Australia’s strong financial sector and robust economy have traditionally made term deposits a favoured choice for savers and investors. However, recent changes in the taxation of interest income from term deposits have particularly impacted Australian seniors.
In light of these developments, it’s crucial for seniors to consider strategies to protect their term deposits from increased tax burdens. We’ll explore effective measures and potential strategies to mitigate the impact of these tax changes on retirement finances, including superannuation and self-managed superannuation funds (SMSFs).
Emergency Measures Needed for Seniors’ Term Deposit Income
Term deposits have traditionally been favoured by Australians, especially seniors, for their safety and reliable income. However, recent changes in tax laws have raised concerns about the treatment of interest income from term deposits, potentially leading to higher tax bills for many seniors.
Emergency measures are needed for several reasons:
- Dependence on Interest Income: Many seniors rely on interest from term deposits to fund their retirement. Higher taxes on these earnings can substantially reduce their retirement income.
- Increased Financial Stress: With many seniors already worried about their investment performance, higher taxes only add to their financial anxiety.
- Limited Investment Options: Seniors often prioritise safety over returns, making term deposits a popular choice. Higher taxes may force them to reconsider their investment strategies.
- Impact on Superannuation Funds: Some seniors hold term deposits within their superannuation funds. Tax changes affecting these funds can compromise their overall financial security in retirement.
Taxation of Term Deposits in Australia
To address the issue of higher tax on term deposits for Australian seniors, it’s essential to understand how these deposits are currently taxed:
Personal Tax Rate
The interest income from term deposits is typically treated as assessable income for tax purposes. Seniors are subject to the personal income tax rate, which can range from zero per cent for the lowest income bracket to 45 per cent for the highest bracket.
Dividend Imputation
Some seniors who hold term deposits within an SMSF may benefit from dividend imputation, which can reduce the tax payable on the fund’s earnings. However, this strategy has limitations.
Superannuation Taxation
Inside superannuation funds, the earnings from term deposits are taxed at a concessional rate of 15 per cent. For retirees over 60, earnings are tax-free, according to the government’s MoneySmart portal.
Strategies to Mitigate the Impact of Higher Taxes
While the tax treatment of term deposits in Australia is a challenge for retirees, there are several strategies to consider to help mitigate the impact of higher taxes.
Superannuation Contributions
Consider making additional contributions to your super fund, as these contributions are generally taxed at a lower rate – but at a price in contribution caps. In answering a similar inquiry for the Australian Financial Review from a 69-year-old, John Wasiliev said it is possible to put in money from savings to an SMSF and earn tax-free earnings as investment. Under current super rules, SMSF contributions in the current fiscal year are capped at $110,000 and will remain the same for FY25 and FY26 per bring-forward entitlements, but they must be sent to a special ‘accumulation account’ within your SMSF structure, with the SMSF trustees and an integrated accountant clearing the account with the ATO.
Transition to Retirement
If you’re not yet retired, a Transition to Retirement (TTR) strategy can help reduce your tax liability. This strategy allows you to access some of your superannuation while still working and potentially lower your tax rate.
Invest in Tax-Efficient Assets
Diversify your investment portfolio to include tax-efficient assets, such as shares that qualify for franking credits, which can help reduce the overall tax impact.
Review Superannuation Investment Options
Examine the investment options within your superannuation fund to ensure they align with your retirement goals and tax preferences.
Professional Advice
A financial advisor or tax expert may help you navigate the complex tax rules and explore tailored strategies to lower the tax impact.
Special Considerations for SMSFs
For those holding term deposits within SMSFs, the following are some additional considerations.
Franking Credits
SMSFs can benefit from franking credits on Australian shares, which can be used to offset the tax payable on other income, including interest from term deposits.
Diversification
Diversify your SMSF investments to include assets with different tax treatments. This can help balance the overall tax liability of the fund.
Seek SMSF Advice
An AFS-accredited financial advisor with considerable knowledge of supers and the intricacies of SMSFs may be vital to guiding you on optimising your SMSF’s tax position. Their counsel may be critical in light of recent developments:
Writing for Forbes Australia in early 2024, Jody McDonald said the high interest rates in Australia and equities investment issues after the pandemic put term deposits as a potential investment vehicle instead of programming more super contributions.
Lobbying for Tax Reform
In response to concerns about the tax impact on term deposits and interest income for retirees, there have been calls for tax reform. These calls have emphasised the importance of providing relief to seniors who rely on their investments for retirement income.
The reform proposals include:
- Tax-Free Threshold for Seniors: Introducing a tax-free threshold for seniors on their interest income from term deposits, similar to the approach taken for income in superannuation funds.
- Increasing Superannuation Contributions: Expanding the opportunities for seniors to make additional superannuation contributions, enabling them to access the concessional tax rate for their investments.
- Franking Credit Policy Review: A comprehensive review of the franking credit policy to ensure that seniors benefit from credits when investing in shares.
- Education and Assistance: Providing seniors with educational resources and support to help them understand and navigate the complex tax rules related to their investments.
Conclusion
The need for emergency measures to save Australian seniors’ term deposits from being taxed is a pressing issue, given the importance of these investments in retirement planning. While changes to tax laws have raised concerns, there are strategies that can help mitigate the tax impact on term deposits, especially when held within superannuation funds or SMSFs. Seeking professional advice and staying informed about potential tax reforms can further empower retirees to make informed decisions about their financial future, even in the face of changing tax rules.
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For further discussion of your retirement financing, please call the A.S.A.G. at 1300 002 724 or email to info@asagfirst.com.au.
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DISCLAIMER: This article is for informational purposes only and does not constitute official advice. A.S.A.G. is not affiliated with any mentioned brands or companies.