Superannuation Ready Reckoner: Taxation and Preservation Rules for 1999-2000


Current Issues Brief 2 1999-2000

David Kehl
Economics, Commerce and Industrial Relations Group
21 September 1999

Contents

Major Issues
Introduction
Taxation of Superannuation Contributions
Age Based Deduction Limits
Taxation of Contributions
Surcharge on Contributions
Low Income Superannuation Rebate
Low Income Spouse Rebate
Regulation of Superannuation Contributions
Superannuation Guarantee
Maximum Contribution Base
Taxation of Superannuation Fund Earnings
Taxation of Superannuation Benefits
Eligible Termination Payments
Reasonable Benefit Limits
Bona fide Redundancy Payments
Death Benefits
Pension and Annuity Rebate
Income Tax Rates
Preservation Rules
New Preservation Rules from 1 July 1999
New Preservation Age from 1 July 1999
Endnotes

Major Issues

Superannuation is a tax-effective investment, but is known for its complexity and frequent change. The complexity covers most areas of the superannuation system including prudential legislation, taxation legislation and disclosure regulation. Frequent legislative changes contribute to the system's complexity. In addition, the superannuation system constantly changes as many of the financial thresholds are indexed. Consequently, numerous thresholds change at the beginning of each new financial year. Hence, the need to know the new superannuation taxation thresholds for each new financial year.

This paper is designed to provide readers with a 'ready reckoner'-a simple, easy to use summary of superannuation taxation and preservation rules, and covers the following topics:

  • the taxation of superannuation contributions and benefits
  • the rebates that apply to certain superannuation contributions and benefits
  • the level of superannuation contributions that employers must make, and
  • the preservation rules that came into operation on 1 July 1999.

Superannuation law is extremely complex and individual circumstances can drastically alter its general application. It is therefore stressed that this paper is not intended to be used for determining the tax liability attached to superannuation in any particular case, especially in view of the many specific considerations that need to be addressed in a summary document of this kind.(1)

It is anticipated that this paper will be updated annually at the beginning of every financial year.

All figures in bold type are indexed thresholds, and are only current for the 1999-2000 financial year.(2)

Introduction

Numerous laws and regulations regulate superannuation, each administered by a particular government agency. Superannuation laws and regulations can be separated into three separate categories: prudential regulation, disclosure regulation and taxation.

Prudential legislation and regulations, administered by the Australian Prudential Regulation Authority (APRA), are directed at safeguarding the assets of superannuation fund members and investors. Disclosure legislation and regulations, administered by the Australian Securities and Investments Commission (ASIC), are directed at ensuring superannuation fund members and investors are provided with relevant information by fund trustees to enable them to make a fully informed investment decision. Taxation legislation and regulations, administered by the Australian Taxation Office (ATO), are directed at superannuation funds and their members to collect revenue for the Commonwealth.

The main focus of this paper is the taxation legislation and regulations that affect superannuation funds and their members.

Taxation of Superannuation Contributions

This section shows how superannuation contributions are taxed, the maximum amount of tax-deductible contributions that an employer can make and the tax rebates that apply to certain superannuation contributions. A superannuation contribution is a payment to a superannuation fund, which is generally concessionally taxed. A tax rebate is a reduction in tax liability that has the same value to all taxpayers independent of the taxpayer's marginal tax rate.

Age Based Deduction Limits

Contributions made to a complying superannuation fund(3) or Retirement Savings Account(4) (RSA) are fully tax deductible to employers up to the age based deduction limits. 'Self-employed persons' (whose income from an employer is less than 10 per cent of their total income) get a full tax deduction on the first $3 000 of contributions plus 75 per cent of the remaining contribution up to the age based deduction limits. The deduction limits are:

Age of employee (years)

Deduction limit

under 35

$10 929

35 to 49

$30 356

50 and over

$75 283

Taxation of Contributions

Employer and tax deductible personal contributions are included in a complying superannuation fund's and RSA's income and are taxed at a rate of 15 per cent.

Surcharge on Contributions

All employer contributions, certain 'golden handshakes' and tax deductible personal contributions made to superannuation funds for high-income earners are subject to a surcharge of up to 15 per cent. The surcharge is currently phased in over the income levels of $78 208 to $94 966 with the surcharge increasing by one per cent for each additional $1 118 of income from $78 208. The surcharge may also be payable if a member doesn't quote their Tax File Number to their superannuation fund. For an account which existed prior to 7 May 1997 and received less than the surchargeable contributions threshold of $2,607, the surcharge will not be levied merely due to the non-quotation of a Tax File Number in relation to that account for that year.

Low Income Superannuation Rebate

An employee who receives any form of employer superannuation support (but is not a 'self employed person') is entitled to a tax rebate of up to $100 for personal contributions made to a complying superannuation fund, provided the employee's assessable (i.e. gross) income is less than $31 000. The tax rebate is calculated as ten per cent of the lesser of:

  • $1 000 reduced by 25 cents for each dollar of the taxpayer's assessable income over $27 000, or
  • the contribution actually made.

Low Income Spouse Rebate

A contributing spouse is entitled to receive an 18 per cent rebate for contributions up to $3 000 per annum to the superannuation fund or RSA of a spouse who has an assessable income of $10 800 or less per annum. The maximum rebate phases out on a dollar-for-dollar basis, and is not available when the low-income spouse's assessable income is $13 800 or more per annum.

Regulation of Superannuation Contributions

The level of superannuation support an employer is required to provide to employees is prescribed under Federal and State industrial awards and the Commonwealth's Superannuation Guarantee (SG) scheme.

Under award superannuation, the parties (generally unions and employers) are bound by an industrial agreement (or award) to make superannuation contributions to a superannuation fund nominated in the agreement. The level of support is normally not greater than three per cent of ordinary time earnings (although this varies between awards).

The SG scheme requires all employers to provide a minimum level of superannuation support in each financial year for employees (with limited exceptions). The SG scheme operates in conjunction with award superannuation so that contributions made by an employer in conjunction with an industrial award may be counted towards the employer's superannuation guarantee obligations.

Superannuation Guarantee

The table below shows the minimum level of employer support.

Year

Per cent of ordinary time earnings

1999-00

7

2000-01

8

2001-02

8

2002-03 and subsequently

9

Maximum Contribution Base

Employers that do not make SG contributions are liable for the SG charge (SGC). The SGC is made up of the employer's SG shortfall (the amount the employee should have received in SG contributions), an interest (or penalty) component and an administration component (to recover costs incurred by the ATO). When calculating an individual employee's SG shortfall, the amount of an employee's salary or wages used to calculate their 'ordinary times earnings' in a contribution period is limited to the maximum contribution base, which is $25 240 for each quarterly period, or $100 960 per annum.

Taxation of Superannuation Fund Earnings

The investment earnings of a complying superannuation fund or RSA are taxed at a rate of 15 per cent. This rate can be reduced through the use of imputation credits. Non-complying funds are taxed at a rate of 47 per cent on its entire assets. Superannuation funds can be non-complying either through choice or through failing to meet the necessary standards and condition required under prudential legislation to qualify for tax concessions.

Taxation of Superannuation Benefits

This section describes the taxation arrangements that apply to superannuation benefits. A superannuation benefit is the amount of money in the superannuation fund or RSA to which the fund member or RSA holder is entitled. Most benefits are payable on termination of employment and will often be subject to preservation (see ''preservation'' below).

The taxation of superannuation benefits is complex due to changes made on 1 July 1983 and 1 July 1988. The complexity arises from avoiding retrospectivity by applying new taxation treatment to only those portions of benefits attributed to service after 1 July 1983 and 1 July 1988.(5)

Eligible Termination Payments

Eligible Termination Payments (ETPS) are lump sums usually paid on retirement or resignation from a job and include 'golden handshakes', payments from superannuation funds, approved deposit funds (ADFs), and RSAs. ETPs are taxed differently from other income.

