On the economic news front, there was some good news. Consumer prices eased by more than expected in October. The news that inflation may have been tamed means interest rate rises may be behind us, for now. The positive data also led to a jump in the Australian dollar, taking it to a new four-month high.
Retail spending slowed in October after a short-lived boost in August and September. But, in a further sign of good times ahead, business investment in the September quarter increased by 0.6% to almost $40 billion.
In mixed outcomes for sharemarket investors, there were some devastating lows this year, and a flat performance as November ended, but the ASX200 is up 4 points since the beginning of the year. The unemployment rate has increased slightly to 3.7% with an extra 27,900 people out of work in October.
Overseas, China’s plan to bolster support for infrastructure drove iron ore prices 36% higher than the low in May. Although prices slipped $4 in November from a one-year high of $138 per tonne. While oil prices have steadied with cuts to production on the table to reduce stocks. Brent crude ended the month at around $83.
Retirement income and tax
How much tax you pay on retirement income depends on your age and the type of income stream.
For most people, an income stream from superannuation will be tax-free from age 60.
How super income streams are taxed
Types of super income streams
Income from super can be an:
account-based pension — a series of regular payments from your super money
annuity — a fixed income for the rest of your life or a set period of time
What is taxable and what is tax-free
Part of your super money is taxable, made up of:
salary sacrificed contributions
personal contributions claimed as tax deductions
Part is tax-free, made up of:
If you’re age 60 or over
Your entire benefit from a taxed super fund (which most funds are) is tax-free.
If you’re age 55 to 59
Your income payment has two parts:
taxable — taxed at your marginal tax rate less a 15% tax offset
tax-free — you don’t pay anything more
If you’re age 55 or younger
You can usually only access your super if you experience permanent incapacity. If this happens, you’ll be taxed the same as people aged 55 to 59.
If accessing super for a different reason, such as severe financial hardship, your income payment has two parts:
taxable — taxed at your marginal rate tax
tax-free — you don’t pay anything more
Tax on other types of super funds
Defined benefit super fund
If you’re with a defined benefit super fund, you’ll get a statement from your fund before becoming eligible for your benefit (super money). This will tell you how much of your benefit is taxable and how much is tax-free.
Untaxed super fund
Some government super funds don’t pay regular tax on contributions. These are known as ‘untaxed funds’. If you’re a member of an untaxed fund, you pay tax when you access your money. Check with your fund to find out more.
Self-managed super fund (SMSF)
If you’re part of an SMSF, how you access your money depends on the ‘trust deed’ (rules).
Tax on transition to retirement income streams
With a transition to retirement (TTR) income stream, you can access your super while working. To get one of these pensions, you must have reached your preservation age (between 55 and 60).
You can take out up to 10% of the balance each financial year. You can’t withdraw it as a lump sum.
You pay the same amount of tax as on other super income streams, according to your age. Investment returns on TTR pensions are taxed at up to 15%, the same as a super accumulation fund.
Tax on non-super income streams
With an annuity bought with money from outside super, you get a fixed income for a set period of time. This pension income, less a deductible amount, is taxed at your marginal tax rate.
The deductible amount is the part of your original money (capital) coming back to you with each pension payment.
Get help if you need it
Find out more about tax on super on the Australian Taxation Office (ATO) website.
Services Australia’s Financial Information Service offers free seminars on topics such as retirement income and pension options – or feel free to contact us for more help.
Reproduced with the permission of ASIC’s MoneySmart Team. This article was originally published at https://moneysmart.gov.au/retirement-income/retirement-income-and-tax
Important note: This provides general information and hasn’t taken your circumstances into account. It’s important to consider your particular circumstances before deciding what’s right for you. Although the information is from sources considered reliable, we do not guarantee that it is accurate or complete. You should not rely upon it and should seek qualified advice before making any investment decision. Except where liability under any statute cannot be excluded, we do not accept any liability (whether under contract, tort or otherwise) for any resulting loss or damage of the reader or any other person. Past performance is not a reliable guide to future returns.
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Trusts and the new super tax rules
Ensuring you’ve structured your finances tax-effectively is always a concern, but with new tax rules for super on the horizon, many people with large balances are considering alternative vehicles to save for retirement.
Unsurprisingly, this has sparked a renewed interest in an old favourite – trusts.
Trusts have always been popular in Australia, with the government’s Tax Avoidance Taskforce (Trusts) estimating more than one million were in place in 2022.
Separating ownership using a trust
The popularity of trusts for business, investment and estate planning purposes is due to both their flexibility and inherent benefits, particularly when it comes to managing your tax affairs.
At their heart, trusts are simply a formal relationship where a legal entity holds property or assets on behalf of another legal entity.
This separation means the trustee legally owns the assets, but the beneficiaries of the trust (such as family members) receive the income flowing from the assets.
A common example of a trust structure is a self managed super fund (SMSF), where the fund trustee is the legal owner of the fund’s assets, and the members receive investment returns earned on assets held within the SMSF trust.
Which trust is best?
There are many different types of trusts, with the appropriate structure depending on the financial goals you’re trying to achieve.
For small businesses and families, the most common trust is a discretionary (or family) trust. These vehicles are very flexible and can be used with immediate and extended family members, family companies or even charities.
In a discretionary trust, the trustee has absolute discretion on how both the income and capital of the trust are distributed to various beneficiaries.
