Retire in Style
Strategies for retirement
The general information contained in this brochure and prepared by MLC Nominees Pty Limited (ABN 93 002 814 959) (AFSL 230702), MLC Investments Limited
(ABN 30 002 641 661) (AFSL 230705) and MLC Limited (ABN 90 000 000 402) (AFSL 230694) does not take into account any person’s particular objectives,
needs or financial situation. Before making a decision regarding the acquisition or disposal of a Financial Product, persons should assess whether the advice is
appropriate to their objectives, needs or financial situation. Persons may wish to make this assessment themselves or seek the help of an adviser. No
responsibility is taken for persons acting on the information provided. Persons doing so, do so at their own risk.
MLC Nominees Pty Limited, MLC Investments Limited and MLC Limited are the issuers of this publication and have their registered offices at 105-153 Miller Street,
North Sydney NSW 2060, and are members of the National group of companies. The offer of interest in a financial product is generally contained in a Product
Disclosure Statement (PDS) or other disclosure document. Copies of PDSs for MLC products are available upon request by phoning the MasterKey Service Centre
on 132 652 or by visiting mlc.com.au
Historic performance is not indicative of future performance. The future value of an investment may rise or fall with changes in the market.
Before acquiring a financial product a person should obtain a PDS or other disclosure document relating to that product and consider the contents of that
disclosure document before making a decision about whether to acquire or continue to hold the product. To acquire the product you must complete the
application form attached to the relevant disclosure document.
Why you need to
create a long-life income
Compared to previous generations,
we are retiring earlier and living longer. The trend towards longer retirement
The average Australian male can now 0 16 65 75yrs
expect to be retired for 21 years, while 1950
Australian women are spending an average
of 25 years in retirement*. 0 20 60 80yrs
While we may have more time to pursue
hobbies and neglected interests, 20 years or pre-work working life retirement
more is a very long time to support yourself
without the security of full-time employment. Figures for an average male
Source: Australian Bureau of Statistics
That’s why more Australians are realising
the need to create a regular, long-lasting
income to fund their living expenses.
What’s more, we are getting plenty of Important information
encouragement from the Government.
The information and strategies provided
By providing incentives in the form of tax are based on our interpretation of relevant
concessions and social security benefits, superannuation, social security and taxation
the Government has made income stream laws as at 3 December 2007.
investments a very attractive option.
Because these laws change frequently,
For example, from 1 July 2007, no tax is you should obtain advice specific to your
payable at age 60 or over on income stream own personal circumstances, financial needs
investments commenced from a taxed and investment objectives, before you decide
super fund (see Glossary). to implement any of these strategies.
In this guide we outline eight potentially The investment returns shown in the case
powerful strategies involving income stream studies are hypothetical examples only.
investments that could be used in the lead They do not reflect the historical or future
up to, and during, your retirement. returns of any specific financial products.
To determine which strategies best suit
your situation, we recommend you seek
* From age 60. Source: Australian Life Tables
Choosing the right mix of assets can make a big difference to
As the graph below reveals, growth assets such as Australian and global shares and property
have delivered higher returns for investors over longer time periods (ie seven years or more).
However, these asset classes have also been more volatile than cash and bonds over the
short-term (ie one to three years).
Asset class comparison – $10,000 invested
Global Shares Australian Property Cash
Australian Shares Australian Bonds Inflation
Note: Year ended 30 June
This comparison is based on historical performance and is not indicative of future performance. Future performance
is not guaranteed and is dependent upon economic conditions, investment management and future taxation.
Source data: Australian Shares: S&P/ASX 200 Accumulation Index (All Ordinaries Accumulation Index prior to
April 2000), Global Shares: MSCI World Gross Accumulation Index ($A), Property: ASX 200 Property Accumulation
Index (Property Trust Accumulation Index prior to July 2000), Australian Bonds: UBS Composite Bond Index –
All maturities (Commonwealth Bank Bond Index prior to November 1987), Cash: UBS Bank Bill Index (RBA
13 Week Treasury Notes prior to April 1987), Inflation: Consumer Price Index. Assumes income is reinvested.
If you’re like many retirees, you'll end up investing your savings for 20 years – maybe longer.
You may therefore want to consider investing a significant portion of your income stream
investment in growth assets. But before you make your investment choice, you should also
consider your goals, needs, financial situation and your level of comfort with market ups
To determine a mix of assets that suits your needs, you should speak to a professional
What types of streams 4
Strategies at a glance 7
Strategy 1 Top-up your salary when moving into part-time employment 8
Strategy 2 Save more for retirement without reducing your income 10
Strategy 3 Use your super tax-effectively when retiring between 12
age 55 and 59
Strategy 4 Use your super tax-effectively when retiring at age 60 or over 14
Strategy 5 Invest the sale of your business tax-effectively 16
Strategy 6 Reinvest your super to minimise tax 18
Strategy 7 Maximise your income stream investment and save on CGT 20
Strategy 8 Use income streams to minimise the Income Test 22
Types of income streams
There are generally two types of income stream investments that can be purchased in the 2007/08
financial year to generate a regular and tax-effective income. The table below compares the key
features and benefits.
Account based pensions
What money can I invest? Superannuation only.
Can I choose my Yes. You generally have the opportunity to invest your money in shares, property, bonds, cash, or a
investment strategy? combination of these asset classes. This means your account balance can increase and decrease
over time, depending on the performance of your chosen investment strategy.
Who carries the investment risk? You.
How is the income determined? You must elect to receive a minimum income each year, based on your age (see FAQs on page 28)
and there is generally no maximum income limit. The exception is that a maximum payment of 10% of
the account balance applies to ‘Transition to Retirement’ account based pensions (see Strategy 1).
Is the income guaranteed? No.
Can I choose my income frequency? Yes. You can generally choose between monthly, quarterly, half-yearly and yearly income payments.
How long will the income There is no pre-determined investment term. How long your investment lasts will depend on the level
payments last? of income you draw and the performance of your chosen investment strategy.
Can I make lump sum withdrawals? You can generally make lump sum withdrawals at any time. The exception is that you can only
withdraw from a ‘Transition to Retirement’ account based pension when you have satisfied another
condition of release (see FAQs on page 26).
Are there any tax concessions? Yes. The taxable income payments will attract a 15% pension offset between age 55 and 59
(see FAQs on page 27). When you reach age 60, you can receive unlimited tax-free* income stream
payments and you don’t have to include these amounts in your annual tax return (which could reduce
the tax payable on your non-super investments).
Are there any social Yes. Part of the income payments may be exempt from the Income Test (see FAQs on page 29).
* Assumes the income stream is commenced from a taxed super fund (see Glossary).
Superannuation or non-superannuation money.
No. Immediate annuities are generally backed by fixed income investments only, and the If you are serious about achieving
rate of return is fixed once the investment commences. the retirement lifestyle you want
(and deserve), you should seek
The life insurance company that issues the annuity. A financial adviser will get to know you,
your circumstances and what your
financial limitations are. They’ll then work
The life insurance company promises to pay a predetermined income for life or an agreed with you to develop a financial plan to
term. The income payments can be indexed in line with the cost of living and, once agreed, help you achieve your goals, now and in
can’t be altered. the future.
This can include:
• Deciding which type of income
stream (or combination of income
Yes (as per account based pensions). streams) suits you best,
• Choosing a suitable investment
The income can be paid for life or an agreed term.
• Maximising your eligibility for Age
Pension benefits, and
Yes. However, for lifetime immediate annuities, the withdrawal (commutation) must be made • Ensuring your Estate Planning affairs
within the guaranteed period (see Glossary). are in order.
If you don’t have a financial adviser, call
132 652 and we can put you in touch
As per account based pensions for immediate annuities purchased with superannuation
money. Otherwise, the taxable income payments are taxed at the investor’s marginal rate.
Yes (as per account based pensions).
