FirstTech Super guide. FirstTech was ranked 1st by advisers for Technical Support in the 2011 Wealth Insights Fund Manager Service Survey.

Transcription

1 FirstTech Super guide FirstTech was ranked 1st by advisers for Technical Support in the 2011 Wealth Insights Fund Manager Service Survey.

2 This Super guide has been developed to provide you with an easy reference tool when planning and reviewing your clients super, tax and retirement strategies. For additional facts, figures and information for the financial year, please refer to your FirstTech Pocket guide.

3 Contents 1. Key tax and superannuation thresholds Resident marginal tax rates Flood levy Low income tax offset Senior Australians tax offset (SATO) Taxation of superannuation member benefits Taxation of super income stream benefits commenced from 1 July Taxation of super death benefits Contributions caps 9 2. Getting money into super How much can be contributed to super? Contribution eligibility rules summary table Adviser contribution checklist Work test Member contributions Employer contributions Mandated employer contributions Voluntary employer contributions Fund-capped contributions Tax file numbers Children and super contributions Caution with rollovers In specie contributions Temporary residents Contributions from personal injury payments Super contribution tax concessions Tax deductions for personal super contributions Conditions for claiming a tax deduction for personal super contributions Primary conditions Additional conditions Employer tax deductions for super contributions Offset for spouse super contributions Children and tax deductions for super Government co-contribution for super contributions Overview of employer and personal deductible contributions Contributions caps and taxation of contributions Contributions caps summary table Concessional contributions cap Concessional contributions Non-concessional cap Non-concessional contributions Indexation of caps Taxation of contributions Contributions caps for constitutionally protected and defined benefit funds and funds with reserves 35 1

4 5. Administration of excess contributions How does the ATO track member contributions? Member responsibility to track contributions Assessment notice Commissioner s discretion Release authority CGT small business concessions and contributions to super Capital gains tax concessions Basic conditions for CGT relief Additional eligibility rules for 15-year exemption Contributing proceeds to super where 15-year exemption applies Additional eligibility rules for $500,000 retirement exemption Contributing capital gains to super where $500,000 retirement exemption applies Additional eligibility rules for 50% (active asset) reduction Additional eligibility rules for small business rollover Lifetime CGT cap Treatment of excess CGT contributions Contribution rules for the CGT cap Death and the small business CGT concessions Moving super Portability transferring super balances Contribution splitting transferring recent contributions Marriage breakdown transferring super to another spouse Getting money out of super Preservation Preservation age Conditions of release with nil cashing restrictions Conditions of release with cashing restrictions Compulsory cashing In specie payments Transition to retirement Cashing restrictions for transition to retirement Income streams for transition to retirement Allowable commutations Rolling back to accumulation Priority of preservation components Transition to retirement strategies 66 2

5 10. Taxation of super benefits Taxation of super lump sums Terminal medical condition payments Taxation of super death benefits Who is a dependant for tax purposes? No low rate cap for death benefits Untaxed element for certain death benefit lump sums Deduction for increased amount (anti-detriment payment) of super lump sum death benefit Taxation of disability super benefits Taxation of salary continuance insurance benefits Taxation of rollover super benefits Untaxed plan cap amount Taxation of super income stream benefits commenced from 1 July Taxation of super income stream benefits commenced prior to 1 July Determining the tax-free and taxable proportions of super benefits Proportioning accumulation phase Proportioning pension phase post 1 July 2007 pensions Proportioning pension phase pre 1 July 2007 pensions Pre July 1983 component Retirement income streams Introduction to super income streams Taxation of retirement income streams Types of super income streams that can be paid Overview of income stream standards Minimum income percentage factors Pro-rata rule and 1 June rule What are the payment standards for account-based income streams? Transition to retirement income streams What are the payment standards for non-account-based (RCV) income streams? What are the payment standards for lifetime income streams? What are the payment standards for fixed term income streams? Commutation rules Social security and aged care treatment of income streams from 20 September Term allocated pensions (TAP clones) Life expectancy factors Taxation of super income Taxation of income in super vs other investment structures Taxation of capital gains in super 93 3

6 13. Super estate planning Taxation of super death benefits Death benefit payments Super not part of an estate Compulsory cashing of benefits upon death Form in which death benefits may be cashed Can death benefits be paid in specie? Who can be paid a super death benefit? Who is a dependant? Death benefit nominations Reversionary pensions Rollovers of super death benefits Prescribed period for death benefit commutations Insurance in super Types of insurance which may be held in super Life insurance Total and permanent disability (TPD) insurance Income protection insurance Trauma insurance Taxation of insurance premiums Taxation of insurance benefits Insurance premiums and contribution caps Self-insurance Tax treatment of group insurance Salary continuance insurance (SCI) comparison Employer super issues What is an employment termination payment (ETP)? Genuine redundancy payments Early retirement scheme payments ETP checklist Contributing ETPs into a super fund Tax-free amount of genuine redundancy and early retirement scheme payments Taxation of ETPs Life benefit termination payments Taxation of life benefit termination payments ETP cap amount Lower cap amount Middle rate part Upper cap amount Transitional rules Transitional termination payments Directed termination payment (DTP) Death benefit termination payments Taxation of unused leave payments Superannuation guarantee (SG) The SGC Choice of fund Small business superannuation clearing house Superannuation holding accounts special account (SHASA) Tax deductions for employer contributions Salary sacrifice arrangement 126 4

7 16. Foreign super Contributions caps and foreign super transfers Transfer within six months Transfer after six months What if the individual receives a withdrawal directly from an overseas super fund? Applicable fund earnings Normal contribution rules and caps apply UK pension transfers Social security Age pension Age pension entitlements Income test for age pension What counts towards the income test? Deeming Deeming rates from 1 July Assets test What counts towards the assets test? Gifting Super, income streams and social security Social security categories of retirement income streams Defined benefit income streams for social security Income testing of retirement income streams How do commutations affect the social security deductible amount? Asset testing of retirement income streams Exempt income streams Assets test for asset tested (long-term) income streams Assets test for asset tested (short-term) income streams Assets test for defined benefit income streams Retaining 100% assets test exemption Retaining 50% assets test exemption Aged care Department of Veterans Affairs (DVA) service pensions FirstTech flyers 154 Glossary of acronyms 155 Contacts for advisers inside back cover 5

8 1. Key tax and superannuation thresholds Resident marginal tax rates Resident individuals Income Rate $0 $6,000 0% $6,001 $37,000 15% over $6,000 $37,001 $80,000 $4, % over $37,000 $80,001 $180,000 $17, % over $80,000 $180,001+ $54, % over $180,000 Note: Medicare levy may also apply where taxable income exceeds a certain level, or the Medicare levy surcharge applies Flood levy Taxable income Flood levy on this income $0 to $50,000 Nil $50,001 to $100,000 Half a cent for each $1 over $50,000 Over $100,000 $250 plus 1c for each $1 over $100,000 Notes: Applies to taxable income for the financial year only. In the case of couples, both members will be assessed individually for flood levy purposes based on their own taxable income. ETPs and certain superannuation benefits paid to your clients under age 60, that are taxable income, will also be included. The levy will not apply to income which is exempt from income tax. For example, superannuation benefits paid to a person over the age of 60 years that are not assessable and not exempt. This levy applies to the taxable component of super withdrawals including those within the low rate cap of $165,000 for , which is subject to a tax rate of nil Low income tax offset Taxable income (TI) Reduction in offset (RI) Maximum offset $0 $30,000 Nil $1,500 $30,001 $67,499 (TI $30,000) x 0.04 $1,500 RI $67,500+ $1,500 Nil 6

9 1.4. Senior Australians tax offset (SATO) Family situation Maximum tax offset level $ Taxable income shade-out threshold $ Taxable income cut-out threshold $ Single 2,230 30,685 48,707 Couple (each) 1,602 26,680 39,496 Couple separated because of illness (each) 2,040 29,600 45,920 Notes: Other eligibility criteria: age pension age or service pension age or older on 30 June 2012 eligible to receive an age or service pension, even if no pension actually paid, and not in prison for the whole income year. For a whole-of-year couple, offset eligibility of each partner is determined by their combined taxable income level, ie less than $78,992 or less than $91,840 if illness-separated, whereas offset entitlement is calculated on the basis of individual taxable income. Offset reduces by 12.5 cents for each dollar of taxable income in excess of the shade-out threshold. Partnered senior Australians can transfer any unused portion of their tax offset to their partner. Please refer to the Senior Australians and pensioner tax offset calculator on the ATO website (partner must be eligible for senior Australians or pensioner tax offset). Medicare levy does not apply for taxable income below the shade-out threshold Taxation of superannuation member benefits The tax-free component is not assessable and not exempt income and is not subject to tax*. Taxation of super lump sums taxable component Age 60 and above Taxable component taxed element Not assessable income and not exempt income (NANE) Max tax rate Taxable component untaxed element Max tax rate 0% First $1.205 million (untaxed plan cap) 15% Balance over $1.205 million (untaxed plan cap) 45% Preservation age to 59 First $165,000 (low rate cap) Balance over $165,000 (low rate cap) 0% First $165,000 (low rate cap) 15% 15% $165,000 (low rate cap) to $1.205 million (untaxed plan cap) 30% Balance over $1.205 million (untaxed plan cap) 45% Below preservation age Whole component 20% First $1.205 million (untaxed plan cap) 30% Balance over $1.205 million (untaxed plan cap) 45% Note: For all non-zero tax rates, Medicare levy may also apply. Please refer to section 10.1 for more information. * NANE income is neither assessable income nor exempt income. It is ignored when working out your client s taxable income and their tax losses. This cap is indexed annually and is rounded to the nearest $5,000. 7

10 1.6. Taxation of super income stream benefits commenced from 1 July 2007 Age Taxable component taxed element 60 and above 0%. Not assessable income, not exempt income (NANE) Taxable component untaxed element MTR less a 10% tax offset Preservation age to 59 MTR less a 15% tax offset MTR (no tax offset) Below preservation age MTR (no tax offset) MTR (no tax offset) Note: For all non-zero tax rates, Medicare levy may also apply. See sections 10.3 and 10.8 for the taxation of super death benefits and disability super benefits Taxation of super death benefits The tax-free component is not assessable and not exempt income and is not subject to tax. Super death benefits paid to a dependant Age of deceased at time of death Type of death benefit Age of recipient Taxation of taxable component Taxed element Untaxed element Any age Lump sum Any age 0% NANE 0% NANE Age 60 and above Income stream Any age 0% NANE MTR less 10% tax offset Below age 60 Income stream Age 60 and above 0% NANE MTR less 10% tax offset Below age 60 Income stream Below age 60 MTR less 15% tax offset MTR (no tax offset) Super death benefits paid to a non-dependant* Age of deceased Type of death benefit Age of recipient Taxation of taxable component Taxed element Untaxed element Any age Lump sum Any age Max 15% Max 30% Any age Income stream Any age Not permitted from 1 July Death benefit income streams commenced prior to 1 July 2007 will be taxed as if received by a dependant. NANE: Not assessable income and not exempt income (not subject to tax). It is ignored when working out your client s taxable income and their tax losses. MTR: Marginal tax rate. For all non-zero tax rates, Medicare levy may also apply. For all payments, the tax-free component is NANE. These payments are not subject to tax. Please refer to Chapter 14 for information on the tax treatment of TPD and SCI. * Refer to section

11 1.8. Contributions caps This section does not include all the contributions caps. Please see Chapter 4 for more information. Concessional contributions cap Income year Amount of cap $25,000 /$50,000* * There is a transitional period between 1 July 2007 and 30 June If a person is age 50 or over on the last day of a financial year within the transitional period, the transitional cap of $50,000 will apply. Between 1 July 2007 and 30 June 2009 the transitional concessional cap was $100,000 pa. This cap is not indexed. This cap is indexed annually and is rounded down to the nearest $5,000 (unchanged from ). Non-concessional contributions cap Income year Amount of cap $150,000/$450,000* * People under age 65 at any time in the financial year may effectively bring forward two years worth of non-concessional contributions, allowing them to contribute $450,000 at any time over a three-year period without exceeding the cap (unchanged from ). Note: If a person has invoked the two-year bring forward rule in a particular financial year, their non concessional cap will remain at three times the non-concessional cap in the first year. CGT cap Income year Amount of cap $1.205 million Note: The CGT cap is a lifetime limit and is indexed annually and rounded down to the nearest $5,000. See section 4.6 for more information. For more information on certain types of super contributions caps breaches and how they could have been avoided, please refer to FirstTech Strategic Update 68 May/June 2011 and the FirstTech contributions checklist which you can complete whenever giving super contributions advice. 9

