Research Paper no. 2 2007–08
Superannuation and taxation 2007 08
Leslie
Nielson
Economics Section
1 August 2007
Following is a technical document to the operation of the
superannuation system and taxation of superannuation benefits in
Australia from 1 July 2007.
Contents
Introduction
From 1 July 2007 new taxation and preservation
arrangements applying to Australia s superannuation system will
take effect. It is not too much to say that the change enacted by
the government during the course of the 2006 07 financial year
constitute the largest overhaul of Australia s retirement saving
system since the advent of the compulsory superannuation system in
the late 80 and early 90s. [1] As a result of these changes the previous Parliamentary
Library publication outlining the operation of the superannuation
system required a drastic rewrite. [2] This paper is that rewrite. While much of the
superannuation system has remained unaltered by these changes, many
aspects have been comprehensively altered, especially the taxation
of the benefits when paid to the individual. New limits on
contributions have also been introduced.
Australia s retirement income system
Australia s retirement income system is based
on the so called three pillars:
- compulsory superannuation contributions for
all employees under the superannuation guarantee regime
- voluntary superannuation contributions
encouraged by tax concessions, and
- a means tested social security age pension.
[3]
This paper concentrates on the first two
pillars, compulsory and voluntary superannuation contributions, and
the payment of benefits from these sources for the year 2007
08.
This document does not address the roles of
the various government agencies that regulate the superannuation
industry. However, it should be noted that 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 of Australia. The ATO also administers
the co-contributions, superannuation guarantee and choice regimes
and regulates self managed superannuation funds (SMSFs). Prudential
legislation and regulations, administered by the Australian
Prudential Regulation Authority (APRA) (except in relation to
SMSFs), 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 that fund trustees
provide relevant information to superannuation fund members to help
them make informed decisions. The Australian Transaction Reports
and Analysis Centre (AUSTRAC) also now regulates superannuation
funds in regard to their identification of members and reporting of
any suspicious transactions.
This paper, updated for the 2007 08 financial
year is designed to provide readers with a summary of
superannuation taxation, contribution, preservation and payment
rules, and covers, amongst others, the following topics:
-
the taxation of superannuation contributions
and benefits
-
the level of superannuation contributions that
employers must make (Superannuation Guarantee) (SG)
-
the ability of superannuation fund members to
direct contributions and benefits to different funds, such as
choosing the destination fund for the SG contributions made on
their behalf (Choice rules)
-
the government co-contributions scheme for low
income earners
-
the ability to split superannuation
contributions with a person s spouse
-
taxation of superannuation fund income
-
the preservation rules that came into operation
on 1 July 1999
-
the application of the goods and services tax
(GST) to superannuation, and
-
self managed superannuation funds.
All figures in bold type are
thresholds indexed in accordance with legislation governing the
amounts that apply in a financial year, and are only current for
the 2007 08 financial year. This document will continue to be
updated at the beginning of every financial year.
Superannuation law is detailed and
comprehensive, and individual circumstances can drastically alter
its general application. This paper has been prepared as a briefing
and reference tool only and is not intended for use in providing
financial advice. This paper should not be used for determining the
tax liability attached to superannuation benefits in any particular
case, especially in view of the limited number of considerations
that are addressed in a summary document of this kind. Nor should
it be used to make any decision on the level of contributions to
make to a superannuation fund or any decision on the choice of any
superannuation fund. The authors, and those who have
provided comments on this paper, disclaim any liability in relation
to any financial decision taken which may be influenced by the
content of this paper.
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This section explains how superannuation
contributions are taxed, the maximum amount of tax-deductible
contributions that an employer can make and the tax offsets that
apply to certain superannuation contributions: [4]
-
a superannuation contribution is a payment to a
superannuation fund which, if made by an employer, is generally
concessionally taxed.
-
a tax offset is a reduction in tax liability
that has the same value to all taxpayers independent of the
taxpayer s marginal tax rate.
Generally, contributions to superannuation
funds can be made in either one of two ways:
-
before tax contributions that are
tax-deductible to the payer (who can be an employer or a
self-employed fund member). They are known as tax-deductible or
concessional contributions, and
-
after-tax contributions that are not
tax-deductible to the payer (called non-deductible,
non-concessional, un-deducted or personal contributions).
Tax-deductible contributions are included in
the taxable income of complying superannuation funds and retirement
saving accounts, and are taxed at a rate of 15 per cent.
Tax-deductible contributions are included in
the taxable income of complying superannuation funds and retirement
saving accounts, and are taxed at a rate of 15 per cent.
Generally, the personal superannuation
contributions which an employee (or the self employed) may make out
of his or her after-tax income are not eligible for a tax deduction
and are not included in the income of complying superannuation
funds or retirement saving accounts and are not subject to tax on
entry into a fund.
See following sections for limits on
contributions and tax applying to amount over these limits.
With the passing of the Superannuation
Laws Amendment (Abolition of Surcharge) Act 2005, the
superannuation contributions surcharge ceased to apply on tax
deductible contributions made after 30 June 2005.
However, the surcharge will continue to be paid by two groups:
-
those who made surchargeable contributions or
who had surchargeable contributions made on their behalf between
1996 97 and 2004 05 and their superannuation fund has not yet paid
the relevant surcharge on their behalf, and
-
defined benefit fund members who are liable to
pay surcharge for the years between 1996 97 and 2004 05, when they
take their benefit (if they have not paid their liability out of
other funds at an earlier point).
No further surcharge is payable by the first
group after the outstanding surcharge amounts have been paid.
Members of defined benefit funds, who are
liable to pay surcharge, do not pay it in the year in which the
liability arises. Rather, the notional liability is calculated and
kept as a charge against their superannuation benefits, when they
are eventually paid. Defined benefit fund members also are able to
pay out their liability before the benefit is paid in order to
avoid the interest that accrues on their surcharge liability.
