An Information Paper on the Taxation of Superannuation and related matters
Commonwealth of Australia 1998
Print ISBN 0 642 25161 4
MEMBERS OF THE COMMITTEE:
Senator John Watson - Chair - Tasmania
Senator Lyn Allison - Victoria
Senator Stephen Conroy - Victoria
Senator Chris Evans - Western Australia
Senator Alan Ferguson- South Australia
Senator John Hogg - Queensland (until 1 March)
Senator Julian McGauran - Victoria
Senator the Hon. Nick Sherry - Tasmania (from 1 March)
The Committees Principal Research Officer, Mr Rod Adams, prepared
this paper. The Committee also acknowledges the assistance and advice
provided by Mr Emery Feyzeny, Partner, KPMG.
Address: The Senate
CANBERRA ACT 2600
Telephone: (02) 6277 3439
Facsimile: (02) 6277 5719
This paper provides an overview of the historical and current taxation
of superannuation funds and benefits. It does not purport to be definitive,
and it does not address some of the finer and more subtle points associated
with the payment of benefits.
In preparing this document the Committee was mindful of the complexity
of the current taxation arrangements for superannuation. Accordingly,
the Committee engaged the services of Mr Emery Feyzeny, a partner in KPMG.
Mr Feyzeny was asked to review the technical accuracy of the material
prepared by the secretariat, and to add value to the paper which was done
in the area of allocated pensions.
The Committee takes the opportunity of expressing its appreciation for
the contributions of professional firms in providing high quality evidence
to its various inquiries over the years.
TAXATION ON SUPERANNUATION
This paper has been prepared in response to a need for a better understanding
of the taxation regime on superannuation. As well as describing the current
law, some emphasis has been given to the relevant history in this area.
Given the complexity of the law, references to particular provisions have
been kept to a minimum.
At the end of the main paper, one suggested package of reforms (proposed
by a private organisation) is outlined. Some comments are then made relating
to taxation and the role of superannuation in providing retirement incomes,
especially in the light of the universal superannuation scheme now firmly
in place in this country.
An appendix has also been prepared describing relevant changes to
social security arrangements as they affect superannuation.
How is it described
1. The tax treatment of superannuation in Australia is complex. An excellent
independent summary, and perhaps the simplest precis possible, is that
by the World Bank which describes it this way:
The tax treatment is complex: contributions, earnings, and benefits
are partially taxed and partially deductible, the result of a pragmatic
attempt to reduce tax expenditures, especially those benefiting higher-income
individuals, while encouraging compliance. Employer contributions are
tax deductible up to specific limits that increase with the worker's
age. Fund earnings are taxed but at a low rate. Benefits beyond a specified
floor are taxed but at a lower rate if the benefit is taken as an annuity
rather than a lump sum.
2. Before entering into the detail, some re-examination of the
background to superannuation in this country is appropriate.
Retirement income policy and superannuation
3. During the period of the previous Government, a retirement income
policy was developed to address problems arising from an ageing population
caused primarily by the "baby boom" generation moving into age
pension age in the next two decades. Central to that policy was the introduction
of the Superannuation Guarantee (SG).
4. Because the Commonwealth has no express power to make laws on superannuation,
it has relied almost exclusively on its taxation power under the Constitution
to promote superannuation policy. Especially it has used provisions in
the Income Tax Assessment Act 1936 (the Tax Act) to provide incentives
5. The 1992 Superannuation Guarantee Charge (SGC) legislation provides
another example of the use of the tax power. This legislation imposes
a charge (tax) on employers who fail to make the minimum superannuation
guarantee (SG) contributions, rather than requiring the contributions
to be made. The level of SG contributions required to be made for the
current and coming years is given in the following table.
Table 1: Super Guarantee Contributions
All Employer Payroll Levels
Note: The maximum contribution base for an individual employee
for each quarterly contribution period is $23,630 for 1997/98 (although
contributions are only required to be paid on an annual basis).
6. With the advent of award superannuation and the SGC, the then Government
needed to increase the level of supervision and regulation of superannuation
funds. The principal response was to enact the Superannuation Industry
Supervision Act 1993 (SIS) and related legislation, under a combination
of the Commonwealth's powers to make laws relating to corporations and
to old age pensions. The Second Reading Speech included the following:
Taken together, these Bills will substantially increase the level of
prudential protection provided to the superannuation industry, and represent
a substantial strengthening of the security of superannuation savings
and of the protection of the rights of superannuation fund members.
7. The government continues to rely on its taxation power to confer tax
advantages on those funds which comply with the requirements of SIS.
Superannuation taxes and incentives
8. Superannuation savings are taxed at three stages:
- on entry to the particular fund - a contributions tax of 15 per cent,
principally on employer contributions;
- an extra contributions tax of up 15 per cent applying to those on
adjusted taxable incomes of $73 220 or more;
- on accumulation while in the fund - an earnings tax of 15 per cent
(income earned on assets in respect of pensions in the course of payment
is exempt of tax), which may be reduced by dividend imputation credits;
- on exit from the fund; when benefits are received as lump sums - a
benefits tax at varying rates, depending upon the amount of the benefit
(those benefits above the Reasonable Benefit Limits are taxed at the
member's marginal rate plus the Medicare Levy); pensions are included
in the recipient's income and taxed at marginal rates.
9. Essentially, what is involved here is a mixture of concessional taxation
incentives to encourage the placing of savings into superannuation.
