Ask An Adviser - Should I Put My Cash In An At-call Account Or My Super? (1)

Top answer provided by:

David Walter

View

Hi Michael,

Thank you for your question and the information you have provided. To answer your question, with tax implications in mind, about what to do with your cash in the bank, there are several strategies available to you. I will outline some of your options and the pros and cons for you below. Please note that these options assume that your wife is currently under age 60.

At call interest account (assume 5% interest) – not tax effective

The benefits of this strategy are that you have direct access to the cash if needed, no reduction in capital value and a solid rate of return, paid monthly.

Unfortunately, this strategy is not very tax effective. You are already in the 19% tax bracket and any interest would be taxed at 19%. With additional share dividend income, your income could exceed the $45,000 threshold for the next tax bracket where the rate of tax is 32.5%.

I don’t believe this strategy would be very tax effective for you based on the information provided.

Superannuation – reasonably tax effective

There are a number of options for you and your wife within the concessionally tax superannuation environment. Some strategies depend on the current superannuation account balances of you and your wife. For the purposes of this article, I will assume that you have balances prior to 1^st July 2023 of under $500,000, have not made any non-concessional contributions to superannuation in the last 3 years and have not maximised your concessional contributions over the past 5 years.

Step 1:  Maximise superannuation non-concessional contributions

You and your wife have the ability to make non-concessional contributions to superannuation to invest in a concessionally taxed environment.

You can contribution $110,000 each per year, or $330,000 each utilising the 3-year bring forward rule.

This means a total of $660,000 can be contributed to superannuation now and another $660,000 in 3-years’ time (assuming no changes to the rules between now and the commencement of the 2027 financial year).

Michael, to achieve the maximum contribution amounts, because you are over 60 and retired you can make tax free withdrawals from your superannuation fund and re-contribute those funds (the withdrawal from super should include sufficient funds to retain a cash buffer in your bank account for emergencies). This changes the tax components of your superannuation fund on the withdrawn and recontributed funds from being a taxable component to a tax-free component. This has estate planning benefits, but that is a topic for another day.

This step will have all of your cash funds invested in an environment where the earnings are taxed at a maximum of 15% - less than your marginal tax rate of 19% and your wife’s marginal tax rate of 32.5%.

Step 2: Convert Michael’s superannuation to pension phase – most tax effective

By converting your super from accumulation to pension phase there are two significant changes that will benefit you.

Firstly, you will need to withdraw 4% of the fund’s value as a tax free income stream. Secondly, the tax rate on earnings within the fund reduces to 0%.

For example, if you have a super pension with an account balance of $500,000, you will receive $20,000 as a tax-free income stream in the first 12 months. This boost to cash flow could allow your wife to utilise salary sacrifice contributions to reduce her taxable income to under $45,000 per year and under the 32.5% marginal tax rate threshold without impacting the overall household cash flow.

Step 3: Sale of rental property

The sale of your rental property will be a Capital Gains Tax (CGT) event. If the sale occurs prior to you turning 67, you may be able to reduce the amount of CGT payable by making concessional contributions to superannuation where the tax rate is 15%. Assuming you make no concessional contributions in the 5 years prior to the sale, you can use up 5 years’ worth of concessional contributions if your super balance is below $500,000 at start of financial year. A sub $500,000 balance can be achieved by withdrawing funds if necessary.

In other words, 5 years’ of unused concessional contributions (5 x 27,500) adds up to $137,500 available to contribute to superannuation. In this scenario, the applicable superannuation tax rate of 15% would mean paying $20,625 in tax while the balance of $116,875 is retained in your super fund.

This compares favourably to a scenario in which the assessable capital gain is added to your income and taxed at marginal tax rates. In this instance, you would be left with $98,808 from a sum of $137,500 once income tax ($35,942) and Medicare levy ($2,750) were paid.

Directing funds to super would therefore offer a healthy saving of $18,067 before factoring in that any additional income would be assessed at the 37% marginal tax rate.

Summary

There is a lot to absorb here! I suggest you seek professional advice from a Financial Planner to take advantage of the concessionally taxed superannuation environment and an Accountant to get an indication of a strategy to minimise your potential future CGT.

Before you do any of the above, you and you wife need to work out what would like to do in your retirement. The best financial plan is the one that meets your goals and objectives so you are able to do what you want, when you want and sleep well knowing your financial future is secure.

While the Adviser Ratings Website facilitates the question and answer functionality, all such communications are between users and authorised financial advisers, of which Adviser Ratings has no affiliation. Adviser Ratings is not the advice provider and does not provide financial product advice and only provides information that is general in nature.

Article by:

David Walter

Was this helpful content?Let others know - share and vote-up