The number of tax offsets, and especially SAPTO (Senior Australians and Pensioners Tax Offset) in our tax legislation confuses many people and also represents an opportunity for those looking towards structuring their retirement or family succession.
What is a tax offset?
The primary difference between a tax offset and a tax credit is that the tax offset will not be refunded to you (and a tax credit will result in a payment back from the ATO). So if you are structuring to retirement and you do not use the full SAPTO benefit in your tax return the unused SAPTO is lost forever – it is not carried forward and it is not paid back to you.
How do you get SAPTO?
The lodgement of your tax return will mean that the ATO assesses your eligibility for SAPTO.
Who gets SAPTO?
To enjoy SAPTO you need to:
- Be of pension age (currently 66 years and 6 months); and
- Enjoy an income below a certain threshold.
The income test is discussed below.
What income is considered?
The income (called the rebated income) tested for SAPTO is a combination of:
- Your taxable income.
- Your reportable superannuation contributions.
- Your superannuation contributions claimed as a tax deduction.
- Your tax losses from negative gearing.
- Your reportable fringe benefits.
The rebate income tested is effectively an attempt to capture any artificially reduced net taxable income.
Importantly the income tested does not eliminate all tax opportunities that might exist. This could include non-reportable fringe benefits, account based pensions (which are normally tax free) superannuation guarantee levy contributions or salary packaged costs of a rental property/share portfolio.
Tax advice can make a significant difference in this instance and it can generate a long term benefit. The documentation of the tax advice is critical to withstand an ATO review of course.
What are the income thresholds for SAPTO?
A single person with a rebate income of $32,379 or less will enjoy the full SAPTO rebate of $2,230. So, a person on this level of income will not pay tax.
As a single person the SAPTO rebate will reduce by 12.5% for every dollar generated over $32,279 so that the entire SAPTO rebate will be eliminated by $50,119 of income (with a tax liability of $6,429.
The application of the SAPTO erosion effectively means that the marginal tax rate for a person enjoying SAPTO over $32,379 is somewhere between 33.5% and 47% (32.5% + 2% medicate + 12.5% SAPTO loss).
The SAPTO maximum income threshold for a couple is $57,948 enjoying $3,204 of SAPTO with the entire rebate disappearing at a threshold of $83,580.
Can you get the low income tax offset (LITO) and the Low and Middle Income Tax Offsets (LAMITO) at the same time as SAPTO?
Yes you can. The combination of different rebates at the same time makes over-arching comments about tax strategy and application extremely dangerous. The issues requires careful documented tax advice.
Can I transfer unused SAPTO portion to my spouse?
Yes you can. And the preparation of your tax return should consider this provision with considered thought.
What else is relevant?
The consideration of SAPTO, LITO and LAMITO is important to structuring a family in businesses affairs. Another consideration is the ability for seniors to enjoy a seniors health card in addition to qualifying for the range of tax offsets. As a guide couples can enjoy a Seniors Health Card with their income is $92,416 or less.
How is SAPTO used in succession?
Often a family in business will structure the family’s succession with a combination of superannuation and retirement income positions. If a family properly understands the after-tax impact of the succession the next generation might be able to better use, and reward, the parents as part of the succession strategy – this could mean that higher (market rents) are charged by the parents and still not incur tax.
Regardless of how the succession or retirement planning is considered the need for independent and clear tax guidance is crucial for a family in business. And by pairing an independent advisor together with sound, documented and separate legal, insurance and investment advice will a family in business have the best opportunity of creating the best succession strategy for a family.
At Westcourt we are committed to smart and clear tax advice for families that increases their net wealth. Speak to a Westcourt tax professional today to make sure you are getting the best outcomes for your retirement and succession.