The reasonable benefit limits
10. The reasonable benefit limits (RBLs) determine the maximum amount
of lifetime superannuation benefit and similar benefits that a person
is entitled to receive on a concessionally taxed basis. This system has
applied since 1 July 1990. All retirement payments are generally included,
such as payments from superannuation funds, approved deposit funds, superannuation
pensions, annuities and ex gratia payments made by employers on termination
of employment (the so called "golden handshakes").
11. The purpose of the RBLs is to limit the amount of concessionally
taxed superannuation benefits received by a person. From 1 July 1990
to 30 June 1994 the reasonable benefits system was based on a person's
Highest Average Salary (HAS). Prior to July 1990, the Tax Act provided
that for the income of a private sector superannuation fund to be exempt
from tax, it must provide benefits that were reasonable. The Taxation
Office determined the level of benefits that were considered reasonable.
12. The RBLs system does not restrict the overall amount of benefits
that a person may receive. Where a person receives a lump sum benefit
in excess of the lump sum RBL, the excess component is taxed at the highest
marginal rate. In the case where the pension RBL is exceeded by the payment
of a complying pension or annuity, the pension may continue to be paid,
but the excessive amount (the amount in excess of the person's pension
RBL) is not eligible for the 15 per cent pension or annuity rebate (see
13. There are two RBLs, the lump sum and the pension RBL. The pension
RBL applies where at least 50 per cent of the total benefits received,
or more than 50 per cent of the person's pension RBL amount, is taken
in the form of pension or annuity which meets the prescribed pension and
annuity standards. Otherwise the lump sum RBL will apply.
14. Since 1 July 1994, the pension and lump sum RBLs have been flat dollar
amounts indexed to Average Weekly Ordinary Time Earnings (AWOTE). The
relevant figures for 1997/98 are $454 718 and $909 435 for lump sum and
pension RBLs respectively. The lump sum RBL is reduced by two and a half
per cent for each year that a recipient is below 55 years of age.
15. There is a raft of provisions covering transitional RBLs, and matters
related to the detail of what is included in RBLs, which will not be covered
in this paper.
16. Until the late 1970s, no taxes were paid on entry to a superannuation
fund and both employee and employer contributions were tax deductible.
Neither were taxes paid on accumulation, with earnings of superannuation
funds being exempt. Taxes on exit were only imposed upon five per cent
of any lump sum and, if pensions or annuities were taken, tax was paid
on those income streams at each recipient's own marginal rates.
17. Changes to the deductibility of employee contributions since 1975-76
have been many and varied, and in some cases the deduction has been replaced
with a more limited rebate arrangement. Employer contributions remain
tax deductible, subject to age based limits (see paragraph 45 below).
18. Successive governments have made significant changes to the taxation
of superannuation, most notably in 1983, 1988, 1994 and finally in the
First major change was in 1983
19. In 1983 there existed two fundamental structural problems in the
taxation of superannuation:
- contrived tax minimisation arrangements which were greatly encouraged
by the existing taxation regime; and
- even in the case of genuine retirement benefits, the taxation of lump
sums was much more generous than that of pensions and annuities.
20. Prior to 1 July 1983, only five per cent of the amount received as
a lump sum payment on termination of employment was taxed. This was virtually
an open invitation to minimise tax, by maximising the lump sum on termination
at the expense of salary.
21. The full amount of pensions and annuities was included in assessable
income, reduced by the deductible amount. (The deductible amount was broadly
equal to dividing the undeducted purchase price (UPP) of the pension or
annuity by the relevant term. It was rare to see substantial UPPs in relation
22. In response to these problems, the Hawke Government introduced the
eligible termination payment (ETP) taxation arrangements with effect
from 1 July 1983. Instead of including only five per cent as assessable
income, the full amount was included subject to a maximum marginal rate
of 30 per cent. Contributions by employees and the self employed on or
after 1 July 1983 which did not attract a tax deduction (known as undeducted
contributions) were exempt from tax. To avoid retrospectivity, the new
rules only applied to lump sums attributed to service after 30 June 1983,
the old rate applying to sums attributed to service pre-1 July 1983.
23. To further encourage the preservation of benefits forgenuine retirement,
the 30 per cent tax on the first $55 000 of the post-30 June 1983 component
was reduced to 15 per cent where the recipient had attained the age of
55. No changes were made to the treatment of pensions and annuities. This
increased their relative attractiveness and reduced the scope for contrived
24. The 1983 changes, by substantially increasing the assessable amount
of lump sum benefits, had the effect of increasing Commonwealth revenues.
However, these revenues were not available to the then government, but
to future governments when the accumulated benefits were received by retirees.
Then in 1988
25. Effective from 1 July 1988, the Hawke Government reduced the tax
on the post-1983 component from 30 to 15 per cent, at the same time imposing
a 15 per cent tax on all contributions (other than undeducted contributions)
and earnings of superannuation funds. This changed the government's collection
from 30 per cent on fund decreases to 15 on fund increases and 15 per
cent on fund decreases. (Benefits decrease funds while contributions and
earnings increase them.)
26. Accordingly, the total tax was reduced to 27.75 per cent. However,
15 per cent became available to the current government. (Logically,
the 15 per cent on the first $55 000 was reduced to zero.)
27. The balance between lump sums and pensions/annuities was disturbed
by the reduction in the tax on lump sum benefits. Hence the government
phased in a 15 per cent rebate to apply to the post-1983 portion of a
pension or annuity commencing after 1 July 1988, and after age 55. Also,
income earned on assets set aside to provide pensions and annuities was
exempted from the 15 per cent tax. (This actually improved the tax position
relative to lump sums.) The result is rebateable pensions and annuities,
which must be purchased with an ETP (but see paragraphs 30 to 32 below).
