrawals for those over the age of 60, or make changes to tax on death benefits for dependents. Others suggest that tax-free pensions be capped to average weekly ordinary-time earnings.

In response to these rumours, some members may wish to consider crystallising as much tax-free benefits as possible to ensure they still have access to a significant amount of tax-free benefits even if the Government introduces legislative changes.

The Recontribution Strategy

The strategy of taking a tax-free lump withdrawal from superannuation, and recontributing the funds as a non-concessional contribution (up to the maximum contribution cap), has been an effective financial planning strategy for many years.

Despite the tax free status of pensions for people aged 60 years and over, the recontribution strategy has remained appropriate for estate planning purposes in the case where a superannuation death benefit is being left to a non-dependant.

If the Government does reintroduce taxes on superannuation withdrawals for those over the age of 60 (or make changes to tax on death benefits for dependents) it makes sense that the recontribution strategy be considered for a wider market.

The Recontribution Strategy with IOOF

Implementing a recontribution strategy with IOOF can be done without the need to actually sell down the underlying assets. This makes the process much simpler and cost effective for your clients.

Step 1
A superannuation withdrawal request can be made with the underlying investments ‘Interdivisionally Transferred’ (ITD) into an IOOF Investment Service Account.

Step 2
The investments can then be contributed back into the Superannuation Account as a non-concessional contribution via another IDT from the IOOF Investment Service Account.

Tips and Traps

  • Be careful of the non-concessional contribution cap of $150,000 p.a. (or $450,000 if the bring forward applies). Heavy penalties apply if the cap is exceeded so don’t withdraw more from superannuation than can be recontributed.
  • The recontribution strategy may result in the members spouse and/or children losing their entitlement to any anti-detriment payment upon the member’s death.
  • Capital gains tax may apply on the IDT of assets between superannuation and the investment account and vice versa. To maximise the benefit to your clients the following general rules of thumb apply;
    • If a capital gain exists, IDT from super pension phase as no CGT applies.
    • If a capital loss exists, IDT from super accumulation phase as member may receive a cash benefit for this loss.

In Summary

Perhaps the tax exempt status of superannuation pensions won’t be changed and a recontribution strategy is unnecessary. However, IOOF allows you to do the recontribution strategy with relative ease and your clients will be grateful if the legislation is changed as they will retain a tax exempt pension in retirement.