Tax Free SMSF at Retirement If you are retired and are over the age of 55 it is possible to convert your SMSF to a Simple Account Based Pension and enjoy a 0% tax rate on your SMSF earnings and capital growth.
Definition of "Retirement" if you are aged between 55 and 59
For a person between 55 and 59 retirement means your employment ceases and you never intend to work again either on a full-time or part-time basis (defined as more than 10 hours per week). This declaration must be made to your SMSF and is made at the time you cease work. It is noted that whilst a person aged between 55 and 59 never intends to work again, they may ultimately do so. This will not alter the person's status as being retired enabling them to have access to their super benefit notwithstanding they have returned to work.
Definition of "Retirement" if you are aged above 60
For a person between 60 and 64 retirement means you simply need to cease your employment. The intention to return to the workforce is irrelevant. This means that you can essentially return to work soon after ceasing your employment, but you will still deemed to be retired and still able to access your super as a Simple Account Based Pension. The definition of retirement in this case is less stringent than for those under 60. It is noted that you can automatically access your super when above 65. You do not need to be retired.
Introducing the Concept of a Simple Account Based Pension
A Simple Account Based Pension is simply an income stream that you receive from your SMSF when you retire. This simply means that periodically (eg each month or other period you nominate) cash is transferred from your SMSF Bank Account to your Personal Bank Account for you to fund your living expenses in retirement. Essentially nothing changes when you commence a Simple Account Based Pension. That is your investments stay as they are. All that happens is that the ATO is notified that you will start accessing your super as an income stream.
Strategy Tax Benefits
The Tax Benefits on commencing this strategy are considerable namely:
- The tax rate of your SMSF reduces to NIL
- You never have to pay tax on your investments earnings in the Fund
- You never have to pay tax on your investments capital growth in the Fund
- You receive a cheque from the ATO each year equal to any franking credits received by your SMSF
- You pay no tax on the pension payments if over 60 and some tax if aged between 55 and 59
How much Tax can I Save
Commencing a Simple Account Based Pension after the age of 60 can result in significant tax savings. This is because you pay no tax on your SMSF investment income and capital growth. Similarly there is no tax payable on the Simple Account Based Pension income you draw from the SMSF.
Whilst it is true that commencing a Simple Account Based Pension works best when you are above 60 (when pension payments to you are tax free) it can still be a worthwhile financial exercise producing valuable tax savings if you are aged between 55 and 59. This is because you pay no tax on your SMSF investment income and capital growth. Offsetting these tax gains is the tax that you pay on the Simple Account Based Pension you draw from the SMSF (which we note is concessionally taxed and receives a 15% rebate). It is noted that if the Simple Account Based Pension income is the sole source of your income then you can generally take approximately $40,000 per year in income tax free. Some tax may apply on income drawn above this amount.
What's the Alternative
It is important to realize that inevitably you will need to commence a Simple Account Based Pension if you want to access your super to live in retirement. If you do not commence a Simple Account Based Pension you can access your super in the form of a Lump Sum, however your super investments will continue to attract tax at up to 15% per annum. This makes little sense when you can enjoy a tax free super status by simply commencing a Simple Account Based Pension.
Let's Consider an Example
- Say you have $1.0 million in super earning 4% pa in fully franked dividend income (assume $17,400)
- You are over 55 and retired
- You commence a Simple Pension drawing the minimum you require to live off, say $50,000
- The tax rate of your SMSF drops to NIL
Tax Saving
The tax savings adopting this strategy are as follows:
Tax Saving from Strategy
Aged 55 - 59
Aged above 60
- Tax on Simple Pension Income
($9,750)
$0
- Tax Rebate on Simple Pension Income
$7,500
$0
- Tax Savings on SMSF Earnings
$6,000
$6,000
- Franking Credits Refund
$17,400
$17,400
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As the above demonstrates there is a significant tax advantage in implementing a Simple Account Based Pension even before the age of 60.
Commencing a Simple Account Based Pension
When you are ready to commence a Simple Account Based Pension ESUPERFUND will attend to all aspects of the Simple Account Based Pension setup process for you. You do nothing.
Free Setup
It is FREE to establish a Simple Account Based Pension.
Apply Now
To establish a Simple Account Based Pension (appropriate if you are over 55 and retired) simply visit our Online Application Form here.
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