28. These 1988 arrangements could not apply to unfunded benefits which
remained taxed under the 1983 rules with no rebate applying. Similarly
the 1994 changes, which are examined next, were to only apply to funded
The 1994 changes
29. The first measure was simply to apply the 15 per cent rebate to all
rebateable pensions and annuities, irrespective of their commencement
date, and to the whole of the taxable amount. The rebate is payable
after age 55 and the effect is to increase the attractiveness of pensions
and annuities as opposed to lump sum ETPs.
30. The second measure involved a change in the definition of UPP (undeducted
purchase price). Until 30 June 1994, the definition of UPP in relation
to rebateable pensions included contributions made before 1 July 1983
for which no deduction or rebate was available and contributions made
after 1 July 1983 for which no deduction was available.
31. The new definition of UPP (from 1 July 1994) simply included contributions
made after 1 July 1983 for which no deduction was available and can be
seen as an equity measure in reducing an overly generous provision. Those
taxpayers disadvantaged by this measure were more than compensated by
the first measure, namely the extension of the 15 per cent rebate to the
whole of the pension.
32. The definition of UPP in relation to rebateable annuities had been
different. A rebateable annuity is an annuity purchased wholly with ETP
moneys, that is an ETP was rolled over to purchase the annuity. The new
definition included only the undeducted contributions component rolled
over to purchase the annuity (not all the components rolled over to purchase
the annuity, except the post-1983 component, as previously). Undeducted
contributions are member contributions made after 30 June 1983 for which
no deduction was available.
33. Accordingly, from 1 July 1994 the same UPP amount applied to rebateable
pensions and annuities.
1996 Budget initiatives
34. From 1 July 1997, a taxpayer will be entitled to an 18 per cent income
tax rebate for superannuation contributions of up to $3 000 a year, which
are made for the benefit of his or her spouse.
35. The contributing partner is entitled to an annual tax rebate of $540
if the non-earning partner receives less than $10 800 a year. The rebate
cuts out when the non-earning partner makes more than $13 800 a year.
36. This measure provides a significant incentive and opportunity for
couples to maximise their joint superannuation entitlement. Couples can
potentially double their RBLs and receive a $540 tax rebate each year
to do it (see paragraph 12 for RBL limits). There are also potential tax
savings, such as the earnings being taxed at a maximum of 15 per cent
and potentially no taxation on benefits up to $90 474. (In 1997/98, on
retirement, generally, the first $90 474 of the post 30 June 1983
component of benefits is tax-free). If there are two superannuation benefits,
couples can effectively double up on the $90 474 threshold.
The surcharge tax
37. A further initiative announced in the 1996 Budget was that a superannuation
contributions surcharge tax of 15 per cent would apply to certain employer
contributions and deductible personal contributions. The surcharge currently
phases in at adjusted taxable income levels (see paragraph 8) of $73 220
(including super), and the full 15 per cent applies at levels above $88
38. This Committee conducted an inquiry into this surcharge and produced
a report in March 1997. The Committee also reported in November 1997 on
a series of Bills amending and expanding the application of the surcharge
39. The employee and government co-contribution proposals announced in
the 1995 Budget have been abandoned by the present Government. Essentially
these proposals would have introduced a minimum employee superannuation
contribution of three per cent through industrial agreements and awards
on a phased-in basis of one per cent per year from 1997/98. The government
would make capped, means-tested superannuation contributions to match
those made by employees, and the self-employed out of their after-tax
1997 Budget announcement of the savings rebate
40. A tax rebate will apply from 1 July 1998 to member (undeducted) superannuation
contributions, all net personal income from savings and investments, or
a combination of both up to annual cap of $3 000. The rate of the rebate
will be seven and one-half per cent from 1 July 1998, increasing to 15
per cent from 1 July 1999.
Employee choice of superannuation fund
41. The necessary legislation to implement the Government's announced
policy of introducing employee choice of superannuation fund was introduced
into Parliament on 4 December 1997. While this is not an issue directly
relating to taxation, employee choice of fund will have the effect of
further developing sophistication and competition in the industry.
42. Accordingly, the matter of choice is relevant when taxation and other
incentives for superannuation savings are under examination. It needs
to be remembered that until the mid-1980s, superannuation had little appeal,
or relevance, for the majority of Australians. The introduction of award
based superannuation followed by rollover funds, which allowed the tax
sheltering of "between jobs" super payouts until retirement,
were key steps in changing perceptions. Then, the introduction of the
Super Guarantee regime made superannuation a widespread entitlement, and
a matter of interest for all employees.
43. The main attraction of superannuation for individuals is that it
provides a disciplined, convenient and tax effective way of saving for
retirement that most people would find difficult to achieve outside the
44. Different taxation treatment applies to contributions made by fund
members themselves and those made by their employers.
Contributions made by employers
45. Contributions made by employers to provide superannuation benefits
to their employees are tax deductible within certain limits, dependent
on the person's age as follows (figures are for 1997/98).
Member's Age Maximum Deduction
Under 35 years $ 10,232
35 to 49 $ 28,420
50 years and over $ 79,482
46. Prior to the 1996 Federal Budget, an employer with ten or more employees
could elect to use a standard contribution limit per employee for deduction
purposes ($27,170 for 1996/97). In the 1996 Budget, the Government announced
the abolition of this standard contribution to limit the deduction to
age based limits, with allowance for pre-Budget contributions.