Time equals money,
even in retirement,
and 20 years or more
is a long time to have
to support yourself
Strategies at a glance
Strategy Suitable for Key benefits Page
1 Top-up your salary when People aged 55 or over A
• ccess super benefits without 8
moving into part-time who plan to scale back retiring or leaving the workforce
employment their working hours M
• aintain your living standard when
transitioning into retirement
2 Save more for retirement People aged 55 or over B
• enefit from an income stream while 10
without reducing your who are still working you are still working
income • Boost your retirement savings
3 Use your super tax- People aged 55 to 59 who E
• liminate lump sum tax 12
effectively when retiring plan to retire R
• eceive up to $38,684 pa in tax-free
between age 55 and 59 income (in 2007/08)
4 Use your super tax- People aged 60 or over R
• eceive unlimited tax-free income 14
effectively when retiring who plan to retire stream payments
at age 60 or over P
• ossibly reduce tax on non-super
5 Invest the sale of your People aged 55 or over R
• eceive a more tax-effective income 16
business tax-effectively who plan to sell their R
• etain more of your capital
business and retire
6 Reinvest your super to P
• eople aged 55 to 59 I
• ncrease the income you can receive 18
minimise tax who plan to retire tax-free each year between age 55
• eople aged 55 or over
P and 59
who have non-dependant E
• nable your non-dependant
beneficiaries (eg adult beneficiaries to save tax in the event
children) of your death
7 Maximise your income People with non-super R
• educe or eliminate capital 20
stream investment and investments who plan gains tax when selling non-super
save on CGT to retire investments
• nvest more money in an income
stream for your retirement
8 Use income streams to People of Age Pension age M
• inimise the income counted under 22
minimise the Income Test who want to increase their the social security Income Test
social security entitlements M
• aximise your entitlement to the
Top-up your salary when moving
into part-time employment
If you’re currently 55 years of age or older and In addition to these income limits, you can only
you plan to scale back your working hours, you take a cash lump sum (or purchase a different
may want to invest some of your existing super type of income stream) once you permanently
in a Transition to Retirement Pension (TRP). retire, reach age 65, or meet another condition
of release (see FAQs on page 26).
This could enable you to receive a tax-effective
income to supplement your reduced salary. But despite these access restrictions, you
For example, if you want to cut back from are likely to pay less tax on the income
say a five-day to a three-day working week, payments from a TRP than you do on your
a TRP can provide some extra income to help salary or wages.
maintain your living standard.
This is because the taxable income payments
will attract a 15% pension offset between age
How does the 55 and 59 (see FAQs on page 27).
strategy work? Also, when you reach age 60, the income
A TRP is an account based pension that can stream payments you receive are completely
be purchased with preserved or restricted tax-free* and you don’t have to include these
non-preserved superannuation benefits when amounts in your annual tax return (which
you have reached your preservation age could reduce the tax payable on your non-
(currently 55 – see FAQs on page 26). super investments).
You can choose how much income you receive When you take into account these tax benefits,
within certain limits. The minimum income you won’t need to draw as much pre-tax
that must be received each year depends on income from the income stream investment
your age (see FAQs on page 28). For example, to replace your salary reduction.
if you are between age 55 and 65, you must * Assumes the income stream is commenced from a
receive at least 4% of your account balance taxed super fund (see Glossary).
each year. The maximum income, on the other
hand, is limited to 10% of the account balance
each year, regardless of your age.
• Access super benefits without having to retire or leave the workforce.
• Maintain your living standard when transitioning into retirement.
Mark, aged 55, is working full-time and wants to cut back his working hours. His pre-tax salary
Tips and traps
will reduce from $60,000 pa to $40,000 pa, so he decides to invest some of his super in a TRP.
• Many people on reduced hours will
By using this strategy, he will continue to meet his after-tax income goal of approximately continue to receive Superannuation
$46,000 pa. He will also only need to draw a pre-tax income of $15,988* from the TRP in the Guarantee contributions (and possibly
first year to cover his pay cut of $20,000 pa. This is primarily because the income payments from Government co-contributions – see
the TRP will attract the full 15% tax offset. FAQs on page 25). It's therefore
important to check whether your
super fund has any minimum account
Before strategy After strategy
balance requirements before
Pre-tax salary $60,000 $40,000 commencing a TRP.
TRP income Nil $15,988* • Once you purchase a TRP, you can
Total pre-tax income $60,000 $55,988 transfer the money back to super at
any time. This could be an attractive
Less tax payable# ($13,350) ($9,338)
option if you decide to return to
After-tax income $46,650 $46,650 full-time work and no longer need
to draw on the TRP to meet your
* In five years time, when Mark reaches age 60, he will pay no tax on the TRP income payments. He will living expenses.
therefore only need to draw an income of $13,000 pa from his TRP to meet his after-tax income goal.
• If you have other financial resources
# Also takes into account the Mature Age Worker Tax Offset (see FAQs on page 28). (and you plan to reduce your working
Assuming Mark has sufficient super, he can decide how much he invests in the TRP. For hours), you may be better off
example, to draw a pre-tax income of $15,988 in year one, he could invest a smaller amount keeping your benefits in super and
commencing a long-term income
(say $159,880) and elect to receive the maximum income of 10% pa. However, he may be
stream once you are fully retired.
better off investing a larger amount (say $399,700, if available) and drawing the minimum
income payment of 4%^ pa based on his age. • If you have met a condition of release
(see FAQs on page 26) and you don’t
By investing a larger amount, Mark will have the flexibility to draw more income if needed have other financial resources, you
(up to the maximum). Furthermore, while the money is invested in the TRP, earnings in the should consider using an account
fund will be tax-free, versus tax at up to 15% applying to earnings accumulating in the accrual based pension that isn’t subject to
phase in super. the maximum income and withdrawal
^ If Mark was aged 65 (or older) a higher minimum income limit would apply (see FAQs on page 28). (commutation) restrictions associated
with a TRP.
• A TRP could also be used to maintain
your living standard when making
salary sacrifice contributions into
superannuation (see Strategy 2).
Save more for retirement without
reducing your income
In Strategy 1, we explained how if you are By taking these steps, it’s possible to
currently 55 years of age or older, you can accumulate more money for your retirement,
use a Transition to Retirement Pension (TRP) due to a range of potential benefits, including:
to supplement your reduced salary when • Less tax on contributions, as salary
scaling back your working hours. sacrifice super contributions are generally
If you plan to keep working (either full or taxed at up to 15%, rather than marginal
part-time) another opportunity is to sacrifice rates of up to 46.5%*
some of the pre-tax salary you receive from • Less tax on investment earnings, as
your employer into superannuation and use a earnings in a TRP are tax-free, whereas
TRP to replace your income shortfall. earnings in a super fund are taxed at a
By using this strategy, you may be able to maximum rate of 15%
build a bigger retirement nest egg without • Less tax on income, as the taxable income
reducing your current income. payments will attract a 15% pension offset
between age 55 and 59 (see FAQs on
How does the page 27). Also, when you reach age 60, the
income stream payments you receive are
strategy work? completely tax-free# and you don’t have to
This strategy involves: include these amounts in your annual tax
return (which could reduce the tax payable
• Arranging with your employer to sacrifice
on your non-super investments).
part of your prospective pre-tax salary
directly into a super fund While the magnitude of the tax savings will
depend on your particular circumstances,
• Investing some of your existing super
combining salary sacrifice with a TRP could
in a TRP, and
be a powerful pre-retirement strategy.
• Using the regular payments from the * Includes a Medicare levy of 1.5%.
TRP to replace the income you sacrifice # Assumes the income stream is commenced from
into super. a taxed super fund (see Glossary).
Note: This strategy could also be used if you are
self-employed (see Glossary). However, rather than
making salary sacrifice contributions, you need to
invest some of your business income in super as
a personal deductible contribution. See your financial
adviser for more information.
• Take advantage of a tax-effective income stream while you are still working.
• Build more wealth to support yourself when you permanently retire.
Craig, aged 55, earns a pre-tax salary of $90,000 pa and receives 9% Superannuation
Tips and traps
Guarantee (SG) contributions from his employer. He decides to reduce his pre-tax salary to • When using this strategy, there are
$55,000 pa and sacrifices $35,000 pa into his super fund to build his retirement savings. some limitations that need to be
considered. For example:
To receive the same after-tax income of approximately $65,000 pa, he then commences a TRP
and elects to receive taxable income payments of $27,313 in the first year. − To replace large salary sacrifice
Note: Assumes Craig continues to receive 9% SG based on his package of $90,000 pa, even after he sacrifices contributions, you may need to
$35,000 pa into his super fund. invest a significant amount of super
in a TRP
Before strategy After strategy − The salary sacrifice (and other
Pre-tax salary $90,000 $55,000 concessional) super contributions
are subject to a cap (see FAQs on
TRP income Nil $27,313
Total pre-tax income $90,000 $82,313
– If your SG contributions are based
Less tax payable* ($24,450) ($16,763) on your reduced salary amount, this
After-tax income $65,550 $65,550 strategy could erode your wealth.
SG contributions $8,100 $8,100 • There may be an advantage in
splitting some of your salary sacrifice
Salary sacrifice contribution Nil $35,000
(or other taxable super) contributions
with your spouse (see your financial
* Takes into account the Mature Age Worker Tax Offset (see FAQs on page 28). adviser for more information).