12 2. Getting money into super 2.1. How much can be contributed to super? There is generally no limit to the amount that may be contributed by, or on behalf of, a member within a financial year. However, the member will be personally liable to excessive tax on contributions made within a financial year that are in excess of contributions caps. For more information on contributions caps and taxation of excess contributions, see Chapter 4. Caution! There is one exception to no limits on contributions to super. The size of a single contribution will be limited if it is a fund-capped contribution (see section 2.9) Contribution eligibility rules summary table The following table summarises the rules for when a person is allowed to contribute or receive contributions to a super fund for the financial year. Important! This is a summary table only. Please refer to the important notes following each table. This chapter looks at the eligibility to contribute to super. For further important considerations on contributions, please see the chapter on contributions caps. For further general information on superannuation contribution eligibility and taxation, please refer to the FirstTech superannuation contributions quick reference guide. Member s age at time of contribution Personal contribution made by the member (section 2.5) eg personal nonconcessional, personal concessional contributions Other contributions made by someone other than member or employer eg spouse contribution, co contribution Voluntary employer contribution (section 2.8) eg salary sacrifice, other employer contributions in excess of SG Under 65 Yes Yes Yes Yes Mandated employer contribution (section 2.7) eg 9% SG, contribution under industrial award 65 to 69 Work test (section 2.4) Work test (section 2.4) Work test (section 2.4) Yes 70 to 74 (section 2.4) Work test (section 2.4) No Work test (section 2.4) Yes 75 and over (section 2.4) No No No Yes Note: A fund may accept contributions in respect of a member if the trustee is reasonably satisfied that the contribution is in respect of a period that it would have otherwise been made. 10

13 2.3. Adviser contribution checklist W W Does the member need to meet the work test for the contribution to be made? Is the contribution limited because it is a fund-capped contribution? Does the fund require the member s tax file number for the contribution to be made? 2.4. Work test A member meets the work test if the member has been gainfully employed for at least 40 hours in a period of not more than 30 consecutive days in the financial year. The work test, if applicable, must be met prior to the contribution being made. The trustee cannot take prospective employment into account. The member must have worked at least 40 hours within 30 consecutive days in the financial year before the trustee can accept the contribution (ref APRA circular 1.A.1). The work test does not apply to people who at the time of the contribution are under the age of 65. From age 65, a member must meet the work test at some point in the financial year prior to making member contributions or receiving voluntary employer contributions. From age 75, a member may not make member contributions or receive voluntary employer contributions regardless of the member s work status. Mandated employer contributions may be made at any age without the member meeting the work test. The work test can be satisfied anywhere in the world. Gainfully employed Gainfully employed is employed or self-employed for gain or reward in any business, trade, profession, vocation, calling, occupation or employment. The concept of gain or reward envisages receipt of remuneration such as salary or wages, business income, bonuses, commissions, fees or gratuities, in return for personal exertion. The gain or reward must be tangible (charity work is not generally considered gainful employment). Age 75 Age 75 includes 28 days after the end of the month in which the member turns age Member contributions Important! The Superannuation Industry (Supervision) Regulations (SIS) eligibility rules define contributions as either employer or member contributions, unlike the tax rules, which define contributions as either concessional or non-concessional. Member contributions are contributions by, or on behalf of, the member to the fund but do not include employer contributions. A member contribution made by the member may be either concessional, where the member claims a tax deduction (if eligible), or non-concessional, where the member does not claim a tax deduction for the contribution (see section 3.2 for claiming tax deductions for personal super contributions). 11

14 Member contributions made by anyone other than the member are not tax deductible to the member or the contributor. For example, eligible spouse contributions and Government co-contributions are not eligible for tax deductions. Member contributions may be made by or for non-residents if the non-resident provides the trustee with a valid Australian tax file number within 30 days of making the contribution. Caution! A self managed super fund (SMSF) may fail the active member test and lose its complying status if member or employer contributions are made to a non-resident member s account. For more information, please refer to Taxation Ruling TR 2008/9 at Refer to Chapter 4 for more detail on the different contribution types Employer contributions Employer contributions are contributions made by, or on behalf of, an employer-sponsor of the fund. An employer-sponsor is an employer who contributes to the fund for the benefit of a member of the fund who is an employee of the employer. Employer contributions can either be mandated or voluntary Mandated employer contributions Mandated employer contributions are contributions made by an employer on behalf of an employee that are either: used to satisfy employer superannuation guarantee (SG) obligations, which cease when the employee reaches age 70, or made to satisfy an obligation imposed by an award made or agreement certified by an industrial authority (there is no age limit on these mandated employer contributions) Budget announcement Raising super guarantee age limit to 75 From 1 July 2013, the age limit for payment of super guarantee contributions will be increased from 70 to 75. This would bring the SG age limit in line with personal and voluntary employer contributions. At the time of writing, legislation to make this effective had not been introduced to Parliament Voluntary employer contributions Voluntary employer contributions are all employer contributions that are not mandatory employer contributions. Examples include salary sacrifice and voluntary employer contributions in excess of an employer s superannuation guarantee obligations, whether of a fixed dollar or percentage amount or to cover insurance premiums or fees. 12

15 2.9. Fund-capped contributions Fund-capped contributions are all member contributions except: personal contributions where a tax deduction will be claimed* (see section 3.2 for claiming tax deductions for personal super contributions) directed termination payments (see section 15.16) contributions arising from structured settlements or orders made for personal injuries contributions that count toward and are within the member s lifetime capital gains tax (CGT) cap (see section 6.9), or payments by the Commissioner of Taxation of SG shortfall component for SG purposes, transfers from the Superannuation Holding Account and Government co-contributions. * In the case of personal deductible contributions, a person has 30 days from the date of the contribution to submit a valid notice (see section 3.3) of their intention to claim a tax deduction (if applicable), otherwise the fund must return the excess fund-capped contribution. If the valid notice is submitted, the contribution is no longer a fund-capped contribution. Return of excess fund-capped contributions To help prevent a person from accidentally contributing more than the non-concessional contributions cap, super funds are required to return single fund-capped contributions that exceed: W W $150,000 if the member is age 65 or over on 1 July of the financial year, or W W $450,000 if the member is less than age 65 on 1 July of the financial year. The fund is required to return the excess fund-capped contribution within 30 days of receipt of the excess contribution plus fees and adjusted for market movement. Important! Super funds are not required to aggregate the total of member contributions received for a person either within the fund or across other funds. The requirement for funds to refund excess fund-capped contributions only applies to single contributions that exceed the limits above. For example, for a member under age 65, if a fund received a single $500,000 member contribution, $50,000 would have to be refunded. If a fund received five $100,000 member contributions within a financial year, the fund would not be required to return any of the contributions Tax file numbers If the fund does not have a member s tax file number (TFN) on record, a member has 30 days from the date of the member contribution to supply the fund trustee with a TFN, otherwise the fund trustee must refund the contribution. A super fund does not have to return employer contributions where a TFN has not been quoted; however, this will trigger no-tfn contributions tax (see section 4.7). 13

16 2.11. Children and super contributions Anyone under age 65, including children (ie under age 18), can contribute to super without meeting a work test. Children are subject to the same contributions caps as adults. Eligibility to contribute to super by or for children Super contribution for a child under age 18 which is made by: Employer of child Child Anyone other than employer or child (eg parent) Tax deduction available? Yes for employer Only if child has derived income in the income year from: W carrying on a business, or W employment activities. A child must also meet all other requirements for claiming a personal tax deduction. No Tax status of contribution Concessional W Concessional if tax deduction claimed, or W non-concessional if tax deduction is not claimed. Non-concessional Contributions tax applied to contribution Max 15% W Max 15% if concessional, or W 0% if non-concessional. 0% Between 1 July 2002 and 1 September 2004 child contributions to child accounts (old Part 4A and reg 7.04(1)(e) of the SIS regulations) were subject to restrictions Caution with rollovers Some rollovers are now contributions Since 1 July 2007, some transfers that were historically considered rollovers are considered to be contributions. This means the contribution rules must be met. Generally, transfers originating from outside the Australian super system are treated under SIS as contributions, and are subject to contribution rules. Examples of transfers from outside the super system include: a directed termination payment from an employer a transfer from an overseas super fund, and amounts from the small business CGT 15-year or retirement exemptions which are transferred into super. Important! If the member is age 65 or over, they will need to meet the work test to make transfers from outside the Australian super system. If the member is age 75 or over, they will not be able to make a transfer from outside the Australian super system regardless of their work status. 14

17 2.13. In specie contributions In specie contributions are those made using assets other than cash. They may be made at any time by a person who is not a related party of the fund provided that all other relevant SIS provisions are met and subject to the trust deed. A person who is a related party of the fund can make an in specie contribution provided that the asset contributed is one that the fund is permitted by SIS to acquire from a related party (eg listed shares or business real property acquired at market value). The market value of the asset being contributed in specie determines the amount of the contribution to be counted towards the relevant contributions cap. For more information on in specie contributions, refer to Taxation Ruling TR 2010/1. Warning: The ATO has issued a Taxpayer Alert (TA 2008/12) on non-cash contributions to superannuation funds. This alert outlines the ATO s concerns with using in specie payments or arrangements designed to allow a member of a super fund to avoid the superannuation contributions caps. For more information, download this alert from Temporary residents From 1 April 2009, only limited conditions of release are available to temporary or former temporary residents (see section 8.4). Therefore, superannuation trustees should be aware if an application for membership of a super fund is in respect of a temporary resident Contributions from personal injury payments Payments arising from structured settlements or orders for personal injuries may be contributed to superannuation and are excluded from the non-concessional contributions cap (refer to section 4.5). However, for this exclusion to apply, a number of conditions must be met in relation to the type and administration of the payment. If these conditions are not met, the amount contributed may be included in the client s non-concessional contributions cap and, as personal injury payments can be large in value, may result in excess contributions tax. Contributions of personal injury payments can be excluded from a client s non-concessional cap if they meet all the requirements of section of ITAA 1997, as follows: Type of payment 1 The payment is for the settlement of a claim for compensation or damages for, or in respect of, personal injury suffered by the client and the claim is based on the commission of a wrong, or on a right created by statute. The settlement must take the form of a written agreement between the parties to the claim (whether or not the agreement is approved or endorsed by a court), or 2 The payment is for the settlement of a claim in relation to a personal injury suffered by the client under a law of the Commonwealth or of a State or Territory relating to workers compensation, or 3 The payment is made following an order of a court for compensation or damages for, or in respect of, personal injury suffered by the client and the claim is based on the commission of a wrong, or on a right created by statute. The order cannot be one approving or endorsing an agreement as set out in point one above. 15

18 A claim for compensation or damages referred to above has to be made either by the client or their legal personal representative (LPR). Note that if a claim is both: for compensation or damages for personal injury, and for some other remedy (eg compensation or damages for loss of, or damage to, property) only the amount of the payment that relates to compensation or damages for personal injury and identified in a settlement agreement or court order as being solely in payment of that compensation or those damages, can be contributed to super as a personal injury payment. The above definitions may result in a relatively broad interpretation of which payments are made for, or in respect of personal injury and could include amounts paid for pain and suffering, for loss of future earnings, for future medical expenses, home modifications etc. However, specific legal advice should be sought to ascertain exactly which amounts paid to a particular client are eligible personal injury payments. Administration requirements The contributions must be made within 90 days of the later of the following: the day the client received the personal injury payment the day an agreement for settlement of the personal injury payment was entered into the day on which a court order for the personal injury payment was made. Two legally qualified medical practitioners have certified that, because of the personal injury, it is unlikely that the client can ever be gainfully employed in a capacity for which they are reasonably qualified because of education, experience or training. This effectively means that the client must be totally and permanently disabled to make a personal injury payment to super that is excluded from their non-concessional cap. Either before or when the contribution is made, the client or their LPR provides a completed contributions for personal injury form to their super fund. In addition to gathering details relating to the payment, the contributions for personal injury form requires a declaration by the client or their LPR that the contributions were derived from a personal injury payment received by the client or the LPR and that the contributions meet the requirements of section of ITAA 1997 (and as outlined above). We would therefore suggest that, in providing advice to a client about the contribution of personal injury payments, financial advisers recommend that the client also seek legal advice as to whether they meet the requirements of section of ITAA