A contributing spouse is entitled to receive
an 18 per cent rebate for contributions made to the superannuation
fund or retirement savings account of a spouse (up to a maximum of
$3000 contributions per annum), provided the spouse has an
assessable income plus reportable fringe benefits of $10 800
or less per annum. The maximum rebate of $540 phases out on a
dollar-for-dollar basis, and is not available when the low income
spouse s assessable income plus reportable fringe benefits is
$13 800 or more per annum. [5]
The superannuation contributions splitting
rules allow a person to request the transfer up to 85 per cent of
tax deductible contributions made by their employer on their behalf
and 100 percent of their personal contributions, made in the
previous financial year, to a superannuation account in their
spouse s name. [6] A
superannuation fund trustee can refuse to action this request. From
April 2007 members are no longer able to split untaxed
contributions made on or after 5 April 2007. [7]
As noted above, non-deductible contributions
are contributions made by individuals on an after tax basis. From 1
July 2007 the following annual limits apply:
-
$150 000, or
-
those under age 65 can make up to
$450
000 in non deductible contributions in one year as an
average over a three year period.
[8] If they make additional non-deductible
contributions in that three year period over the $450,000 limit the
additional contributions are subject to a penalty rate of
tax.
These thresholds increase in $5000 increments
if the annual increase in the Average Weekly Ordinary Time Earnings
(AWOTE), as calculated by the Australian Bureau of Statistics,
justifies such changes. [9] This method of increasing the threshold applied to many
other superannuation related thresholds after 1 July 2007.
Both payments received for personal injury and
certain small business CGT exempt amounts (see below) contributed
to a superannuation fund are exempt from the above limits. [10]
A tax of 46.5 per cent is imposed on the
amount of a person s non-deductible contributions in excess of
these annual limits. [11] In the case of an excess concessional contributions tax
liability, the member has a choice of having all or some of the
liability being released from their super account or they can
simply pay the debt from other savings.
In the case of an excessive non-concessional
contributions tax liability, the member must take the debt out of
the super account. [12] They may then pay the tax liability with these
funds.
From 1 July 2007 an employee for
superannuation guarantee purposes, and the self employed, may be
entitled to a Government superannuation co-contribution. These
contributions are non-deductible contributions.
In the 2007 08 year of income, an employee
with total income less than $28 980 who makes
personal superannuation contributions is eligible for a $1.50
contribution from the Government for every dollar of eligible
personal contributions made to a complying superannuation fund.
[13] The maximum
amount of eligible personal contributions that the Government will
match is $1 000. That is, the Government will contribute $1 500 if
an employee with income less than $28 980 makes $1
000 in personal superannuation contributions.
In the 2007 08 year for an employee with a
total income between $28 980 and $58
980, the maximum amount of the Government co-contribution
is reduced by five cents for every dollar above $28
980. There is no entitlement to the co-contribution once
an employee s total income is $58 980 or more.
[14] From the 2007
08 year of income, these thresholds are indexed in line with
full-time adult average weekly ordinary time earnings. The
following table sets out the levels of government co-contributions
that may be paid, by total income and personal contributions
made.
Table 1: Government Superannuation
Co-contributions amount by income and personal contribution 2007
08
|
Personal Superannuation contribution(s) is
|
$1000
|
$800
|
$500
|
$200
|
|
Total Income
|
|
|
|
|
|
$28 980 or less
|
$1500
|
$1200
|
$750
|
$300
|
|
$30 980
|
$1400
|
$1200
|
$750
|
$300
|
|
$32 980
|
$1300
|
$1200
|
$750
|
$300
|
|
$34 980
|
$1200
|
$1200
|
$750
|
$300
|
|
$36 980
|
$1100
|
$1100
|
$750
|
$300
|
|
$38 980
|
$1000
|
$1000
|
$750
|
$300
|
|
$40 980
|
$900
|
$900
|
$750
|
$300
|
|
$42 980
|
$800
|
$800
|
$750
|
$300
|
|
$44 980
|
$700
|
$700
|
$700
|
$300
|
|
$46 980
|
$600
|
$600
|
$600
|
$300
|
|
$48 980
|
$500
|
$500
|
$500
|
$300
|
|
$50 980
|
$400
|
$400
|
$400
|
$300
|
|
$52 980
|
$300
|
$300
|
$300
|
$300
|
|
$54 980
|
$200
|
$200
|
$200
|
$200
|
|
$56 980
|
$100
|
$100
|
$100
|
$100
|
|
$58 980
|
$0
|
$0
|
$0
|
$0
|
Source: ATO: Key Superannuation rates and
thresholds
The lowest amount of co-contribution payable
is $20 per financial year. That is, if an employee contributes as
little as $1 in personal contributions he or she will receive a
co-contribution payment into their superannuation fund of at least
$20 for the financial year. [15]
As noted above these contributions are non
deductible contributions. This means they are not subject to
contributions tax. However, the investment earnings of the fund on
co-contributions amounts are subject to tax (see below).
From 1 July 2004 any individual under the age
of 65 may make non-deductible contributions to a superannuation
fund. This includes children
under the age of 18. However, issues relating to contractual
capacity tend to limit the ability of children under 18 to
establish a superannuation account outside of an employment
arrangement. The special rules allowing a relative to contribute on
behalf of a child have been replaced by the general principle that
a fund may accept contributions made in respect of a member who is
under age 65 . [16]
These contributions will not qualify the child s superannuation
account to receive a government co-contribution payment. [17]
Amendments made to the Superannuation Industry
(Supervision) Regulations 1994, with effect from 1 July 2004, allow
anyone under 65 years of age to make contributions to a
superannuation fund without needing to meet any work test
requirements. From 1 July 2007 only those meeting these
requirements can make non-deductible contributions to a
superannuation fund.
Between 65 and
75
A superannuation fund may accept contributions
from a person in the following age groups:
-
age 65 and over but not yet 70, if a person has
been gainfully employed on at least a part time basis during the
financial year in which the contributions are made (e.g. personal
contributions, spouse contributions)
-
age 70 and over but not yet 75 only personal
contributions (i.e. no spouse contributions) if the person has been
gainfully employed on at least a part time basis during the
financial year in which the contributions were made.