While the after-tax income and SG contributions are exactly the same in both scenarios, this • The Australian Tax Office (ATO) has
strategy has the potential to increase Craig’s retirement savings. confirmed straightforward
arrangements involving a TRP and
This is partly because Craig will invest more money in super each year than he will withdraw
salary sacrifice should not result
from his TRP. For example, in the first year, while Craig will receive an income of $27,313 in adverse tax consequences and
from the TRP, he will invest a net amount of $29,750 in his super fund (ie $35,000 less 15% penalties under the general anti-
contributions tax = $29,750). That’s an extra $2,437 in the first twelve months alone. Also, avoidance provisions. However, if the
earnings in the TRP are tax-free, versus tax at up to 15% applying to earnings accumulating strategy is artificial or contrived, it is
in the accrual phase in super. likely to attract ATO attention.
If we assume Craig has $325,000 in super (consisting entirely of the taxable component) and
invests this amount in a TRP, the next table shows the value added by this strategy over various
time periods. For example, if Craig uses this strategy for the next ten years, he will increase his
retirement savings by a further $94,285.
Value of investments
Before strategy After strategy Value added
After year… (super only) (super and TRP) by strategy Other assumptions: Both the super and TRP
investment earn a total pre-tax return of 8% pa
1 $358,036 $362,351 $4,315 (split 3% income and 5% growth). The overall franking
level on investment income is 25%. Salary doesn’t
5 $518,640 $543,882 $25,242 change over the ten-year period. Craig receives a
10 $802,583 $896,868 $94,285 tax-free income from the TRP from age 60. Neither
the super or TRP investment are cashed out.
Use your super tax-effectively when
retiring between age 55 and 59
When you retire, you need to decide what • When you become eligible for SATO, the
you’re going to do with your super. Should maximum tax-free income you can receive
you take the money as a cash lump sum is $25,867 per single, or $21,680 per
and invest outside super? Or should you keep member of a couple.
your money in the superannuation system by
Conversely, if you use your super to start an
rolling over to an income stream investment,
income stream investment:
such as an account based pension?
• Lump sum tax is not payable when you
While receiving a cash lump sum can be
rollover the benefit.
tempting, if you retire between age 55 and 59,
rolling over to an income stream investment • No tax will be payable on earnings within
can enable you to make a larger investment the fund.
and receive a more tax-effective income to • The taxable income payments will attract
meet your ongoing living expenses. a 15% pension offset between age 55
and 59 (see FAQs on page 27). As a result,
How does the while you are in this age bracket, you’ll be
strategy work? able to receive taxable income payments of
up to $38,684 pa without paying any tax#.
If you receive your super as a lump sum prior
• When you reach age 60, you can receive
to age 60:
unlimited tax-free^ income stream
• You will generally have to pay lump sum tax payments and you don’t have to include
on at least some of your benefit (see FAQs these amounts in your annual tax return
on page 26). (which could reduce the tax payable on
your non-super investments).
• When you invest the net proceeds outside
super, income exceeding $11,000 pa will While the impact of the tax benefits will
be taxed at a marginal rate of 16.5%* or depend on your individual circumstances,
higher until you become eligible for the commencing an income stream could make
Senior Australians Tax Offset (SATO) – a big difference to your retirement lifestyle.
see FAQs on page 28.
* Includes a Medicare levy of 1.5%.
# Excluding the Medicare levy.
^ Assumes the income stream is commenced from
a taxed super fund (see Glossary).
• Eliminate lump sum tax.
• Receive up to $38,684 pa in income stream payments tax-free between age 55 and 59.
• Pay no tax on the income payments at age 60 or over.
Tips and traps
Ruth, aged 55, has $500,000 in super consisting entirely of the taxable component. She has not
received any super benefits in the past and is about to retire. • Capital Gains Tax (CGT) may also
The table below compares the lump sum tax payable (and net amount invested) if she receives be payable within the fund when
super is received as a cash lump
her super as cash versus commencing an account based pension. By electing the latter, Ruth will
sum. However, with some super
get to invest an additional $59,400 for her retirement.
funds (eg a self-managed fund or a
discretionary master trust), no CGT
Receives super as Commences an will be payable when you start an
cash lump sum account based pension income stream investment.
Value of super at retirement $500,000 $500,000 • If you need to take some of your
Less low rate cap on super as a cash lump sum, you may
the taxable component ($140,000)* N/A want to defer receiving benefits until
you reach age 60 when you will
Taxable lump sum withdrawn $360,000 N/A
be able to make unlimited tax-free
Less lump sum tax at 16.5%# ($59,400) N/A withdrawals.
Net amount invested $440,600 $500,000 • Using your super to commence an
income stream can also be tax-
* Figure applies in 2007/08. effective if you retire at age 60 or
# Includes a Medicare levy of 1.5%.
over (see Strategy 4).
Let’s now assume Ruth requires an after-tax income of $35,000 pa to meet her living expenses. • There may be some tax and/or
The next table shows that by using her super to commence an account based pension, she’ll estate planning advantages if you
have an extra $196,586 in 25 years (in today’s dollars). receive some of your super as a lump
sum and re-contribute the amount
This is because, in addition to making a larger investment, she will pay no tax on her income
into super as a personal after-tax
stream payments from age 60. Conversely, because of the tax she will need to pay on her non-
contribution prior to commencing
super investments over the next 25 years, she will have to draw more investment capital to meet
the income stream investment (see
her living expenses. Strategy 6).
• Before starting an income stream
Value of investment Invests net lump Commences an
investment, you may want to invest
(in today’s dollars) sum outside super account based pension
non-super money in super
After 25 years (see Strategy 7).
in retirement $39,347 $235,933
• Commencing an income stream
Assumptions: Both the account based pension and non-super investment generates a pre-tax return of 8% pa could help you to qualify for (or
(split 3% income and 5% growth). The franking level on investment income is 25%. Ruth’s after-tax income increase your entitlement to) social
goal ($35,000 in year one) is indexed at 3% pa. Where an income shortfall occurs, capital is withdrawn from the security benefits – see Strategy 8.
non-super investment or additional income is drawn from the account based pension investment. Where applicable,
Age Pension benefits are taken into account. The final figure in year 25 is after any Capital Gains Tax.
Use your super tax-effectively
when retiring at age 60 or over
In the previous strategy, we explained why if • When you become eligible for SATO, the
you retire between age 55 and 59, you may maximum tax-free income you can receive
want to use your super to start an income is $25,867 per single, or $21,680 per
stream investment, rather than receive a cash member of a couple.
Conversely, if you use your super to start
However, if you retire at age 60 or over, while an income stream investment, such as an
the issues you need to consider are slightly account based pension:
different, commencing an income stream
• No tax will be payable on earnings within
investment can also be a very tax-effective
option. This is particularly true if your super
benefit is quite large and/or you will receive • You can receive unlimited tax-free* income
income from other sources (eg from any non- stream payments, and
super investments you already hold). • You don’t have to include the income
payments in your annual tax return (which
How does the could reduce the tax payable on non-super
strategy work? investments).
If you receive your super as a lump sum at These tax benefits can enable you to receive a
age 60 or over, you will not have to pay lump more tax-effective income to meet your living
sum tax on your benefit*. However, when you expenses.
invest the proceeds outside super: * Assumes the income stream is commenced from a
taxed super fund (see Glossary).
• Income exceeding $11,000 pa will be # Includes a Medicare levy of 1.5%.
taxed at a marginal rate of 16.5%# or
higher until you become eligible for the
Senior Australians Tax Offset (SATO) –
see FAQs on page 28, and
• Receive unlimited tax-free income stream payments.
• Possibly reduce tax payable on non-super investments.
Warren, aged 60, is about to retire and needs an after-tax income of $40,000 pa to meet his
Tips and Traps
living expenses. He has $500,000 in super consisting entirely of the taxable component and is
• There may be some estate planning
considering the following options: advantages if you receive some
• Taking the money as a cash lump sum and investing outside super (in a unit trust) of your super as a lump sum and
re-contribute the amount into super
• Keeping the money in super by rolling over to an account based pension. as a personal after-tax contribution
The table below shows that by electing the latter, he’ll have an extra $56,185 left over after prior to commencing the income
20 years (in today’s dollars). stream investment (see Strategy 6).
• Before starting an income stream
This is because he’ll pay no tax on the income payments from the account based pension.
investment, you may want to invest
Conversely, over time, considerable tax will be payable on the income payments and capital
non-super money in super
drawdowns made from the unit trust investment. (see Strategy 7).
