The Bull

Saturday 17

November, 201810:14 AM



Financial Planning question

SMSF strategies for low income earners

SMSF strategies for low income earners Jeremy Gillman-Wells

We are low income earners (paying only 15%) but have our own SMSF. How can we lessen the tax burden on our SMSF to enable us to build wealth and retire eventually? It seems that all the tax strategies only allow for high income earners.  From what I have read starting transition to Retirement Pension would be no benefit as we are taxed 15% both in and out of Super. Regards Narelle

Response:

There is no doubt that the more you earn, the more access you have to tax minimisation strategies. There are two reasons for this:

> The more you earn, the more tax  you pay. Therefore the greater the opportunities available to move  yourself back down the marginal tax rate scale, say from 41.5% to 15%;  and

> The more you earn, the greater  your cashflow. Therefore the greater propensity you have to use money to gain  access to tax minimisation strategies, whilst still being able to afford your  veggies (pay for your daily living needs).

So here a few "rules of thumb" for low income earners to boost super savings:

Salary sacrifice contributions are  classified as taxable contributions to the superannuation fund, which attract contributions tax at a  maximum rate of 15%. Therefore, it may  not be that tax effective for  people on low incomes to use this strategy. As a general rule, the benefit for you on the lowest marginal tax rate (15%) is relatively small. However, tax issues aside, salary sacrifice  can also improve:

- Family Tax Benefit;

- Government co-contribution; and

- Eligibility under the  less than 10% test for personal deductible contributions.

- (Note that  these rules are changing after 1 July 2009 this year so all of these strategies will be less attractive).

Your own personal contributions to super from after  tax money will help boost your super savings and have the added advantage of  staying in the tax free portion of your fund. Having a larger tax free portion  helps if you retire between age 55-60 and also helps your "non-dependants" if  you die.

Furthermore, non concessional  contributions (your own after tax  contributions), benefit from the government co-contribution for eligible low to middle  income earners (earnings up to  $60,342). The matching rate is  $1.50 for every dollar you put in up to $1,000. The matching will temporarily reduce to $1 per dollar for eligible contributions in the  financial years commencing 1 July 2009  up to 30 June 2012.

Either way you look  at it, that's a 150% guaranteed return this financial year and still a 100%  guaranteed return next financial year. So you could be boosting your super by  around $1,500 of free money for each member of the fund this year alone.

One of the advantages of using Transition to Retirement income streams is that when you change to the pension phase, your super balance goes from being taxed at a maximum of 15% on earnings  to completely tax free earnings. So say you had $250,000 in super,  earning 5% pa, then your maximum tax payable in accumulation phase would  be $250,000 x 5% x 15% = $1,875. If you decide to start an allocated pension  (TtR), then you would save that $1,875.

If you didn't need all of the  money from your income stream, then you could recycle this back into the super  accumulation side of your SMF.

Remember that super gets taxed at a MAXIMUM of 15%.  So if you have $500,000 in cash earning 5% pa then your tax will be $500,000 x  5% x 15% = $3,750. Total return = $21,250. But you could take advantage of the  tax benefits from imputation credits and Australian shares. Yes the risk  profile of your fund would increase, but we are talking here about tax  strategies.

So if you put that $500,000 into blue chip Australian  shares paying fully franked dividends, your return and tax profile might look  like this...$500,000 x 5% (fully franked dividend) = $25,000. Tax at 15% =  $3,750 less the franking credit of $10,714 = a tax  return of $6,964 or a total return of $31,964.  Nice!!

Post Budget09 Rules of Thumb for Super

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By Jeremy Gillman-Wells, Financial Planner, Bentham Financial Group 

Jeremy Gillman-Wells is an Authorised Representatives of AMP Financial Planning Pty Limited   | ABN 89 051 208 327 | AFS Licence No 232706. In order to get the latest newsletter, click here.

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