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10 Top Australian Tax Tips for Retirement

The first difference that hits you when you retire is your regular salary or wage payments cease the moment you step outside the boss’s premises (thanks for the memories!). From that moment onwards, you’re on your own. Therefore, knowing you can fund the next phase of your life is very important.

Plan for retirement

As every farmer can tell you, before you can reap the harvest you must first sow the seeds, water the plants, and wait for the crops to mature. This approach is also the case if you plan to support yourself in retirement. Ordinarily, you can follow one of two options: Simply do nothing and pray to the super gods to help you fund your retirement, or you can try to make it happen.

For the 2013–14 tax year, your employer in Australia is obligated to contribute 9.25 per cent of your weekly salary or wage into super. This contribution (super guarantee) amounts to around $5,550 a year if you earn $60,000 a year. And the contribution is even less if your salary or wage is below that amount. If you rely on this option, you may find yourself begging for a quid in retirement.

Your alternative option is to become proactive and build up your wealth both inside and outside the superannuation system. With respect to the super option, you can consider salary sacrificing. Under this arrangement, you can put more money into super by forgoing part of your salary. In return, you stand to gain a tax benefit. For example, if your marginal tax rate is 32.5 per cent and you put an additional $10,000 into super, you stand to save $1,750 in tax. This saving happens because your super fund is liable to pay tax at the rate of 15 per cent on the $10,000 you contribute, instead of the 32.5 per cent tax if you decided to keep the money. You can also make non-concessional contributions to help boost the nest egg.

You can endeavour to accumulate wealth outside the superannuation system by investing in assets, such as shares and real estate. These types of investment have the capacity to increase in value and pay regular income. If you borrow money to buy these assets, the interest you incur is ordinarily a tax-deductible expense.

Live within your means

A major issue you need to resolve — if you’re contemplating retirement in the foreseeable future — is whether you have accumulated enough capital. Generally, the amount you need depends on the pension you require to live on comfortably in retirement. As a general rule, 60 per cent of your final salary is considered a reasonable amount to live on. The capital you need to amass to achieve this percentage is between 13 and 17 times your desired pension. For example, if you consider you need $50,000 as a yearly pension, you need to have up to $850,000 in your super fund account.

When you convert your superannuation fund account from the accumulation phase to the pension phase, the income and any capital gains your super fund derives to fund your pension is exempt from tax.

Do a budget

If you’re retired or plan to retire, one thing you need to do is prepare (and keep up to date) a simple budget of all your cash inflows and outflows. Doing a budget allows you to control your spending habits and means you can plan ahead with some degree of confidence. As long as your cash inflows exceed your cash outflows, you’re in front. But if your cash outflows exceed your inflows, you may quickly find yourself queuing up for a handout. Wherever possible, you’re best to continually reinvest surplus funds to supplement your future cash inflow needs.

During the next phase of your life, the majority of your cash inflows consist of a pension and investment income. These payments tend to be regular and are unlikely to vary to any great extent. On the other hand, your cash outflows are predominantly basic living costs and ongoing household expenditure, such as rates, insurances, gas, electricity and telephone bills. With respect to your cash outflows, they’re unlikely to decrease and are more likely to increase.

Your cash inflows, therefore, need to increase each year to cover all your cash outflows, especially unbudgeted extraordinary costs that tend to regularly pop up. Many pension schemes make provision to increase your pension payments each year and, if you’re over 60 years of age and retired, you can withdraw tax-free, lump sum payments. Having a healthy superannuation fund balance is a nice feeling if you want to live comfortably in retirement!

Get proper advice

If you’re retired or plan to retire soon, seek professional advice from a financial planner. This qualified person can review your financial position and steer you in the right direction. A financial planner can also advise you on whether you qualify for any Centrelink benefits to supplement your pension and what you need to do to get them. Furthermore, a planner is authorised to give you financial advice in respect of investing your money.

Keep up to date too. Read the daily newspapers, particularly the part that offers readers financial advice. They can give you some good ideas that may apply to your particular circumstances, and keep you informed on the latest developments relating to pensions and taxation matters. Also check out the superannuation page (under Topics) of the Australian Government website.

Work for the pension: Transition to retirement

To encourage you to remain in the workforce rather than take the early retirement option, the federal government has introduced the transition to retirement pension. Under this arrangement, you can elect to receive a super pension and still remain gainfully employed.