By paying less tax on the account based pension, he will use up less of his money to meet his • Commencing an income stream
after-tax income goal of $40,000 pa. The additional $56,185 left over in the account based could help you to qualify for (or
pension will enable him to meet future living expenses or provide a larger inheritance. increase your entitlement to) social
security benefits – see Strategy 8.
Value of investment Cash out super and Use super to start
(in today’s dollars) invest in managed fund account based pension
After 20 years in retirement $126,898 $183,083
Assumptions: Both the account based pension and unit trust investment generate a pre-tax return of 8% pa
(split 3% income and 5% growth). The franking level on investment income is 25%. Warren’s after-tax income
goal ($40,000 in year one) is indexed at 3% pa. Any income received above Warren’s requirements is invested in
the managed fund. Where applicable, Age Pension benefits are taken into account. The final figure in year 20 is
after any Capital Gains Tax.
Invest the sale of your business
If you’re selling your business to retire, • The taxable income payments will attract
one option is to invest the money in your a 15% pension offset between age 55 and
own name, outside super. However, a better 59 (see FAQs on page 27). As a result,
approach may be to make a personal after- while you are in this age bracket, you’ll be
tax super contribution and start an income able to receive taxable income payments of
stream investment, such as an account up to $38,684 pa without paying any tax#.
based pension. • When you reach age 60, you can receive
By using this strategy, you could receive unlimited tax-free^ income stream
a more tax-effective income to meet your payments and you don’t have to include
living expenses. these amounts in your annual tax return
(which could reduce the tax payable on
your non-super investments).
How does the
While these tax concessions could enable
strategy work? you to receive a more tax-effective retirement
If you invest the sale proceeds outside super: income, there is a cap on the amount
of personal after-tax (and other non-
• Income exceeding $11,000 pa will be
concessional) super contributions you can
taxed at a marginal rate of 16.5%* or
make without incurring a penalty.
higher until you become eligible for the
Senior Australians Tax Offset (SATO) – From 1 July 2007, the non-concessional
see FAQs on page 28, and contribution cap is $150,000 a year (or
• When you become eligible for SATO, the $450,000 in one year if you’re under age
maximum tax-free income you can receive 65 in that year and don’t make further
is $25,867 per single, or $21,680 per contributions in the following two years).
member of a couple. As well as this cap, it’s possible to use certain
Conversely, if you make a personal after-tax proceeds from the sale of your business to
super contribution and start an income stream: make personal after-tax super contributions of
up to $1 million over your lifetime (see FAQs
• No tax will be payable on earnings within on page 24).
Strategy# the fund.
* Includes a Medicare levy of 1.5%.
# Excluding the Medicare levy.
^ Assumes the income stream is commenced from
a taxed super fund (see Glossary).
• Receive a more tax-effective income to meet your living expenses.
• Retain more of your investment capital.
Adrian, aged 60, is selling his small business, which he has owned for over 15 years. He expects
Tips and Traps
to receive $1 million after claiming the 15 year CGT Exemption (see FAQs on page 25). When the
• If the proceeds from your business
sale is completed, he plans to retire and estimates he’ll need an after-tax income of $60,000 pa. exceed the amount you are able to
If Adrian invests the $1 million outside super and earns a total return of 8% pa (of which 3% get into super in the year of sale, you
may be able to make additional super
or $30,000 is income), he will need to withdraw $31,180 in capital in the first year to meet
contributions in future years by using
his after-tax income goal of $60,000. This takes into account the $1,180 in tax payable at his
the $150,000 or $450,000 cap on
marginal rate on the income and realised capital gains from the non-super investment. non-concessional contributions.
After considering his options, Adrian decides to invest the $1 million in super as a personal • If you think you may start another
after-tax contribution. Because he doesn’t anticipate purchasing another business in the future business in the future, you should
(and he qualifies for the 15 year CGT exemption) he will get the money into super by claiming consider using up the $150,000 or
$450,000 cap on non-concessional
the full $1 million lifetime limit*.
super contributions before using
He will then use the $1 million to start an account based pension and will draw income payments the lifetime limit of $1 million that
of $60,000 in the first year to meet his living expenses. Because he is age 60, he will pay no tax is available on the sale of business
on these income payments. assets. This may enable you to
use the remaining lifetime limit at
The table below summarises the income and tax implications of both options in year one. a later date.
• You need to notify your super fund
Invest outside super Invest in super and start if you want any personal after-tax
account based pension contributions to count towards your
Income from non-super investments $30,000 Nil lifetime limit of $1 million.
• There are a range of other
Income payments from account based pension Nil $60,000
concessions that could be used
Capital drawdown required $31,180 Nil to reduce capital gains tax when
selling business assets (see FAQs
Pre-tax income and capital received $61,180 $60,000
on page 24).
Less tax payable ($1,180) Nil
• Before starting an income stream
After-tax income and capital received $60,000 $60,000 investment, you may want to invest
non-super money in super
(see Strategy 7).
By starting an account based pension, Adrian will only need to receive pre-tax income payments
of $60,000 in year one to meet his living expenses (compared to $61,180 in pre-tax income
and capital withdrawals if he decided to invest outside super). As a result, Adrian’s investments
are likely to last a lot longer.
As the next table shows, by investing in an account based pension, Adrian will have an additional
$285,773 (in today’s dollars) after 20 years to meet his future living expenses or provide a larger Assumptions: Both the account based pension
inheritance. and non-super investment generate a pre-tax
return of 8% pa (split 3% income and 5%
growth). The franking level on investment income
Value of investment Invest outside super Invest in super and start is 25%. Adrian’s after-tax income goal ($60,000
(in today’s dollars) account based pension in year one) is indexed at 3% pa. Any income
received above Adrian’s requirements is invested
After 20 years in retirement $460,953 $746,726
in the non-super investment. Where applicable,
Age Pension benefits are taken into account.
* Claiming the full lifetime limit will give Adrian the scope to utilise the $150,000 or $450,000 cap on non- The final figure in year 20 is after any Capital
concessional contributions, should he want to invest other money in super in the current year, or future years. Gains Tax.
Reinvest your super to
Prior to commencing an income stream, Because the personal after-tax contribution will
you might want to withdraw a portion of form part of the tax free component of your
your existing super benefits and re-contribute super benefit, taking these steps can enable
the amount back into your super fund. you to increase the tax-free income payments
you receive from an income stream investment
By using this strategy you may be able to
between age 55 and 59* (see case study).
receive more tax-free income payments
between age 55 and 59* to meet your But regardless of your age, re-contributing
living expenses. super benefits could still be worthwhile
from an estate planning perspective. This
There may also be some estate planning
is because the re-contributed amount
advantages if your beneficiaries include people
will be tax-free in the hands of all eligible
who are not considered dependants for tax
beneficiaries. Conversely, when the taxable
purposes (eg adult children).
component is received by non-dependants
for tax purposes (eg adult children) tax is
How does the payable at 16.5%^.
strategy work? * If you are age 60, or over, you can receive unlimited
tax-free lump sum and income stream payments,
Generally speaking, if you are between age provided the benefit is paid from a taxed super fund
55 and 59* and satisfy a condition of release (see Glossary).
(see FAQs on page 26), you could withdraw # Where you have tax free and taxable components,
up to $140,000 (in 2007/08) from the taxable each lump sum withdrawal will contain a
proportional amount of each component.
component# of your super benefit without
^ Includes a Medicare levy of 1.5%. A higher tax
paying any tax. rate may apply if the death benefit includes an
Provided you are eligible to contribute to
super (see FAQs on page 24), you can then
re-contribute this amount into your super fund
as a personal after-tax contribution prior to
commencing an income stream investment,
such as an account based pension.
• Receive more tax-free income payments.
• Enable your non-dependant beneficiaries (eg an adult child) to save tax in the event
of your death.
Jane, aged 58, has retired with $300,000 in superannuation (consisting entirely of the taxable
Tips and Traps
component), and wants to purchase an account based pension. She also receives $10,000 each
• If you are under age 60, you may
year in other taxable income and has not received any super benefits in the past. want to invest the withdrawn amount
After consulting with her financial adviser, Jane: in your spouse’s super account so
they can commence an income
• Withdraws $140,000 from her super (with no tax payable on this amount)*, and stream in their name. This allows
• Re-contributes the proceeds back into her fund as a personal after-tax super contribution#, you to take advantage of two sets
prior to commencing her account based pension. of personal income tax thresholds
as a couple. If your spouse is aged
The table below shows how the components of her account based pension will change. As you 60 or over, they will pay no tax
can see, by using this strategy, her investment will now have a tax free component of $140,000. on the income stream payments.