47. Employer contributions (whether deductible or not) are included as
income of the relevant superannuation fund and are taxed at 15 per cent.
Contributions made by members of funds
48. Different taxation treatment applies to member contributions depending
on whether the member's employer or spouse also makes contributions. Members
who attract no employer or spouse contributions, or only small amounts
of employer support, qualify as eligible persons, able to make
tax deductible personal superannuation contributions. There are tests
applying to the question of 'employer support'.
49. An eligible person for these purposes is able to make deductible
contributions of the first $3 000 plus 75 per cent of those contributions
above $3 000 up to the same age limit totals as listed above for employers.
50. Members with employer support are not entitled to any taxation concessions
for superannuation contributions unless their annual income is below $31
000. For incomes below $27 000, there is a maximum rebate of $100 based
on maximum rebateable contributions of $1 000 which reduce by 25 cents
in dollar of income over $27 000, so that the rebate is fully phased out
at incomes of $31 000 and above.
The 15 per cent surcharge
51. This surcharge was effective from 20 August 1996 and originally applied
to those contributions made by, or on behalf of, individuals whose annual
income (defined to be taxable income plus employer and tax deductible
personal contributions) exceeded $70 000. The surcharge was phased in
over the income range $70 000 to $85 000, the rate increasing by 0.001
per cent for each $1 above $70 000. From 1997/98 the annual income range
will be indexed to movements in average weekly earnings; for 1997/98 the
income range is $73 220 to $88 910.
1997 Budget initiative
52. A 15 per cent rebate, limited to $450 per year on personal after
tax contributions, is to be phased in over a two year period commencing
1 July 1998 (see paragraph 40).
Taxation of superannuation fund income
53. A complying superannuation fund benefits from a concessional rate
of taxation of 15 per cent on its income, which includes the taxable contributions
as outlined in the above paragraphs, and investment income (including
any realised capital gains of the fund). However, tax is not payable in
respect of income on assets supporting pensions in the course of payment.
Such a fund must:
- be a regulated superannuation fund for the purposes of the SIS Act;
- comply with the conditions of the SIS Act and Regulations; and
- not have been deemed non-complying by the Insurance and Superannuation
54. Complying funds can take advantage of any franking credits in respect
of Australian company dividends received, even though they do not pay
tax at the full rate. However, a complying superannuation fund must pay
tax at 47 per cent on certain types of non-arm's length income and certain
private company dividends (collectively referred to as "special income"),
if it derives that type of income.
55. A fund which does not qualify as a complying fund is taxed at 47
per cent on its income.
Taxing benefits - lump sums
56. Benefits from superannuation funds may be paid as lump sums or by
way of pension or annuity. The taxation treatment varies in each case.
Lump sums are generally paid as eligible termination payments (ETPs).
57. This next main part of the paper deals with the broader aspects relating
to the taxation treatment of lump sum benefits including the concept of
an ETP, then turns to the individual components of ETPs. It is appropriate
first, however, to examine the matter of rollovers.
58. Rollovers allow persons in receipt of an ETP to defer paying tax
on the amount received. In most cases, a taxpayer who is entitled to an
ETP can elect to roll over all or part of the payment into a complying
superannuation fund, approved deposit fund or eligible annuity. Any part
of the payment that is rolled over in the approved manner is not subject
to income tax at the point of rollover. The institution to which the rollover
payment is made may be liable for contributions tax and surcharge tax
on all or part of the rollover payment.
59. A subsequent payment to the taxpayer from the rollover fund, whether
as an ETP or as a pension or annuity income stream, will generally be
assessed as income. The relevant rate of tax may vary according to the
original composition of the payment (that is, before the rollover).
Eligible termination payments (ETPs)
60. An ETP is a payment made in respect of a taxpayer in consequence
of the termination of any employment of the taxpayer. Such payments include
retirement, termination and similar payments, superannuation fund payments
(except those in the form of a pension or annuity), and approved deposit
61. At the simplest level, there are two categories of ETPs - those which
deal with superannuation and like payments and those which do not. The
main examples of non-superannuation type payments include "golden
handshakes" and other severance payments, contractual termination
payments, payments in lieu of unused sick leave, and payments in compensation
for loss of office or employment. Also included are payments in lieu of
notice of termination, and payments by transfer of property (e.g. a parcel
of shares) to the taxpayer.
62. However, eligible termination payment has become something of a generic
term which is confusing in some commentaries and analyses. While lump
sum payments from superannuation funds are ETPs, so are certain other
payments (such as golden handshakes) from employers on resignation or
retirement, payments from approved deposit funds (ADFs), commutations
of pensions or annuities and the residual capital value of pensions and
63. 'Eligible termination payment' is defined in section 27A(1) of the
Tax Act. The definition covers nearly four pages, but the key distinction
is between paragraph (a) and the rest of the definition. Paragraph (a)
deals with any payment made in respect of the taxpayer in consequence
of the termination of any employment of the taxpayer, other than
what are essentially payments relating to superannuation. Paragraph (b),
and those following, deal with payments from superannuation funds and
64. The fact that ETPs are defined in the Tax Act indicates that they
are essentially instruments designed to assist with the special tax treatment
associated with particular types of payments. There can be some confusion
arising out the fact that some of the special rules relating to ETPs apply
to payments which have no connection with the termination of employment.