19 3. Super contribution tax concessions 3.1. Tax deductions for personal super contributions From 1 July 2007, if the criteria outlined below are met, a person may claim a tax deduction for 100% of personal contributions made to super. Personal contributions, where a tax deduction is claimed, are concessional contributions, which are subject to a person s concessional contributions cap. Excess concessional contributions are taxed an additional 31.5%. See section Conditions for claiming a tax deduction for personal super contributions The following primary conditions must be met to claim a tax deduction for a personal super contribution: The taxpayer makes a personal contribution to a complying super fund or RSA for themselves, for the purpose of providing super benefits. The taxpayer may only deduct the contribution for the income year in which the contribution is made. The taxpayer must submit a valid notice to the fund trustee (see Taxpayer s valid notice in section 3.3). The fund trustee must have given the taxpayer an acknowledgement of receipt of the valid notice. The taxpayer must have made the contribution on or before the day that is 28 days after the end of the month in which they turn age 75. Additional conditions must be met only if: the taxpayer is an employee, at any time during the income year the taxpayer is under age 18, or the contribution is sourced from the sale of an active asset, where the small business CGT concessions apply Primary conditions Taxpayer s valid notice To deduct the contribution, or a part of the contribution, a taxpayer must have given the trustee of the fund a valid notice of their intention to claim the deduction, and the trustee must have given the taxpayer an acknowledgement of receipt of the notice. A valid notice, the approved form (ATO NAT 71121), can be found at It is not compulsory to use the ATO version of this form. These notifications can be made to the super fund in various ways and funds may create their own form for their members to use. The ATO form sets out the minimum data requirements. Timing The notice must be given to the fund provider before the earlier of: the day the taxpayer lodges their income tax return for the income year in which the contribution was made, or the end of the next income year following the year of the contribution. 17

20 Merging super funds submitting a notice Members are able to lodge a deduction notice with a successor fund where the relevant contributions were made to the transferring fund. A member of a successor fund may submit or vary a valid notice if: after making the contribution, all of the member balance was transferred to the successor fund, and there has not been a notice relating to the contribution submitted previously. What makes a taxpayer s notice invalid The taxpayer s notice is not valid in any of the following circumstances: the notice is not in respect of the contribution the notice includes all or a part of an amount covered by a previous notice when the taxpayer gave the notice: they were not a member of the fund, or the trustee no longer holds the contribution, or the trustee has begun to pay an income stream based in whole or part on the contribution before the taxpayer gave the notice: the taxpayer had made a contributions splitting application in relation to the contribution, and the trustee had not rejected the application. A taxpayer cannot deduct more for the contribution (or a part of the contribution) than the amount stated in the notice. Important! Don t let your client lose their tax deduction. The notice to claim a tax deduction will be considered invalid if the trustee has begun to pay an income stream based in whole or part on the contribution. This applies regardless of whether a residual amount equal to or in excess of the amount sought as a tax deduction is left in the accumulation account. This means, if you are planning to commence any kind of pension for a client, remind the client to send the trustee a valid notice of intention to claim any tax deductions for personal super contributions prior to commencing the pension. The trustee must acknowledge the notice then it is safe to commence the pension. If the notice is not submitted and acknowledged prior to commencing the pension, the client will lose their eligibility to claim the tax deduction. Deductions for partial rollovers A valid deduction notice will be limited to a proportion of the contributed amount if the person has chosen to roll over or withdraw a part of the superannuation interest held by the trustee prior to the lodgement notice. The amount that can be covered by the notice will be limited to a proportion of the tax-free component of the superannuation balance that remains after the rollover or withdrawal. That proportion is the value of the relevant contribution divided by the tax-free component of the superannuation interest immediately before the rollover or withdrawal. 18

21 Amount that can be covered by a valid notice after the withdrawal or rollover = Tax-free component of remaining interest Contribution Tax-free component of interest before rollover or withdrawal The calculation of the reduced amount that can be covered by a valid notice will be more complicated if there are multiple contributions and withdrawals in a financial year. For further detail including a worked example, refer to Taxation Ruling TR 2010/1 at Variations A taxpayer cannot revoke or withdraw a valid notice in relation to the contribution (or a part of the contribution). A taxpayer can vary a valid notice, but only so as to reduce the amount stated in relation to the contribution (including to nil). However, a taxpayer cannot vary a valid notice after the earlier of: the day the taxpayer lodges their income tax return for the income year in which the contribution was made, or the end of the income year following the year of the contribution. A notice can still be varied after these time limits where: the notice is being varied as a result of the ATO not allowing a deduction, and the notice is reducing the amount of a previous notice by the amount that it is disallowed. A variation is not effective if, when the taxpayer makes it in the same circumstances as the original notices: they were not a member of the fund the trustee no longer holds the contribution, or the trustee has begun to pay an income stream based in whole or part on the contribution. Acknowledgement of notice The trustee must, without delay, give the taxpayer an acknowledgement of a valid notice. The trustee may refuse to give the taxpayer an acknowledgement if the value of the member s account, at the time the trustee receives the notice, is less than 15% of the contribution. 19

22 3.4. Additional conditions 10% rule for employees If a person is an employee at any time during the income year, the 10% rule must be met for the person to be eligible to claim a tax deduction for personal super contributions. The 10% rule is: No more than 10% of: the total of assessable income for the income year, plus reportable fringe benefits (RFB) for the income year, plus reportable employer superannuation contributions (RESC) for the income year must be attributable to employment. Assessable income (from employment) + RFB + RESC < 10% Assessable income (from all sources) + RFB + RESC Note: Employment is where the person is treated as an employee for SG purposes. A person may be treated as an employee for SG purposes even where they do not receive any SG support (eg employee earning less than $450 per month). Important! The 10% rule only has to be met if, in the income year in which the contribution is made, the taxpayer is treated as an employee for SG purposes. For example, someone who is totally self-employed, unemployed or living off investment earnings only, would not have to meet the 10% rule. Assessable income Assessable income is income before deductions. Salary sacrifice will reduce assessable income. Deductions for personal super contributions will reduce taxable income, but will not reduce assessable income. Reportable employer superannuation contributions (RESC) A RESC is, for an individual for an income year, an amount contributed by an employer or associate of the employer for the benefit of an individual to a superannuation fund or RSA, to the extent that either or both of the following applies: the individual has or had the capacity to influence the size of the amount the individual has or had the capacity to influence the way the amount is contributed so that his or her assessable income is reduced. Government proposal on RESCs Contributions to superannuation that are required by an industrial instrument or rules of a superannuation fund are expressly excluded from the RESC definition to the extent that there is no capacity to influence the content of the requirement to make the contribution or its size. For more information, refer to Schedule 4 of Tax Laws Amendment (2011 Measures No.4) Bill At the time of writing, this Bill was before Parliament and had not received Royal Assent. 20

23 Maximum earnings test All amounts that are attributable to the employment activity are taken into account as assessable income in the 10% test. These include: the salary or wages (as used in its ordinary meaning) from the activity allowances and other payments earned by an employee the other payments, such as commission, director s remuneration and contract payments, that are treated as salary or wages by section 11 of the SGAA for those persons who engage in an employment activity in a capacity other than a common law employee an employment termination payment received by a person in consequence of the termination of their employment, and workers compensation and like payments made because of injury or illness received by a person while holding the employment, office or appointment the performance of which gave rise to the entitlement to the compensation payments. In the application of the maximum earnings test, the relevant employment activity need not be an activity in Australia. For a non-resident, the income attributable to employment outside Australia is not assessable income in Australia and so will not be counted in the maximum earnings test. A non-resident with Australian sourced income that is not attributable to employment activities may therefore be able to deduct a personal superannuation contribution made to an Australian superannuation provider against their Australian sourced income. However, the employment income of an Australian resident employed overseas by a foreign employer will be counted in the maximum earnings test if the income is assessable income. Source: Taxation Ruling TR 2010/1, paragraphs Age-related conditions If a taxpayer is under the age of 18 at the end of the income year in which they make a contribution, the child must have derived income in the income year: from the carrying on of a business, or attributable to activities where the child is treated as an employee for SG purposes to be eligible to claim a tax deduction for the super contribution. If a taxpayer is aged 65 or more and under 75, he/she must satisfy the work test in order for the super fund to accept the contribution. Contributions sourced from the sale of a small business A person cannot claim a tax deduction for CGT contributions that count toward their lifetime CGT cap. If an amount arising from a CGT small business exemption is contributed by someone age 55 or over as a personal contribution, they may claim a tax deduction, but the contribution will count toward the concessional cap. 21

24 3.5. Employer tax deductions for super contributions From 1 July 2007, employers may claim a tax deduction for 100% of any super contributions made on behalf of employees to a complying super fund. The age-based limits that previously applied were abolished from 1 July While there is no longer any limit on the amount of contributions which an employer may claim as a tax deduction, an employee is unlikely to want their employer(s) to make contributions in excess of their concessional contributions cap because of the excess tax imposed on the individual. An employer may claim a 100% tax deduction for super contributions made on behalf of employees either: on or before the day that is 28 days after the end of the month in which the employee turns 75, or where the employer was required to make the contribution by an industrial award, determination* or notional agreement preserving State awards that is in force under an Australian law. * An award or determination does not include an industrial agreement, such as an Australian Workplace Agreement, Collective Agreement or preserved State agreement under the Workplace Relations Act 1996, or a similar agreement made under a State law. Former employees Employers are able to claim a deduction for contributions made within four months after an individual stops being their employee, provided: The employer would have been entitled to the deduction if the contribution was made at a time the individual was an employee of the employer and either of the following also applies: the contribution is to satisfy the employer s SG obligation in respect of the individual the contribution relates to a one-off payment in lieu of salary or wages that relate to a period during which the individual was an employee. Controlling interest A taxpayer may claim a tax deduction for a superannuation contribution made in respect of an individual who is not the taxpayer s employee, but an employee of an entity where the taxpayer has a controlling interest. For more information, contact the FirstTech team. Employee For an employer to deduct a contribution for an employee, the employee must be: an employee within the expanded definition of employee in section 12 of the Superannuation Guarantee (Administration) Act 1992, or engaged in producing the assessable income of the employer, or an Australian resident who is engaged in the employer s business. Employers are able to claim a deduction for contributions made on behalf of SG employees who are not engaged in producing the assessable income of the business, nor engaged in the business for the employer but are SG employees for the purpose of the SGAA (eg some directors may fall into this category). However, individuals who are not SG employees will still need to be engaged in producing the assessable income of the business or engaged in the business before a deduction can be claimed. 22

25 Limits on deductions for personal services income An employer cannot deduct a contribution made to a super fund or an RSA for an associate s work if the contribution relates to gaining or producing the employer s personal services income (PSI). An associate includes a spouse, business partner or relative of the employer. However, an employer is permitted to deduct a contribution for work performed by the associate which does not relate to gaining or producing the employer s PSI. In this case, the deduction would be limited to SG contributions. See Taxation Ruling TR 2003/10 for further information on tax deductions that relate to personal services income Offset for spouse super contributions Conditions A taxpayer is eligible to claim a tax offset for eligible spouse contributions if the following conditions are satisfied: The recipient spouse s assessable income + plus reportable fringe benefits (RFB) + reportable employer superannuation contributions (RESC) for the income year must be less than $13,800. The couple live together in a bona fide domestic relationship (ie includes a de facto spouse but excludes married couples who have separated) or in a relationship that is registered under a law of a State or Territory. The contribution must be made to a complying super fund, provide super benefits for the spouse or provide death benefits for the spouse s dependants. The contributor must not claim the contribution as a tax deduction. The gainful employment status of the contributor is not relevant. Eligible spouse contributions may not be made for a recipient spouse who is age 70 or over. If the recipient spouse is: under age 65, then his/her gainful employment status is not relevant aged at least 65 but under 70, then the contribution must be made at a time that the recipient spouse meets the work test (see section 2.4). Spouse contributions are preserved. Both the contributor and the spouse must be Australian residents for tax purposes when the contribution is made. Amount of offset The maximum tax offset is $540. The amount of the offset is calculated as 18% of the lesser of: W W $3,000 [(recipient spouse s assessable income + RFB + RESCs) $10,800], and the amount of the spouse contribution actually made. 23