* Jane satisfies a condition of release to access her super because she is over age 55 and has retired Furthermore, if your spouse will reach
permanently. age 60 before you, they can take
# Because Jane is under age 65, she can make super contributions without having to meet a work test. advantage of tax-free income stream
payments earlier than you.
• If your spouse makes a personal
Component Before strategy After strategy
after-tax contribution into their super
Taxable $300,000 $160,000 account, they may qualify for a
Tax free Nil $140,000 Government co-contribution of up
to $1,500 (see FAQs on page 25).
Total $300,000 $300,000
• If you make an after-tax contribution
on behalf of your spouse, you may
Let’s now assume Jane draws an income of $25,000 pa from her account based pension (in qualify for a spouse offset of up to
addition to her $10,000 in other taxable income). The next table summarises her income and tax $540 (see FAQs on page 25).
situation in the 2007/08 financial year before and after this strategy.
• The low rate cap of $140,000 (in
Tax situation Before strategy After strategy 2007/08) applies to the total of all
taxable components (and post-
Account based pension income payments $25,000 $25,000
June 1983 components prior to
Tax-free income payments^ (Nil) ($11,667) 1 July 2007) that are taken as cash
Other income $10,000 $10,000 at age 55 and over, and is indexed
periodically in increments of $5,000.
Taxable income $35,000 $23,333
Tax payable $1,325 $350
Because her account based pension has a significant tax free component after implementing
this strategy, she will receive $11,667 in tax-free income payments and pay almost $1,000 less
tax this financial year. Her adult children will also be able to receive a greater proportion of her
account based pension tax-free, in the event of her death.
^ The tax-free income payments are determined by multiplying the tax free proportion of the income stream at
commencement by the annual income payments received. In this example ($140,000 / $300,000) x $25,000 =
Note: Jane will pay no tax on her income stream payments when she turns age 60 in 2009/10.
Maximise your income stream
investment and save on CGT
When you retire, you may want to invest To use this strategy, you must be eligible to
non-super money in super, so you can start contribute to super (see FAQs on page 24).
an income stream investment (such as Furthermore, you must generally receive
an account based pension) and receive a less than 10% of your assessable income
potentially more tax-effective income. (plus reportable fringe benefits) from eligible
One way this could be achieved is if you use
your non-super money to make a personal As a result, this strategy can usually only be
after-tax super contribution – either in your used if:
own name or on behalf of your spouse.
• You’re self-employed, or
However, when selling a non-super investment • You’re under age 65, have recently retired
that gives rise to a capital gain (eg shares or and don’t receive any super contributions
property), you may want to claim a proportion from an employer in the financial year you
of your super contribution as a tax deduction*. sell an asset and invest in super.
By using this strategy, you could reduce
* Contributions claimed as a tax deduction will count,
your Capital Gains Tax (CGT) liability and along with certain other amounts, towards your
make a larger income stream investment. concessional contribution (CC) cap. From 1 July
2007, the CC cap is $50,000 pa or, if you’re aged
50 or over, $100,000 pa for five years until 30 June
How does the 2012. If the cap is exceeded, excess contributions
strategy work? will be taxed at a penalty rate of 31.5%, in addition
to the contributions tax of 15%.
If you invest the proceeds from the sale of Note: The amount of your super contribution you
don’t claim as a tax deduction will be classified
an asset into super and claim a tax deduction* as a non-concessional contribution (NCC). These
for an amount that offsets your taxable contributions do not attract the 15% contributions tax
capital gain, you can reduce (or eliminate) in the fund. However, amounts exceeding the NCC cap
your CGT liability. are subject to a penalty tax of 46.5%. From 1 July
2007, the cap is $150,000 a year (or $450,000 in
Also, even though the tax-deductible portion one year if you’re under age 65 in that year and don’t
make further contributions in the following two years) –
of your super contribution will attract a
see FAQs on page 24.
contributions tax of 15%, you may still be
able to get more money into a concessionally
Strategy# taxed income stream investment, as the case
• Reduce or eliminate CGT on the sale of non-super investments by making tax-
deductible contributions to super.
• Make a larger income stream investment for your retirement.
Mike, aged 63, is single and retired a year ago. This financial year, he will receive a taxable
Tips and traps
investment income of $25,000 (with a tax liability of $2,475). He has also received $350,000
from the sale of a holiday home purchased five years ago, including a taxable capital gain • To offset a capital gain, the super
contributions you claim as a tax
deduction need to be made in the
He wants to invest the $350,000 in super and start a tax-effective income stream investment. same financial year in which the
If he doesn’t claim any of his super contribution as a tax deduction, he’ll pay a total tax bill of investment is sold.
$18,225, including $15,750 in CGT on the holiday home. However, if he claims $50,000# of his • With assets such as shares and
super contribution as a tax deduction, he will offset his taxable capital gain and will only need to unit trusts, there may be a benefit in
pay $2,475 in tax on his investment income. spreading the sale over two or more
financial years so you can use this
Without claiming deduction With claiming deduction strategy progressively. Where the
capital gain is large, this approach
Investment income $25,000 $25,000
could enable you to make a personal
Taxable capital gain* $50,000 $50,000 deductible super contribution in each
Less deduction for super contributions (Nil) ($50,000)# year a partial sale is made.
Taxable income $75,000 $25,000 • If you are still working and not
seeking to immediately commence
Tax payable^ $18,225 $2,475
an income stream, you could
Tax saving (CGT) $15,750 consider contributing only the
minimum amount to super (to offset
* This figure is after the 50% CGT discount and assumes Mike has no capital losses to offset his taxable any CGT on the sale of non-super
capital gain. investments) and continue to invest
# Mike is eligible to claim the tax deduction because he has not received any employer superannuation the remainder outside super.
support this financial year.
• Rather than selling an asset and
^ Includes a Medicare levy of 1.5%.
transferring the proceeds into
Note: The personal deductible super contribution of $50,000 is within the CC cap and the rest of his super
contribution, which he doesn’t claim as a tax deduction (ie $300,000) is within the NCC cap of $450,000 that is superannuation, it may be possible to
available to people under age 65 that don’t make further contributions in the following two years. contribute certain qualifying assets to
super as an ‘in-specie’ contribution.
While this strategy has eliminated Mike’s CGT liability, the personal deductible super contribution
While the transfer may still result in
of $50,000 will be taxed at 15% in the fund, reducing his net super investment to $342,500.
CGT being payable, you may be able
However, Mike will still get to invest an extra $8,250 for his retirement, when compared to paying to offset your capital gain by claiming
CGT and commencing the income stream entirely with personal after-tax contributions. a portion of the in-specie contribution
as a tax deduction. Stamp duty may
Without claiming deduction With claiming deduction also be payable on the transfer.
Sale proceeds received $350,000 $350,000 • Investing non-super money into
Less CGT on holiday house ($15,750) (Nil) super could enable you to access (or
increase your entitlement to) social
Less contributions tax on
security benefits – see Strategy 8.
deductible super contribution (N/A) ($7,500)
Net investment in income stream $334,250 $342,500
Additional after-tax investment $8,250
Use income streams to minimise
the Income Test
Many Australians over the age of 65 receive By contrast, income stream investments such
some form of Government pension support. as account based pensions and immediate
But before you can qualify to receive the annuities (with terms greater than five
Age Pension, Centrelink assesses your years) receive a more generous Income
investments using income and assets tests. Test treatment.
Importantly, it’s the Income Test that usually As a general rule, the income payments are
reduces pension benefits. So if you want to counted under the Income Test, but any capital
maximise your entitlement for social security returned as part of the income payment is
benefits, you should consider using investments exempt.
such as an account based pension or immediate
This exempt amount is known as the social
annuity to take advantage of the favourable
security deduction amount, and is calculated
Income Test treatment.
by dividing the purchase price of the income
By using this strategy, you may be able stream investment by your life expectancy or
to increase your Age Pension entitlement the fixed term of the income stream.
(and after-tax income) quite significantly.
When assessing your application under
the Income Test, Centrelink only counts the
How does the difference between the income payments and
strategy work? the social security deduction amount, which
is a significant concession.
Under the rules applied by Centrelink, income
from certain investments (like term deposits,
directly owned shares and unit trusts) are
deemed to earn a specific rate of interest for
Income Test purposes, regardless of the actual
income they generate (see FAQs on page 29).
• Take advantage of the favourable Income Test treatment that applies to account based
pensions and immediate annuities (with terms greater than five years).