[18]
For the purposes of these particular rules,
being gainfully employed on a part time basis during a financial
year requires the person to have worked at least 40 hours in a
period of not more that 30 consecutive days in that financial year.
For example, a person who works 40 hours in a fortnight can make
superannuation contributions (within the above contribution limits)
for the rest of the financial year. [19]
If a person aged between 65 and 75 continues
to work but does not meet the gainfully employed on a part time
basis test their superannuation fund may still receive mandated
employer contributions made on their behalf (i.e. any award based
contributions and SG contributions made by an employer, with the
latter payable up to age 70). The consequence of not meeting the
work test within this age range is that the person themselves
cannot make their own contributions to a superannuation fund.
Age 75 and
over
If a person is aged 75 or more only mandated
employer contributions (e.g. award contributions) can be accepted
on behalf of the person by a fund. [20]
A person can contribute an amount arising from
the sale of a small business to a superannuation fund without
incurring either CGT or a personal income tax liability. [21] This money is called a
CGT Exempt Component and is also exempt from contributions tax when
it is placed into a superannuation fund. Rather, these
contributions are treated as a non-deductible contribution for
taxation purposes. [22]
The total of all CGT exempt amounts contributed
to a superannuation fund in respect of an individual cannot exceed
$1 000 000 over that person s lifetime. This limit
will be indexed in line with increases in the AWOTE in $5000
increments. [23]
Additional requirements apply where the asset
is held through a company or trust structure, or jointly held with
another in a partnership arrangement.
Contributions arising from personal injury
payments are exempt from the non-deductible contributions limits,
if no tax deduction is claimed. The payment must be in the form of
a structured settlement , an order for a personal injury payment,
or lump sum workers compensation payment to be exempt from these
limits. [24]
From 1 July 2007 the following annual limits
apply on tax deductible contributions made by an employer on the
behalf of an employee and by a self employed individual claiming
these contributions as a tax deduction against their taxable
income:
A tax of 31.5 per cent is imposed on the
amount of a person s tax-deductible contributions in excess of the
above annual limits. [27] Amounts of concessional contributions made in excess of
these limits cannot be returned to the contributor to avoid this
tax. A member may withdraw an amount equal to the tax liability to
be paid and pay that liability with these amounts. [28]
From 1 July 2007 the self employed, under the
age of 75, can claim all personal superannuation contributions as a
tax deduction, but the work test has to be satisfied. [29] The unemployed aged
under 65 also can claim personal contributions as a tax deduction,
assuming of course they had the financial capacity to make such
contributions and taxable income to offset the contributions
against.
These contributions can be claimed as a tax
deduction if less than 10 per cent of a person s assessable income
and reportable fringe benefits are attributable to employment as an
employee. [30]
Tax deductible contributions are paid by an
employer under either an industrial award, or by an employer unde
the provisions of the superannuation guarantee (SG) legislation or
directly by a self employed individual. Employees can also arrange
with their employer to have salary sacrifice contributions made on
their behalf. Some employers also contribute more than the amount
required by the SG provisions because they choose to do so.
Until 30 June 2008 details of the
superannuation support that an employer is required to provide to
employees can be prescribed under federal and state industrial
awards in addition to the provisions of the Commonwealth s
superannuation guarantee scheme. The provisions of the
Workplace Relations Amendment (Work Choices) Act 2005
allow for the superannuation provisions of various industrial
awards to continue to have effect until 30 June 2008. [31]
Under award superannuation, the parties
(generally unions and employers) are bound by an award to make
superannuation contributions to a nominated superannuation fund or
funds. Some awards allow for choice of fund. The level of support
is normally not greater than 3 per cent of ordinary time earnings
or some other notional earnings base defined in the award and
permitted by the Superannuation Guarantee (Administration) Act
1992 (SG Act).
The award based superannuation provisions may
be replicated in a workplace agreement; or an agreement may make
reference to an award superannuation provision, but at a higher
employer contribution rate.
The superannuation guarantee scheme requires
all employers to provide a minimum of 9 per cent superannuation
support in each financial year for employees (with limited
exceptions). [32]
The superannuation guarantee 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 using the notional
earnings base in the award or ordinary time earnings.
Generally, employers may use an employee s
notional earnings as the basis for calculating their SG
contributions made on behalf of an employee. An employee s notional
earning s base may be lower than their earnings arising from their
ordinary hours of work. From 1 July 2008 employers will not be able
to use a notional earnings base to calculate the superannuation
guarantee contributions other than an employees ordinary hours of
work. [33] All
superannuation guarantee contributions will have to be calculated
on an employee s ordinary time earnings.
The ordinary time
earnings of an employee is the lesser of:
-
the total of the employee's earnings in respect
of ordinary hours of work and earnings consisting of over-award
payments, shift loading or commission but not including lump sum
payments made on termination of employment in lieu of unused annual
leave, long service leave or sick leave, or
-
the maximum contribution base for the
contribution period.
[34]
The requirement for an employer to pay
Superannuation Guarantee (SG) amounts on behalf of their employees
arises under the SG Act. The general operation of that Act is that
all employers are liable for the Superannuation Guarantee Charge
(SGC or the Charge). The amount of the Charge is reduced by the
amount of SG contributions paid by the due date. If the employer
does not make the required SG payments on behalf of their employees
by the due date (28 days after the end of the relevant calendar
year quarter) they are liable to pay the Charge. [35] Relief from paying some elements
of the Charge is given if the SG payments are made within an
additional 28 day period.
Following are the general circumstances where
the employer is not liable to pay the SGC:
The above list is not exhaustive, but
represents the major circumstances where an employer is not liable
for the Charge and therefore does not have to make SG payments on
behalf of these employees.