26 3.7. Children and tax deductions for super A child may claim a tax deduction for contributions they make to their super if the child meets the criteria set out in sections 3.2, 3.3 and 3.4. Parents cannot claim tax deductions for contributions made to the child s super fund on behalf of the child. The only exception to this is where the parent is also the child s employer Government co-contribution for super contributions The super co-contribution is an Australian Government initiative introduced on 1 July 2003 to assist eligible low to middle income employees and self-employed people in saving for their retirement. The maximum Government co-contribution is $1 for every $1 of eligible personal super contributions made in a financial year and is subject to an income test. The maximum co-contribution of $1,000 is reduced by cents for every $1 that the taxpayer s total income exceeds $31,920 in until it reaches or exceeds $61,920. The indexation rate that applies to the income threshold above which the maximum superannuation co-contribution begins to phase down was frozen at 2009/10 levels for and Budget announcement Government co-contribution income threshold indexation frozen until 30 June 2013 The Government has announced that it will freeze indexation of the co-contribution income thresholds to Therefore, the lower and upper co-contribution income thresholds will remain at $31,920 and $61,920 respectively until 30 June At the time of writing, legislation to make this effective had not been introduced to Parliament. The Government co-contribution does not count toward either the concessional or the non concessional cap. Eligibility A person may be eligible to receive a co-contribution if all of the following criteria are met: The person makes one or more eligible personal super contributions (a personal non concessional contribution) during the income year. 10% or more of the person s total income 1 for the income year is attributable to the following: employment, where the person is an employee for SG purposes, and/or self-employment, where the person is carrying on a business. Total income 1 = assessable income + reportable fringe benefits + reportable employer super contributions. An income tax return for the person for the income year is lodged. The person is less than 71 years old at the end of the income year. The person does not hold a temporary visa under the Migration Act 1958 at any time in the income year or, if they do, is a New Zealand citizen or the holder of a visa to be prescribed in the Regulations. The person s total income 2 for the income year is less than $61,

27 Total income 2 = assessable income + reportable fringe benefits + reportable employer super contributions any amounts for which the person is entitled to a deduction as a result of carrying on a business. Note: You may need to check each fund s trust deed to confirm that the fund can receive the Government co-contributions. Assessable income: Assessable income is income before deductions. Deductions for personal super contributions will reduce taxable income, but will not reduce assessable income. Salary sacrifice will reduce assessable income; however, salary sacrifice super contributions are effectively added back through the inclusion of reportable employer super contributions in the income definitions (refer below). Reportable employer super contributions From 1 July 2009, both total income 1 and total income 2 includes a client s reportable employer super contributions in determining eligibility for and the amount of a co contribution. Reportable employer super contributions include the amount of superannuation contributions made on behalf of an individual by their employer or an associate of the employer where the individual has, or might reasonably be expected to have, the capacity to influence the size of the amount and/or the way the amount is contributed so that his or her assessable income is reduced. An example would be salary sacrifice arrangements which typically involve negotiations by an employee with their employer. Employer contributions made to meet the employer s superannuation obligations under Federal, State or Territory legislation are not RESCs. This includes an obligation under the Superannuation Guarantee (Administration) Act Business deductions The income concept used here is a net concept for individuals who carry on a business, and is designed to ensure that self-employed individuals with high gross business receipts are not arbitrarily exceeding the co-contribution income threshold. Any amount for which a person is entitled to a deduction as a result of carrying on a business has the meaning given by the Income Tax Assessment Act 1997 (ITAA 1997). The general principles of s8-1 of ITAA 1997 must be met. That is, a business can deduct any loss or outgoing to the extent that it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income. There are also specific deductions that certain provisions of the act allow. Division 12 of ITAA 1997 contains a reference table of specific personal and business deductions. Deductions for personal super contributions are not business deductions The Explanatory Memorandum to the Tax Laws Amendment (Simplified Superannuation) Act 2007 made this specific exclusion to business deductions: Business deductions do not include work-related employee deductions or deductions that are available to eligible individuals (including the self-employed) for their personal superannuation contributions. paragraph

28 Tip! A practical guide to business deductions, Income Tax and Deductions for Small Business (NAT 10710) can be found at Calculating the Government co-contribution The maximum co-contribution of $1,000 is potentially available to individuals whose total income 2 in does not exceed $31,920 pa. The maximum co-contribution reduces by cents for every dollar of total income 2 over $31,920, cutting out at $61,920. A person s maximum co-contribution limit is calculated as follows: $1,000 [((total assessable income + reportable fringe benefits + RESCs any amounts for which the person is entitled to a deduction as a result of carrying on a business) $31,920) x ]. A person s co-contribution entitlement is the lesser of: the actual non-concessional contributions made during the financial year, and the person s maximum co-contribution limit as calculated above. Tips! If your client is entitled to a Government co-contribution but has reached preservation age and declared retirement or retired due to permanent incapacity or their legal personal representative is authorised to apply on behalf of the deceased person and no accumulation accounts are open to receive their co-contribution, they may apply to the ATO to have the co-contribution paid directly to them. Use the following form available at ato.gov.au Super co-contribution request for direct payment (NAT 10759) The ATO co-contribution calculator can be found at: If your client has closed their super fund to which they made eligible personal contributions and rolled over to another fund, they can notify the ATO of the new fund details for receipt of a co-contribution by completing the following form available at Super fund nomination form (NAT 8676) Are children eligible for Government co-contributions? A child may receive a co-contribution if they meet all the eligibility tests outlined above. Are spouse contributions eligible for Government co-contributions? No, spouse contributions are not personal contributions made by the member. 26

29 Government proposal Low income earners government contribution The Government will provide a contribution equal to 15% of concessional contributions made, up to $3,333, for low income earners with an adjusted taxable income of up to $37,000. The maximum Government contribution paid will be $500 (not indexed). This measure will apply to contributions made from 1 July 2012, with the first Government contributions expected in For more information please refer to the consultation paper titled Low Income Earners Government Superannuation Contribution June 2011 at At the time of writing, legislation to make this effective had not been introduced to Parliament. 27

30 3.9. Overview of employer and personal deductible contributions Conditions for tax deductibility Amount of deduction that may be claimed if the criteria above are satisfied Deductibility of interest on loan to pay a contribution Employer contribution W The contribution is to provide super benefits to a person who is an employee of the employer at the time the contribution is made and the fund is a complying super fund. W The employee must be: W an employee as defined by s.12 of the SG Act engaged in producing assessable income of the employer, or W an Australian resident engaged in the employer s business. W The contribution is made on or before 28 days after the end of the month in which the employee turns age 75 (excludes amounts required to be paid under an industrial award, determination or notional agreement preserving State awards). Note: This summary does not address other employment-connected deductions (eg former employees or controlling interest deductions). Up to 100% of the contribution may be claimed as a tax deduction in the year of income it was made, unless one of the following applies: W the contribution forms part of an ineffective salary sacrifice agreement (may deduct as salary or wages under s.8-1, ITAA 1997) W the employer elects to offset the contribution against their liability to pay an SG charge after the SG due date (no deduction) W the contribution is of a transitional termination payment (no deduction) W the employer, or an associate, are subject to the personal services income (PSI) rules (deduction generally limited to amount required to ensure no SG shortfall), or W the contribution is paid to a non member spouse to satisfy an entitlement under the Family Law Act 1975 (no deduction). If the criteria for tax deductibility above are satisfied, any associated financing cost is deductible. Personal deductible contribution W (If applicable) Assessable income and reportable fringe benefits (RFB) + RESCs attributable to holding an office or appointment, performing functions or duties, engaging in work or doing acts or things that result in the person being treated as an employee for SG purposes must be less than 10% of total assessable income and RFB and RESCs for the year. W The contribution must be made on or before 28 days after the end of the month in which the person turns age 75. W If the person is under age 18 at the end of the income year, they must have derived income from carrying on a business or employment-related activities in that year. W The person has given the trustee a valid notice specifying the amount of the contribution intended to claim as a deduction (before the earlier of the time they lodge their tax return for that income year, or the end of the income year following the year the contribution was made), and has received an acknowledgement of the notice from the trustee. Up to 100% of the contribution may be claimed in the year of income it was made, unless one of the following applies: W the contribution relates to the small business capital gains tax (CGT) retirement concession and the individual was under age 55 (no deduction) W the contribution is a transitional termination payment (no deduction), W when the notice was given, the fund had begun to pay a pension during the year based in whole or part on the contribution (no deduction), or W when the notice was given the fund no longer held the whole of the contribution (deduction determined according to formula). For more detail please refer to Section 3.3 or Taxation Ruling TR Any associated financing costs are not deductible (irrespective of whether the contribution is deductible). 28

31 Ability to create a tax loss via contribution Rules for accepting contribution for SIS purposes Treatment of contribution for tax purposes Ability to make an in specie contribution Employer contribution Yes Mandated (eg SG, award) = accepted at any age Non-mandated: To age 65 = no work test Age (+28 days after end of month turning 75) = employee must satisfy work test (ie gainfully employed for at least 40 hours over 30 consecutive days in the financial year) There is no restriction to accepting a contribution if no tax file number (TFN) is quoted, but a no-tfn contributions tax of 31.5% may apply. An employer contribution is a concessional contribution (irrespective of whether it is tax deductible) and counts towards the member s concessional contributions cap. The contribution is included in the assessable income of the fund and is taxed at a maximum of 15%. If the contribution exceeds the member s annual concessional contributions cap of $25,000 ($50,000 if aged 50+ until 30 June 2012), a further 31.5% tax applies. Excess concessional contributions also count towards the member s non-concessional contributions cap. Returned contributions that have been, or can be, deducted are treated as assessable income unless the payment is received as a superannuation benefit. Yes Fringe benefits tax (FBT) is not payable on in specie contributions made to an employee on or after 1 July Caution: CGT and stamp duty may apply (but any assessable capital gains may be offset by deductibility of the contribution). Trustees must also ensure that they do not breach the related party acquisition and/or in-house asset rules. Personal deductible contribution No To age 65 = no work test Age (+28 days after end of month turning 75) = must satisfy work test of being gainfully employed for at least 40 hours over 30 consecutive days in the financial year. Contributions are refunded where the amount exceeds the fund-capped contribution limits and/or the member fails to quote a TFN. Contributions must be refunded within 30 days if no TFN is subsequently quoted within that time. A personal member contribution covered by a valid notice to claim a tax deduction is a concessional contribution and counts towards the member s concessional contributions cap. If a tax deduction is not claimed or is subsequently denied by the tax office or the amount is reduced under a notice, that contribution is non-concessional unless it is an employment termination payment that is a directed termination payment (refer note below table). A contribution covered by a valid notice is included in the assessable income of the fund (unless the amount is subsequently varied) and taxed at a maximum of 15%. If the contribution exceeds the member s annual concessional contributions cap of $25,000 ($50,000 if aged 50+ until 30 June 2012), a further 31.5% applies. Excess concessional contributions count towards the member s non-concessional contributions cap. Yes Caution: CGT and stamp duty may apply (but assessable capital gains may be offset by deductibility of the contribution). Trustees must also ensure that they do not breach the related party acquisition and/or in-house asset rules. Note: A contribution for tax purposes does not include a rollover super benefit or super lump sum paid from a foreign super fund. A directed termination payment (DTP) is treated as a personal member contribution for SIS purposes. For more information, refer to sections and

32 4. Contributions caps and taxation of contributions There is generally no limit on the amount of contributions which can be made to superannuation. There are, however, limits on the amount of contributions which can be made and still receive concessional tax treatment. These limits are known as contributions caps and have been in place since 1 July There are two contributions caps which restrict the amount that may be contributed to super by, or on behalf of, an individual within a financial year and once either of those limits is exceeded an individual may incur excess contributions tax Contributions caps summary table Contributions caps limit how much may be contributed to an individual s super in a particular financial year without the member incurring excessive contributions tax. The caps apply to the individual. For example, if a member has multiple employers, contributions from all employers will be totalled to count against the member s concessional cap. The table below summarises the contributions caps for individuals for (these are unchanged from ). Further detail on each contributions cap follows this table. Contributions cap Concessional contributions cap for Non-concessional contributions cap for Age of member Under age 50 on 30/6/12: $25,000 Under age 65 at any time during : W $150,000 or W up to $450,000 over a three-year period under bring forward provision (see section 4.4) 50 or over on 30/06/12: $50,000 Age 65 or over for all of : $150, Concessional contributions cap For a description of contributions that count toward an individual s concessional cap, see section 4.3. A person s concessional cap for will depend on their age. Concessional cap under age 50 For people under the age of 50 on the last day of the financial year, the concessional contributions cap is $25,000 (for ). From 1 July 2012, this will be the cap for people of all ages. This cap is indexed annually and rounded down to the nearest $5,000. See section 4.6 for more information on indexing. Transitional concessional cap age 50 or over There is a transitional period* between 1 July 2007 and 30 June Between 1 July 2009 and 30 June 2012, if a person is age 50 or over on the last day of a financial year within the transitional period, the transitional concessional contribution cap for that year is $50,000. This cap is not indexed. From 1 July 2012, the concessional cap will be $25,000 (indexed) for taxpayers of all ages. * Note: Between 1 July 2007 and 30 June 2009, the transitional concessional cap was $100,000 pa. 30