• Qualify for (or increase your entitlement to) Age Pension payments and receive related
benefits (eg the pensioner concession card).
Maree, aged 64, and her husband Paul, aged 66, are both retired. They own their home and have
Tips and traps
a jointly owned investment portfolio made up of the following assets:
• To convert a non-super investment
Investment Value Income yield (pa) into an income stream investment,
you need to be eligible to make super
Term deposit $140,000 5.5% contributions (see FAQs on page 24).
Unit trust* $50,000 3.5%
• To offset capital gains tax on the sale
Cash Management Trust $10,000 5% of shares, property and certain other
assets, you may be able to claim a
* The unit trust is invested in a balanced fund and is expected to also provide capital growth over the longer-term. portion of your super contribution as
If they keep their current investments, while they will qualify for a part-pension of $22,040, a tax-deduction (see Strategy 7).
they will not achieve their after-tax income goal of approximately $33,000 pa (see table below). • If you (or your spouse) make a
Consequently, their adviser recommends they redeem the term deposit and invest the money in personal after-tax super contribution,
superannuation in Maree’s name so she can commence an account based pension. the contributor may qualify for a
Government co-contribution of up to
Maree will invest her account based pension in a balanced fund and will draw an income of
$1,500 (see FAQs on page 25).
$7,700 in the first year (the same amount of income she would have received from the term
deposit). • If you make an after-tax super
contribution on behalf of your spouse,
Thanks to the favourable Income Test treatment applying to account based pensions, their
you may qualify for a spouse offset of
combined income for social security purposes is now below the Income Test threshold of $6,032#.
up to $540 (see FAQs on page 25).
As a result, they are entitled to the maximum Age Pension for a couple and will receive an
additional $1,464 in social security payments. • Many non-income stream
investments are subject to deeming.
By using this strategy, they will exceed their after-tax income goal of $33,000 pa. Also, because
So it makes sense to invest in assets
the account based pension is invested in a balanced fund, they have the opportunity for long-term that generate a higher return than the
capital growth (unlike the term deposit). deeming rates. The extra return is not
# As at 20 September 2007 counted for the social security Income
Test, and can be used to supplement
Before strategy After strategy your income needs.
Term deposit $7,700 Nil • To qualify for social security benefits,
Unit trust $1,750 $1,750 you also have to pass an Assets
Test. This test generally reduces
Cash Management Trust $500 $500
your pension entitlement if you are
Account based pension Nil $7,700 a homeowner and your assessable
Age Pension $22,040 $23,504 assets exceed $166,750^ (for singles)
or $236,500^ (per couple combined).
Total income $31,990 $33,454
^ As at 20 September 2007.
After-tax income $31,990 $33,454
Who can contribute to super? What is the concessional contribution (CC) cap?
Subject to the fund rules, contributions to your super account The CC cap is a cap that applies to certain super contributions
in 2007/08 are allowed in the circumstances outlined in the that include, but are not limited to:
following table: • All contributions from an employer (including salary sacrifice),
• Personal contributions claimed as a tax deduction (where
Your age Allowable contributions
< 65 P
• ersonal contributions, mandatory • Employment Termination Payments rolled over to super between
employer contributions, voluntary employer 1 July 2007 and 30 June 2012 exceeding $1 million*.
contributions and spouse contributions.
65-69 • ersonal contributions, voluntary employer
From 1 July 2007, the cap is $50,000 pa or, if you’re aged 50
contributions and spouse contributions, or over, $100,000 pa for five years until 30 June 2012.
provided you have worked at least 40 If the cap is exceeded, excess contributions will be taxed at
hours over a consecutive 30 day period
a penalty rate of 31.5%, in addition to a contributions tax
during the financial year.
• Mandatory employer contributions.
Where penalty tax is payable, you will be able to request your
• ersonal contributions and voluntary
employer contributions, provided you super fund to release sufficient benefits, or you can pay the tax
have worked at least 40 hours over a out of your non-super money.
consecutive 30 day period during the * The $1 million is reduced by all other transitional Employment Termination
financial year. Payments received between 1 July 2007 and 30 June 2012 (including
• Mandatory employer contributions. those taken in cash).
75 + • andatory employer contributions.
M What is the lifetime limit?
The lifetime limit is a limit of up to $1 million that is available
An existing super benefit can be rolled over at any time. You will to business owners when investing amounts from the following
also need to satisfy these conditions if you want to rollover an sources in super as a personal after-tax contribution:
employment termination payment or invest the proceeds from • Capital proceeds from the disposal of assets that qualify for
the sale of a business in super. the 15 year CGT Exemption (see below), including capital
proceeds that would have qualified for the 15 year CGT
How much can you contribute to super? Exemption except that the disposal did not result in a capital
Assuming you are eligible to make contributions (see above), gain or capital loss.
certain caps and limits apply. These include the non-concessional • Capital gains from the disposal of assets that qualify for
contribution cap, the concessional contribution cap and the the CGT Retirement Exemption (see below) up to a limit of
lifetime limit. Each of these caps/limits is outlined below. $500,000 per person.
What is the non-concessional contribution What CGT concessions are available to small
(NCC) cap? business owners?
The NCC cap is a cap that applies to certain super contributions Small business owners have a number of CGT concessions
that include, but are not limited to, personal after-tax available to them. Some can also take advantage of more than one
contributions and spouse contributions received. CGT concession.
From 1 July 2007, the cap is $150,000 pa (or $450,000 in one To qualify for these concessions, small business owners must
year if you’re under age 65 in that year and don’t make further have net assets of less than $6 million in 2007/08 (or be subject
contributions in the following two years). to the Simplified Tax System) and the assets disposed of must be
active assets (eg land, buildings and goodwill) used in producing
If the cap is exceeded, excess contributions will be taxed at a
penalty rate of 46.5%. Where penalty tax is payable, you must
request your super fund to release sufficient benefits to pay the tax. Where an entity (ie a trust or company) conducts the business,
Note: Particular contributions are excluded from this cap. The main ones
there are further conditions that must be met including the
include: significant individual 20% test.
• Certain proceeds from the sale of small business assets up to a lifetime
limit of $1 million (see below), and
• Settlements received for injuries relating to permanent disablement.
There are various concessions available if a small business The table below outlines the co-contribution you may be entitled
owner meets the relevant conditions, including the: to receive in the 2007/08 financial year.
• 15 year CGT exemption – This is a 100% CGT exemption
Income* Personal after-tax Co-contribution available
available to all small business owners on the disposal of active
assets held for 15 years or more. The assets must have been
disposed of for the purpose of retirement, and the small business $28,980 or Any amount Personal contribution x 1.5
less (max. $1,500)
owner must be at least 55 years of age or incapacitated.
• 50% CGT Active Assets exemption – This is a 50% $28,981– $0–$1,000 An amount equal to
$58,979 the lessor of:
exemption available to all small business owners on the
• ersonal contribution
disposal of active assets. x 1.5, or
• CGT Retirement exemption – This is available to all small $
• 1,500 – [0.05 x
business owners up to a maximum lifetime limit of $500,000. (income* – $28,980)]
If the small business owner is less than 55 years of age, they
$28,981– $1,000 or $1,500 – [0.05 x
must invest the proceeds in a super fund. However, if the small $57,979 more (income* – $28,980)]
business owner is 55 or over, they can take the proceeds as
$58,980 Any amount Nil
cash, invest in super or purchase an income stream.
Note: Other conditions may apply for these concessions.
* Includes assessable income plus reportable fringe benefits.
In addition to the small business concessions, the 50% CGT
# The personal after-tax contributions (but not Government co-contributions)
discount is available to individuals and beneficiaries of trusts
will count towards the ‘non-concessional contribution’ cap outlined on
on all assets held for more than 12 months. This exemption is page 24.
generally utilised before any other concession is claimed.
What is the spouse contributions tax offset?
What are Government co-contributions?
The spouse offset is a tax offset of up to $540 that may be
If you make personal after-tax super contributions, the available to you if you make personal after-tax super contributions
Government may make a co-contribution into your super account on behalf of your low-income or non-working spouse.
(up to a maximum of $1,500 pa). To qualify for a co-contribution:
The amount of the tax offset will depend on your spouse's
• Your assessable income plus reportable fringe benefits must income^ as follows:
be less than $58,980 pa.
• At least 10% of your assessable income plus reportable Spouse's Contribution You can claim
fringe benefits must be attributable to eligible employment or income^ amount~ a tax offset of:
carrying on a business. $10,800 or less $0-$3,000 18% of contributions
• You need to make personal after-tax contributions to your super
account. Note: Salary sacrifice contributions don’t qualify. $10,800 or less $3,000 or more $540 maximum
• You need to lodge an income tax return.
