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| ABN |
Australian Business Number |
| APRA |
Australian Prudential Regulation Authority |
| ASIC |
Australian Securities and Investments Commission |
| ATO |
Australian Taxation Office |
| GST |
Goods and Services Tax |
| SG Act |
Superannuation Guarantee (Administration) Act 1992 |
From 1 July 2007 new taxation and preservation arrangements
applying to
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:
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.
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]
Generally, contributions to superannuation funds can be made in either one of two ways:
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:
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:
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.
| 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.
A superannuation fund may accept contributions from a person in the following age groups:
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.
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 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:
However, the Superannuation Guarantee (Administration) Act 1992 excludes various groups of employees from the coverage of the choice of superannuation fund legislation including:
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.
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]
| 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.
| 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:
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:
The following table illustrates the minimum annual pension payment rates, by age; applying from 20 September 2007.
| 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:
| 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]
From 1 July 2002, temporary residents who
permanently depart
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:
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.
| Age of the deceased |
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:
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]
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
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:
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:
Some of the SIS Act key compliance requirements applying to SMSFs include:
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: