Retirees had one dream, contribute all assets in super, convert the fund to pension phase and then draw tax free income stream (as long as minimum was withdrawn) after 1st July 07. Nirvana for over 60 year's olds, this dream is now a reality a total "tax free" life.
Australia is truly a "Tax Heaven" for some.
The benefit of putting all monies in super does not only give the retiree "Tax Free" Income for life, it also allows asset rich kids to use parents as a tax shelter for their investment incomes, as they can now use parents for their tax free thresholds of $6000. Further, for 2007/8 year any income up to $11,000 due to low income rebate of $750 is tax free and any income for over 65 year old up to $25,867 is tax free due to senior tax offset.
All this is possible as income stream from a super pension is not included in the retiree's total income. In fact, no Payment summary is required to be issued by the super fund.
But wait. There is more, how about, "getting something from the tax man". Pay back time.
This is how the strategy works : Effective from 1 July 2007: the co-contribution initiative has been extended to include self-employed persons. Hence, any small salary or business income can make retiree's eligible for co-contribution.
It means that if your total income for co-contribution purposes is $28,980 or less in a year of income, the Government will put in one dollar and fifty cents ($1.50) for every dollar ($1) you put into your super fund after tax (you do not claim a deduction for this contribution) and If your total income (your assessable income + your reportable fringe benefits) is less than $58,980 in a year of income and you make personal superannuation contributions of up to a $1,000, the Government will make a super co-contribution.
From 1st July 2007, you can only receive the government co-contribution if 10% or more of your total income is from active income. Active income is income from running a business, eligible employment or a combination of both.
When you work out what per cent of your income is active, ignore your business income deductions. This helps self-employed people with low incomes or low profit margins.
The following table shows if your income is included in total income and if it counts as active income.
Income source |
Total income |
Active income |
Partnership income from carrying on a business |
Yes |
Yes |
Investment income |
Yes |
No |
Director fees as a company director |
Yes |
Yes |
Employment income through a company or trust |
Yes |
Yes |
Distribution from a trust that is carrying on a business |
Yes |
No |
Eligible employment generally means anything resulting in you being treated as an employee. Investment income received directly or via a trust is not considered as active income.
Hence any turnover of trading business income or any paid work in a year will be considered as active work and make the retiree eligible for co-contribution as long as this active work is more then 10% of total income.
Some examples for 60 year old retiree to become eligible for co-contribution are:
1) $200 trading income (form buying and selling of any item), if this is the only income, besides pension income - trading income then becomes more then 10% of total income of the retiree. This trading income can be from one transaction.
2) $200 salary income - PAYG payment summary - for say, mowing lawns, if this is the only income of the retiree besides pension income - salary income then becomes more then 10% of total income of the retiree. This salary income can be for one hour of work.
3) If dividend and / or interest income + Rental Income = $5000 at least $556 income has to be earned from active income (Total income $5,556 = more then 10% from active income)
To be entitled to co-contribution you must be less than 71 years old at the end of the income year in which you make the personal superannuation contribution. It means that there is a window of opportunity for retirees from age 60 to 70.
A couple can get up to $3,000 and if co- contributions for 2006 are repeated a couple can receive up to $6,000. As there is no maximum which has to be withdrawn from the new account based pension, all the retiree has to do is withdraw an extra $1000 and contribute it back as non-concessional contribution in the fund.
There is a work test (40 hours in a consecutive 30 day period) condition for contributions from over 65 year olds. And to receive non - concessional contributions from memebers (not age based contributions) and Government co - contributions for members, your trust deed must allow trustees to accept these contributions.