In order to allow Australians to build wealth and provide for their retirement, governments past and present have created our concessionally taxed superannuation environment. Within that environment there are numerous opportunities to accelerate wealth creation.
A Self-Managed Super Fund (SMF) is effectively one of the few remaining ‘tax havens’ for the individual, offering significant taxation advantages and associated strategies with the potential to deliver the holy grail of tax planning – ZERO tax.
Some of these inherent advantages can be summarised as the Tax-Frees of Super.
First, let’s consider a hypothetical SMSF in the Accumulation Phase with an equal allocation of cash and shares.
Note that earnings on the share component have been taxed at the company rate of 30%. However, the low tax rate of 15% on earnings within superannuation turns a potential $7,500 tax liability into a zero-tax result. Here’s how that looks. (Fig 1) Key: FA = Franked Amount IC = Imputation Credit
Once a SMSF member is able to go into pension phase the tax advantages become even better with ZERO tax on earnings PLUS a refund of the imputation credit.
Pension payments are taxable from preservation age to age 60. However, there is also a 15% rebate on the drawdown.
From age 60 you pay ZERO tax on your pension payment! (Fig 2)
What is the situation on your death? All members generally have a Taxable Component and a Tax-Free Component within their balance.
The tax implications of a payment on death are shown here (Fig 3), however strategies may be employed to minimise or eliminate the tax on these death benefit payments.
And that leads us to the real power of superannuation; the opportunity to deploy powerful strategies that compound the benefits of these inherent tax advantages. An example of such a situation is when one member is in pension phase and the other is in accumulation phase.
Imagine an outcome where you own your own home, and the rest of your wealth sits in a SMSF. With tax-free earnings and tax-free pension payments after age 60, this would mean that you are paying ZERO tax on your TOTAL wealth. In this situation, you would not even have to lodge a personal income tax return.
It’s possible. Just ask us how.
Jarrod Bramble is the Managing Partner of Cutcher & Neale, leading a 22-Partner firm with more than 220 staff across four Australian offices and offshore support teams. He has driven the firm’s east coast expansion, embedding core values, corporate governance and an Executive Leadership model that fosters alignment across the partnership. Recognised as Innovative Partner of the Year at the 2019 Xero Awards, Jarrod is passionate about developing forward-thinking strategies that help clients achieve their financial, business and investment goals. As custodian of Cutcher & Neale, he is committed to nurturing its legacy for the next generation.