To take advantage of this concession, you need to have reached your preservation age (55 years of age at the time of writing) and you must elect to receive a non-commutable pension until you reach 65 years of age. This means while you’re in receipt of this pension, you can’t withdraw any lump sum payments from your super fund until you reach 65 years of age or retire. Your maximum pension can’t exceed more than 10 per cent of the balance in your super fund, while the minimum pension can’t be less than 4 per cent of your balance.

The good news here is that if you’re over 60 years of age the entire pension is tax free. On the other hand, if you’re aged between 55 and 59 years, you qualify for a 15 per cent tax offset. Meanwhile, the entire earnings generated to fund your pension are tax free.

It’s proposed that from 1 July 2014 if your super fund earns more than $100,000 per annum during the pension phase, your fund is liable to pay a 15 per cent rate of tax on earnings that exceed $100,000.

Earn some tax-free pocket money

One great thing about getting a superannuation pension comes in after you reach 60 years of age: The pension you receive from a complying super fund is tax free. But wait — the news gets even better! The superannuation pension is also excluded from your assessable income. This rule means that if this super pension is your sole source of income, as far as the Tax Office is concerned your taxable income is nil. You can use this tax provision to your advantage if you need to work on a part-time basis or sell some investment assets and take a capital gain.

When you take into account the $18,200 tax-free threshold, the low income tax offset, the $500 mature age tax offset (if you’re born before 1 July 1957), and the Seniors and pensioners tax offset, you can earn up to $37,000 before you’re likely to pay any significant amount of tax. To add icing to the cake, if you make a contribution to your superannuation fund, you qualify for a contribution under the federal government co-contribution scheme!

Update your pension entitlement

If you’re in receipt of a superannuation pension, being prudent about regularly reviewing and updating your legal documents that indicate who you want to receive your pension in the event of your death makes good sense. Why? Because your personal circumstances can quickly change (for example, your spouse could die or you could get divorced), and beneficiaries who were originally eligible to receive your pension may now be ineligible (for instance, children who are no longer dependants).

If you want your pension to be paid to a specific beneficiary, you need to sign a binding death benefit nomination form. If you take this route, the trustee must pay your pension to the person or persons you nominate. To ensure the nomination is valid, though, you need to renew the form every three years.

Take advantage of the main residence CGT provisions

If you reside in a property you acquired before 20 September 1985, the property is excluded from the CGT provisions. The fact the property happens to be your residence is irrelevant because you acquired it before CGT was introduced.

The CGT provisions apply only to CGT assets you acquire on or after this date.

You can use this rule to your advantage if you’re contemplating buying another property. For example, if you buy property in a location where you may like to live in retirement (for example, at a seaside resort), the property is exempt from tax if it becomes your main residence. Meanwhile, you can lease your pre-CGT property. If your personal circumstances change, you can move back into your pre-CGT property. Under the temporarily absent rule, you can lease your new main residence for up to six years without affecting its exemption status. Or, the property remains exempt from tax for an indefinite period if you decide not to lease it.

Downsize: Too big for comfort

Under the CGT provisions, your main residence is exempt from CGT. If you’re fortunate enough to own a property that increases substantially in value, you can be effectively sitting on a potential goldmine that isn’t liable to tax. If you’re a self-funded retiree and you think you may not have enough income to fund your retirement, one option you can consider is selling the property. With the net proceeds, you can buy a cheaper house or apartment and reinvest the balance. If you choose this route, you achieve three things:

  • The capital gain you make on disposal is exempt from tax.

  • You still own a main residence, which continues to be exempt from tax.

  • You can purchase a quality share portfolio that pays franked dividends to help supplement your income, or you can put the money into a complying superannuation fund and buy a pension.

    If you’re over 60 years of age, the pension is tax free and any income or capital gain your super fund derives during the pension phase to fund your pension payments isn’t liable to tax. If you’re between 65 and 74 years of age, you need to satisfy an employment test before you can make a contribution to a super fund. Unfortunately, after you turn 75 years of age, your window of opportunity closes, because you can’t make a contribution to a super fund.

Exploit your winning edge

The long-serving scout’s motto ‘Be prepared’ has an important place in your retirement strategy. During your years in retirement, you need to be constantly on the lookout for good buying opportunities that can pop up from time to time. This advice is especially the case if the income you derive isn’t likely to be taxed.

In general, you’re best to continually build wealth to help fund your retirement and counter the impact of inflation. Otherwise, you may find yourself behind as you get older. For example, using your home as collateral to secure a line of credit is a facility you can use to your advantage. This need may arise whenever a slump in the share market occurs. So, if you have this type of facility at your disposal, you’re able to access cash at short notice and you then have the option to buy shares at a cheaper price, which then have the capacity to increase in value and supplement your income.

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