Nick Bruining Q+A: What tax advantages are on offer to pull cash from a term deposit and stick it in super?

Question

I am currently in the highest marginal tax bracket and have a number of term deposits earning various interest rates.

I am 58 years old and mortgage free.

I understand there may be tax advantages in placing this cash into superannuation.

Would this be a good strategy once I turn 60 as I understand I can access my super at any time?

Answer

You have correctly identified that there are many super funds that offer term deposits within their investment options.

However, be aware that for many of them the choice is often limited to a handful of banks and a limited range of terms. The rates on offer rarely reflect what you can obtain as a retail investor.

Also be aware that because the trustee is regarded as a single entity, collectively all the term deposits probably exceed the $250,000 threshold for the Financial Claims Scheme guarantee to apply.

By placing the money into super as a concessional contribution, you may be able to claim a tax deduction for the contribution, though a contributions tax of 15 per cent will apply. If your adjusted taxable income exceeds $250,000, the contributions tax would increase to 30 per cent, but that is still significantly less than your marginal tax rate of 49 per cent, including the Medicare levy.

You would be restricted to the annual $30,000 contribution cap, which includes what your employer contributes. If you make a non-concessional contribution, no contributions tax is deducted as no tax deduction can be claimed.

While there is a $120,000-a-year limit with non-concessional contributions, you can probably make use of the “bring-forward” rule, which will allow you to contribute three years’ worth of contributions in a single year — or $360,000.

Your understanding of the accessibility rules is slightly incorrect. To access super, you will need to have “ceased gainful employment since turning 60”.

That condition does not require you to cease all employment after turning 60. You could, for example, start and cease a part-time job after reaching 60 and that would satisfy the condition.

Question

My 71-year-old husband is expecting $20,000 from a UK redress scheme.

We are both on a Centrelink aged pension.

Does he need to advise Centrelink of this money and, if so, how is it likely to affect our Centrelink payments?

We were hoping to upgrade to a newer car using this money.

Answer

The payment itself is not regarded as income for income means-test purposes, but it will need to be disclosed to Centrelink within 14 days of it hitting your account.

How it impacts your pension payment will depend entirely on your situation before the $20,000 arrives. If this amount puts your total assets over $417,000 then each extra $1000 beyond that will result in a $3-a-fortnight reduction in your combined pension.

That total includes all of your existing financial assets plus the scrap value of your personal effects and contents and the value of your car, if sold privately. Typically, we use a total value of $10,000 for all personal effects and contents, not the insured values.

If you use the money to buy your new car, remember that it depreciates the moment it leaves the car yard. You could then depreciate the value of the new car by 20 per cent. Use the base price of the car, do not include the cost of any add-on features such as tinting or an extended warranty.

If you are not homeowners, the asset test limit increases by $252,000.

If the $20,000 remains in the bank account and you are being income tested — perhaps because of a UK pension or other income — the deeming system would be used and the deemed income from the $20,000 would be, at most, $17.31 a fortnight.

If this additional income puts you over the income free area for couples of $360 a fortnight, you would lose 50¢ per $1 at most, $8.65 a fortnight.

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