How to make your taxable super component tax-free

My wife of 66 years will be retiring soon and will be starting an account-based pension. Her super contribution has a substantial amount in the taxable component, and I have read about a re-contribution strategy to bring this to a tax-free status. Our effort to get the super fund to inform us of how to go about this has been ignored, with no feedback.

Retirees often get confused, believing that all withdrawals from super are tax-free. It is more complex than that, although it only becomes relevant to your family when you fall off your twig.

Retirees often get confused, believing that all withdrawals from super are tax-free. It is more complex than that, though its unlikely to benefit you directly.Credit:Louie Douvis

To explain, since 2007, a super benefit consists of two tax components. The tax-free component contains money that you contribute without claiming a tax deduction and is a fixed number of dollars.

The taxable component contains everything else, i.e. all deductible contributions plus growth received by the fund, so this component changes every day. Unfortunately, many super fund statements do not show these figures, so you need to phone and specifically ask for this breakdown.

You cannot withdraw either component alone, but only in the ratio that they exist.

On death, a super benefit passes tax-free to a spouse, child under 18 or another tax-dependant person. A child over 18, can receive the benefit directly but the taxable component is taxed 15 per cent plus Medicare, i.e. $17,000 in every $100,000 and this is seen as taxable income which can affect the recipient’s family tax benefit or pension.

Once your benefit is non-preserved, e.g. after age 65, you can withdraw some or all of your super and recontribute it as a ‘non-concessional’ contribution subject to the normal caps of $110,000 in one financial year, or bring forward $330,000, thus converting this into a tax-free component. It won’t help you at all, but your children will be grateful, unless you spend it all.

My husband is 67 and earns $115,000. While he gets 15 per cent super, he has only accumulated $50,000. I am 53, earning $100,000, salary sacrificing to the max and my super balance is $235,000. I plan to work until 63-65. We both have about $50,000 to $65,000 in carry-forward allowances, due to a period of unemployment/redundancy. Our house is worth about $2 million, and we have three children 11-21 years old, so not interested in downsizing just yet. We have a mortgage of $350,000 for a house in Sydney which will need some repairs, $10,000 in an offset account and some small managed funds. Recently, we got pre-approval for a property loan of up to $850,000 using our home as security and a facility of $75,000. What is the best way to try to build wealth before our retirement? I realise we may have left things a bit late.

You already have an investment property in Sydney but don’t mention its value or whether it is positively or negatively geared. It doesn’t sound as though you can afford a negatively geared property in a falling market, nor one that needs expensive repairs.

Your first step could be to sell this, clear the debt and use your carry forward unused concessional contributions to both reduce any CGT and also build up your super. (For other readers, you can carry forward and use up unused concessional contributions, but only going back five years. Since this was introduced in July 2018, a 2018–19 unused cap amount that is not used by the end of 2023–24 will expire. Note that the concessional cap was $25,000 until July 2021 when it rose to $27,500. You or your accountant can find your carry forward amount at my.gov.au.)

This is not the time in the investment cycle, or this late in your career, to take on debt in the hope of levering up your returns. If you want to use gearing, you can find geared equity and property investment options within super funds, but I wouldn’t recommend it. Just work and save as much as possible over the next 10 to 15 years.

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

If you have a question for George Cochrane, send it to Personal Investment, PO Box 3001, Tamarama, NSW, 2026. All letters answered. Help lines: Australian Financial Complaints Authority, 1800 931 678; Centrelink pensions 13 23 00.

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