Employers who do not make superannuation
guarantee contributions are liable for the superannuation guarantee
charge. The superannuation guarantee charge is made up of the
employer s superannuation guarantee shortfall (the amount that the
employee should have received in superannuation guarantee
contributions), an interest (or penalty) component and an
administration component (to recover costs incurred by the ATO).
When calculating an individual employee s superannuation guarantee
shortfall, the amount of an employee s salary or wages used to
calculate their ordinary time earnings in a contribution period is
limited to the maximum contribution base, which is $36 470
per quarter. [41]
From 1 July 2003 employers have been required
to make superannuation guarantee contributions on a quarterly
basis.
Certain contributions will not be eligible for
a tax deduction. These contributions include:
From 1 July 2005 employees have been
required to choose the complying superannuation fund into which
they want to have their superannuation guarantee contributions
paid. Where an employee does not choose a superannuation fund, the
employer may choose the complying superannuation fund, provided it
is an eligible choice fund . An eligible choice fund is:
-
a complying superannuation fund
-
a retirement savings account
-
a fund presumed to be a complying
superannuation scheme under section 24 of the SG Act, or
-
a fund presumed to be a complying
superannuation fund under section 25 of the SG Act.
However, the Superannuation Guarantee
(Administration) Act 1992 excludes various groups of employees
from the coverage of the choice of superannuation fund legislation
including:
-
Commonwealth public sector employees, who
commenced employment before 1 July 2005
-
some employees who are members of defined
benefit superannuation funds,
-
employees under preserved State Industrial
Awards (as defined by cl 1 of Sch 7 to the Work Place Relations
Act 1996) (Work Choices Act), and
-
employees with superannuation entitlements
under certain certified agreements or Australian Workplace
Agreements.
[46]
However from 1 July 2006, choice of
superannuation fund has been extended to employees working for
corporations that were previously under a State industrial award,
but as a result of the Work Choices Act and associated regulations
are now under the Federal workplace relations system. [47]
Briefly, portability allows a superannuation
fund members to transfer some, or all, of their superannuation fund
balances to another superannuation account in their own name.
Portability makes it easer to consolidate a person s multiple
superannuation accounts. [48]
The assessable income of a complying
superannuation fund or retirement savings account, comprising of
both the investment earnings and the contributions received, are
taxed at a rate of 15 per cent. The capital gains tax discount for
superannuation funds is one third of the capital gains included in
a superannuation fund s assessable income.
The tax that a superannuation fund pays on its
assessable income can be reduced through the use of imputation
credits and other deductions such as those related to property
investment. [49] In
practice the average rate of tax on the earnings of a
superannuation fund is about 7.1 per cent per annum. [50]
Funds which are made non-complying are taxed
at a rate of 45 per cent on their assessable income, including
realised capital gains and taxable contributions. [51] Superannuation funds can be
non-complying either through choice or through failing to meet the
necessary standards and conditions required under prudential
legislation to qualify for tax concessions. All APRA regulated and
licensed funds are complying funds.
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This section describes the taxation
arrangements that apply to superannuation benefits. A
superannuation benefit generally is the amount of money in the
superannuation fund or retirement savings account to which the fund
member or retirement savings account holder is entitled. Most
benefits are in the form of lump sums or are capable of being
converted into a lump sum. However, some schemes, including those
covering many Commonwealth public servants, pay a substantial part
of benefits in the form of a pension. Most benefits are payable to
the member only on retirement or satisfaction of another condition
of release such as permanent disability and will often be subject
to preservation (see Preservation rules below).
These amounts should not be confused with
employment termination payments which refer to amounts paid arising
solely from the termination of employment. This latter class of
payments are not further discussed in this document.
From 1 July 2007 a superannuation benefit may
comprise the following:
The tax free component of a superannuation
benefit is generally made up of contributions from a person s
post-tax income and by amounts which represent the portion of a
superannuation benefit that accrued before 1 July 1983. The tax
free component is exactly that - it is paid tax free; no matter
whether it comes from a taxed or an untaxed source.
The taxable component of a superannuation
benefit is the total value of the superannuation benefit
less the tax free component. The taxable component is
usually made up of tax deductible contributions made to the
superannuation fund by the person and/or by the employer on the
person s behalf, as well as earnings on all contributions. For most
people the taxable component is entirely made up of an element
taxed in the fund, that is, a part that has been subject to tax at
the time that contributions were made and upon earnings.
The tax treatment of a taxable component also
depends on whether or not it is drawn from an element which has
been untaxed in a fund. Most members draw benefits from an element
that has been taxed in a fund. In comparison, an element untaxed in
the fund usually arises in public sector superannuation plans where
tax has not been paid on contributions or earnings, or from
unfunded schemes. [52] As noted above, only 10 per cent of superannuation fund
members belong to such schemes. [53] An element untaxed in the fund can also be
relevant when a taxed fund pays out an insurance death benefit to a
non-dependant such as an adult child.
Different taxation arrangements apply to the
element taxed in the fund and the element untaxed in the fund.
These arrangements are summarised in the following tables. The tax
rates specified in the tables are maximum rates of tax. The
Medicare levy (1.5% p.a.) is also payable upon any superannuation
benefit where a tax rate greater than zero per cent applies.
[54]
Table 2: Tax treatment of
superannuation member benefits -taxed elements
|
Age when benefit received
|
Superannuation lump sum
|
Superannuation pension
|
|
Aged 60
and above
|
Tax
Free
|
Tax
Free
|
|
Preservation age to 59
|
0% up to
$140 000, 15% on amount above this figure
|
Marginal
tax rate but with 15 % tax offset
|
|
Below
preservation age
|
20%
|
Marginal
tax rate but no tax offset for most pensions (a)
|
Source: Explanatory Memorandum to Simplified
Super Legislation [55]
(a) A disability superannuation pension
received below preservation age receives a 15 % tax offset
The superannuation pension offset and
preservation age are further discussed below.
The following table summarise the taxation
treatment of the benefits that are untaxed in the fund. These rates
apply from 1 July 2007.
