[lazyplane]

Hi,
I like to start a new thread on Supplementary Retirement Account(SRS) and see if anyone has any views on this.I read in the papers that SRS is deferred tax saving plan and most of what is written in the newspaper seem to think this is a really good idea for high income earners..

Well, i read the FAQ from the SRS guide and I thik spotted something on the capital gain part that really intrigued me. This was what was stated in the FAQ.

Quote Question 74
“74. 50% of SRS withdrawal is taxable without distinguishing capital gains, income and contribution. Is the Government taxing capital gains with the introduction of SRS?

SRS is a tax deferral scheme. Under a typical tax deferral scheme where a sum of money is not taxed upfront but instead taxed at a later time after netting off all subsequent capital gains and losses from investments, the individual will be no worse off than if the sum of money was taxed upfront and all subsequent capital gains were exempt from tax.
As an illustration, consider a person who has an earned income of $10,000. Assume his marginal tax rate is 10%. He pays an income tax of $1,000 and invests the balance of $9,000. He makes a capital gain of 3% each year until he reaches the retirement age 10 years later. Assume his marginal tax rate remains at 10% at retirement. At the end of 10 years, he will have a total of $12,095.
Total = ($10,000 * 0.9) * 1.03 * 1.03 *….(for 10 years) = $12,095
Next, consider another person with the same earned income of $10,000 but who invests the sum under a tax deferral scheme. He does not pay income tax on $10,000 and is able to invest the full $10,000. He makes the same capital gain of 3% each year until he reaches the retirement age 10 years later. The capital gains accumulate tax-free in the account. At the end of 10 years, everything in the account is taxed at the same marginal tax rate of 10%. After paying tax, he will also have a total of $12,095.
Total = $10,000 * 1.03 * 1.03 *….(for 10 years) * 0.9 = $12,095
In fact, under the SRS, the individual will be better off, as only 50% of the withdrawals will be taxed. The same person above will have a total of $12,768 if he withdrawals everything in the first year of retirement.
Total = 0.5 * ($10,000 * 1.03 * 1.03 *….(for 10 years))
+ 0.5 * ($10,000 * 1.03 * 1.03 *….(for 10 years)) * 0.9
= $12,768 “
Unquote.

When I saw the calculations, I was really intrigued.

So i did some of my own calculations and I think I see a possible problem that SRS is not always “no worse off” because my calculation shows that those whom do manage to earn a very high return on their SRS account may be taxed higher. Extreme high returns can be possible because SRS allows account holders to invest in equities.

To give a snap shot of my calculations/scenario, assume a middle age person of 36 and contributing the max level of 11,475 per year for 30 years . As there may be many variation on tax calculations for this individual, let just assume this is relatively high income earner(above S$160k) and his marginal tax rate is 17% for this 11,475.

Based on the above scenario, if this person earns a capital appreciation of 12% on his SRS portfolio per year, my calculations shows that he will have a total SRS portfolio of around $2.77 million at end of 30 years with a total tax savings of S$58.5k for 30 years of contribution.

Because of the restriction to withdraw everything under 10 years, and in terms of optimal tax planning, he should withdraw a total of $251k each year for 11 years (11 year, he needs to withdraw everything)

Going through the 50% tax benefit + the fact that first 20k tax income incur zero tax, we can see that he will be taxable income will be 105k (251k *50% - 20k) at a estimated effective tax rate of around 9.6% which works out to be $10k per year.

And if all this is correct, then his tax cost for 11 years of withdraw is around $123k in total Hence his tax cost of $123k vs savings of S$58.5 k will mean he may have been better off just paying his marginal tax rate per year.

There are many assumption in this case , especially tax rate. But I am wondering if my above suspicion that SRS may not be beneficial for extreme high capital gain returns individual is correct.

Any SRS account holders or specialist care to comment ?