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Couple considering finances, MO50, financial planning, advice

Are there ways to pay 0% tax besides an account-based pension?

We have a listener question from Sue today, regarding investments outside of super. Her husband has no taxable income right now and Sue is considering investing his money to take advantage of franking credits or interest rates going up; maybe even taking the cash part of her husband’s super and investing it in a high-interest account or term deposit. (Our previous blog and podcast episode looks at 0% taxed super income streams in depth.)

This is the type of account that Sue and her husband hold money in. Sue’s husband is drawing income from his, and is currently aged over 60. As it’s a tax-free income, he doesn’t need to lodge a tax return at the end of the financial year.

Put simply, there isn’t really any way to take further advantage of her husband’s situation as he already pays 0% in tax. The only option that could boost their income is if he was prepared to return to part-time work, where he could earn up to approximately $21,500 a year without paying any income tax. He could continue to draw his passive income, too.

Let’s assume he has $1 million inside his 0% taxed super income stream. No amount of money he could move out in his own name would create any kind of advantage for the couple. As to her question about franking credits, these are already claimed inside the 0% taxed super income stream which adjusts the rate of return (ROR).

Super funds give you a ROR during the accumulation phase where 15% tax is deducted. For the same investment strategy in an account-based pension, you would get roughly 1-1.5% extra ROR from the tax saving. This differs from fund to fund. The franking credits are claimed at fund level and you won’t see franking credits on your ROR.

Let’s assume a fund has $100 million of members’ money associated with Australian companies that pay full rate of tax, and let’s also assume the companies pay a 4% dividend. That’s $4 million worth of dividends. With those particular dividends there's also roughly $1.7 million in tax that companies pay. That particular fund would put in a claim with the Australian Taxation Office saying the tax has already been paid by those companies. Then, for those members, the ATO will send money into their 0% taxed super income streams and the ROR for members will increase.

Our listener, Sue, would be no worse off if she transferred some money out into her husband's name and bought some shares in Australian companies; but she wouldn’t be any better off either, because – put simply – nothing is better than paying 0% tax.