SMSF Modelling. Meg Heffron. Rely on our excellence for SMSF administration, compliance, documentation, advice

Transcription

1 SMSF Modelling Meg Heffron Rely on our excellence for SMSF administration, compliance, documentation, advice

2 SMSFs what s the main game? Presumably for most: Ensure capital provides adequate retirement income Save enough Draw it out tax effectively Hedge against future change where possible Staying out of trouble

3 Using SMSFs Some important character development: When / for whom to start pensions? How many? Any tricks along the way? BUT in the context of the main game retirement income for life & staying out of trouble

4 SMSF Modelling Question 1 : When / for whom pension(s) should start

5 The three pension groups Over 55s 3 groups from a pension perspective No brainers easy decision to start Need income? Over 60 & can re-contribute? Can increase salary sacrifice (mitigate tax) High taxpayers under 60, high taxable income Non-contributors good short term tax outcome but can t recontribute

6 High taxpayers High taxpayer s dilemma: Don t want income (more tax) but it keeps on coming: Concessional cap reducing (1/7/12) so less salary sacrifice Minimum pensions increasing back to normal levels (1/7/13)

7 High taxpayers TRIS outcomes Ken : $1m in super, $150k salary package At Age 55 (2013/14) Start pension $25k super Employer $125k salary Tax: $3.8k Tax: $36.0k Total tax paid: Personal $45.4k Super conts $3.8k Super earnings $12.0k $0.0k Total $45.8k $51.8k $49.2k Super Fund 4% taxable earnings: $40k Tax: $6.0k Pension $40k Personal Bank account

8 High taxpayers Breakeven points Year CC Cap Pension (Min %) Salary / other income (before concessional conts) $100k $150k $200k 2011/12 $50k 3% 3.3% 4.7% 4.7% 2012/13 $25k 3% 4.5% 4.7% 6.0% 2013/14 $25k 4% 6.0% 6.3% 8.1% 2013/14 (50% tax free ) 2.9% 3.1% 3.9%

9 High taxpayers Breakeven points What if the (minimum) pension payment taxed as a lump sum? Superannuation Income Stream Benefit Taxable component - Marginal rates less 15% offset Superannuation Lump Sum Taxable component Nil% on first $175k 15%+medicare thereafter. Breakeven generally 0%

10 High taxpayers Breakeven points Minimum pension taxed as a lump sum can it be done? Yes if: Have some unrestricted non preserved (eg retired) Pension still in place (not fully commuted) Member elects beforehand to take lump sum

11 Non-contributors A different challenge can t re-contribute: Pension forces build up of non super assets Balancing act: Tax benefits super fund tax exempt Tax cost tax on non super investment returns Influenced by: Rate of tax outside super How the $ eventually leave super

12 Non-contributors Setting the model: Age 65, single $1m in super (100% taxable) No need for income, unable to contribute 3 scenarios considered for non super assets: 1. Initially, no non-super assets 2. Other assets able to trap income at 30% 3. Top marginal rate taxpayer

13 Value added by pension gross wealth 40% 30% 20% How much better off with a pension? Measured by comparing Gross value of assets Personal tax rates - no other income Company tax rate Top marginal tax rate 10% 0% -10% %

14 Value added voluntary sale 40% 30% 20% How much better off with a pension? Measured by comparing net worth (voluntary sale during lifetime) Personal tax rates - no other income Company tax rate Top marginal tax rate Allowing for natural turnover (10% pa) 10% 0% % -20%

15 Value added by pension death 40% 30% 20% How much better off with a pension? Measured by comparing assets net of super benefits tax only (death) Personal tax rates - no other income Company tax rate Top marginal tax rate 10% 0% -10% %

16 What do they tell us? Who should start a pension even if they don t need the money? Other assets / very high taxpayer? NO, looks attractive on death but perhaps illusory Benefit only arises if die with no opportunity to cash out super No other assets / able to trap income at 30%? Probably YES, but watch full liquidation during lifetime!