33 2011 Budget announcement Operation of higher concessional cap for those over 50 from 1 July 2012 The Government has amended its previous announcement regarding a permanently higher concessional cap for those aged 50 or over with a total super balance of less than $500,000. The Government has now proposed that the higher concessional cap for eligible clients will be $25,000 higher than the standard concessional cap. This replaces the Government s original proposal that a non-indexed cap of $50,000 would apply. At the time of writing, legislation to make this effective had not been introduced to Parliament Concessional contributions A concessional contribution is generally a super contribution to a complying super fund which is included in the super fund s assessable income. Caps apply to concessional contributions as shown in the table in section 4.1. Contributions included in the concessional contributions cap Employer contributions (including SG and salary sacrifice contributions). Personal contributions made by the member for which a tax deduction is claimed. Member contributions made on behalf of the member by another person, eg contribution by a friend (does not include spouse contributions, or child contributions). The taxable component in excess of $1 million arising from a directed termination payment (DTP) (not indexed) (see section 15.16). Amounts allocated from a fund s reserves to a member s account will be included in the member s concessional contributions cap except where: W they are allocated in a fair and reasonable manner to an account for every member of the fund or class of member in the fund, and W the amount that is allocated for the financial year is less than 5% of the value of the member s interest in the fund at the time of the allocation, or W the amount is allocated from a reserve for the purpose of enabling the fund to meet pension liabilities. Payments by the Commissioner of Taxation to a super fund from the Superannuation Holding Accounts Special Account (see section 15.23). Payments by the Commissioner of Taxation to a super fund of SG shortfall amounts (see section 15.20). An exclusion may apply where the payment should have been made pre 1 July Note: Payments from reserves in lieu of contributions (net of tax) must be grossed up by (to include the tax liability) to calculate the amount counted towards the cap. An allocation does not have to be grossed up where the full nominal amount is allocated to a member s account and the trustee then deducts an allowance for tax. Concessional contributions cap exclusions The following contributions are specifically excluded from the definition of concessional contributions. Contributions excluded from the concessional contributions cap The tax-free component and the first $1 million of the taxable component of a DTP (not indexed) (see section 15.16). 31

34 Contributions to non-complying super funds. Transfers or rollovers of untaxed benefits from an untaxed scheme into a taxed fund (see section 10.10). Applicable fund earnings from an overseas pension transfer, received after six months of Australian tax residency, which the client elects to have taxed in the Australian super fund (see section 16.3). Contributions made to constitutionally protected super funds. Amounts incorrectly reported as concessional. Contributions included in the assessable income of a fund but for which a tax deduction was disallowed by the ATO are included in the non-concessional contributions cap. These contributions are not included in the concessional contributions cap Non-concessional cap For a description of contributions that count toward an individual s non-concessional cap, see section 4.5. A person s non-concessional cap for will depend on their age. Age 65 and over People who are age 65 or over for the entire financial year will have a nonconcessional cap of $150,000 for The non-concessional cap is set at six times the concessional cap. Note: The higher transitional $50,000 concessional contributions cap is not used for the purpose of calculating a person s non-concessional cap. Under age 65 People who are under age 65 at any time during the financial year will have a non concessional cap of $150,000 for Alternatively, these people may use the bring forward rule. Bring forward rule People under age 65 at any time in a financial year may effectively bring forward two years worth of entitlements of non-concessional contributions for that income year, allowing them to contribute a greater amount (ie $450,000 in ) without exceeding their non concessional cap. This is known as the bring forward rule. If maximum contributions are brought forward into the current financial year, the person will not be able to contribute to super again for the following two financial years. The bring forward rule is not retrospective. That is, if a person has not contributed for several years in the past, this cannot be added to their contribution limit for the current financial year. The contributions caps operate on a use it or lose it basis. 32

35 Once non-concessional contributions are made in excess of $150,000 in a financial year, the two-year bring forward rule is automatically invoked (no election is required). People age 63 or 64 during may use the bring forward rule regardless of their intentions for future gainful employment or retirement from the age of 65. They will not have to meet the work test for any contributions made while they are under age 65. The person will need to meet the work test at the time of any subsequent contributions made when the person is age 65 or over Non-concessional contributions A non-concessional contribution is generally a super contribution to a complying super fund which is not included in the super fund s assessable income. Caps apply to non-concessional contributions as shown in the table in section 4.1. Contributions included in the non-concessional contributions cap Personal contributions for which no tax deduction is claimed. Excess concessional contributions. Spouse contributions (counted toward receiving spouse s cap). Contributions made on behalf of a child under age 18 by anyone other than the child s employer. 100% of transfers of overseas pensions into Australian super funds within six months of Australian residency. A portion of transfers of overseas pensions into Australian super funds after six months of Australian residency. The portion included is: (gross transfer applicable fund earnings) (see section 16.5). Proceeds from the sale of a small business that are contributed to super if the amount did not qualify for the 15-year or retirement CGT small business exemptions. Contributions that are included in the assessable income of a fund but for which a tax deduction was disallowed by the ATO. Any contributions made after 10 May 2006 to a fund while it was non-complying are counted to the member s non-concessional cap in the year the fund regains its complying status. Employer contributions in excess of the employee s age-based deduction limit in the period 10 May 2006 to 30 June 2006 and 1 July 2006 to 30 June Contributions made between 7 December 2006 and 30 June 2007 by a person on behalf of another person, but which are not Government co-contributions or contributions made on behalf of a spouse, child or employee (for example, those made by a friend) are included in the $1 million cap on non-concessional contributions. Non-concessional cap exclusions The following contributions are specifically excluded from the definition of non-concessional contributions. 33

36 Contributions excluded from the non-concessional contributions cap Government co-contributions. Rollovers within the Australian super system. Tax-free component of directed termination payments (see section 15.16). Proceeds from the disposal of assets that qualify for the small business 15-year exemption or the $500,000 retirement exemption that are contributed to super are exempt from the non concessional cap as long as they are counted towards, and don t exceed, the lifetime CGT cap of $1.205 million (indexed and rounded down to the nearest $5,000) (see Chapter 6). Contributions arising from structured settlements or orders for personal injuries (refer to section 2.15). Contributions to constitutionally protected funds other than contributions included in the contributions segment. An amount that a trustee of a public sector super scheme that came into operation before 5 September 2006, chooses to not be included in its assessable income Indexation of caps The concessional contributions cap and CGT cap for are indexed by the following factor: Dec quarter average weekly ordinary time earnings (AWOTE) prior to current financial year Dec quarter AWOTE for 2008 and indexed down to the nearest $5,000. Due to this rounding, the caps may not rise every financial year. The caps will never decrease. The non-concessional contributions cap, being six times the concessional contributions cap, is indirectly indexed through indexation of the concessional contributions cap. Lump sum benefit caps Certain lump sum benefit caps which include the low rate, ETP and untaxed plan caps are indexed annually (as above) and are rounded down to the nearest $5,000. Amounts withdrawn are not indexed and this cap is reduced by lump sum benefits previously received. For more information, refer to sections 10.1 and The upper cap amount of $1 million that applies to transitional termination payments is not indexed (refer to sections and 15.14) Taxation of contributions Contributions may only be made to accumulation accounts. Contributions cannot be made to existing pensions. The tax treatment of contributions in the accumulation phase is summarised in the table below. Contribution type Within cap Exceeding cap Effectively adds to: Concessional 15% additional 31.5% Taxable component Non-concessional 0% 46.5% Tax-free component 34

37 Excess concessional contributions Excess concessional contributions are taxed at 31.5% to individuals (in addition to the 15% tax paid by the super fund) as shown in the table above. Excess concessional contributions will also count toward the non-concessional cap. If the excess concessional contribution also exceeds the non-concessional cap, it gets taxed again at 46.5%. Such a contribution is taxed at 93% in total (15% % %). Excess non-concessional contributions Excess non-concessional contributions are taxed at 46.5% to individuals. CGT cap amounts Contributions which count toward the CGT cap (see Chapter 6) do not incur excessive tax if within the lifetime CGT cap. Amounts beyond the CGT cap amount will be either concessional or non-concessional contributions and may affect a person s total contributions that count toward either the concessional or non-concessional cap. No-TFN contributions tax Where a TFN is not attached to an individual s account, any contributions that are included in the assessable income of the fund (generally concessional contributions see section 4.3) will be subject to 31.5% no-tfn contributions tax. Note: Member concessional contributions (ie personal deductible contributions) must be refunded if no TFN is provided (see section 2.10). However, contributions of less that $1,000 in an income year to an account that existed prior to 1 July 2007 are not subject to no-tfn contributions tax. No-TFN contributions tax is payable by the super fund, in addition to any other tax paid on the contribution. Where a TFN is subsequently provided within a four-year period (including the financial year the contribution was made), a super fund or retirement savings account (RSA) provider is entitled to claim a tax offset for the amount of tax paid on the no-tfn contributions income in the most recent three income years before the current year. For more information on the untaxed plan cap, please see section 10.1 and for more information on the ETP lower and upper cap amounts, please see sections and respectively Contributions caps for constitutionally protected and defined benefit funds and funds with reserves There are some exceptions to the contributions cap rules that apply to constitutionally protected funds, and modifications for defined benefit interests. Constitutionally protected funds (CPFs) CPFs are untaxed super funds that do not pay income tax on contributions or earnings they receive. CPFs are operated by some state governments in Australia for their employees. Under the Australian constitution, state governments cannot be taxed, so different arrangements appy to concessional contributions. Funds created for members of the judiciary are also often CPFs. Contributions made to a CPF are always exempt from the concessional cap. Contributions included in the contributions segment (generally contributions that are not taxable to the fund) will, however, be counted against the non-concessional cap. 35

38 Defined benefit interests concessional contributions If a person has superannuation that is, or includes, a defined benefit interest, the amount of that person s concessional contributions for a financial year is the sum of: any concessional contributions, including allocated surplus amounts, which do not relate to the defined benefit interest, and the person s notional taxed contributions for the financial year. A member s superannuation fund is a defined benefit interest to the extent the member s entitlements are defined by reference to one or more of the following: the individual s salary at a particular date or averaged over a period another individual s salary at a particular date or averaged over a period a specified amount specified conversion factors. Some superannuation plans may pay death or disability benefits that are referenced to the member s salary. However, a superannuation interest is not a defined benefit interest if the only benefits payable in reference to a salary (or other matters outlined above) are death or disability benefits. Allocated surplus amounts Concessional contributions include an amount allocated by a superannuation provider to a member s account from a reserve (see note on page 31) or surplus in relation to the plan for a member in a financial year, other than: amounts allocated to all members (or all members of a specific class to which the reserve relates) on a fair and reasonable basis given the members proportionate interest in the fund, and those allocations for the financial year represent less than 5% of each member s interest in the fund, or an amount allocated from a reserve in order to allow a fund to pay a superannuation pension liability, or on the commutation of an income stream, where the amount is allocated to the member receiving the income stream and is used to commence another income stream in the name of the member as soon as practicable, or on the commutation of an income stream due to the death of a member and the amount is allocated as soon as practicable in order to allow a death benefit to be paid as either an income stream or a lump sum. Notional taxed contributions The amount of notional taxed contributions may be defined in different ways depending on: the person who has the superannuation defined benefit the superannuation plan in which the superannuation exists, or the superannuation provider in relation to the superannuation plan. 36

