The $2 billion Tax Mistake – Are You Making It?

More than 1.5 million Australians aged 65 or older are believed to be needlessly paying 15 per cent on their superannuation savings, when they could easily switch their savings into a tax-free environment.

A recent report published by the Actuaries Institute, It’s Time: Here’s How to Turn Superannuation into a Retirement Income System, estimates these ‘stranded balances’ total a massive $326 billion and the owners of these accounts are paying $2 billion in tax on their superannuation savings which they could avoid.

That’s $2 billion  that could be added to their superannuation account, helping to provide for their retirement. So how does this happen and how can you fix it?

Many people are not aware that superannuation is taxed. There’s a 15 per cent contribution tax levied every time you contribute to super and claim it as a tax deduction, such as happens every time your employer pays in to super on your behalf.

The funds you have sitting inside your super account are also taxed. A 15 per cent tax is also levied on all income received from investments as well as 15 per cent incurred on any capital gains achieved by those investments.

However, once you turn 65 years of age you can largely avoid this tax.

To do this, you simply need to convert part of your super from being in accumulation mode and subject to the 15 per cent tax to being in pension mode where all the assets supporting your pension become tax free.

The one catch is once you convert your super to pension paying mode, neither you nor your employer can contribute to the account. However, there is a ‘work around’ to resolve this issue.

Simply set up two super accounts, one in pension paying mode, which is tax free, and one in accumulation mode, which can accept contributions. When you have formally retired you simply roll-over the funds from your accumulation mode into your pension account which is allowed.

All Australians who reach 65 years of age can decide to move all or part of their savings into pension paying mode and if you have reached 75 years of age, when your ability to contribute to super reduces further, you should consider converting all your super to pension paying mode.

Sound complex? Yes, it is but remember there are total savings of $2 billion in getting this strategy right and if you need help, please just contact me. As the great Kerry Packer once said, don’t pay more tax than you need to.