Case Studies
Let's look a bit closer at SMSF's as a strategy
Super Funds consist of two modes of accounts. The first is accumulation mode; this is when we are putting money into our super fund leading up to retirement. The second is pension mode, this is when we decide to take a pension, regardless of whether it is a transition to retirement (TTR) pension (Age 55 - 60) or a full pension (Taken after the age of 60).
Super Funds in accumulation mode are taxed at a rate of 15%. In addition, SMSF's are eligible for a 1/3 Capital Gain Discount. (There are some contributions which are not taxed within the super fund, for instance a contribution made that you do not claim a tax deduction for.)
Super Funds in pension mode are not taxed. This means that if a super fund sells an asset, the value of the asset associated with the pension mode of account is not taxed.
Here are some examples of how SMSF's can be used to minimize tax:
Scenario 1.
Joe Bloggs, age 58, has a SMSF. Joe is still working and earns $50,000pa. Joe would be paying tax of $8,850 plus 1.5% medicare levy. Net after tax income is $41,150.
Scenario 2.
Joe decides to start salary sacrificing $20,000 to the SMSF. Joe's income from working is now $30,000 and he pays tax of $3,600 leaving him with $26,400. To maintain the same after tax income of $41,150 Joe will take a TTR Pension of $14,750. The SMSF pays 15% tax on the $20,000 salary sacrificed = $3,000. The total tax paid in this scenario is $6,600 which is a saving of $2,250. (Joe is eligible for a 15% tax offset on the TTR pension, therefore no tax is payable on this amount.)
Scenario 3.
Joe buys an investment property outside the super fund in his name only. When he decides to retire, he sells the investment property. Presume he purchased the property more than 12 months ago and that the gain he has made on the sale of the property is $200,000. After applying the 50% capital gain discount, Joe's taxable income would be increased by $100,000. If Joe's income from working was still $50,000, Joe then has a taxable income of $150,000 and total tax to pay of $44,450.
Scenario 4.
Assume Joe had bought the investment property inside the Super fund. Joe's personal tax is still $8,850. The $200,000 gain is within the super fund and is eligible for the 1/3 discount so tax payable is $20,000. Giving a total tax payable of $28,850. A tax saving of $15,600
Scenario 5.
Now assume Joe was in a TTR pension and the investment property was inside the super fund. Les also assume the balance of the superfund is 80% pension mode and 20% accumulation mode. The tax payable in the super fund would be $3,000 for the salary sacrificed amount, and $6,000 on the 20% of the gain relating to the accumulation mode. This is a tax saving of $2,250 on his personal return per scenario 2 plus $38,450 tax saved vs. scenario 3 or $9,600 tax saved vs. scenario 4.