Table 3: Tax treatment of superannuation
member benefits -untaxed elements
|
Age when benefit received
|
Superannuation lump sum
|
Superannuation pension
|
|
Aged 60
and above
|
15% on
first $1m per superannuation plan. Top marginal
rate on amounts over this
|
Marginal
tax rates and 10 per cent of gross pension paid tax offset
|
|
Preservation age to 59
|
15% on
first $140 000, 30% on amounts between this figure
and $1m and top marginal rate on amounts above
$1m
|
Marginal
tax rates but no tax offset
|
|
Below
preservation age
|
30% on
amounts up to $1m, top marginal rate
thereafter
|
Marginal
tax rates but no tax offset
|
Source: Explanatory Memorandum to Simplified
Super Legislation [56]
From 1 July 2007 there are two main tax
offsets applying to recipients of superannuation pensions:
-
the 15 per cent tax offset. A tax offset equal
to 15 per cent of the pension arising from the taxed source
[57] for recipients
aged between preservation age (currently 55) and 59, and
-
a tax offset equal to 10 per cent of the
pension paid from an untaxed source where the recipient is 60 years
of age or over.
[58]
Some pensions, such as those paid from the
Commonwealth s Public Sector Superannuation Scheme (PSS), may
contain payments from both a taxed and untaxed source, along with
some tax free amounts representing return of own contributions.
These pensions would qualify for both of the above tax offsets on
the relevant components.
A member is able to leave their benefits in
their superannuation fund indefinitely. They are able to withdraw
as much, or as little, as they chose at any time after their
preservation age provided that they either retired or have reached
age 65. [59] The
decision to leave benefits in a superannuation fund indefinitely is
subject to the rules of the particular superannuation fund
involved. However, investment earnings within the fund are tax free
if the amount concerned is used to finance an income stream which
meets the requirements of the legislation.
The ability to leave superannuation benefits
in a fund indefinitely has a commencement date of 10 May 2006.
[60]
From 20 September 2007 the following
arrangements will govern the payment of income streams from a
superannuation fund:
-
only the required payment of a minium amount
per year
-
no upper limit on the annual amount paid
(including cashing out the entire amount of capital backing the
pension)
-
no provision for an amount to be left over when
the pension ceases, and
-
the pension would be transferred only on the
death of the recipient to their dependant(s), or cashed out as a
lump sum to the dependant s estate. Such a pension cannot be paid
to a child aged 25 and over unless the child is permanently
disabled.
[61]
The following table illustrates the minimum
annual pension payment rates, by age; applying from 20 September
2007.
Table 4: Required minimum superannuation
pension payments
|
Age
|
Minimum payment percentage
|
Minimum annual payment for each $100,000 in the
account
|
|
Under
65
|
4%
|
$4000
|
|
65 74
|
5%
|
$5000
|
|
75 79
|
6%
|
$6000
|
|
80 84
|
7%
|
$7000
|
|
85 89
|
9%
|
$9000
|
|
90 95
|
11%
|
$11
000
|
|
95 or
more
|
14%
|
$14000
|
Source: Schedule 7 Superannuation Industry
(Supervision) Regulations 1994
Say a person, aged 56, elected to take their
superannuation benefit in the form of a pension. Further, that the
benefit was worth $100 000 when they made this decision. The
minimum amount to be paid in that financial year would be $4000.
The person could decide to take a pension of $10 000 in that
financial year if they so wished.
From 1 July 2007 both lump sum and pension
benefits paid from superannuation funds will be divided into both
taxed and tax free amounts. Partial payouts will also be divided
into these components, in the same proportion as the main benefit.
[62] For example,
if the main benefit was made up of 30 per cent tax-free and 70 per
cent taxed components then any partial withdrawal would be
similarly proportioned.
This rule will not impact the payment of
benefits from a fully taxed source if the recipient is aged 60 or
more. As noted above, such benefits are tax free in the hands of
the recipient. However, this new rule will affect partial
withdrawals made before that age, such as withdrawals under
financial hardship or on compassionate grounds, particularly where
the benefit contains a significant amount of non-deductible
contributions (i.e. contributions made on an after tax basis).
Preservation refers to the prudential
regulatory requirement that certain superannuation benefits be
maintained either in a superannuation or rollover fund or
retirement savings account until permanent retirement or after the
member reaches preservation age. [63] Benefits may be paid on a member s death or
invalidity prior to preservation age.
Preservation age is the age at which a fund
member can gain access to benefits that have accumulated in a
superannuation fund or retirement savings account, provided that
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 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:
Table 5: Preservation ages by date of
birth
|
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
|
|
After 30 June 1964
|
60
|
Source: Reg 6.01(2) Superannuation Industry
(Supervision) Regulations 1994
The preservation rules changed significantly
from 1 July 1999. These rules provided that all superannuation
contributions (including member contributions) and superannuation
fund investment earnings, from that date forward, would be
preserved until the member s preservation age.
Pre-1 July 1999, non-preserved components of a member s
superannuation entitlement generally retain their non-preserved
status.
Prior to 1 July 1999, some monies held in a
member s superannuation fund account were unpreserved benefits and
could be accessed, subject to some restrictions, without having to
wait until the member had reached the preservation age and retired
from the workforce. An example is non-deductible (or member)
contributions made from after-tax income prior to
1 July 1999, where the member is no longer working for
the employer with whom they were employed when he or she made these
non-deductible contributions.
From 1 July 2004, any employer eligible
termination payment rolled over into a superannuation fund or
approved deposit fund must be preserved until the member satisfies
a condition of release that allows them access to their preserved
benefits, such as retiring from the workforce once he or she have
reached their preservation age. From 1 July 2007 the only employer
termination payments that can be rolled into superannuation are
those that were specified in existing employment contracts as at 9
May 2006 and are paid in before 1 July 2012.
Preserved superannuation benefits can be
accessed on compassionate grounds and severe financial hardship or
as the result of permanent incapacity. The rules and procedures in
regard to release on compassionate grounds or financial hardship
are strictly prescribed in the legislation.
