Time to reallocate assets within the family
With the opportunities for investing or reinvesting money into super soon to be severely limited, now's the time to plan ahead for alternative tax-effective strategies.
The first and most sensible place to look is the reallocation of ownership of assets within the family. This includes assisting children to boost their super and/or to achieve home ownership.
Now more than ever before it will be crucial where possible to split super balances equally between spouses. After July 1, 2017, legislation caps tax-free pension accounts at $1.6 million per person. The rules allow couples to invest up to $3.2 million in tax-free pension accounts if they split their balances equally.
But without careful planning including taking advantage of this tax year's withdrawal and re-contribution opportunities, many couples are likely to end up with one partner having much more in super than the other. In these situations, after July 1, 2017, retirees with balances in excess of $1.6 million have several alternative options when investing the excess above $1.6 million.
Evaluating these options involves reviewing the personal tax situation of both partners. Where all the retirement assets are in super and there's no or very little personal income, withdrawing part or all of balances in excess of $1.6 million to invest in personal names has attractions.
Because the income from the $1.6 million pension account will still be tax-free, both partners will also be able to receive at least another $20,000 annually of investment income tax-free. The advantage of doing this is that after age 60 all withdrawals from funded super schemes are tax-free.
Assuming an average 7 per cent annual yield, both partners could in retirement have around $300,000 each in personal names as well as $1.6 million each in pension accounts and pay no income tax. Where one or both partners receive taxable income from an investment property, small business or defined benefit pension, investing the excess above $1.6 million in a superannuation accumulation account instead of withdrawing it from super may be more tax effective.
Retaining the money in an accumulation account will ensure that the maximum income tax rate payable is 15 per cent. Compared with personal marginal tax rates this is highly attractive when the money can also be withdrawn tax free.
Post July 1, retirees with the financial capacity to help their adult children may also benefit from investing money outside super in a family trust. The family trust structure is extremely attractive when several of the beneficiaries have low marginal tax rates. This can include the retired parents and adult children not working.
Among the huge advantages available to family trusts is the ability to vary annual trust distributions to beneficiaries to minimise the tax payable on annual income.