Also, there are special rules applying to payments which are similar in
character to ETPs, but which are excluded from the definition of eligible
termination payment under the Tax Act.
65. The following sections describe the taxation aspects of the types
of components that may be part of a relevant ETP at least related to superannuation.
Components of an ETP
Early retirement, redundancy and invalidity
66. Concessional tax treatment is given to payments under approved early
retirement schemes, bona fide redundancy and invalidity.
An ETP will qualify for concessional tax treatment as a bona fide redundancy
payment if the payment is made in consequence of the dismissal of the
taxpayer from employment because of bona fide redundancy.
67. Up to a certain limit, payments under early retirement schemes and
bona fide redundancy payments made on or after 1 July 1994 are tax-free
and are not ETPs. However, any excess is an ETP and taxed accordingly.
68. Invalidity payments made after 30 June 1994 are exempt from tax.
Concessional components - pre 1 July 1994
69. This is that part of an ETP which consists of, or is attributable
to, a bona fide redundancy payment, an approved payment or an invalidity
payment, made before 1 July 1994. The relevance of this since 1994 is,
of course, in relation to a payment made now of a rolled over ETP made
before 1 July 1994.
70. This concessional component is taxable to the extent that five per
cent of that component is included in assessable income and taxed at marginal
71. No tax is payable on undeducted contributions. These are member contributions
made to a fund after 30 June 1983 for which no taxation deduction was
allowable. Certain member contributions to a superannuation fund are eligible
for a rebate of tax (see paragraphs 48 to 50). Such rebateable contributions
qualify as undeducted contributions in this context. Note that undeducted
contributions retain their identity if rolled over.
Pre-July 1983 component
72. This is the proportion of an ETP relating to eligible service before
1 July 1983, of which five per cent is included in assessable income and
taxed at marginal rates.
Post-June 1983 component
73. This component is determined after the determination of all the other
components, and is equal to the total of the ETP reduced by all those
other components. The post-June 1983 component is included in full in
the taxpayer's assessable income for the year of payment, to the extent
that the component has not been rolled over. However, the rate of taxation
may be concessional, depending on the age of the recipient and whether
or not the payment was made from a taxed source.
74. A payment is from a taxed source if:
- it is made by a superannuation fund that is a resident fund and not
a constitutionally protected fund, or by an ADF, which is taxable;
- it is a commutation or residual capital value payment relating to
a pension or annuity where the provider is taxable; or
- it is attributable to the taxed element of an earlier ETP.
Post 1983 - tax rate on taxed and untaxed element
75. In some cases, the post June 1983 component may contain both taxed
and untaxed elements. (Note that the trustee of a taxed fund may elect
to have all or part of a payment treated as though it is from an untaxed
76. The rate of tax on the post-June 1983 component depends on the age
of the taxpayer and, if aged over 55, on the amount of the component.
For 1997/98, the tax rates are limited to maximum amounts set out in Table
77. This is the amount that exceeds the member's lump sum RBL (see paragraphs
10 to 15). It is taxed at the top marginal rate of tax, plus Medicare
Levy, regardless of the taxpayer's level of income.
Summarising the taxation of lump sum benefits
78. The relevant breakdown of components of ETPs and their taxation rates
is set out in the table below.
Table 2: Tax Treatment of ETP Components
||Able to roll over (Y/N)
|Post-June 1994 invalidity
(pre-July 1994 bona fide redundancy/
approved early retirement/invalidity
payments which have been rolled over)
|Non-qualifying component of an immediate
- pre age 55 years
- taxed element
- untaxed element
- post age 55 years
- taxed element
- untaxed element
* Plus Medicare levy.
** The ATO is the sole determinant of whether a benefit is excessive
or not. This determination only takes place subsequent to a cash benefit
having been received at which time it can no longer be rolled over. However,
if a person suspects that a benefit may be excessive then it can be rolled
over, in which case the ATO determination is deferred.
*** This threshold is allocated between the two components and
is indexed annually (figure is for 1997/98).
Other termination payments
79. The taxation of termination payments in relation to long service
leave and annual leave is detailed in the following table.
Table 3: Termination Payments
||Maximum Rate of Tax*
||% to be Included as Assessable Income
||Resignation, Retirement Payments
||Redundancy, Invalidity and Early
Retirement Scheme Payments
|Long Service Leave
- Pre 16-8-78
- 16-8-78 to 17-8-93
- Post 17-8-93
- Accrued to 17-8-93
- Post 17-8-93
* Medicare levy to be added.
Taxation of annuities and pensions
80. Pensions are regular incomes paid by superannuation funds, and annuities
are regular incomes paid by life insurance companies and Friendly Societies.
A pension or annuity is an annual amount payable during the remainder
of the life of the recipient, or for a fixed period. 'Pension' is generally,
but not necessarily, descriptive of payments relating to past service.
81. Allocated pensions and allocated annuities are relatively recent
innovations. They are very similar in nature and consequently, all future
reference will be limited to allocated pensions.
82. An allocated pension is an income stream which can be paid by any
complying superannuation fund. The key difference between a complying
pension and an allocated pension relates to the manner in which it is
measured for RBL purposes. A complying pension, which is required to meet
a stringent series of preconditions, is measured against the recipient's
pension RBL. An allocated pension is only required to meet minimal
conditions, the most significant of which relates to the minimum and maximum
amounts of pension which may or must be received in each year of income.