• You must be under age 71 at the end of the financial year $10,801–$13,799 Any amount An amount equal to
the lesser of:
the personal after-tax super contribution is made. S
• pouse contribution
• You can’t be a temporary resident. x 18%, or
• $3,000 — (spouse's
The Australian Tax Office will determine your entitlement based income^ - $10,800)]
on the data received from your superannuation fund (usually by x 18%
31 October each year for the preceding financial year) and the $13,800 or more Any amount Nil
information contained in your tax return. As a result, there can
be a time lag between when you make your personal after-tax ^ Includes assessable income plus reportable fringe benefits.
contribution and when the Government pays the co-contribution. ~ The after-tax super contributions received by your spouse will count
towards their ‘non-concessional contribution’ cap – see page 24.
Note: Some funds or superannuation interests may not be able to receive
co-contributions. This includes unfunded public sector schemes, defined A spouse under the relevant legislation includes a married or
benefit interests, traditional policies (such as endowment and whole of life)
de facto spouse, but does not include a partner (married or
and insurance only superannuation interests.
de facto) who lives in a different home or a same sex de facto
spouse. The receiving spouse must also be under age 65 or,
if between 65 and 70, must have worked at least 40 hours
over 30 consecutive days during the financial year.
When can you access your super? What tax is payable when a super benefit is
Your super can generally be accessed when you meet one of the received as a lump sum?
following conditions of release: The table below summarises the tax payable in the 2007/08
• Retiring after reaching your preservation age financial year on a lump sum benefit paid from a taxed super
(55 to 60 – see below) fund (see Glossary).
• Leaving your employer after age 60
Component Tax payable
• Attaining age 65
• Permanent incapacity (specific requirements apply) Tax free Nil
• Death Taxable:
• Severe financial hardship (the amount is restricted and you • If under age 55 • 21.5%*
• If aged 55 to 59 • irst $140,000# is tax-free
must have received Commonwealth income support for six and the rest is taxed at
months consecutively, or nine months cumulatively if aged 55 16.5%*
or over) • If aged 60+ • Nil^
• Compassionate grounds (must be approved by APRA/ATO)
• Upon permanent departure from Australia for certain * Includes a Medicare levy of 1.5%.
temporary residents holding a specific class of visa # This low rate cap applies to the total of all taxable components (and post-
June 1983 components prior to 1 July 2007) that are taken as cash at
• Leaving the service of your employer who has also
age 55 and over, and is indexed periodically in increments of $5,000.
contributed into your super fund – restricted non-preserved ^ Lump sum payments received at age 60 or over do not need to be
benefits only. included in your tax return.
A transition to retirement pension (see Glossary) may also Where you have a tax free and taxable component, each lump
be commenced with preserved and restricted non-preserved sum withdrawal will include both components in the same
benefits if you have reached your preservation age (see below). proportion as these components make up the total interest
Note: You can access unrestricted non-preserved benefits at any time. immediately before the withdrawal.
What are the preservation ages? How much tax is payable on earnings from an
The age at which you can withdraw your super (ie the age at income stream?
which it’s no longer preserved) depends on when you were born. With account based pensions, immediate annuities and any other
The table below shows the current preservation ages. income streams commenced with superannuation money, no
tax is generally payable by the trustee of the fund on investment
Date of birth Preservation age earnings (eg interest, dividends, rent and realised capital gains).
Before 1 July 1960 55
1 July 1960 – 30 June 1961 56
How much tax is payable on regular income
1 July 1961 – 30 June 1962 57
The table below summarises the tax payable on the regular
1 July 1962 – 30 June 1963 58 payments from an income stream investment commenced from
1 July 1963 – 30 June 1964 59 a taxed super fund (see Glossary) after 1 July 2007.
1 July 1964 or after 60
Component Tax treatment
Tax free Tax-free
How long can I keep my benefits in super?
Effective 10 May 2006, you can keep your benefits in the • If under age 55 • Taxed at marginal rates
accumulation phase of a super fund for as long as you like. • If aged 55 to 59~ T
• axed at marginal rates,
less a 15% tax offset
(see page 27)
• If aged 60+ • Tax-free†
~ The same tax treatment applies to income streams commenced due to
† Income payments received at age 60 or over do not need to be included
in your tax return.
Where you have a tax free and taxable component, each income What are the life expectancy factors?
payment (or lump sum withdrawal) from an income stream
The table below outlines the life expectancies for males and
investment will include both components in the same proportion
females based on a range of ages. For example, if you are a
as these components make up the amount used to purchase the
55 year old male, your life expectancy is 25.92 years.
income stream investment.
If an income stream is commenced with non-super money: Age Male Female Age Male Female
50 30.39 34.51 71 13.41 16.29
• Part of the regular income payments will generally be
tax exempt. This is known as the deductible amount 51 29.49 33.58 72 12.75 15.53
and is calculated by dividing the amount invested by 52 28.59 32.66 73 12.11 14.78
your life expectancy (see below) or the fixed term of 53 27.69 31.73 74 11.50 14.05
the income stream. 54 26.80 30.82 75 10.90 13.33
• The rest of the income payments are taxable at your
55 25.92 29.91 76 10.32 12.63
56 25.05 29.00 77 9.77 11.94
57 24.19 28.10 78 9.24 11.27
What are the current marginal tax rates?
58 23.34 27.21 79 8.73 10.61
The following table summarises the tax rates that apply to
59 22.49 26.32 80 8.24 9.98
residents in the 2007/08 financial year:
60 21.66 25.44 81 7.77 9.38
Taxable income range Tax payable 61 20.84 24.57 82 7.32 8.81
$0–$6,000 Nil 62 20.04 23.71 83 6.89 8.27
63 19.24 22.85 84 6.48 7.76
$6,001–$30,000 15%* on amount over $6,000
64 18.46 22.00 85 6.11 7.28
$30,001–$75,000 $3,600 + 30%*
on amount over $30,000 65 17.70 21.15 86 5.77 6.83
$75,001–$150,000 $17,100 + 40%* 66 16.95 20.32 87 5.47 6.41
on amount over $75,000 67 16.21 19.49 88 5.20 6.02
Over $150,000 $47,100 + 45%* 68 15.48 18.67 89 4.95 5.66
on amount over $150,000 69 14.78 17.87 90 4.74 5.33
70 14.08 17.08
* These rates do not include the Medicare levy (see below).
What is the Medicare levy? Source: Australian Life Tables 2000–02
The Medicare levy is a levy of 1.5% that is payable on your
What tax offsets may be available?
taxable income on top of normal marginal tax rates. If you earn
less than $16,741 pa ($28,248 pa combined for couples) you 1 Superannuation pension and annuity tax offset
are exempt from the levy. If you earn slightly more than these
limits, the levy is phased in. An additional 1% surcharge applies For income streams purchased with superannuation money,
to singles with an income (including reportable fringe benefits) the taxable income payments attract a 15% pension offset
over $50,000 ($100,000 combined for couples) who have no between age 55 and 59#.
private health insurance. # The same tax treatment applies to income streams commenced due to
disability. If you are age 60 or over, you can receive unlimited tax-free
income payments from an income stream commenced from a taxed
super fund (see Glossary).
If you are between age 55 and 59 and receive $30,000
in taxable income payments from an account based
pension, you may be entitled to a tax offset of $4,500,
which can be used to reduce the amount of tax you are
required to pay.
ie $30,000 x 15% = $4,500
2 Senior Australians tax offset 4 Low income tax offset
This offset is available if you are over Age or Service Pension A tax offset of $750 is available if your taxable income is
age (see page 29). The maximum tax offset is reduced by $30,000 pa or less. The tax offset is reduced by 4 cents for
12.5 cents for each dollar of taxable income exceeding the each dollar of taxable income above $30,000 pa, and cuts
relevant shade-out threshold (see below). out at $48,750 pa.
Maximum Shade-out Upper Example:
offset threshold threshold If you are single with a taxable income of $35,000 pa,
Singles $2,230 $25,867 $43,707 you may be entitled to a tax offset of $550.
Couples (each) $1,602 $21,680 $34,496 ie $750 less 4% of ($35,000 – $30,000) = $550
Example: How are the income payments from an account
If you are single with a taxable income of $30,000 pa,
based pension determined?
you may be entitled to a tax offset of $1,713.
