This article was first published on 17 May, 2021 in The West Australian, Your Money and written by Empire Financial Group Managing Director Raymond Pecotic.
State Government employees who are members of GESB West State super may have an added bonus benefit to accessing the home downsizer contribution, or making non-concessional contributions.
GESB West State is a constitutionally protected, tax-deferred scheme.
Unlike other funds, the usual tax of 15 per cent on contributions and earnings, and 10-15 per cent on capital gains, is not deducted and paid at the time of the contributions, earnings or gain. Instead, it is deducted as a flat 15 per cent of the fund’s value at the time a member withdraws funds at retirement or starts a pension income stream.
At the end of a working life in State government, there can be a significant tax debt due in the fund.
However, not all components of a super fund are taxed in the same way. “Pre-July 83 component” is the term used to describe any interest accumulated in a fund before July 1, 1983, and is tax-free.
It means the 15 per cent deducted at retirement does not apply to this portion.
The taxable and tax-free components in a GESB West State fund are determined via a simple pro-rata calculation, and it is possible to use non-concessional contributions and/or the downsizer contribution to alter the make-up of this calculation and significantly reduce tax on retirement.
Let’s use an example where an eligible GESB member started work on March 13, 1978, and plans to retire this July.They have a West State fund balance of $1 million.
Using rounded figures, they have 43 years of service, with five of those pre-83 and tax-free (11.6 per cent).The benefits accrued in the remaining 38 years of service (88.4 per cent) are taxable.
On a balance of $1m, that means $884,000 is taxable at 15 per cent, for a tax bill of $132,600.
Now let’s assume a member is over 65, (or over 60 from July 1, 2022), soon to retire, and wishes to make the maximum $300,000 downsizer contribution to super.
Let’s assume the member has $100,000 in cash they can also use to make a non-concessional contribution.
As the downsizer contribution does not count towards contributions caps, they can make the whole $400,000 contribution to their eligible GESB account.
Alternatively, they could also use bring-forward rules to make the same amount of non-concessional contributions over a period of two financial years if they meet age eligibility criteria.
They now have a balance of $1.4m. An 11.6 per cent portion of their fund is considered tax-free, but it is now calculated on the increased balance. That pre-83 component now becomes $162,000. The downsizer and non-concessional contributions are also tax-free, meaning $562,000 of the fund is tax free, and only the remaining $838,000 is subject to the 15 per cent tax on exit. Total tax payable is now only $125,700 — a saving of $6900.
There are significant opportunities available to eligible GESB members approaching retirement to make the most of the unique tax benefits West State and Gold State funds offer.
But this is a specialised area so it is important to seek expert financial advice.
Raymond Pecotic is the managing director of Empire Financial Group