This gives the trustee a great deal of flexibility when it comes time to allocate income to family members paying different marginal tax rates.
Advantages of a trust structure
Discretionary trusts offer tax, asset protection, estate planning and property holding benefits.
They can also assist with the accumulation of assets for younger generations within your family and provide opportunities for the discounting of capital gains.
For small businesses and farming operations, a discretionary trust can be used to provide valuable asset protection. If your business goes bankrupt or a beneficiary is divorced, creditors will be unable to access assets or property held within the trust as it is the legal owner of the assets.
Building wealth outside super
With new tax rules for super fund balances over $3 million being introduced, trusts also provide a useful tool to consider for continued wealth accumulation.
Unlike super funds, trusts don’t have annual contribution limits, restrictions on where you can invest or borrowing limits. Money can be added and removed from the trust as necessary, providing significant financial flexibility.
Discretionary trusts can also be used with vulnerable beneficiaries who may make unwise spending decisions. The trustee can decide to provide a spendthrift child or a family member with a gambling addiction regular income, but not large capital sums.
Holding ownership of assets within a trust is useful for estate management, as the assets will not be part of a deceased estate, avoiding the possibility of a Will being challenged.
Trusts aren’t always the solution
Although trust structures provide many benefits, there are also tax issues that need to be considered. For example, any trust income not distributed to beneficiaries is taxed at the top marginal rate.
Trusts can be expensive to set up, administer and dissolve when they are no longer needed and the trustee’s actions are restricted by the terms of the trust deed.
If a family dispute arises, running a trust can become difficult and making changes once it is established isn’t easy.
If you would like to find out more about trusts and whether one is appropriate for your business or family, call us today.
How to give back
Australia is a giving country, but we often give in kind rather than financially.
Whenever there is a disaster here or overseas, Australians rush to donate their time, household goods and cash. However, we still lag other countries when it comes to giving money.
According to Philanthropy Australia, our total financial giving as a percentage of Gross Domestic Product is just 0.81 per cent, compared with 0.96 per cent for the UK, 1 per cent for Canada, 1.84 per cent for New Zealand and 2.1 per cent for the US.i
Currently the number of Australians making tax deductible contributions is at its lowest levels since the 1970s.ii Despite this, the Australian Tax Office reports that deductible donations claimed by individuals rose from $0.74 billion in 1999-2000 to $3.85 billion in 2019-20.iii
Considering an estimated $2.6 trillion will pass between generations over the next 20 years, the opportunities for increasing our financial giving abound. Philanthropy Australia wants to double structured giving from $2.5 billion in 2020 to $5 billion by 2030.iv
Many ways to give
There are many ways of being philanthropic such as small one-off donations, regular small amounts to say, sponsor a child, donating to a crowd funding platform or joining a giving circle.
For those with much larger sums to distribute, a structured giving plan can be one approach.
You can choose a number of ways to establish a structured giving plan including through a public or private ancillary fund (PAF), a private testamentary charitable trust or giving circles.
Whichever way you choose, there are attractive tax incentives to encourage the practice.
The type of vehicle will depend on:
the timeframe of your giving
the level of engagement you want
whether you want to raise donations from the public
whether you want to give in your lifetime or as a bequest
whether you want to involve your family to create a family legacy.
Private ancillary fund
A private ancillary fund is a standalone charitable trust for business, families and individuals. It requires a corporate trustee and a specific investment strategy. Once you have donated, contributions are irrevocable and cannot be returned. To be tax deductible, the cause you are supporting must be a body identified as a Deductible Gift Recipient by the Australian Tax Office.
The benefits of a PAF are that contributions are fully deductible, and the deductions can be spread over five years. The assets of the fund are exempt from income tax.
The minimum initial contribution to a PAF is at least $20,000. The costs of setting up a PAF are minimal and ongoing costs are usually about 1-2 per cent of the value of the fund.
Each year you must distribute 5 per cent of the net value of the fund to the designated charity.v
Testamentary charitable trust
An alternative to a PAF is a testamentary charitable trust, which usually comes into being after the death of the founder. The governing document is either a trust deed or the Will.
With a testamentary charitable trust, trustees control all the governance, compliance, investment and giving strategies of the trust. The assets of the trust are income tax exempt. The minimum initial contribution for such a fund is usually $500,000 to $2 million.vi
Philanthropy through structured giving still has a long way to go in Australia. The latest figures for total giving in Australia is $13.1 billion, of which $2.4 billion is structured giving. Currently the number of structured giving entities stands at just over 5400.vii
As the baby boomers pass on their wealth to their families, there is a wide opening for some of this money to find their way into charities and causes through structured giving.
If you want to know more about structured giving and what is the right vehicle for you to help the Australian community at large, then give us a call to discuss.
i, iii https://www.philanthropy.org.au/wp-content/uploads/2022/11/7480-PHA-Giving-Trends-and-Opportunities-2023-1.2.pdf
v, vi https://www.philanthropy.org.au/guidance-and-tools/ways-to-give/choosing-the-right-philanthropic-structure/
vii A Blueprint to Grow Structured Giving 2021 – Philanthropy Australia
This advice may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please seek personal financial advice prior to acting on this information. Investment Performance: Past performance is not a reliable guide to future returns as future returns may differ from and be more or less volatile than past returns.