The minimum income that must be received each year from an
ie $2,230 less 12.5% of ($30,000 – $25,867) = $1,713
account based pension is calculated by multiplying the account
balance at the start of the pension (and on 1 July each year) by
a percentage that depends on your age – see table below.
3 Mature Age Worker tax offset
There is generally no maximum income payment. The exception
This offset (with a maximum of $500) is available if you are
is that a maximum amount of 10% of the account balance can
55 years of age and over, and earn taxable income from
be received from a ‘Transition to Retirement’ account based
personal exertion, including salary and wages, business
pension, regardless of your age.
income or personal services income. Taxable income from
these sources also needs to be within the following limits:
Age at start of pension Minimum % of account
(and 1 July each year) balance that must be received
Taxable income* Offset available
Under 65 4%
$0–$10,000 5% of taxable income*
$53,001–$63,000 $500 – [0.05 x (taxable
income* – $53,000)]
$63,001 or more Nil
* From personal exertion.
95 or more 14%
Example: Note: An income payment may be deferred until the following financial
If you are 55 years old, with a taxable income from year where an account based pension is commenced between 1 June
personal exertion of $57,000 pa you may be entitled and 30 June. A pro-rata minimum payment is required if it is commenced
to a tax offset of $300. before 1 June. The maximum income payment of 10% for a ‘Transition to
Retirement’ account based pension does not need to be pro-rated.
ie $500 less 5% of ($57,000 – $53,000) = $300
Peter turned 62 in June 2007 and on 1 July 2007 the
account balance of his account based pension was
$150,000. Based on his age, the minimum income he
must receive in the 2007/08 financial year is 4% of his
account balance (or $6,000).
ie $150,000 x 4% = $6,000
Note: If Peter had commenced a ‘Transition to Retirement’ account based
pension, the maximum income payment he could receive in the 2007/08
financial year would be 10% of his account balance (or $15,000).
What are the social security thresholds?
The following figures are updated quarterly by the Department of Family and Community Services and are current as at 20 September 2007.
Singles Max for Couples Max for
part pension part pension
Deeming thresholds (pa)* $39,400 – $65,400 –
Income Test thresholds (pa) $3,432 $38,759.50 $6,032 $64,792
Assets Test thresholds:
Homeowners $166,750 $529,250 $236,500 $839,500
Non-homeowners $287,750 $650,250 $357,500 $960,500
Age pension (max pa)# $14,131 – $23,504 –
* The current deeming rates are 3.5% on the first $39,400 for singles ($65,400 for couples) and 5.5% on the balance.
# These amounts include a Pharmaceutical allowance of $5.80 per fortnight for singles and $2.90 (each) for couples.
How are income stream investments treated under the Income Test?
The table below summarises the social security Income Test treatment of income stream investments in the 2007/08 financial year~.
Type Income Test treatment
Term certain annuities with a term These investments are deemed to earn 3.5% on the first $39,400 for singles
of five years or less (or $65,400 for couples) and 5.5% on the balance. This deemed income will
count towards the Income Test.
All other income stream investments The income payments received, less the deduction amount, will count towards
the Income Test. The social security deduction amount is calculated by dividing
the purchase price of the income stream by your life expectancy (see page 27)
or the fixed term of the income stream.
~ Certain income streams purchased before 20 September 2007 may also qualify for a full or part social security Assets Test exemption.
At what age may you be eligible for Age Pension benefits?
The minimum age you can be eligible for Age Pension benefits is 65 if male or between 60 and 65 if female (see table below).
Note: To qualify for the Age Pension, you will also need to meet an Income and Assets Test and satisfy certain other criteria. The minimum age to qualify for
Department of Veteran Affairs benefits is five years younger than those applying to Age Pension applicants.
Date of birth Age Pension age (for women)
Before 1/7/1935 60
1/7/1935 – 31/12/1936 60.5
1/1/1937 – 30/6/1938 61
1/7/1938 – 31/12/1939 61.5
1/1/1940 – 30/6/1941 62
1/7/1941 – 31/12/1942 62.5
1/1/1943 – 30/6/1944 63
1/7/1944 – 31/12/1945 63.5
1/1/1946 – 30/6/1947 64
1/7/1947 – 31/12/1948 64.5
1/1/1949 and later 65
Age Pension age – The age at which you are entitled to receive Age Restricted non-preserved benefits – Benefits that can only be
Pension benefits (see FAQs on page 29). withdrawn from the super system when you have met a condition of
release (see FAQs on page 26).
Assets Test – A test on your assets to determine your social security
entitlements. Under this test there is a certain amount of assets you Reversionary beneficiary – The person who you have elected at the
can have before your full entitlement to social security is reduced outset of the contract to receive your income stream on your death.
or cuts out. The level at which your pension begins to reduce varies
Rollover – When you move your super benefits directly to a super or
depending on whether you are single or married and whether you own
your home (see FAQs on page 29).
Self-employed – To qualify as self-employed, you need to receive less
Commutation – The process by which some (or all) of your income
than 10% of your assessable income, plus reportable fringe benefits,
stream is converted back to a lump sum.
from eligible employment.
Condition of release – Circumstance upon which you can withdraw
Self-Managed Super Fund (SMSF) – A super fund that has fewer
your super benefits (see FAQs on page 26).
than five members, where all members are trustees of the fund and all
Contributions tax – A tax of 15% applied to personal deductible and the trustees are members.
employer contributions made to a super fund.
Super fund – A fund that provides benefits generally for retirement
Deduction amount (social security) – The portion of your income purposes. Complying super funds are those that satisfy the conditions
stream payments not assessed as income for social security purposes specified for complying funds under the Superannuation Industry
each year. (Supervision) Act. Complying super funds are concessionally taxed.
Deeming – A method of assessing your entitlement to social security Tax free component – that part of a superannuation benefit that is
benefits under the Income Test. Deeming assumes that certain financial received tax-free.
investments earn a specified rate of interest, regardless of what they
Tax offset – An amount deducted off the actual tax you have to pay.
actually earn. Current deeming rates are 3.5% on the first $39,400
You may be able to claim a tax offset in your end of year tax return.
($65,400 for couples) of financial investments plus 5.5% on the
Sometimes a tax offset may be taken into account in calculating your
Employment termination payment – A payment made from an
Taxable component – the remainder of a superannuation benefit after
employer to an employee on termination of employment (previously
allowing for the tax free component. The amount of tax payable on the
known as an employer eligible termination payment).
taxable component may depend on the manner in which the benefit
Guaranteed period – the period the life company guarantees to make is received (ie lump sum or pension), the age of the recipient, the
the income payments from a lifetime annuity, regardless of whether you dependency status of the beneficiary (death benefits only) and the size
die during this time. of the benefit.
Income Test – A test on your total income to determine your Taxable income – Income (including capital gains) you receive after
entitlement to social security benefits. As with the Assets Test, the allowing for tax deductions.
amount of income allowed before your benefits are reduced depends on
Taxed super fund – a super fund that pays tax on contributions and
factors such as your marital status.
earnings in accordance with the standard superannuation tax provisions.
Mandatory employer contributions – Super contributions your
Transition to retirement pension – An income stream that can be
employer is required to make on your behalf by law. Includes
purchased with preserved and restricted non-preserved super benefits
Superannuation Guarantee (SG) contributions and employer
after reaching your preservation age.
contributions required under an industrial award or certified agreement.
Unit trust – An investment where your non-super savings are
Preservation age – The age at which you can withdraw your preserved
pooled with other investor’s savings to form a large fund, which is
super benefits – between 55 and 60, depending on your date of birth
professionally managed by investment experts.
(see FAQs on page 26).
Unrestricted non-preserved benefits – Benefits that have previously
Preserved benefits – Benefits that must be kept in the super system
met a condition of release and therefore can be withdrawn from a super
and cannot be withdrawn until you have met a condition of release (see
fund at any time.
FAQs on page 26).
Unsupported – A person who is not eligible to receive superannuation
Purchase price – The lump sum amount used to buy an income
from an employer in the current financial year.
stream. Although account based pensions can only be purchased or
commenced with super monies, immediate annuities can be purchased Voluntary employer contributions – include salary sacrifice
with either super or non-super monies. contributions and contributions made by an employer that are
discretionary (ie not mandatory).
Speak to your financial adviser about making the most of your retirement savings with these investment solutions.
How to contact us
MLC MasterKey Service Centre
For more information call MLC Service Centre from
anywhere in Australia on 132 652,
or contact your financial adviser.
PO Box 200
51238 MLC 12/07
MLC also has guides on wealth creation, wealth protection, debt management and superannuation.
Ask your financial adviser for more details.