Q. I am retired and receive a Public Sector Superannuation (PSS) defined benefit pension. I have a small balance in an industry superannuation fund. I don’t qualify for any government benefits other than the health insurance rebate. Can I make tax deductible personal contributions of up to $35,000 to my industry super fund each June and then making an annual withdrawal of that amount as a lump sum each July until I reach age 60? I understand the lump sum would be tax free but assessable income provided I stayed within the lifetime low rate cap of $195,000. The benefits seem to be a tax saving while still having access to that money if I need it. Does this sound too good to be true ?
A. You are eligible to claim a tax deduction for personal contributions to your Super fund provided no more than 10% of your assessable income (including Fringe Benefits or Superannuation Contributions) is derived from an Employer. As you are retired, I assume you have no employment income so therefore this should not be an issue.
Other requirements to claim a tax deduction would be that the contributions are made to a complying Superannuation fund and that you notify the fund that you intend to claim a tax deduction and the fund has acknowledged receipt of those instructions.
As you are under age 65, you will not be required to satisfy the work test of 40 hours in a 30 day period within the financial year that you make the contribution.
A Superannuation tax deduction will offset Income tax that you would pay on investment or pension income. Public Sector Superannuation (PSS) Pensions are considered to be taxable income by the Australian Taxation Office (ATO). As you are under age 60, tax would be withheld from your pension according to your marginal Income Tax rate less a 15% tax offset. However note, a portion of you PSS Pension was funded by your employer from the Consolidated Revenue fund. This amount is treated as coming from an untaxed source and therefore this portion is liable for tax at your Marginal tax rate without the 15% Tax offset. Check with PSS to determine what portion of your pension is considered untaxed.
Please note when you claim a tax deduction for a Personal contribution to Super, contributions tax of 15% applies to the Superannuation contribution amount, so please take this into consideration when calculating any tax saving.
In terms of withdrawing proceeds from the Industry Super fund, having retired, you have satisfied a condition of release so you are correct that provided you stay below the lifetime low rate cap of $195,000, the benefits will be tax free. If you exceed the lifetime low rate cap, tax would be levied on the excess amount at 15% plus Medicare levy.
The problem with this strategy is the ability to claim a tax deduction on Superannuation contributions is based on the Superannuation benefit being for retirement. Based on legislation (Sec290-150 ITAA1997), I believe the ATO may likely have an issue with your proposed strategy as by withdrawing the funds a short time later, the contribution is clearly not being made to fund for retirement purposes.