Prev |

INDEX

| Next

13. TRAPs and Spouse Superannuation Benefit Transfers

Transition to retirement pensions (TRAPs) can be combined with the spouse superannuation benefit transfers to create a very powerful tax planning strategy. The strategy works best when one spouse is over age 60 and the other spouse is say age 50. The younger spouse pays large deductible superannuation contributions and then arranges for 85% (ie the after tax amount) of these contributions to be transferred to the older spouse, under the spouse superannuation benefit transfer rules. The older spouse can then draw the benefits out of the fund, either as a tax free pension or as a tax free lump sum (although for a number of technical reasons we prefer the tax free pension option).

A simple example may help explain this strategy.

Dr Sue is 50, and is married to Joe, a part time journalist, age 66. Joe works for more than 40 hours each 30 day period, and is therefore an employee for superannuation purposes. Joe is a director of Sue's practice trust’s corporate trustee, and is also employed as its bookkeeper.

Dr Sue arranges for her practice trust to pay deductible superannuation contributions of $50,000 for her and $25,000 for Joe, and Joe asks his newspaper employer to salary sacrifice $25,000 of his salary, so that he receives a total of $50,000 of superannuation contributions each year.

This means Dr Sue and Joe's combined tax liabilities have been reduced. Yes, more is paid into superannuation but because Joe is over age 65 there is no limit on the amount he can withdraw from the fund tax free.

There is a further tax saving in the hands of the SMSF, since the income earned from investing Joe’s benefits is now tax free. This can easily be $15,000 a year, depending on the amount of the benefits and how they are invested. And there is a further non-cash benefit in that Sue’s benefits are able to be accessed 11 years earlier, ie when Joe is 65, rather than when Sue is 65.

Salary sacrifice techniques approaching age 55 or age 60

In some cases pre-planning for a transition to retirement pension (ie a TRAP) can start ten or more years before the TRAP actually starts. This pre-planning is very simple and merely involves the doctor and/or the doctor’s spouse arranging for large deductible superannuation contributions to be made each year after say age 50 to reduce taxable income and minimize income tax payable.