Transition to Retirement – Want to Stop Paying Tax?

By Jason Fittler

Tax! No one likes paying tax. Many of you would be aware that I started in the financial sector as an accountant and I still practice as one.
The one thing accountants focus on is reducing their client tax, why? Because that is the number one complaint from clients. “I am paying too much tax… How, can I avoid this?”  You must remember, “If you are paying a lot of tax it means you’re earning a lot of money”.

The above statement is true; however, you can not have your cake and eat it… Well, so we thought. On 1 July 2007 this all changed. The new super rules meant that you can indeed earn lots of money and pay no tax. The catch, you need to do this through your super fund. This is where transition to retirement rules come in.

In short it works like this, if you are over the age of 55 years you can start an account based pension from your super while at the same time salary sacrificing your income up to your age based limit into your super fund. What does all of this mean?  In short you pay less tax.  Let’s look at an example.

Mr. Smith is 55 years old and is currently working full time; he intends to retire at age 60 and has $500,000 in super. Mr Smith earns $70,000 per annum and pays around $16,000 per annum in tax.

He decides to start a Transition to retirement Pension which allows him to draw between 4% and 10% of the value of his pension each year. As such he can draw down between $20,000 and $50,000. He will then salary sacrifice all of his income into his super as he is comfortable living on $50,000 per annum.

Savings are as follows;

1. By salary sacrificing all of his income he is reducing the tax bill from $16,000 per annum to $10,500 per annum. The $10,500 is the contribution tax payable by the super fund. This is saving of $5,500 pa or a 7.8% increase in his take home pay.

2. The funds coming out of his super fund will be taxed at his marginal rate but he will receive a 15% rebate for tax which the super fund has already paid. So tax payable would be $10,300 less 15% rebate of $7,500. He would then pay tax of $2,800 on these funds.

3. His take home pay would reduce from $4,500 per month to $3,900 per month. Making very little difference to quality of life however at the same time growing his super rapidly.

If paying less tax and having more money in retirement interests you, then make sure you come along to our seminar on the 22nd of May on Transition to Retirement.

Want to know the best part; once you turn 60 and retire you will no longer pay any tax.

If you can’t wait to find out more give us a call on 07 4771 4577 and we will review your position now.