Picture your retirement. You might see yourself ...
Picture your retirement. You might see yourself spending time with the grandkids. Perhaps picking up a neglected hobby.

You might even plan to pack up your worldly possessions and hit the road for greener pastures.

So, when?
To most, the answer vaguely sits between ‘when I’ve had enough of work’ and ‘when I can afford to’.

But when it comes to shoring up your retirement savings, timing can be everything.

Many of our clients have a significant asset they overlook when planning for their retirement: leave entitlements. 

In a lot of cases, having a large amount of leave can make a substantial difference when determining when you can safely retire. 

Because of this, its highly important to make the right decision when deciding how to have these entitlements paid out. 

Many people are required to take leave entitlements as a lump sum. If this is your situation, the only real decision you need to make is your retirement date. 

Depending on your taxable income, the timing can have a substantial impact on your ability to minimise tax on these proceeds. 

Let’s look at an example:
  • you plan to retire at the end of the financial year
  • you earn $100,000 per year in gross income
  • at retirement you’ll have 6 months’ worth of annual leave owing
  • these entitlements are equivalent to a gross sum of $50,000. 

If you were to retire and receive this lump sum in the last week of June, it would be combined with the $100,000 already earned and you’d be taxed on the lot as your total earnings.

Because your taxable income would be relatively high, you would effectively pay 39% tax on the $50,000 worth of leave entitlements ($19,500), leaving you with a net payment of $30,500. 

Now let’s look at what would happen if you held off for a week until July 2019.

Assuming no other sources of income your total taxable income for the year would only be $50,000. 

Based on this, you’d pay a reduced tax amount of $8,017 and would get to keep the $41,983 remaining. 

In addition, assuming you met certain criteria you could potentially look to contribute $25,000 of this to superannuation and only pay super contributions tax of 15% on this portion ($3,750). 

This would bring your remaining taxable income for the year down to $25,000, which would leave net income of $24,051 after a small amount of income tax ($949).

This would bring your overall tax liability down even more ($4,699) and would mean you could keep $45,301. 

Assuming you have met your preservation age you would be eligible to have the super portion paid to you as a tax free lump sum if required. 

With some careful planning you could come away with an additional $14,801. 

Not bad for a week’s work.

Written by Dallas Davison.  
Published by Dallas Davison. April 15, 2019