We can't afford to support the boomers... so why give more now?

I picked up a copy of The Financial Review today to be greeted with the headline "Grim future for tax cuts", with Peter Costello predicting that future generations will not be able to afford tax cuts, with forecasts that the ageing population will fuel a rise in heath spending and age pensions. This was all part of the Federal Government's Intergenerational Report.

This news shouldn't surprise. However, wasn't it Peter Costello who came out last May promising tax free retirements for Baby Boomers and almost doubling the Assets test for Centrelink entlements, effectively allowing a couple to have $800,000 in assets and still access Age Pension?

"The key point is to keep expenses controlled. We have got to be disciplined with our financial management to keep our budget in surplus. That's very important," Mr Costello told the Nine Network.

Mr Costello has provided a lifetime burden on the younger generations. These tax savings & increased Social Security benefits have to be funded some how. As much as we hate to think it, the mining boom isn't going to last forever!

Tax free pensions... until you die

The most well documented aspect of the super changes. From next Financial Year, Pensions paid from super and lump sum super withdrawals will be tax free if you're aged over 60. However, this isn't where tax in super ends. There is another tax, the "death tax" when the 'taxable' components of pensions/super are paid to non-dependants when someone dies, they are taxed at 15%.

Now, the definition of a dependant in this case is basically spouse or dependant child, under age 18, which generally means that those of us who have Boomer parents transferring their assets into super, are not going to see everything when our parents unfortunately, but inevitably depart this fine planet.

However, given that super benefits can be withdrawn tax free over 60, those who unfortunately die slowly, are able to withdraw their entire super benefits before they die. However, those who probably more fortunately die quickly do not get this opportunity.

This needs to be changed. Time for the Government to remove this 15% death tax. On one hand they are trying to make people put as much as they can into super, but aren't providing the estate planning benefits. Assets held outside of super can be transferred to non-dependants with no tax liability (however the recipient inherits the original purchase date & price).

John Howard and Peter Costello, time to provide something for us younger generation. The generation who's vote doesn't seem to be important to you. You can't buy our vote on the low interest rate lie this election.

Until then, the benefit of a slow and painful death will only be the tax savings one can provide to their children.

When tax free share income isn't really tax free... and how to make it tax free!

I was having a bit of a heated discussion with a fella the other day about tax effectiveness of share investing. I offered him advice on how to make his shares even more tax effective, but I'm not sure he understood.

His argument was that he could earn $75,000 a year from his portfolio of shares and not pay a cent tax. This of course is because he holds a portfolio of shares that pay fully franked dividends. Meaning, he is entitled to a 30% tax rebate on this income in the form of imputation credits, and as he is on the 30% marginal tax rate, he pays no tax. He then said to me, "Why should I bother with these tax free pensions when I'm receiving tax free income anyway. I agreed, YOU are not paying tax, however SOMEONE IS. By restructuring your affairs, you can get the tax back!

You see, the reason most share income from blue chip stocks contains this 30% credit, is because companies have already paid tax on this income, at the company tax rate, which not suprisinly, is 30%. So, whilst the investor isn't paying tax out of their own pocket, they effectively are, as tax is being withheld before they actually see the income (dividend).

My proposal to this investor (he was over 60), was to get his direct share portfolio into a Self Managed Super Fund (I didn't address Capital Gains Tax, but this would definitely have to be looked at), and then he had two options, leave the funds in the growth phase of super, in which case income is taxed at 15%, or convert it to an allocated pensions, from 1 July, draw the minimum income which is 4%, and whilst within pension the fund pays NO TAX on earnings.

These imputation credits will then be credited back to the fund, which means the tax is basically being paid back and the investment will truly become tax free. If it stays in the growth phase of super, you're looking at half the credit coming back (super pays tax on income at 15%), or if its in pension, the whole credit basically gets added onto returns.

Put simply, if your shares are within the pension phase and you are receiving a dividend yield of 5% fully franked, you're dividend all of a sudden becomes about 7.15%. Pretty good huh!