From 1 July 2005 a person who has reached
their preservation age may access their superannuation benefits in
the form of a non-commutable income stream without having to retire
or leave their current employment. Further, an allocated pension
taken under these provisions can be stopped at any time and
restarted at a later date. [64] These measures were designed to cater for more
flexible working arrangements towards the end of a person s working
life. These pensions are known as transition to retirement
pensions
For all new such pensions no more than 10 per
cent of the account balance of a transition to retirement pension
to be withdrawn as a pension payment in any one year. [65]
Departing Australia
superannuation payments
From 1 July 2002, temporary
residents who permanently depart Australia can gain access to their
accumulated superannuation. To be eligible for a payment:
-
the person must have entered Australia on an
eligible temporary resident visa (New Zealand residents are
excluded)
-
the person s visa must have expired or been
cancelled, and
-
the person must have permanently departed
Australia.
The payment of superannuation benefits that
qualify as departing Australia superannuation payments are subject
to special withholding tax rates to claw back the tax concessions
the contributions received when originally paid into the
superannuation. These rates are:
Back to top
Briefly, lump sum superannuation benefits paid
to a dependant of the deceased are tax free. [67] However, lump sum benefits paid
to non-dependants are taxed as outlined in tables 2 & 3 above,
according to the age of the recipient.
If a non-dependant receives a benefit, and it
includes a tax-free component, this amount remains tax free in the
non-dependant s hands. Further, capped tax rates on the lump sum of
15 per cent for the taxed element and 30 per cent for the untaxed
element apply. [68]
Taxation of superannuation pensions paid as a
result of the death of a member to their dependant is complex;
depending on the age of the member on death, and the age of the
person receiving it.
From 1 July 2007 a non-dependant cannot
receive a superannuation pension as a result of the death of a
superannuation pensioner after this date. A child aged 25 and over
is generally regarded as a non-dependant. However, the
non-dependant beneficiary in such circumstances may be entitled, to
receive a superannuation lump sum based on the commutation (i.e.
cashing out) of a pension paid to the deceased.
Pensions that commenced to be paid to a person
as a result of the death of a member before 1 July 2007 will
continue to be paid. Where such pensions are paid to a
non-dependant they are taxed as if they were received by a
dependant.
The following table summarises the tax
treatment of superannuation pensions paid to a non-dependant as the
result of the death of a primary pension recipient.
Table 6: Tax treatment of superannuation
pensions paid to a dependant of a deceased superannuation pensioner
after 1 July 2007.
|
Age of the deceased
at time of death
|
Age of the recipient
|
Tax Treatment of pension income in the hands of the
non-dependant recipient
|
|
60 or
above
|
Any
age
|
Income
arising from a taxable component tax free
Income
arising from an untaxed component marginal tax rates but with
access to the 10% tax offset
|
|
Below age
60
|
Above age
60
|
Income
arising from a taxable component tax free
Income
arising from an untaxed component marginal rates but with access to
the 10% tax offset
|
|
Below age
60
|
Below age
60
|
Income
arising from a taxable component marginal tax rates but with access
to the 15% tax offset
Income
arising from untaxed component marginal tax rates (no access to the
10% tax offset).
|
Source: Explanatory Memorandum to Simplified
Super Legislation [69]
From 30 June 2004, the definition of dependant
was widened to include people living in an interdependent
relationship. [70]
An interdependent relationship exists where the two people
involved:
-
have a close personal relationship
-
live together
-
one or each of them provides the other with
financial support, and
-
one or each of them provides the other with
domestic support and personal care.
[71]
From 1 July 2007 payment made to
non-dependants of Defence Force personal, Australian Protective
Service officers and federal or state or territory police killed in
the line of duty will be paid tax free. [72]
This treatment will apply from 1 January 1999.
Ex-gratia payments will be made to those non-dependants who
received superannuation payments between 1 January 1999 and 30 June
2007. [73]
Increased amount of death benefit
payments
A death benefit lump sum, paid to a trustee of a deceased
estate, spouse, former spouse or a child may be increased by part
of the contributions tax paid on tax-deductible contributions paid
into the fund since 1 July 1988. The superannuation fund can
recover any appropriate increase in the amount paid through a tax
deduction.[74]
This applies only where the person dies as a member of a
superannuation fund and where the trustees of the fund concerned
agree to increase the death benefit payment. As noted above, due to
the recent change in superannuation law a person may remain a
member of a fund irrespective of age or attachment to the
workforce, and withdraw as much or as little as they like. This
will lead to increased numbers of persons remaining members of
their superannuation funds until they die.
This section summarises how the GST is applied
to superannuation funds. [75]
The GST is a broad based, value added tax of
10 per cent on most goods and services supplied in Australia. It
has been fully effective from 1 July 2000. (Some contracts entered
into before 1 July 2000 are also affected by the GST). The GST is
payable on transactions where goods and/or services are supplied
for consideration (payment). No business is necessarily GST-free;
only certain transactions may be classified as such.
In all countries that have a GST type tax,
financial services are given special treatment. This is because of
the difficulty in valuing the service provided when there are sums
of capital and interest and other earnings in most financial
transactions. It is difficult to determine GST on transactions
comprising both a fee for service and an interest charge.
Accordingly, financial services are input-taxed .
Superannuation funds are in the business of
making financial supplies , meaning that the provision,
acquisition, or disposal of an interest in or under a
superannuation fund, scheme, approved deposit fund or retirement
savings account or in or under an annuity or allocated pension, is
a financial supply. [76] Accordingly, no GST is payable by superannuation funds
in respect of contributed capital and related fees paid by members
or employer sponsors.
Most of the services provided to members by
superannuation funds are free of GST; that is, they are input taxed
financial supplies . This means that superannuation funds pay GST
on many of their purchases (such as computers), do not levy GST on
the supplies they make to their ultimate customers (that is, on
benefits paid to fund members), and are input taxed (that is, they
are not able to obtain input credit for the GST levied on the goods
or services they purchased).