Also, whilst a complying pension can only be commuted or have a residual
capital value in very limited circumstances, such restrictions are not
imposed on an allocated pension. However, as a trade-off, allocated pensions
count towards the recipient's lump sum RBL.
83. The tax treatment depends on the date on which the annuity or pension
first became payable. Different treatments apply to the determination
of the undeducted purchase price (UPP) and the extent to which a rebate
Annuity or pension first payable before 1 July 1983
84. Such income is fully assessable during the year of receipt after
deducting the undeducted purchase price (UPP) in relation to the pension
or annuity. The UPP means that portion of the cost of the annuity or pension
to the recipient for which a deduction or rebate has not been allowed
or is not allowable, or which does not qualify for a rebate.
85. Details of the relevant calculations will not be examined in this
Annuity or pension first payable on or after 1 July 1983
86. This income is fully assessable after deducting, in the case of a
purchased annuity, the 'deductible amount' in relation to the annuity
for that year of income.
87. The 'deductible amount' represents the UPP of the annuity reduced
by its residual capital value, if any, and apportioned over the term for
which the annuity or pension will be paid or can reasonable expected to
be paid. Again the details of the relevant calculations are beyond the
scope of this paper.
Tax rebates for annuities or pensions
88. From 1 July 1994, a flat 15 per cent rebate of tax is available to
recipients of a 'rebateable superannuation pension'. (This replaces the
variable rebateable arrangements as previously existed.)
89. Rebateable superannuation pensions are those paid by complying funds
which have been subject to the 15 per cent tax on their income since 1
July 1988, and where the recipient is 55 years or over. A rebateable annuity
is one purchased wholly by the rollover of an ETP or ETPs, and is not
a superannuation pension.
90. Where the pension or annuity is from a source where tax has not been
paid (such as from some government schemes), the rebate is not available.
Also, any part of the pension or annuity which exceeds the relevant RBL
limit does not qualify for the rebate.
91. A complying superannuation fund which provides death (or disability)
benefits may claim a deduction relating to the cost of providing those
92. A death benefit paid from a fund is tax exempt if paid to a dependent
of the deceased member within six months of death or granting of probate,
and is within the pension RBL of the deceased member. Death benefits above
the pension RBL are taxed as an excessive component of an ETP (see paragraph
93. Death benefits paid to non-dependents from a complying superannuation
fund are taxed at a maximum rate of 15 per cent plus the Medicare levy.
REFORM OF THE TAXATION ON SUPER:ACCESS ECONOMICS
94. As part of a report commissioned by the Life Investment and Superannuation
Association of Australia (LISA) and the Investment Funds Association of
Australia (IFA), Access Economics looked at the taxation of superannuation
and proposed a series of reforms.
95. The concern of Access Economics in their paper was, inter alia, to
encourage an increase in superannuation savings. The Senate Select Committee
on Superannuation, while mindful of the savings issue, is more concerned
with the integrity of the superannuation system in the context of providing
retirement incomes. However, even in this context it is useful to look
at the reforms proposed by Access Economics. They included:
- abolition of the 15 per cent contributions tax (for deductible contributions)
, the superannuation fund earning tax, and the proposed government co-contribution
(Note: The co-contribution has already been abandoned by the present
- cancellation of the 15 per cent contributions surcharge;
- allowing non-deductible, or partially deductible, contributions full
- abolition of RBLs and annual age-related contribution limits;
- allowing the super funds refundable tax credits, to permit them full
access to imputation credits on franked dividend income;
- applying income tax at the full applicable rates to all superannuation
payouts, whether paid as lump sums or as annuities (the progressive
tax structure then works automatically to encourage annuities relative
to lump sums);
- applying these reforms prospectively, that is to contributions and
earnings from a specified starting date; and
- applying the reforms to both voluntary and compulsory superannuation
Flows and stocks
96. The intended effect of the reforms is to encourage an increase in
superannuation saving which Access Economics describe as a flow concept
- that is, the flow of funds into superannuation.
97. That is to be contrasted to the stock concept which relates
to the stock of savings overall. Access Economics is concerned to ensure
there is not simply a flow into superannuation out of other forms of savings
which could occur as a result of the reforms they propose. Rather Access
Economics' objective is to increase the stock.
98. Accordingly, they seek to ensure this flow into superannuation 'is
not undermined by taxpayers opting for salary sacrifice into voluntary
superannuation out of current income, while maintaining current expenditures
by running down stocks of savings accumulated in the past'.
99. Access Economics go on to describe the required set of conditions
to protect savings stocks which will not be outlined in this paper. However,
they list the following examples of the advantages of their package:
- superannuation fund administration and the superannuation system generally,
are both greatly simplified;
- the superannuation tax system is made more fair, and complications
between defined benefit and accumulation schemes do not arise, because
tax liability is determined on payout; and
- the elements of compulsion remain, together with increasing preservation
age, ensuring a minimum level of income saving and reducing scope to
100. The Access Economics proposals can fairly be regarded as a unique
reform package for assisting superannuation in providing retirement incomes.
101. The reforms proposed are unique in their comprehensiveness overall,
and in their concentration on the taxation of benefits, while releasing
contributions and fund earnings from the imposition of tax. It is likely
that this strategy should promote larger and faster accumulation of superannuation
savings. Also, by eliminating RBLs, what can be perceived as discrimination
is removed against those who would provide for higher retirement savings
and boost national savings in the process.
102. However, there is also a perceived inequity in the abandoning of
RBLs, and there is a need to be aware of the political sensitivity involved
in such a move.