39 Notional taxed contributions for funds with five or more defined benefit members Notional contributions are determined by an actuary to be notional taxed contributions, according to one of two methods. The first method applies to accruing members of a defined benefit category if the fund benefit is not wholly sourced from an accumulation of contributions made in respect of the member. Notional taxed contributions = 1.2 x (new entrant rate x S x D /365) M where: New entrant rate is the new entrant rate for the benefit category worked out by an actuary and can be advised by the fund. S is the member s annual superannuation salary relevant to the benefit category on the first day of the financial year on which the member had a defined benefit interest in the scheme. D is the number of days during the financial year that the member was an accruing defined member of the benefit category. M is the amount of member contributions paid by or on behalf of the member in respect of the member s defined benefit interest in the fund during that part of the financial year that the member was an accruing member of the benefit category, and which are not assessable income of the fund. A second method applies in special circumstances and relies on the advice of an eligible actuary. Such special circumstances arise where: a discretion is exercised to pay a benefit upon voluntary exit or redundancy that is not bona fide and the benefit exceeds the benefit assumed in calculating the new entrant rate a member s accrued retirement benefit increases during a financial year as a result of a change of benefit category the governing rules of the defined benefit fund are amended in a way that may result in an increase in a member s benefit and the amendment is made for a reason other than to satisfy a legislative requirement a member s superannuation salary is increased in a non-arm s length way with the primary purpose being to achieve an increase in superannuation benefit. The method above is used to determine the notional taxed contributions of members of a superannuation fund where: the fund has five or more defined benefit members the superannuation fund has five or more defined benefit members on 1 July 2007 and the number of defined benefit members becomes less than five after that date the trustee is an RSE licensee, the fund has been in existence for five or more years and had five or more members at any time before 1 July 2007 and the employer-sponsor is dealing at arm s length with each defined benefit member the fund meets either criteria above and the defined benefit members are transferred after 1 July 2007 to another fund whose trustee is an RSE licensee and the employersponsor is dealing at arm s length with each defined benefit member the fund had no defined benefit members on 30 June 2007 but has at least 50 defined benefit members on or after 1 July 2007 and the employer sponsor is dealing at arm s length with each defined benefit member. 37

40 Notional taxed contributions for funds with fewer than five defined benefit members Allocation of contributions must be made in proportion to the present and prospective liabilities of the fund to its members. The notional taxed contributions are the amount of assessable contributions which have been allocated to the member in the financial year. An amount allocated from a reserve may count towards the member s concessional cap unless the amount allocated is used solely for the purpose of allowing the fund to discharge all or part of its pension liabilities. Notional taxed contributions are nil non-accruing members Where the notional contributions are determined by an actuary and the member is a non accruing member of the fund for the whole of the financial year, the amount of notional taxed contributions of the defined benefit interest of the member is nil. A non-accruing member is a member of a defined benefit superannuation fund where the member meets either of the following requirements: the member s membership in the fund consists only in the member receiving pension payments under the scheme (subject to further conditions), or the member has a benefit entitlement in the defined benefit fund but no employerprovided benefits have accrued to the member during the period and the rules of the fund provide that the benefit is not to increase in nominal terms (subject to some exceptions regarding indexing). For the purposes of determining whether a member of a defined benefit superannuation fund is a non-accruing member, any employer contributions paid to the fund to meet partially, or wholly, unfunded benefit liabilities of the fund are not to be treated as employer contributions for the benefit of the member for the period. Notional taxed contributions are nil public sector superannuation schemes Notional taxed contributions will also be taken to be nil where the defined benefit interest is in a public sector superannuation fund and none of the interest is sourced to any extent from contributions made into a super fund or earnings on such contributions. However, notional taxed contributions are not taken to be nil where the interest is an element taxed in the fund attributable to one or more rollover superannuation benefits. Defined benefit interests non-concessional contributions An amount allocated by a superannuation provider for a member will generally be included in that member s non-concessional contributions for a financial year if it has been allocated under Division 7.2 of the SIS Regulations and it is not an assessable contribution of the fund. Amounts that will not be included in non-concessional contributions include Government co-contributions, contributions arising from structured settlements or orders for personal injuries, contributions relating to some CGT small business concessions, contributions where a choice has been made by the trustee (with the consent of the contributor) for the contribution to be treated as an element untaxed in the fund effectively shifting the liability for tax on the contribution to the recipient of the benefit. Grandfathering for existing defined benefit interests Given the unique nature of defined benefit interests, and the difficulty for members to reduce their contributions or notional taxed contributions, certain arrangements are grandfathered so that these members are not unfairly taxed on what would otherwise be 38

41 excess concessional contributions. Special arrangements apply to members with a defined benefit interest on 5 September 2006 and 12 May If these members have notional taxed contributions for that interest that exceed the concessional contributions cap, the notional taxed contributions for that interest will be taken to be the concessional cap. This arrangement will cease to apply if the scheme amends its rules to increase the member s benefits. The grandfathered arrangement will continue to apply if the defined benefit interest has been transferred to one or more successor superannuation funds that retained equivalent rights for members. To be eligible for grandfathering, the member must have: for the and financial years, been a member of an eligible defined benefit fund on 5 September 2006 for the financial year onwards, been a member of an eligible defined benefit fund on 12 May 2009, and not had a change to improve their benefit, or a move to a new benefit category since that date, and not had a non-arm s length change to their salary of more than 50% in a year or 75% in three years since that date. 39

42 5. Administration of excess contributions 5.1. How does the ATO track member contributions? Super funds are required to give the Commissioner of Taxation an annual member contribution statement. The member contribution statement is due on 31 March following the end of a financial year for SMSFs and 31 October following the end of a financial year for all other funds. The member contribution statement includes (but is not limited to): the member s TFN the total contributions for the financial year for the member the amount of employer contributions, and the amount of personal contributions. The ATO is able to collate the member s total contributions after receiving the member contribution statements from all the member s super funds after the end of a financial year. Since the ATO does not have the details of a member s contributions until several months after the end of the financial year, the ATO is not able to provide advisers with the member s contribution history during a financial year. To determine which contributions cap a member s contributions are to be counted towards, the ATO must match information from the member contribution statements with information about deductions for personal contributions from the member s tax return. The amount of a personal contribution that has been claimed as a tax deduction in the member s tax return will be added to the amount of any employer contributions reported in member contribution statements for that member and counted to the member s concessional contributions cap. Any remaining personal contributions reported in member contribution statements for that member will be counted towards the member s non concessional contributions cap Member responsibility to track contributions An individual needs to keep track of all contributions made to super accounts on their behalf to avoid accumulating excessive contributions. Employers and super funds cannot monitor total contributions for a member since a member may have multiple employers and/or multiple super fund accounts. As outlined above, the ATO does not have the necessary information to track contributions during a financial year Assessment notice The ATO will notify the individual of their excess contributions (if any) and associated tax liability via an excess contributions tax assessment. The ATO must issue the notice in writing as soon as practicable after making the assessment. Important! Excess contributions tax is due and payable by the individual at the end of 21 days after the ATO gives the individual the assessment notice. Amounts of unpaid excess contributions tax after that time are subject to a general interest charge. 40

43 5.4. Commissioner s discretion The taxpayer may apply to the Commissioner of Taxation in the approved form for a determination that part or all of the excess contributions (concessional or non-concessional) be disregarded or reallocated to another income year. The application must be made within 60 days of receiving an excess contributions tax assessment. A determination will only be issued where the taxpayer can demonstrate that special circumstances exist (ie that it was unjust, unreasonable or inappropriate to impose the liability for excess contributions tax). Government proposal ATO discretion on excess contributions tax assessments This measure proposes giving the ATO the ability to exercise its discretion prior to an assessment being issued for excess contributions tax. At the time of writing, legislation to make this effective had been introduced but not passed by Parliament Release authority As soon as practicable after making an excess contributions tax assessment for a person, the Commissioner of Taxation must give the person a release authority in respect of the amount of excess contributions tax. The release authority will state the date and the amount of excess contributions tax the person is liable to pay. The excess contributions tax liability is charged to the individual, not the super fund. The person may pay for the tax liability personally (for excess concessional contributions tax) or by having their fund release the amount from their super fund (for both excess concessional and excess non-concessional contributions tax). Excess concessional contributions tax liability The person may give the release authority for an amount of excess concessional contributions tax to their super provider within 90 days after the date of the release authority or if they no longer have a super interest, the person may pay the tax liability out of their own pocket. Regardless of the method used, the tax liability is still due and payable by the individual within 21 days after the ATO gives the individual the assessment notice. Excess non-concessional contributions tax liability The person must give the release authority for an amount of excess non-concessional contributions tax to their super provider within 21 days after the date of the release authority. If the person does not have a super interest, they must pay the contributions tax out of their own pocket. If the person has a super interest, they do not have the option of paying excess non-concessional contributions tax out of their own pocket. The Commissioner of Taxation may give the release authority directly to one or more super providers that hold a super interest (other than a defined benefit interest) for the person if any of the following occur: The person does not give the release authority to a super provider within 90 days after the date of the release authority. The total of the amounts (if any) paid by super providers in relation to the release authority falls short of the amount of the excess non-concessional contributions tax. 41

44 The total of the values of every super interest (other than a defined benefit interest) held for the person by a super provider to which the release authority is given falls short of the amount of the excess non-concessional contributions tax stated in the release authority. A super provider that has been given a release authority must pay to the person or the Commissioner of Taxation within 30 days after receiving the release authority the lesser of the following amounts: The amount of excess tax stated in the release authority. An amount specified by the taxpayer. The person s account balance. The proportioning rule does not apply to a payment made under a release authority. Amounts from super or pensions may be released for the payment of amounts under a release authority. See section 8.4 for conditions of release for release authorities and section for the ability to commute amounts of complying pensions for the purpose of release authorities. Budget announcement Excess contributions tax relief from 1 July 2011 The Government has announced it will provide a once-only opportunity to withdraw excess concessional contributions made during the or later financial years. This withdrawal opportunity is limited to excess concessional contributions of up to $10,000 (not indexed). Instead of being subject to excess concessional contributions tax of 31.5% and contributions tax within a super fund, the refunded excess concessional contributions will be assessable personally to the client and taxed at their marginal tax rate. At the time of writing, legislation to make this effective had not been introduced to Parliament. 42

45 6. CGT small business concessions and contributions to super Important! The CGT small business concession tax rules can be very complex and this chapter provides only a brief overview of some of the main issues in the context of superannuation. A client must seek professional tax advice from a qualified tax professional in regard to CGT small business concessions. A new tax agent services regime commenced on 1 March 2010, defining a tax agent service and requiring these services to be only provided by a registered tax agent. Financial planning advice that covers the areas of superannuation and small business CGT concessions may have the potential to be considered a tax agent service. For further general information on small business CGT concessions, please refer to the FirstTech small business CGT concessions flowchart on FirstNet Adviser. Small business entities include a sole trader, partners in a partnership, trusts and companies. The word entity will be used in this chapter to describe small business entities Capital gains tax concessions Small business owners have potentially one of, or a combination of the following four concessions available to them to reduce any capital gain upon the sale of active assets of a business: 1. The small business 15-year exemption (allows a business person to disregard the entire capital gain for tax purposes). 2. The small business 50% (active asset) reduction. 3. The small business retirement exemption (allows a business person to disregard up to $500,000 of capital gains for tax purposes). 4. The small business rollover (allows deferral of the capital gain realised on the sale of active assets of the business where the proceeds are used to purchase replacement assets). In addition, a small business owner who is an individual taxpayer may also be eligible for the 50% individual discount for CGT assets held for longer than 12 months Basic conditions for CGT relief Where a capital gain arises from the sale of active assets, the three major basic conditions that must be met to qualify for CGT small business concessions are: 1. Maximum net asset value test or aggregated turnover test: the maximum net asset value of assets that the small business entity and entities connected with the taxpayer, affiliates of the taxpayer and entities connected with the taxpayer s affiliates own must not exceed $6 million, or the entity must be a small business entity or a partner in a partnership that is a small business entity. A small business entity is an entity that carries on a business and the aggregate of its annual turnover plus the annual turnover of connected entities and affiliates is less than $2 million. 43