Nonetheless, in some circumstances
superannuation funds are eligible for reduced input tax credits.
For example, superannuation funds if registered for GST purposes
are eligible for reduced input taxed credits of the GST paid for
administration and legal services. In addition, superannuation
funds have to levy GST on their non- input tax financial supplies ,
provided that the fund is registered or required to be registered
for GST purposes. For example, superannuation funds are required to
levy GST on the supply of premises to commercial property tenants.
If a superannuation fund s turnover (which excludes input-taxed
supplies) exceeds $75 000 per year, it must register with the ATO
for GST purposes. The Government is also encouraging people who
manage their own superannuation funds to apply for an ABN to assist
with the administration of their fund. Possession of an ABN does
not necessarily mean that a superannuation fund is registered for
the GST. [77]
This section summarises the main features of a
self managed superannuation fund (SMSF).
A self managed superannuation fund is a fund
that:
-
has a trust deed that meets the requirements of
the Superannuation Industry (Supervision) Act 1993 (SIS
Act)
-
has no more than four members
-
all the members are trustees of that fund
-
no member of the fund is an employee of another
member of the fund, unless they are related, and
-
no trustee of the fund receives any
remuneration for their services as trustee.
Because all the members of a self managed
superannuation fund are trustees, the fund is not subject to the
full range of prudential regulation and supervision. However,
trustees of self managed superannuation funds still have to meet a
number of obligations:
-
lodging an annual income tax return and
superannuation fund annual return
-
lodging a superannuation member contributions
statements (MCS)
-
reporting payments of member benefits
-
appointing an approved auditor to complete the
annual audit
-
maintaining records for up to 10 years,
and
-
complying with investment restrictions.
Some of
the SIS Act key compliance requirements applying to SMSFs
include:
-
meeting the sole purpose test
-
formulating and giving effect to an investment
strategy
-
not accessing member s money without meeting a
specific condition of release
-
not providing loans or financial assistance to
members or relatives, and
-
not borrowing money to invest.
Self managed superannuation funds are
regulated by the ATO.
A self managed superannuation fund may pay an
allocated pension or a term allocated pension (sometimes called a
market linked pension) to its members.
However, there are restrictions on the ability
of a self managed superannuation fund to pay a defined benefit
pension:
-
no self managed superannuation fund established
on or after 12 May 2004 may pay a defined benefit pension.
[80]
Back to top
Endnotes
[1] . Changes enacted
mainly by the
Tax Laws Amendment (Simplified Superannuation)
Act 2007.
[2] . Leslie Nielson,
Superannuation ready reckoner: taxation, preservation,
self-managed superannuation funds and social security rules for
2005 06, Research Brief, no. 3, Parliamentary Library,
Canberra, 2005 6, 26 September 2005.
[3] . Treasury,
A
Plan to Simplify and Streamline Superannuation - Detailed
Outline, May 2006, p. 1, See
http://simplersuper.treasury.gov.au/documents/outline/default.asp
(accessed 13 May 2006).
[4] . Tax offsets is
the generic term used by the Australian Taxation Office to refer to
tax offsets, tax rebates and tax credits.
[5] . Income Tax
Assessment Act 1997 (ITAA97) s. 290-230.
[6] . Subsection
27A(1) Income Tax Assessment Act 1936.
[7] Subreg 6.41(3)
Superannuation Industry (Supervision) Regulations 1994.
[8] . ITAA97 sections
292-20 and 290-85.
[11] .
Sections 4 and 5 of the Superannuation (Excess Non-concessional
Contributions Tax) Act 2007 and s.292-80 ITAA97.
[12] .
Section 292-410 ITAA97.
[13] .
Total income of a year of income is defined in section 8 of the
Superannuation (Government Co-Contribution for Low Income
Earners) Act 2003 as being the person s assessable income for
the year of income and his or her reportable fringe benefits for
the year of income.
[14] .
Australian Taxation Office,
Key superannuation rates and
thresholds, 12 June 2007.
[15] .
Section 11, Superannuation (Government Co-contributions for Low
Income Earners) Act 2003.
[16] .
Superannuation Industry (Supervision) Regulations reg
7.04(1).
[17] .
Section 6, Superannuation (Government Co-contribution for Low
Income Earners) Act 2003.
[18] . Reg
7.04 Superannuation Industry (Supervision) Regulations 1994.
[19] . Reg
7.01(3) Superannuation Industry (Supervision) Regulations
1994.
[20] . Reg
7.04 Superannuation Industry (Supervision) Regulations 1994.
[21] .
Section 152-310 ITAA97.
[22] .
Section 292-90 ITAA97.
[23] .
Section 292-105 ITAA97.
[24] .
Section 292-95 ITAA97.
[25] .
Section 292-20 ITAA97.
[26] .
Section 292-20, Income Tax (Transitional Provisions) Act
1997.
[27] .
Sections 4 and 5 of the Superannuation (Excess Concessional
Contributions Tax) Act 2007 and s.292-15 ITAA97.
[28] .
Section 292-410 ITAA97.
[29] .
Subsection 290-165(2) ITAA97.
[30] .
Section 290-160 ITAA97.
[31] .
Section 527 Workplace Relations Act 1996.
[32] .
Section 19 Superannuation Guarantee (Administration) Act
1992.
[33]
Sections 5 to 7
Superannuation Laws Amendment (2004 Measures
No. 2) Act 2004 (No 93 of 2004) amending subsection 23(2) to
(5)
Superannuation Guarantee (Administration) Act 1992.
These latter sections do not take effect until 1 July 2008.
[34]
Subsection 6(1) Superannuation Guarantee (Administration) Act
1992.
[35] .
Section 16 Superannuation Guarantee (Administration) Act
1992.
[36] .
Sections 22 and 23 Superannuation Guarantee (Administration) Act
1992.
[37] .
