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Long Term Tax Planning

February 17th, 2007 at 08:09 pm

Although it's always risky to make long term plans based on the assumption of status quo - especially where tax laws are concerned - the recent changes to the Australian Superannuation rules bring some interesting long term tax planning ideas to mind.

Basically the new Superannuation rules are that any withdrawals (lumpsum or pension payments) from a "tax paid" superannuation fund will be tax free after age 60. One possible side effect of this change will be to make it more tax-efficient to realise capital gains on investments held outside of super once you are retired, over 60, and getting most of your income as an untaxed superannuation pension. The ATO information about the new rules states that "Individuals will not need to include lump sum superannuation benefits and superannuation pensions from a taxed fund made after 30 June 2007 in their tax returns. Superannuation funds will not need to report benefit payments made after 30 June 2007 to the ATO for RBL purposes." Presumably this would mean that such amounts are not taken into consideration when calculating capital gains tax for your personal tax return during retirement.

I'm thinking that I'll be able to live off my tax-free superannuation benefits during retirement, make use of margin lending to offset any non-superannuation investment dividends with tax-deductible margin loan interest, and thus have almost no taxable income during retirement.

This should mean that I could sell off, say, $100,000 worth of my non-superannuation portfolio each year during my retirement and have a fairly low capital gains tax liability each year (as the CGT calculation is based on the normal personal marginal tax rates applied to 50% of the realised gain for assets held more than 12 months).

For example, selling $100,000 worth of my portfolio during a retirement tax year, with say 75% of the amount being a "capital gain" would result in a CGT bill of:
75% realised capital gain = $75,000
50% discount applied = $37,500 taxable CG
tax on $37,500 = $6,600 (using 2007 tax rates)

I'm trying to do a spreadsheet comparison of holding my current non-superannuation geared stock portfolio until retirement and liquidating it during retirement using this technique, vs. liquidating the geared stock portfolio now (and paying considerable capital gains tax due to my taxable salary income) and contributing the after-tax amount into my superannuation account where concessional tax rates would apply to the investments. Regardless of what the modelling tells me is the more tax-efficient plan, putting all my investments inside superannuation may not be a wise choice due to the restrictions on accessing any superannuation investments prior to "retirement age". Although I do have an adequate undeducted, non-preserved amount within my superannuation account that could be withdrawn in an emergency.

I'll let you know if my spreadsheet modelling comes up with any useful insights.

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