46 Access to the small business CGT concessions has been extended for taxpayers who qualify under the $2 million aggregated turnover test. Individuals who own a CGT asset used in a business by a related entity as well as partners owning a CGT asset used in a partnership business qualify. 2. Active asset test An asset does not have to be an active asset immediately before the CGT event. The CGT asset being sold must be an active asset for at least 7½ years of the ownership period or half of the ownership period. The ownership period starts from the time the taxpayer owns the asset and ends at the time of the CGT event, or if the business ceased within the last 12 months, cessation of the business. An active asset is generally an asset that is used, or held ready for use, in the course of carrying on a business, by the business owner, an affiliate or related entity of the business owner. 3. Rules for companies and trusts If the asset being sold is a share in an Australian company or an interest in a resident trust, there must be a CGT concession stakeholder just before the CGT event: the entity claiming the concession must be a CGT concession stakeholder in the company or trust, or CGT concession stakeholders in the company or trust must together have a small business participation percentage in the entity of at least 90%. There are further rules specific to each CGT small business concession Additional eligibility rules for 15-year exemption A small business entity can disregard a capital gain arising from a CGT asset that it has owned for at least 15 years if certain conditions are met. The main conditions are that: the basic conditions for small business relief are satisfied (refer to paragraph 6.2 above) the entity continuously owned the asset for the 15-year period leading up to the CGT event if the entity is an individual, the individual retires in connection with the CGT event is aged 55 or over or is permanently incapacitated, and if the entity is a company or trust, the entity had a significant individual for a total of at least 15 years, during which the entity owned the asset, and the individual who was the significant individual just before the CGT event retires or is permanently incapacitated Contributing proceeds to super where 15-year exemption applies If the sale of an asset qualifies for the 15-year exemption on the capital gain, the owner has the option of contributing all or some of the total proceeds from the sale to super. The proceeds from the sale will likely exceed the capital gain from the sale. The contribution of the sale proceeds will not be treated as either a concessional or a non concessional contribution if the contribution does not exceed the person s lifetime CGT cap, which is currently $1.205 million (see section 6.9). The person must meet the work test to contribute the amount to super if they are between age 65 and under 75. From age 75, a person is not permitted to make personal or voluntary employer contributions to super and therefore may not contribute the sale proceeds to super. 44

47 There are further administrative requirements for contributing these proceeds to super (see section 6.11) Additional eligibility rules for $500,000 retirement exemption A small business entity may choose to disregard a capital gain from a CGT event happening in relation to an active asset of the small business using the $500,000 (lifetime limit) retirement exemption. The main conditions for eligibility are that: The basic conditions for small business relief are satisfied (refer to section 6.2). For individuals: a choice to disregard the capital gain (ie the CGT exempt amount) has been specified in writing by the day the individual lodges their tax return for the year of the CGT event (or longer as permitted by the Commissioner), and just before the choice is made by the individual, if they are under age 55, the individual must contribute an amount equal to the CGT exempt amount to a super fund at the later of when they made the choice, or receipt of the capital proceeds. If the individual is age 55 or over, the payment may be received directly. For company or trust: a choice to disregard the capital gain (ie the CGT exempt amount) has been specified in writing by the day the company or trust lodges their tax return for the year of the CGT event (or longer as permitted by the Commissioner), and the company or trust has made payment to at least one of its CGT concession stakeholders by the later of seven days after it makes the choice, or seven days after receipt of capital proceeds, and just before the payment is made by the company or trust, if the recipient is under age 55, the company or trust must contribute an amount equal to the CGT exempt amount to a super fund at the later of when they made the choice, or receipt of the capital proceeds. If the individual is age 55 or over, the payment may be received directly Contributing capital gains to super where $500,000 retirement exemption applies If the sale of an asset qualifies for the retirement exemption, the owner has the option of contributing all or some of the exempted capital gain to super. The capital gain that is exempted from capital gains tax is limited to a lifetime limit of $500,000. The amount of the capital gain (maximum of $500,000) that is contributed to super will not be treated as either a concessional or non-concessional contribution if the contribution counts towards and does not exceed the person s lifetime CGT cap, which is currently $1.205 million (see section 6.9). The person must meet the work test to contribute the amount to super if they are between age 65 and under 75. From age 75, a person is not permitted to make personal or voluntary employer contributions to super and therefore may not contribute the sale proceeds to super. There are further administrative requirements for contributing these proceeds to super (see section 6.11). 45

48 6.7. Additional eligibility rules for 50% (active asset) reduction There are no additional rules for the 50% (active asset) reduction. Amounts exempt from capital gains tax under this exemption may be contributed to super as a non-concessional or concessional contribution. Business owners have the option of not applying the active asset reduction when selling CGT assets. By not applying this 50% reduction, the amount of capital gain that can be exempt under the $500,000 retirement exemption (and contributed to super under the lifetime CGT cap) can, in many cases, be maximised Additional eligibility rules for small business rollover The eligibility rules for the small business rollover concessions are beyond the scope of this publication. Please refer to the FirstTech capital gains tax flowchart or the ATO website for further information. The proceeds from the sale of an asset that meet the small business rollover requirements must be used to purchase replacement assets, so they cannot be contributed to super Lifetime CGT cap Income year Amount of cap $1.205 million Note: The CGT cap is a lifetime limit and is indexed annually and rounded down to the nearest $5,000. The lifetime CGT cap is currently $1.205 million. This is indexed. See section 4.6 for more information on indexing. The CGT cap is only available for small business entities in certain circumstances described in sections 6.4 and 6.6. Contributions that may count toward the CGT cap are measured from 10 May Amounts that will count towards a person s lifetime CGT cap when contributed to super are: capital proceeds from the sale of an active business asset that qualify for the 15-year exemption, or capital gains from the sale of an active asset that qualify for the $500,000 retirement exemption (not indexed) Treatment of excess CGT contributions Where the proceeds or capital gains that are exempt from tax under the CGT small business concessions are contributed to super, they must be within the person s lifetime CGT cap to be counted toward the lifetime CGT cap. If the contributions exceed the lifetime CGT cap, the contribution will count toward the person s non-concessional or concessional cap (depending upon whether the person claims a tax deduction on the contribution amount above the lifetime CGT cap). Tip! Remember that rollovers of CGT exempt amounts are considered to be contributions, and the relevant work tests must be met for people age 65 or over (see sections 2.12 and 2.4). 46

49 6.11. Contribution rules for the CGT cap In addition to qualifying for the small business CGT concessions, there are further rules to be met to allow those CGT exempt amounts to be contributed to super and count toward the CGT cap rather than being counted as non-concessional or concessional contributions. Important! In addition to the rules outlined, to have a contribution count toward the CGT cap amount a client must complete a request on the approved form and give it to the super provider at or before the time the contribution is made. The ATO has published an approved form NAT To obtain a copy of ATO form NAT 71161, go to and enter in the blank search box in the top right hand corner of the screen. It is not compulsory to use the ATO version of the form. These notifications can be made to the super fund in various ways and funds may create their own form for their members to use. The ATO form sets out the minimum data requirements. The small business 15-year exemption contribution rules If an entity can disregard a capital gain (or would be able to if a capital gain arose) from a CGT event under the 15-year small business exemption, the client may choose to contribute all or part of these proceeds to super. Note: Contributions to super under this rule may include the proceeds from the sale of pre-cgt assets (purchased prior to 20/09/85), or proceeds from a sale where there was no capital gain or a capital loss. Direct ownership of CGT asset and the 15-year exemption Where the entity owned the CGT asset directly, the super contribution must be made by an individual before the later of: the day the entity is required to lodge their tax return for the income year in which the CGT event happened, or 30 days after the day the entity receives the capital proceeds. Company or trust owns the CGT asset and the 15-year exemption Where the CGT asset is owned through a company or trust structure, the following requirements must be met: The individual receiving the exempt proceeds from the company or trust must be a CGT concession stakeholder just before the CGT event. The payment must not exceed the individual s CGT concession stakeholder participation percentage. The company or trust must make the payment to the individual within two years after the CGT event. Where the individual wishes to make a contribution under the lifetime CGT cap, the contribution must be made within 30 days of the individual receiving the payment from the company or trust. 47

50 The small business retirement exemption contribution rules An entity may choose to contribute all or part of a capital gain that has been exempted from CGT under the CGT retirement exemption to super (an individual under the age of 55 must contribute the amount to super to qualify for the small business retirement exemption). The contribution will be limited to the lesser of the exempt amount (which is limited to $500,000) and the person s remaining lifetime CGT cap amount. Direct ownership of CGT asset and the retirement exemption Where the entity owned the CGT asset directly, the super contribution must be made on or before the later of: the day the entity is required to lodge their tax return for the income year in which the CGT event happened, and 30 days after the day the entity receives the capital proceeds from the CGT event. Company or trust owns the CGT asset and the retirement exemption Where the CGT asset is owned through a company or trust structure, the following requirements must be met: The individual receiving the exempt proceeds from the company or trust must be a CGT concession stakeholder just before the CGT event. The entity must make a payment to the individual that satisfies the company or trust conditions under the small business retirement exemption (these conditions are in s of ITAA 1997 and include the requirement to make a payment within the later of seven days after the company or trust chooses the concession and seven days after the entity receives proceeds from the CGT event). If the individual is under age 55 just before the payment, the company or trust must instead contribute the payment to super on the individual s behalf. Where the individual over 55 wishes to make a contribution under the lifetime CGT cap, the contribution must made within 30 days of the individual receiving the payment from the company or trust Death and the small business CGT concessions Beneficiaries, legal personal representatives and surviving joint tenants who acquire small business assets as a result of death will generally be eligible for the small business CGT concessions if: the deceased would have met the basic conditions if disposing of the asset just prior to the time of death, and the asset is disposed of by the beneficiary or legal personal representative within two years of the date of death. Where the 15-year exemption is claimed in this case, the requirement that the CGT event happens in connection with retirement does not apply. Where the small business retirement exemption is claimed in the event of death, there is no need to contribute the exempt amount to super, regardless of the individual s age. Note: While beneficiaries, legal personal representatives and surviving joint tenants may have access to the small business CGT concessions, they are not able to utilise the lifetime CGT cap. Therefore, any sale proceeds contributed to super will count against the non-concessional or concessional contributions caps as appropriate. 48

51 Tip! For more detail and an explanation of terms relating to small business CGT concessions, refer to the ATO s Advanced guide to capital gains tax concessions for small business, which can be found online at: 49

52 7. Moving super 7.1. Portability transferring super balances From 1 July 2005, members of accumulation style super funds and approved deposit funds (ADFs) can roll over part or all of their super to another super fund regardless of whether employer contributions will continue to be made to the fund. Super portability laws do not apply to: SMSFs unfunded public sector super schemes a defined benefit super interest where the member is an employee of the employer sponsored fund, or benefits paid as a pension (other than an allocated pension). Tip! If you want to help your client to roll over benefits from another super fund, use the ATO portability form: Request to transfer whole balance of superannuation benefits between funds (NAT 71223) available at Transferring the balance of super under the portability laws does not affect where a person s continuing employer contributions are made. If a person is eligible for choice, they may change the fund that receives employer contributions by completing a Standard Choice Form (NAT 13080). Information required A request to roll over or transfer a member s entire account balance may be made using the ATO s portability form or in another manner. A request to roll over or transfer a partial account balance may include the information required in the ATO s portability form and any other additional information that the trustee of the transferring super fund advises the member as being necessary to process the request. Additional information may be required for transfers to SMSFs. The trustee of the transferring out fund may require further information about the person s status as a member, a trustee or a director of a corporate trustee of the SMSF. Examples of documents showing that a member is a member or trustee of a SMSF include: a trust deed the member s contribution statement, and the annual return of the SMSF. Time limits Subject to some exceptions below, the trustee must roll over or transfer the amount (or the part of the amount requested to be transferred) as soon as practicable, and in any case within 30 days, after receiving the request or all the information required to process the transfer. 50

53 Illiquid investments For an investment choice made by a member before 1 July 2007, a trustee is not required to roll over or transfer the amount requested within the 30-day period if any part of the member s interest was an illiquid investment immediately before 1 July 2007 and the trustee has informed the member, before 1 July 2008, of the nature of the illiquid investment, the impact of the investment on the portability of the member s interest, and the period within which the investment can be rolled over to another fund. An illiquid investment is one that: cannot be converted to cash in less than 30 days, and if converted to cash within 30 days, the cashing out would have an adverse impact on the value of the investment. For an investment choice made by a member on or after 1 July 2007, and where the investment strategy chosen is an illiquid investment, the trustee is not required to roll over or transfer the whole of the member s withdrawal benefit (or a partial amount requested to be transferred) within the 30-day period if the trustee informs the member of: the effect of this rule before the member makes the investment choice the reasons why the investment is illiquid the maximum period in which a transfer must be paid, and obtains written consent that the member understands and accepts that a period longer than the 30 days is required because of the illiquid nature of the investment. Note: The trustee may process a portability request in two or more transactions to ensure that only the transfer of the illiquid investment is delayed for more than the 30-day period. Requests for further information If the trustee of the fund has not received the information in the ATO form it may refuse to roll over, but: the trustee must, within 10 working days after receiving the request, ask the member for this information, and if the trustee has not received the information within 10 working days after making the request, the trustee must make reasonable further enquiries of the member to obtain this information. Trustee not required to transfer in some cases The trustee of a super fund/adf is not required to comply with a portability request from a member where: the nominated super fund/rsa will not accept the amount the amount to be rolled over is only part of the member s account balance and the rollover will reduce the account balance to less than $5,000, or a previous rollover has occurred in the last 12 months. Note: A member can withdraw their entire account balance where the balance is below $5,

