The Australian Government has inadvertently opened another superannuation loophole that enables people to simultaneously put money into superannuation and then withdraw it, thereby saving on income tax:
When parliament approved the Coronavirus Economic Response Package Omnibus Bill 2020 last week, they put no new restrictions on how people could contribute into super.
This means that it’s possible to voluntarily contribute $10,000 of your pre-tax income into super over the next three months, and also apply to withdraw a $10,000 lump sum from super tax-free at some point before June 30.
You still end up with $10,000 in your pocket. But if you contribute through a salary sacrifice arrangement with your employer and stay within the concessional contributions limits, your voluntary contributions will be taxed at 15% rather than your marginal personal tax rate.
When you pull out the funds from super, the withdrawal is tax free. And, you will be able to do the same thing again between July 1 and late September…
This chart illustrates the sums involved.
It applies to a very specific scenario: a working age individual who is on 9.5% compulsory super contributions, has an annual salary below $158,000, has made no previous voluntary contributions to super in 2019-20, and who elects to make a “simultaneous” (within 2019-20) pre-tax contribution to and withdrawal of the maximum possible $10,000 from super over the next three months.
It suggests that, as long as an individual in this situation has an annual income of approximately $30,000 or more, there is a prospective tax saving from rearranging his or her financial affairs over the next three months.
These types of superannuation tax arbitrages are nothing new.
In 2005, former Treasurer Peter Costello implemented the mother of baby boomer bribes in the form of the “transition-to-retirement” (TTR) rules, which allowed those aged over 55 to legally minimise their tax by salary sacrificing up to $35,000 into a superannuation account and then simultaneously withdrawing the funds as income. In turn, TTR effectively allowed high income earners to reduce their marginal tax rate from 45% to 15% on the last $35,000 of their income.
Super Guide described Costello’s TTR rules as the “retirement magic pudding” since “you could have your cake and eat it too”:
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TTR pensions were originally designed by the Howard Government to allow people to reduce working hours in the lead-up to retirement and replace all or some of the pay they lost by drawing an income stream from their superannuation.
That was the idea, but it wasn’t long before they were being used as a tax dodge. People over 60 could draw a tax-free pension from age 60 while still working full time and salary sacrifice back into super, growing their super and consuming it at the same time. Hence the Magic Pudding analogy.
The TTR rules were modified in 2017 to make them a little less generous. Nevertheless, they still represent a tax dodge, especially for workers aged over 60, as the below example illustrates:
Jill is 58 and earns $100,000 a year which puts her in the 39% tax bracket (including the Medicare Levy). She has $200,000 in super and wants to keep working full-time but wishes she could do more to increase her retirement savings. As she doesn’t have the spare cash to make extra contributions, she decides to take advantage of a TTR strategy.
Her employer currently pays Super Guarantee contributions of $9,500, allowing her to salary sacrifice $15,500 into super and stay within the concessional (pre-tax) super contributions cap of $25,000 a year. This reduces her income tax (concessional contributions are taxed at 15% rather than her marginal tax rate of 39%), but it also reduces her take-home pay.
To make up the difference, Jill transfers $200,000 into a TTR pension. Under the rules, she must withdraw between 2% ($4,000) and 10% ($20,000) a year. To maintain her current level of take-home pay, she withdraws around $12,500 a year.
As Jill is not yet 60, she pays tax on her TTR pension but receives a rebate of 15%. The bottom line is an overall tax saving of $800 a year which will increase her super by the same amount. Admittedly, this is not a life-changing amount. However, when Jill turns 60 and her TTR pension is tax-free, her tax savings (and super boost) will be over $3,600 a year.
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The only difference between this latest rort and Costello’s TTR rort is that it allows younger workers to also arbitrage the tax system.
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness.
Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.