17 SMSF modelling Question 2 : We re starting, but how many? 2011 Heffron

18 How many? Multiple (rather than one) pensions: 1.More effective re-contribution strategy Isolate new (non-concessional) contributions But important to question : is this effective in changing components? effective in reducing taxes? Case study George is 60, $1m all taxable, retired

19 Multiple pensions & recontribution George at 65 ($1.47m) $859k $1,277k

20 Do benefits taxes really hurt anyway? $ Present Value (adj for inflation) 250, , , ,000 50,000 - Total taxes (death, no dependants) CGT on Super Benefits Tax Balance at 60 : $1m, all taxable. Cost base : $750k

21 How many? Multiple (rather than one) pensions (cont d): 2.Estate planning flexibility Tax free pension to estate / children? Nearing death cash out taxable only? 3.Protection from legislative change Tax reintroduced? Large $ from tax free pension

22 How many? Multiple (rather than one) pensions (cont d): 4.Maximise unrestricted non preserved How? Isolate UNP in its own pension Who cares? Access to large amounts before retirement / 65? Early start on recontribution after 60? Pay lump sums (in lieu of pension payments) Tax benefits In specie payments Does it really make any difference?

23 How many? 4. Separate pension for UNPB (Balance $1m, UNP $200k) $250,000 $200,000 $150,000 $100,000 UNP - 2 pensions UNP - 1 pension $50,000 $

24 SMSF Modelling Question 3 : We ve started, now what? 2011 Heffron

25 We ve started, now what? Ever re-think 100% pension phase? YES: Capital losses Managing capital gains at the end

26 Capital losses Why do pension funds care about holding on to losses? Legislative change (taxing pension funds) Change in circumstances (back to accumulation) Death with no spouse (TR 2011/D3)

27 Capital losses Realising a loss in 2011/12? Ideally unsegregated: Loss carried forward Available to use in a future year How to be unsegregated : Small accumulation account? New contribution? Just like segregating before realising a gain in reverse!

28 Capital losses Next year 2012/13: Ideally segregated Loss still carried forward New gains ignored don t use up carried forward loss

29 CGT at the end fully segregated How much tax is paid on death? Member dies Balance : $850k 1 Feb All assets sold, balance paid to estate ($865k) 1 May 1 July Pension Bal : $800k (Cost base $700k) Tax method: Segregated Taxable gain $110k (2/3 x $165k) CGT to pay $16.5k 30 June

30 CGT at the end unsegregated How much tax is paid on death? Member dies Pension : $849k Accum : $1k 1 Feb All assets sold, balance paid to estate ($865k) 1 May 1 July Pension Bal : $799k Accum Bal : $1k (Cost base $700k) Tax method Unsegregated (actuary % = 69%) Taxable gain 2/3 x $165k x 31% = $34k CGT to pay $5k 30 June

31 But to finish with the main game.. What were we aiming for? Ensure capital provides adequate retirement income Save enough Draw it out tax effectively Hedge against future change where possible Staying out of trouble

32 How much is enough? Some challenges: Male life expectancies at 60 over last 25 years: Life expectancy Age at death > half the population lives beyond life expectancy There s more to dealing with a couple than looking at longer life expectancy

33 Capital required at age 60 Pension of $60k pa, 3% inflation, 8% pa return $1,000,000 $750,000 $500,000 Until 100 Until both dead $250,000 Life of female aged 60 $0 Current mortality tables Allowing for mortality improvement Life of male aged 60

34 Capital required at age 60 $1,500 Capital to last to age 100 $1,250 $1,000 $ 000 $750 $500 $250 $0 Tax on Benefits tax 6% return 0% return earnings Base case - 8% return Additional cost -8% return % return % return 80-83

35 To sum up Some useful excursions: Who should start pensions & when? High taxpayers breakeven points Non contributors generally start unless v high income earner How many? Generally several. Ever revisit? Generally yes. But the main game? How much is enough.

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