When adding up tax, keep an eye on Centrelink
The Age
Friday April 1, 2011
THE interplay of the income tax, superannuation and Centrelink rules can cause a great deal of confusion. Some aspects of superannuation can be tax free but are counted by Centrelink under both the income and assets test.Q I have $400,000 in a self-managed super fund (SMSF) and a bank debt on the family house of $350,000. I also have a taxed public service pension of $10,000 a year and my slightly younger wife has a separate super fund of $100,000.I want to keep the SMSF because it has been providing a return of twice the interest rate on my house. I believe I can withdraw $150,000 from my super fund and then reinvest $150,000 back into the super fund so that it becomes a tax-free benefit, rather than a taxable benefit.I believe my public service pension will be taxed at a very high rate once, but this will be offset by the percentage of the super which is deemed to be income for Centrelink purposes, provided I live long enough. Am I correct?Once I am 65, I will qualify for the Pensions Loans Scheme, because my pension would certainly be reduced for the taxable component of my super pension.Could I use the super to reduce my indebtedness to the bank?A You make several points in your question that are not correct. If you are 60 or older when you take the lump-sum payment from your SMSF it will be not taxable. This will mean your public service pension will not be added on top of the lump sum and tax will not be paid at a higher rate.Also, if you are under 65 when you take the lump sum and recontribute it, you can take up to $450,000, not just $150,000, as long as you have not exceeded the $150,000 non-concessional contribution limit in any of the previous three years.Taking the lump sum and recontributing it will not affect your eligibility for the age pension. This is because, under deeming rules, if you are not taking a pension from your SMSF, the income deemed by Centrelink is not altered because of an increased tax-free benefit. The tax-free component is of no benefit to you; it will only benefit your adult children if they receive your superannuation after you die.The only way to decrease the impact of your superannuation on the income test is to start receiving an account-based pension from your SMSF. If this is paid at the minimum pension rate, after the deduction for the cost of the pension allowed by Centrelink, very little if any pension will be counted.The value of your benefits in the SMSF will still affect your eligibility for the age pension under the assets test. Under the assets test the value of your home loan is not taken into account to reduce your assets, as it relates to your home, which is not counted as an asset.If you want to maximise your eligibility for the age pension, it may be better to take a lump sum to pay off your mortgage. You could find that that increases the age pension; and not having to meet mortgage payments will leave you with more cash.Before taking any action you should seek advice from a superannuation and pension specialist. You should also ask for advice related to the Pension Loans Scheme as I am not sure it would provide you with much benefit.Questions can be emailed to super@taxbiz.com.auSelf-Managed Superannuation Funds: A survival Guide by Max Newnham is available in bookshops.
© 2011 The Age