ETPs are comprised of several components (although not all ETPs have every component). Each component of an ETP is taxed in a different manner and may be subject to various rebates.

The various components of an ETP and their respective taxation treatment is provided in the following table:

 

ETP Component

Maximum Tax Rate (add Medicare levy)

Post-June 1983 component-refers to superannuation benefits accrued with respect to employment or fund membership after 30 June 1983. This component is the amount of the ETP reduced by the total amount of all the other ETP components. These benefits are taxed according to whether the fund earnings were taxable and the age of the benefit recipient, as follows.

Person less than age 55:

  • Taxed element: a post-June 1983 component is a taxed element if the fund is subject to 15% tax on investment earnings of the fund (i.e. most superannuation funds).
  • Untaxed element: a post-June 1983 component is an untaxed element if the fund is not subject to 15% tax on investment earnings (e.g. some government superannuation funds and golden handshakes for employees).

Person 55 years or over:

  • Taxed element:
  • from $0 to $96 637
  • balance

 

  • Untaxed element:
  • from $0 to $96 637
  • balance

 

 

 

 

 

20%

 

 

30%

 

 

0%

15%

 

 

15%

30%

Pre-July 1983 component-the amount of an ETP that relates to superannuation benefits accrued with respect to employment before 1 July 1983.

5% of amount is taxed at marginal tax rates

Undeducted contributions-member contributions (since 1 July 1983) not subject to a tax deduction (not included for RBL purposes-see below).

Exempt

CGT exempt component-an exemption from CGT (on a total maximum capital gain of $500 000) can be claimed on the sale of a small business where the proceeds are used for retirement.

Exempt

Concessional component-until 1 July 1994, this included any approved early retirement scheme payment, bona fide redundancy payment or invalidity payment. From 1 July 1994, ETPs no longer have a concessional component, except where an ETP with a concessional component was rolled over (transferred to) a complying superannuation fund before 1 July 1994 and subsequently paid out by the fund.

5% of amount is taxed at marginal tax rates

Post-June 1994 invalidity payments-the recipient's disability must be verified.

Exempt

Non-qualifying component-that part of an ETP that represents investment income accruing between the time of purchasing an annuity (other than by a rollover) and the time of payment.

Full amount taxed at marginal tax rates

Excessive component-the amount of an ETP in excess of a person's RBL.

47%

 

Reasonable Benefit Limits

The amount of concessionally taxed superannuation benefits a person is allowed to receive over his or her lifetime is limited by reasonable benefit limits (RBLs). The table below shows the lump sum and pension RBLs. The pension RBL is available provided that at least 50 per cent of the total benefit received by a person is taken in the form of a pension or annuity that satisfies the pension and annuity standards.

Reasonable Benefit Limits

$

Lump sum

485 692

Pension

971 382

Bona fide Redundancy Payments

From 1 July 1994 a limit of $4 858 plus $2 429 for each year of completed service has been placed on redundancy and early retirement payments. Amounts within the limit are exempt from tax.

Death Benefits

All death benefits made on or after 1 July 1994 are subject to pension RBLs. Death benefit payments made directly to the dependants of a deceased member are exempt from tax up to the deceased person's pension RBL. Any amount above that is treated as an excessive component. When paid to a person other than a dependant, death benefit payments become ETPs. The post June 1983 death benefit ETP is taxed at 15 per cent if paid from a taxed source and 30 per cent if paid from an untaxed source.

Pension and Annuity Rebate

Where a person receives an ETP and uses it to purchase an annuity or pension from a taxed superannuation fund and the person is 55 or more years of age, the person is entitled to a tax rebate, at 15 per cent, on the assessable part of the annuity or pension payment that is not in excess of the person's RBL.

