I had two superannuation accounts and recently consolidated them to save on fees. The receiving fund has informed me that I will lose $18,500 to the tax office due to the transfer of an untaxed component of $123,000. Why, when transferring money between superannuation funds, is there any tax? And surely, someone should have flagged that this tax will be charged before the consolidation happened.
An untaxed component within super is fairly rare these days, and so I can easily see how this might have been missed. For most of us, when our employer makes contributions into our super fund, 15 per cent tax is collected by the fund and passed onto the tax office.
Combining two super accounts? Beware any untaxed portions.Credit: Simon Letch
For untaxed super, this 15 per cent has not been deducted at the time of contribution. Untaxed super is no free lunch, though. The can is just being kicked down the road. At some point untaxed super will be taxed, usually at the point that it converts into an income stream. Rollovers are another instance, as you have just experienced.
Untaxed super only occurs for some federal and state government workers, and can also arise from insurance payouts. Untaxed super can give you an inflated sense of how much super savings you have available for your retirement.
It would have been preferable if you had been made aware in advance that this tax would be deducted, however you have not been disadvantaged. At some point, all untaxed super will have tax levied and will become taxed super. You’ve got that conversion behind you now.
We are hoping to pack up our family and head overseas for a year. My wife and I are 40 and 42 with three young kids. We’re looking to sell our house before we go. Once we pay off our mortgage we should have about $900,000 in savings. We are wondering what you suggest we do with that money for the year. We will need to access some for travel, and then look to buy a new house when we return.
Wow, that sounds like a fantastic plan, good on you! Given your one-year time frame, and need for some access, I would be keeping these proceeds in the bank. Even a conservative/balanced investment fund would have a suggested minimum time frame of three years.
Hunt around for the account paying the best interest. Some of the options you see will require a deposit every month and no withdrawals.
Give this serious consideration, as if you did a withdrawal say every second month, then you would only get the high interest rate for half the time your money is invested, in which case you may have been better off in an account paying a slightly lower rate, but without these restrictions.
One extra thought. Could you retain your home and rent it out for the year? If the rent covered the mortgage, ideally with a bit to spare, it might be viable. Your current plan has you sitting on the sidelines of the residential property market for a year, which is a risk.
If you could retain the property, you be protected should house prices rise. Your home would maintain its capital gains tax primary residence exemption during this time under the Temporary Absence Rule, often referred to as the six-year rule. The rental income would be taxable, but since employment income would be zero I assume, this is unlikely to be a significant problem.
Paul Benson is a Certified Financial Planner at Guidance Financial Services. He hosts the Financial Autonomy podcast. Questions to: paul@financialautonomy.com.au
- 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 personal circumstances before making any financial decisions.
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