103. Currently, the taxation regime on superannuation does seem to be
in danger of no longer being supportive of a comprehensive superannuation
system in this country. While it is reasonable that superannuation overall
should not be tax exempt, it needs to be remembered that it is the taxation
power of the Commonwealth which is used to promote superannuation. The
purpose of such promotion, since the early 1990s at least, should have
been so as to assist, or at least not inhibit, the development of the
universal superannuation arrangements.
104. The effectiveness of current taxation concessions in promoting universal
superannuation are questionable, given the increasing complexity of Commonwealth
taxation in general and on superannuation in particular.
105. It may be that a comprehensive review of the taxation of superannuation
is now warranted. Such a review should be independent of any review of
1. Parliamentary Research Service Background Paper No. 23 of 1994,
Supercalifragilisticexpiannuation - A Plain English Guide to Australian
2. CCH Australia Limited, Australia Master Tax Guide 1997.
3. CCH Australia Limited, Australian Superannuation Law and
4. Fifteenth Report of the Senate Select Committee on Superannuation,
Super Guarantee - Its Track Record (February 1995).
5. Seventeenth Report of the Senate Select Committee on Superannuation,
Super and Broken Work Patterns (November 1995).
Social Security Changes and Superannuation
Removal of the exemption of superannuation from social security tests
1. Before 20 September 1997, assets held in superannuation and rollover
funds were exempt under the Department of Social Security tests for people
below pension age. At pension age, amounts held are assessed in the same
way as other types of financial investments under the assets test and
the income test.
2. From 20 September 1997, superannuation assets are assessed for a person
aged between 55 years and age pension age, when that person has been on
income support for a total cumulative period of 39 weeks after reaching
age 55. The superannuation assets will be assessed in the same way as
other financial investments.
3. Under the income test, superannuation assets are now treated as financial
investments and added to the value of any other financial investments.
The extended deeming rates are then applied to that total to calculate
assessable income from financial investments. That income is then added
to income from other sources to work out the person's total income.
4. For the assets test, superannuation and rollover amounts will be counted
as assets and added to the value of other assessable assets.
5. The assessment of superannuation assets under the income and assets
test will not necessarily mean a reduction in a person's rate of social
security payment. This is because a person can have assets and income
up to a certain amount before their payment is affected. Persons with
small or modest amounts of superannuation, and little other income and
assets, will not be affected.
6. Legislation for these changes has been approved by Parliament. The
Superannuation Committee inquired into these changes in its 20th report
tabled in November 1996, Provisions of the Social Security Legislation
Amendment (Further Budget and Other Measures) Bill 1996 - Schedule 1.
7. A majority of the Committee recommended at that time that a threshold
of $250,000 be applied before the new provisions applied, and that the
new provisions only apply to superannuation assets accrued after 20 August
1996, the date of the budget announcement of the changes. However, those
recommendations were not adopted by the Government.
8. How persons are affected by the changes to the means test treatment
of superannuation depends on their individual circumstances, such as:
- the amount of superannuation they have;
- whether they are receiving a pension or allowance; and
- the amount of other income and assets they have.
9. It is not necessary for a person to have exhausted all their superannuation
savings before they can receive social security payments. Also, superannuation
assets of a person aged between 55 and age pension age cannot affect their
payment until they have been on income support for 39 weeks.
10. Periods on major or full income support payments count toward the
accrual of the 39 weeks. These payments include:
Disability Support Pension; Wife Pension; Carer Pension; Supporting
Parent Pension; Bereavement Allowance; Widow B Pension; Widow Allowance;
Disability Wage Supplement; Mature Age Allowance; Newstart Allowance;
Sickness Allowance; Special Benefit; Partner Allowance; Special Needs
Pension; Benefit Parenting Allowance; Age Service Pension; Invalidity
Service Pension; Partner Service Pension; Carer Service Pension.
11. Payments such as Basic Parenting Allowance and Family Payment do
not count toward the 39 weeks.
12. There has been continued criticism of removing the exemption of super
assets from the social security means tests. The change has not been well
received. Also, to some extent at least, this policy move by the Government
relates to the matter discussed next - the change to early access to superannuation
under the hardship rules - which has also been criticised.
Early access to superannuation for social security recipients
13. The Government announced in the 1997-98 Budget that, effective from
1 July 1997, it would be changing the rules relating to the early
access to preserved superannuation benefits. These changes affect access
on grounds of financial hardship. Formerly, the hardship test allowed
individuals to access their superannuation where the Insurance and Superannuation
Commissioner determined in writing that the individual was in severe financial
hardship. (Persons were also able to obtain access to their benefits on
The Government's changes
14. The subjective tests for hardship were replaced by objective tests
requiring applicants to satisfy specific conditions, and by a defined
set of criteria for compassionate grounds. In the case of hardship, the
new test involves receipt of Commonwealth income support payments for
a minimum continuous period.
15. The Government's changes also shifted the responsibility for assessing
hardship applications from the Commissioner to individual funds. (The
Commissioner was to still decide applications on compassionate grounds,
but exercise of this discretion was now confined by a series of objective
criteria spelt out in the new regulations.)
