Nick Bruining Q+A: The generous tax offsets that give pensioners a helping hand

Question

I am a little confused about a tax issue related to the article on death tax in last week’s Your Money.

You indicated that a couple that choose to close their superannuation and invest the money in bank accounts could earn more than $64,000 before they have to pay tax.

How can they earn so much when the tax-free threshold is $18,000 each? Multiplied by two, that would equal $36,000?

Answer

There is a common misunderstanding about individual tax liabilities when the published marginal tax rate tables show that from zero to $18,200 the tax rate is nil.

Above $18,200 income tax is payable at various rates until the top rate of 45 per cent is reached when income exceeds $190,000 a year.

To add to the confusion, and in addition to income tax, the Medicare levy of at least 2 per cent is payable, and can be higher if the person does not have adequate private health insurance. Complicating the calculations of tax owed are the various tax credits or offsets that are applied, and these reduce your final tax bill.

Typically, these are targeted at low-income earners and shade out as your taxable income increases.

The first of these, the low income tax offset, applies to all Australian resident individual taxpayers. The effect of the LITO credit means a person can earn up to $22,866 a year before being liable for any tax or Medicare levy. It is why financial advisers do not recommend strategies that reduce taxable income below this level, because there is no point.

That’s particularly the case when someone is salary-sacrificing income to superannuation because at least 15 per cent contributions tax will be deducted — even if their personal tax rate is zero.

Once you reach 67 — or age pension age — the seniors and pensioners tax offset kicks in.

The SAPTO is added to the LITO. A single senior with both the SAPTO and LITO can earn $36,960 before they’re liable to pay income tax. For a couple, thanks to the LITO and SAPTO, each can earn $32,774 — or a combined $65,548 — which is, of course, higher than the number mentioned in last week’s answer.

When weighing up whether to continue using super, consider that you can generate 5 per cent a year, risk-free, in a major bank’s account on amounts up to $2 million.

A couple would need about $1.31m in combined bank accounts to generate anywhere near the $65,548 figure.

Question

In last week’s Your Money you answered a question about a novated lease being used to purchase an electric vehicle.

I have recently separated from my partner and note that he has since purchased a new EV. I have been told by others that this was salary packaged.

Does the exemption to fringe benefits tax also mean that other income-tested payments such as child support payments might be reduced from a similar reduction to taxable income?

Answer

While a fully electric vehicle up to certain limits is exempt from FBT, the full value of the fringe benefit is still classified as a reportable fringe benefit and contributes to a figure called adjusted taxable income.

ATI is used for a range of income-tested financial liabilities and concessions, including child support obligations.

It includes the pre-tax assessable income from all sources including employment, investments, some tax-free pensions or benefits — including some from Centrelink — and overseas income.

Added to these are voluntary concessional contributions to superannuation and an add back of investment losses, typically those associated with negative gearing.

ATI also includes reportable fringe benefits provided by an employer, often through salary-packaging arrangements.

In this case, however, the value is “grossed up” to reflect the FBT that might have been paid, but for the exemption.

The grossing up process often sees the ATI figure increase, which in some cases would result in a higher child support liability, not a reduced liability.

Nick Bruining is an independent financial adviser and a member of the Certified Independent Financial Advisers Association