Section 27(2) Superannuation Guarantee (Administration) Act
1992.
[38] .
Section 28 Superannuation Guarantee (Administration) Act
1992.
[39] .
Section 28 Superannuation Guarantee (Administration) Act
1992.
[40] .
Section 27(1) Superannuation Guarantee (Administration) Act
1992.
[41] .
Australian Taxation Office,
Key superannuation rates and
thresholds, 12 June 2007.
[42] .
Section 290-5 ITAA97.
[43] .
Section 290-1,
Income Tax (Transitional Provisions) Act
1997.
[44] .
Subsection 290-60(4) ITAA97.
[45] .
Section 290-95 ITAA97.
[46] .
Section 32, Superannuation Guarantee (Administration) Act
1992.
[47] .
Schedule 17 Workplace Relations Amendment (Work Choices)
(Consequential Amendments) Regulations 2006 (No. 1) (SLI No. 50 of
2006). This Schedule makes necessary amendments to the
Superannuation Guarantee (Administration) Act 1992 and
associated regulations.
[48] .
Division 6.5 Superannuation Industry (Supervision) Regulations
1994.
[49] .
Imputation credits form part of the dividend imputation system.
The Australian Financial Review: Dictionary of Investment
Terms, 5
th Edition, Sydney, 2000, p. 110,describes
Imputation Credit as Taxation credits which are passed onto
shareholders who have received franked dividends in relation to
their shareholdings. Imputation credits arising from the company
tax paid by a company in relation to its profits.
[50] .
Australian Government,
International Comparison of Australia s
Taxes, 3
rd April 2006, p. 229.
[51] .
Subsection 26(2) Income Tax Rates Act 1986.
[52] . An
unfunded scheme is one where the benefits are contributed to the
scheme only when the member claims those benefits. That is, the
benefits are not funded by either the employee or the employer
during the time that person s membership.
[53] .
Australian Government, A Plan to simplify and streamline
superannuation Detailed outline, May 2006, p. 45.
[54]
. The Hon. Peter Costello MP, Treasurer,
Explanatory Memorandum
to Tax Laws Amendment (Simplified Superannuation) Bill 2007 et
al,7 December 2006, pp 45 and following.
[57] .
Section 301-25 ITAA97.
[58] .
Section 301-100 ITAA97.
[59] .
Treasury, A Plan to Simplify and Streamline Superannuation Detailed
Outline, 9 May 2006, p. 20.
[60] . The
Hon. Peter Costello MP, Treasurer, A Plan To simplify and
Streamline Superannuation Transitional Issues That Apply
Immediately ,
Media Release, No 57 of 2006, 14 June
2006.
[61] .
Treasury, A Plan to Simplify and Streamline Superannuation -
Detailed Outline, 9 May 2006, p. 21.
[62] .
Section 307-125 ITAA97.
[63] .
These prudential regulatory requirements are set out in the
Superannuation Industry (Supervision) Act 1993 and
Regulations 6.18 and 6.19 and Part 1 of Schedule 1 of the
Superannuation Industry (Supervision) Regulations
1994.
[64] .
Superannuation Industry (Supervision) Amendment Regulations 2005
(No. 2) and Retirement Savings Accounts Amendment Regulations 2005
(No. 1). Any type of income stream can be taken under these
provisions, including allocated pensions or market linked pensions.
However, they are non-commutable until the person has reached 65
and retired.
[65] .
Treasury, A Plan to Simplify and Streamline Superannuation Detailed
Outline, 9 May 2006, p. 23.
[66]
Section 5 Superannuation (Departing Australia Superannuation
Payments Tax) Act 2007.
[67] .
Section 302-60 ITAA97.
[68] .
Sections 302-140 and 302-145 ITAA97.
[69] . The
Hon. Peter Costello MP, Treasurer, Explanatory Memorandum to Tax
Laws Amendment (Simplified Superannuation) Bill 2007 et al,7
December 2006, p. 49.
[70] .
This includes people in a same-sex relationship where they meet the
definition of interdependant relationship.
[71] . Reg
10A Superannuation Industry (Supervision) Regulations 1994, Section
302-200 ITAA97.
[72] .
Subsection 302-195(2) ITAA97.
[73] .
Schedule 4, section 5, Tax Laws Amendment (2007 Measures No. 3) Act
2007.
[74] . Section
295-485 ITAA97.
[75] . For more
details, see the Association of Superannuation Funds of Australia
and the GST Start Up Office,
The Goods and Services Tax and the
Superannuation Industry Workbook, January 1999, website at:
http://www.superannuation.asn.au/gst/rpm.cfm?page=workbk.
[76] . This is set
out in regulation 40 13 of A New Tax System (Goods and Services
Tax) Regulations 1999.
[77] . See The New
Tax System Advisory Board media release,
Self Managed Super
Funds Should Apply for an ABN Now, 28 May 2000.
[78] . Reg 9.041
Superannuation Industry (Supervision) Regulations 1994. and ATO
Fact Sheet,
Self Managed Superannuation Funds and
Pensions, 31 May 2005.
[79] . The Hon Mal
Brough, Minister for Revenue and Assistant Treasurer, Press
Release,
Extension of Transitional Arrangements for Small
Funds, No. 049, 6 June 2005 and Reg 9.041 Superannuation
Industry (Supervision) Regulations 1994 and Superannuation Industry
(Supervision) Amendment Regulations 2005 (No. 4), which amends Reg
9.041(3) to allow a SMSF to commence to pay a defined benefit
pension in certain circumstances before 1 July 2006.
[80] . ATO
Superannuation Determination, SD 2004/1,
Superannuation: can a
self managed superannuation fund provide a defined benefit
pension?, at
http://law.ato.gov.au/pdf/sd04-001.pdf,
accessed 16 June 2005, and The Hon Mal Brough MP, then Minister for
Finance and Assistant Treasurer, Outcome of the Review of Pensions
in Small Superannuation funds,
Media Release, 27 September
2005.