The Committee's reference
16. In June 1997, this Committee was given a reference to examine the
Government's changes to early release of benefits, including the changes
to the hardship provisions. In its report tabled in September 1997, the
Committee recommended several changes to the new rules. These recommendations
- extending the definition of income support;
- reducing the required period of receipt of income support payments
(Labor Senators specifying a period of 12 weeks);
- adding a subjective test, being the total inability to meet reasonable
and immediate family living expenses;
- making the Insurance and Superannuation Commission the appropriate
body to assess claims for financial hardship; and
- expanding the criteria under the compassionate grounds provisions,
to include a residual discretion for the Insurance and Superannuation
Commissioner to release benefits other than in accordance with the listed
criteria, where such serious and special circumstances exist so as to
justify compassionate consideration.
Subsequent negotiation and changes
17. In the Senate, the Labor Opposition moved for disallowance of the
regulations which gave effect to the Government's changes to the early
release rules. Following the full Parliamentary period allowed for dealing
with the disallowance motion, the Government announced it would be introducing
amending regulations which followed, at least in part, the recommendations
of the Committee in its report.
18. The changes from the original Budget announcement included:
- a reduction in the period for which an applicant for early release
must be in receipt of Commonwealth support payments, from 12 months
to six months;
- tightening of the hardship test; and
- more flexibility in the compassionate grounds criteria.
19. Following the Government's announcement that new regulations would
be introduced, the motion for disallowance of the former regulations was
20. It is fair to say that the first steps towards integrating the superannuation
and the social security systems were not without difficulties. However,
future changes may well see closer linkages between these two systems.
LIST OF COMMITTEE REPORTS
Super System Survey - A Background Paper on Retirement Income
Arrangements in Twenty-one Countries (December 1991)
Papers relating to the Byrnwood Ltd, WA Superannuation Scheme (March 1992)
Interim Report on Fees, Charges and Commissions in the Life Insurance
Industry (June 1992)
First Report of the Senate Select Committee on Superannuation - Safeguarding
Super - the Regulation of Superannuation (June 1992)
Second Report of the Senate Select Committee on Superannuation - Super
Guarantee Bills (June 1992)
Super Charges - An Issues Paper on Fees, Commissions, Charges
and Disclosure in the Superannuation Industry (August 1992)
Third Report of the Senate Select Committee on Superannuation - Super
and the Financial System (October 1992)
Proceedings of the Super Consumer Seminar, 4 November 1992 (4 November
Fourth Report of the Senate Select Committee on Superannuation - Super
- Fiscal and Social Links (December 1992)
Fifth Report of the Senate Select Committee on Superannuation - Super
Supervisory Levy (May 1993)
Sixth Report of the Senate Select Committee on Superannuation - Super
- Fees, Charges and Commissions (June 1993)
Seventh Report of the Senate Select Committee on Superannuation - Super
Inquiry Overview (June 1993)
Eighth Report of the Senate Select Committee on Superannuation - Inquiry
into the Queensland Professional Officers Association Superannuation Fund
Ninth Report of the Senate Select Committee on Superannuation - Super
Supervision Bills (October 1993)
Tenth Report of the Senate Select Committee on Superannuation - Super
Complaints Tribunal (December 1993)
Eleventh Report of the Senate Select Committee on Superannuation - Privilege
Matter Involving Mr Kevin Lindeberg and Mr Des O'Neill (December 1993)
A Preliminary Paper Prepared by the Senate Select Committee on Superannuation
for the Minister for Social Security, Options for Allocated Pensions
Within the Retirement Incomes System (March 1994)
Twelfth Report of the Senate Select Committee on Superannuation - Super
for Housing (May 1994)
Thirteenth Report of the Senate Select Committee on Superannuation -
Super Regs I (August 1994)
Fourteenth Report of the Senate Select Committee on Superannuation -
Super Regs II (November 1994)
Fifteenth Report of the Senate Select Committee on Superannuation - Super
Guarantee - Its Track Record (February 1995)
Sixteenth Report of the Senate Select Committee on Superannuation - Allocated
Pensions (June 1995)
Seventeenth Report of the Senate Select Committee on Superannuation -
Super and Broken Work Patterns (November 1995)
Eighteenth Report of the Senate Select Committee on Superannuation -
Review of the Superannuation Complaints Tribunal (April
Nineteenth Report of the Senate Select Committee on Superannuation -
Reserve Bank Officers Super Fund (June 1996)
Twentieth Report of the Senate Select Committee on Superannuation - Provisions
of the Social Security Legislation Amendment (Further Budget and Other
Measures) Bill 1996 - Schedule 1 (November 1996)
Twenty-first Report of the Senate Select Committee on Superannuation
- Investment of Australia's Superannuation Savings (December 1996)
Twenty-second Report of the Senate Select Committee on Superannuation
- Retirement Savings Accounts Legislation (March 1997)
Twenty-third Report of the Senate Select Committee on Superannuation
- Superannuation Surcharge Legislation (March 1997)
Twenty-fourth Report of the Senate Select Committee on Superannuation
- Schedules 1, 9 & 10 of Taxation Laws Amendment Bill (No. 3) 1997
Twenty-fifth Report of the Senate Select Committee on Superannuation
- The Parliamentary Contributory Superannuation Scheme & the Judges'
Pension Scheme (September 1997)
Twenty-sixth Report of the Senate Select Committee on Superannuation
- Super - Restrictions on Early Access: Small Superannuation Accounts
Amendment Bill 1997 and related terms of reference. (September 1997)
Twenty-seventh Report of the Senate Select Committee on Superannuation
- Superannuation Contributions Tax Amendment Bills. (November 1997)
Super Taxing - An information paper on the Taxation of Superannuation
and related matters. (February 1998)
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