Rules For Retirees

Sydney Morning Herald

Wednesday May 26, 2004

Anne Lampe

PAYE taxpayers are moving into retirement at the rate of knots as they voluntarily leave their jobs or involuntarily face redundancy in their mid-fifties.

With retirement comes a whole new tax ball game, with rules, exemptions and tax payment calculations that are more involved than those applying to PAYE employees.

One of the major benefits of being a

self-funded retiree is that they are entitled to a senior Australian tax offset. This means they receive a tax rebate for individual incomes of $20,000 to $37,840, cutting out at the latter figure.

At an annual income level of $20,000 a year the retiree pays no tax, a situation that does not apply to any other category of Australian taxpayer. The maximum tax offset per retiree is $2230.

But it applies only if the retiree ticks the appropriate box on their tax return. If they don't tick the box they may miss out, because under self-assessment this is unlikely to be picked up by the Australian Taxation Office.

Another valuable tax reduction mechanism for retirees is a concept called the undeducted purchase price (UPP) of an annuity or pension.

This term refers to the part of a pension, income stream or annuity that has been paid for in post-tax salary during your working life. It means that for a $50,000 annual pension income stream, $15,000 could represent the UPP - the amount of pension for which a deduction can be obtained in retirement. As we mentioned, that's because this bit of pension was paid for out of the employee's after-tax income during his or her working life, while the retirement benefit accumulated in super.

That would mean that tax would be payable on $35,000, which is then subject to the senior Australians allowance, mentioned earlier, for that income level.

Combining these two measures means that many retirees on pensions will be paying little if any tax.

The ATO will assist retirees to work out the UPP impact on their pension if it is given sufficient information about which elements of super was funded by employer contributions and which bits by the employee in after-tax dollars.

Other tax offsets which should be examined for eligibility include the spouse rebate, if private health cover has been taken out, and net medical expenses over a specified limit (see story on page 5).

However, if retirees earn investment income of more than $2000 a year and have a tax liability of more than $500 a year, they are required to make annual PAYG instalments. This is where things become more involved.

The ATO looks at your previous tax assessments. Where the annual tax liability is more than $8000, quarterly tax instalments are required to be paid.

The due date for payment of the annual instalments is October 21. If it is not paid by that time, a late payment interest rate is applied to the tax obligation.

Paying quarterly instalments of tax - which are due on 28 October, 28 February, 28 April and 28 July - can make cash flow management easier.

A further complication is possible if the retiree owns an investment property which attracts GST. Most residential properties

do not require GST to be paid on rent, although it is paid on the inputs, such as maintenance work.

But the landlord is not required to charge GST on the amount he or she charges the tenant - although they then do not receive any benefit from the GST paid on services.

The tax is, however, payable on commercial rents. Retirees are required to complete a quarterly business activity statement if rental is more than $50,000 a year.

The decision process for retirees owning property differs if the property is residential or commercial.

If commercial, does it produce more than $50,000 in rental income or less than this figure? If you can pay tax quarterly, this is probably the best option.

All taxpayers have deductions available to them. For retirees, some of the deductions listed at the ATO website (www.ato.gov.au /individuals/content) include the cost of managing your tax affairs and subscriptions to investment magazines. There is a Tax Pack for retirees with guides to the above.