Income Tax Rates

Individual income tax rates are relevant to calculating an individual's superannuation entitlement. For example, a fund member that has an ETP that contains a non-qualifying component has taxation levied on that component at the member's marginal income tax rate. In addition, if a fund member has an ETP that contains a concessional component, five per cent of that component is taxed the at member's marginal income tax rate. The marginal income tax rates are in the following table:

Taxable income ($)

Marginal income tax rate (%)

up to 5 400

0

5 401-20 700

20

20 701-38 000

34

38 001-50 000

43

excess over 50 000

47

The marginal income tax rates above apply to Australian residents and do not include the Medicare levy, which is generally 1.5 percent. A low-income rebate, worth a maximum of $150, can affect the tax paid for lower income earners.

Marginal income tax rates are to change from 1 July 2000.

Preservation Rules

Preservation refers to the prudential regulatory requirement(6) that certain superannuation benefits be maintained either in a superannuation or rollover fund or RSA until permanent retirement or after the member reaches preservation age.

New Preservation Rules from 1 July 1999

New preservation rules, administered by APRA, took effect from 1 July 1999. Under the new regulations, all superannuation contributions (including member contributions) and superannuation fund investment earnings, from that date forward, will be preserved till the member's preservation age. Pre-1 July 1999 non-preserved components of a member's superannuation entitlement generally retain their non-preserved status.

New Preservation Age from 1 July 1999

Preservation age is the age at which a fund member can gain access to benefits that have accumulated in a superannuation fund or RSA, provided the member has permanently retired from the workforce.

The Government announced in the 1997 Budget that the preservation age would be increased from 55 to 60 years on a phased-in basis. By 2025, the preservation age will be 60 years for anyone born after June 1964, with the age 60 years preservation age being reduced by one year for each year that the person's birthday is before 1 July 1964. This means that persons born before 1 July 1960 will continue to have a preservation age of 55. The following table summarises the phase-in schedule:

For a person born

Preservation age (years)

before 1 July 1960

55

1 July 1960-30 June 1961

56

1 July 1961-30 June 1962

57

1 July 1962-30 June 1963

58

1 July 1963-30 June 1964

59

1 July 1964-30 June 1965

60

Under the new preservation rules, a person will continue to be allowed to have early access to preserved benefits where the benefits are taken in the form of a non-commutable lifetime pension or lifetime annuity on termination of gainful employment, subject to the governing rules of the fund or RSA. Preserved superannuation benefits can be accessed on compassionate grounds and severe financial hardship.

Endnotes

  1. This paper has been prepared as a briefing and reference tool only and is not intended for use in a providing financial advice. The author disclaims any liability in relation to any financial decision taken which may be influenced by the content of this paper.

  2. Indexed thresholds were obtained from the following sources:

Commissioner of Taxation, Superannuation Guarantee Determination, SGD 1999/1

Commissioner of Taxation, Superannuation Contributions Determination,

SCD1999/2

Commissioner of Taxation, Superannuation Contributions Determination,

SCD1999/3

Commissioner of Taxation, Superannuation Contributions Determination,

SCD1999/4, and

Commissioner of Taxation, Taxation Determination, TD 1999/27.

  1. A complying superannuation fund qualifies for concessional tax rates. It is regulated under the Superannuation Industry (Supervision) Act 1993.

  2. RSAs are simple low-cost, low-risk superannuation products offered by life insurance companies, banks, building societies and credit unions. They are regulated under the Retirement Savings Account Act 1997 and have the same tax treatment as superannuation.

  3. For more information on the evolution of the taxation of superannuation, refer to Michael Reid, 'Supercalifragilisticexpiannuation-A Plain English Guide to Australian Superannuation Arrangements', Background Paper No. 23 1994, Department of the Parliamentary Library.

  4. These prudential regulatory requirements are set out in the Superannuation Industry (Supervision) Act 1993 and the Superannuation Industry (Supervision) Regulations.

 

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