I am planning to return to part-time work after 12 months' leave, following the birth of my second child. I plan to work two days a week at the office and half a day at home. I estimate the gross cost of child care (before any eligible child-care benefit) for the two children for two days a week will be approximately $11,650 in 2007-08. I estimate my taxable income that year will be about $32,000. My husband estimates his taxable income for 2007-08 will be about $57,000. Am I better off financially if I work or stay at home and claim all the government benefits I am eligible for? Is it worth me trying to negotiate with my employer to salary sacrifice the child-care payments? J.P.

After the 30 per cent child care offset, your normal tax of $5430 on income of $32,000 will be reduced by $3495 (30 per cent of $11,650), leaving you with a net income of about $30,065.

This is only approximate as the offset can only be claimed in the following financial year's return.

You'll need to compare that against any other benefits you've been receiving, but I suspect it will be hard to beat.

And if the Treasurer pulls another rabbit out of the hat in this year's budget (remember, there's an election coming up), you might get even more.

There is no tax benefit in salary sacrificing for child-care costs unless you work for a charity or public benefit institution, which can offer some tax-free fringe benefits. See the Family Assistance Office website at http://www.familyassist.gov.au.

Taxing a redundancy package

I am about to be made redundant. Apparently there are two components to a redundancy package - a tax-free component and a taxable component. Could you please explain the tax ramifications of each component and whether they can be rolled into a superannuation scheme to avoid the tax burden? J.G.S

Regardless of the amount your employer offers you, the Australian Taxation Office allows you a tax-free amount of $6783 plus $3392 for every complete year of service. In other words, if you work one year and 364 days, you get $3392 (plus $6783) tax free. So try to make your final year a complete year if possible. A redundancy payment is not a superannuation payment, although you can contribute the money into a super fund as a tax-free undeducted contribution, just as you can any other savings. This may then also get you a Government co-contribution if you have made no other undeducted contribution.

Any excess portion of the redundancy is classified as an untaxed eligible termination Payment. It can be rolled over into a super fund and, if so, is taxed at 15 per cent.

If you're under 55 and take it in cash, then you are taxed at 31.5 per cent. If over 55, then the first $135,590 is subject to the low tax threshold (taxed at 16.5 per cent), and any excess is taxed at 31.6 per cent.

Any accrued annual leave received as part of an approved redundancy scheme is included in your assessable income, but tax is limited to a maximum of 31.5 per cent, while long service leave earned before August 16, 1978 is taxed on 5 per cent (i.e. 5 per cent is added to your marginal income, while the remainder is limited to a maximum rate of 30 per cent plus Medicare).

I assume you are taking your redundancy this financial year, before June 30, because the rules all change after that!

Less tax from July 1

My wife and I are both retired public servants and receive Commonwealth Superannuation Scheme pensions. My income is about $34,000 a year, from which I pay tax of about $6000. I understand my Commonwealth super pension won't be tax free from July 1 like other super pensions. Surely I should be entitled to some tax reduction. I am 83, an ex-serviceman and receive a disability pension gold card, but no service pension. J.R.

You are entitled to a tax reduction from July 1 when you will receive a 10 per cent tax offset, thereby cutting tax by $3400 or more than 50 per cent.

Different eligibility rules

Are the eligibility rules for the age pension the same as for the Commonwealth Health Care Card? J.P.

No. The age pension is subject to its own income and assets tests.

The Commonwealth Seniors Health Card is paid to people over age pension age who have an adjusted taxable income (which includes taxable income, net rental property income or losses, fringe benefits and certain foreign income) below $50,000 a year if single.

The threshold is $80,000 a year for couples and $100,000 a year combined for people separated by illness.

With the advent of tax-free superannuation, many more people are likely to be eligible for the Seniors Card.

Asset test changes

I am a 68-year-old widower. I receive a NSW Government superannuation pension of $28,000 a year. I also earn $12,000 a year from other income. As a single person, I do not qualify for the old-age pension.

My questions are: a) Is my NSW state superannuation pension going to be tax free after June 30? b) After September 30, the age pension assets test taper rate is being reduced from $3 a fortnight to $1.50 a fortnight for every $1000 in additional assets above the limit.

Is the income test reduction rate for singles also going to be reduced, allowing me to qualify for a part age pension? S.L.

Yes, the old NSW, Queensland and Victoria state super pensions are fully funded and should be tax free from July 1.

However, the Commonwealth, Tasmanian Lifetime and South Australian state pensions are unfunded and should still be taxed from July, although they will carry a 10 per cent tax offset for those over 60.

No, there will be no change to the income test, apart from the usual indexation.

So if the income test prevents you from getting an age pension, you will see no change. You could remarry and enjoy higher means test thresholds, but that's a high price to pay for the age pension.

Being wise with salary sacrifice

My husband turns 55 in August, has $200,000 in superannuation, earns $90,000 a year and salary sacrifices $3000 a month. I turn 60 in March next year, have $5000 in superannuation and do not work. We have no debts. When he turns 55, should my husband place all or part of his current super in an allocated pension and take a transition to retirement pension, then draw a salary that has minimum taxation and increase salary sacrifice?

Or should we wait until I turn 60 (by which time we would have started spouse super splitting to transfer his super to my account) and draw out tax-free amounts for living expenses from my account, while he increases his salary sacrificing? M.C.

There is little point in your husband starting a transition to retirement (TTR) pension unless he is either over 60 (when super pensions become tax free after July), or takes a smaller pension such that he drops into a lower salary bracket.

Otherwise the 15 per cent tax offset he gets on his taxable pension is counterbalanced by the 15 per cent tax paid in the super fund on his salary sacrificed amount.

There is a benefit if a large part of the pension is tax free but this is rare where all the previous contributions have been made as employer contributions and, therefore, fall into the taxable component.

Super splitting operates only on contributions made in the previous year.

Alternatively, your husband can withdraw and gift to you any benefits that are non-preserved and unrestricted and place these in your name. These apply mostly to older benefits and I would assume there are few of these.

If you wait until July 2008, he will have been able to split or transfer his net contributions for 2006-07 and 2007-08 ($72,000 gross or $61,200 after the fund's 15 per cent tax) into your fund, to hopefully give you a total of about $80,000 to $90,000, depending on your fund's earnings.

You, being over 60, can then use this tax free benefit to live on while your husband salary sacrifices down to an annual income of $25,000 a year.

This is the threshold of the 15 per cent tax bracket and there is no tax benefit in salary sacrificing below it.