54 Protection Where a member chooses to transfer part of their super, leaving less than $1,000 in their account that includes/has included employer financed benefits, they will not be classified as a protected member and the normal member protection standards will not apply. A protected member is a member of a regulated super fund who has a withdrawal benefit that is less than $1,000 and contains, or contained, benefits that are mandated employer financed benefits. The sum charged as administration costs in respect of a protected member must not exceed the investment return credited to, or debited against, the member s minimum benefits for the period Contribution splitting transferring recent contributions Super contribution splitting allows your clients to transfer concessional contributions made during the year to their spouse s super account, either in the same or another fund. The split will generate a contributions-splitting super benefit which is a 100% taxable component when it is withdrawn from the originating spouse s account. The amount is fully preserved in the receiving spouse s account. Spouse contribution splitting is not compulsory, with each fund deciding if and when to offer splitting. It is important to check with each fund to determine whether your clients will be able to use spouse contribution splitting. What can be split? Only splittable contributions up to the maximum amount may be split under this measure. Splitting laws only apply to accumulation accounts and defined benefit interests that are not part of a defined benefit component. Splittable contributions Splittable contributions, subject to the exclusions below, are: contributions to a regulated super fund on or after 1 January 2006, or allocated surplus contribution amounts that are allocated on or after 1 January Note: Splittable contributions do not include: Non-deductible contributions made between 5 April 2007 and 30 June Amounts that would form part of the contributions segment (part of the tax-free component) of the super interest, eg non-concessional contributions. Rollover super benefits. Amounts that have previously been split. Super lump sums paid from a foreign super fund. Directed termination payments (DTPs). Contributions by the Commonwealth, a State or a Territory to a public sector super scheme in relation to a benefit that accrued in a financial year that commenced before 1 July 2005 are not splittable contributions. There are three types of splittable contributions: Taxed splittable contributions are contributions that are included in the assessable income of a super fund and allocated surplus contribution amounts, eg super guarantee and salary sacrifice contributions. Untaxed splittable contributions are contributions made by a fund member or by another person to a regulated super fund on or before 5 April 2007 that are not included in the assessable income of the fund, eg personal undeducted contributions or spouse contributions made on or before 5 April

55 Untaxed splittable employer contributions are contributions made by the Commonwealth, a State or a Territory to a public sector super scheme that are not included in the assessable income of the fund. What can t be split? Splitting laws also do not apply to accounts that are subject to payment splits or payment flags under a marriage breakdown. Maximum splittable amounts The maximum amount of contributions made in a particular financial year that can be split depends upon the type of splittable contribution. Type of splittable contribution Taxed splittable contributions eg salary sacrifice and SG contributions Untaxed splittable contributions eg personal undeducted contributions made on or before 5 April 2007 Untaxed splittable employer contributions eg contributions by the Commonwealth, a State or a Territory Maximum splittable amount The lesser of: W 85% of the concessional contributions for that financial year, and W the concessional contributions cap for that financial year 100% of the amount of the untaxed splittable contributions made in the financial year 100% of the concessional contributions cap for that financial year Applying to split contributions A member must apply to their fund to split contributions, specifying the amount and type of contributions to be split, along with their spouse s personal and super account details. The member s spouse must be aged under preservation age at the time of the split request. If the member s spouse has reached preservation age and is under age 65, they must declare that they do not satisfy the retirement condition of release at the time the split request is made. Contributions splitting cannot be made to a member s spouse age 65 or over. When can contributions be split? Contributions can generally be split after the conclusion of the financial year in which the contribution is made and only in that financial year. This means that contributions made between 1 July 2010 and 30 June 2011 can be split from 1 July 2011 until 30 June However, if the client intends to roll over their entire super balance before the end of the financial year, they can also apply to split their contributions within that same financial year so that the split occurs prior to the rollover. A further timing issue arises for clients wishing to claim a personal tax deduction for their contributions. These clients must lodge their valid notice (see section 3.3) with the fund before they apply to split. This ensures that the correct taxation status of the contributions is determined prior to the split. 53

56 7.3. Marriage breakdown transferring super to another spouse Since 28 December 2002, the Family Law Act 1975 (in particular part VIIIB) stipulates that interests in super, RSAs and ADFs are to be included in the definition of property, and can be divided on marriage breakdown. A rollover of super benefits under the super and divorce laws is referred to as a family law super payment for tax purposes. It is not included in the assessable income of the receiving fund. A family law super payment is treated as a super benefit of the non-member (receiving) spouse, but not the member (originating) spouse. The definition of spouse includes relationships registered under particular State or Territory laws or couples who live together on a genuine domestic basis (including same sex couples). See the Colonial First State flyer Breaking up can be hard but your super needn t be for more information on super and divorce. 54

57 8. Getting money out of super 8.1. Preservation Benefits are generally preserved (ie not accessible) in super until a condition of release has been met. Where a trustee of a regulated super fund or an ADF is reasonably satisfied that a member has met a condition of release with a nil cashing restriction, the member s preserved benefits and restricted non-preserved benefits in the fund at that time become unrestricted non-preserved benefits (ie accessible). The preservation rules below are the minimum standards required. The governing rules of a super fund may impose stricter rules. Preserved amounts The preserved component of a member s benefit may comprise one or more of the following: Preserved amounts which are fixed dollar amounts as at 30 June Contributions from 1 July Rolled over preserved amounts. ETP rollovers from 1 July 2004 to 30 June Directed termination payments from 1 July All fund earnings from 1 July Restricted non-preserved amounts (RNP amounts) The RNP component of a member s benefit may comprise one or more of the following: RNP amounts which are fixed dollar amounts as at 30 June 1999 (these amounts are not indexed and any earnings on these benefits are preserved) transferred or rolled over RNP amounts (subject to the rules of the receiving fund or RSA). RNP amounts do not apply to any contributions made after 30 June Accessing RNP amounts RNP amounts are generally made up of undeducted contributions made to a super fund prior to 1 July This money can become an unrestricted non-preserved benefit and cashed out when the member has terminated gainful employment with an employer who has contributed to the same super fund prior to the member s termination of employment. Unrestricted non-preserved amounts (UNP amounts) If a condition of release with a nil cashing restriction is satisfied, the benefits will become UNP amounts and can be accessed at any time. The benefits can be taken in cash or as a pension or rolled over to commence an annuity. If UNP amounts (including an employer termination payment (ETP) received by a fund prior to 1 July 2004) are rolled over to another super fund or RSA, they will generally continue to remain unrestricted subject to the rules of that super fund or RSA. Will not be indexed and any earnings on these benefits will be preserved. Priority of preservation components upon withdrawal Please see section 9.5 for the priority of preservation components on payment of super benefits. 55

58 8.2. Preservation age Date of birth Preservation age Before 1 July From 1 July 1960 to 30 June From 1 July 1961 to 30 June From 1 July 1962 to 30 June From 1 July 1963 to 30 June On or after 1 July Conditions of release with nil cashing restrictions Summary table Retirement on or after preservation age. Attaining age 65. Death. Permanent incapacity. Termination of gainful employment (restricted non-preserved amounts). Terminal medical condition. Termination of gainful employment with a standard employer-sponsor of the regulated super fund on or after 1 July 1997 where the member s preserved amounts in the fund at the time of the termination are less than $200. Being a lost member who is found, and the value of whose benefit in the fund, when released, is less than $200. Retirement The definition of retirement depends on the member s age and is summarised as follows: In the case of a person who has reached a preservation age that is less than 60: an arrangement under which the member was gainfully employed has come to an end, and the trustee is reasonably satisfied that the person intends never to again become gainfully employed for 10 hours or more each week. In the case of a person who has attained the age of 60 An arrangement under which the member was gainfully employed has come to an end, and either of the following circumstances applies: the person attained that age on or before the ending of the employment, or the trustee is reasonably satisfied that the person intends never to again become gainfully employed for 10 hours or more each week. 56

59 Australian Prudential Regulation Authority (APRA) Guidance APRA Superannuation Circular No I.C.2. (para 68 and 69) provides further clarification for members retiring after the age of 60: A member with a preservation age of less than age 60 who ceases gainful employment before age 60 may still retire after age 60, provided that the trustee is satisfied, at the time of the benefit claim, that the member intends to never again be gainfully employed either part-time or full-time. Apart from the circumstances set out in the preceding paragraph, when a member has reached age 60, retirement occurs when an arrangement under which the member was gainfully employed has ceased on or after the day the member reached age 60. Permanent incapacity Definition of permanent incapacity from 1 July 2007 Permanent incapacity, in relation to a member, means ill health (whether physical or mental), where the trustee is reasonably satisfied that the member is unlikely, because of the ill health, to engage in gainful employment for which the member is reasonably qualified by education, training or experience. To be reasonably satisfied a trustee will usually request medical evidence in the form of two doctors certificates to that effect. This is to also satisfy the requirement for the payment of a disability super benefit (refer to section 10.8). The SIS definition of permanent incapacity above is sometimes referred to as an any occupation definition of permanent incapacity because it relates to gainful employment for which the member is reasonably qualified by education, training or experience. Total and permanent disablement (TPD) A Product Disclosure Statement (PDS) will usually state a definition of TPD for insurance purposes (for the actual wording of the definition, please refer to the insurance contract). An insurer will determine the definition of TPD which may be an any occupation or own occupation definition. Any occupation vs own occupation insurance definitions of TPD An insurer generally defines TPD in one of two ways: Any occupation the insurer may define TPD as various circumstances which leave a person unable to engage in gainful employment in any occupation for which the member is reasonably qualified by education, training or experience (any occupation). The probability of an insurance payout under this definition is lower than an own occupation definition, but is more compatible with the SIS permanent incapacity condition of release. Own occupation the insurer may define TPD as various circumstances which leave a person unable to work again in their own occupation they held just prior to total and permanent disablement. The probability of an insurance payout under this definition is higher than an any occupation definition, but is less compatible with the SIS condition of release. If TPD insurance is held in super, regardless of whether a person has met the insurer s definition of TPD, it will be the SIS definition of permanent incapacity which must be met to release the proceeds from super. The SIS definition of permanent incapacity is an any occupation definition. This means that if a member has satisfied an own occupation definition of TPD, the insurer may pay the insured benefit into the member s superannuation account but the trustee may not be able to cash out the benefit if the member does not satisfy the broader SIS definition of permanent incapacity as it is an any occupation definition. 57

60 Termination of gainful employment (restricted non-preserved amounts) There are no cashing restrictions for restricted non-preserved benefits where a member terminates gainful employment with an employer who had, or any of whose associates had, at any time, contributed to the regulated super fund in relation to the member. Terminal medical condition From 1 July 2007, a terminal medical condition exists in relation to a person at a particular time if the following circumstances exist: two registered medical practitioners have certified, jointly or separately, that the person suffers from an illness, or has incurred an injury, that is likely to result in the death of the person within a period that ends not more than 12 months after the date of certification at least one of the registered medical practitioners is a specialist practising in an area related to the illness or injury suffered by the person, and for each of the certificates, the certification period has not ended. To be reasonably satisfied a trustee will request medical evidence in the form of two doctor certificates to that effect (one of the certificates must be certified by a specialist). For more information on the tax treatment of terminal medical condition payments, refer to section Conditions of release with cashing restrictions Summary table Former temporary residents Departing Australia Superannuation Payment (DASP). Severe financial hardship (trustee decision). Compassionate grounds (application to APRA). Termination of gainful employment (preserved amounts). Temporary incapacity. Attaining preservation age (transition to retirement see Chapter 9 for further detail). A release authority is given to the fund by the member or by the ATO. The amount released may be no more than the amount of the member s excessive tax liability. A transitional release authority is given to the fund by the member. The amount released may be no more than the amount of the excessive non-concessional contributions specified on the release authority. Temporary residents In December 2008, significant changes were made to the legislative regime for temporary and former temporary residents. The changes are an initiative designed at reducing the number of lost accounts in the superannuation system. The position prior to 18 December 2008 A member who held an eligible temporary resident visa that had expired could request the fund trustee to release his or her benefits, provided they had permanently left Australia. An eligible temporary resident visa was a visa included in a list in the SIS regulations. New Zealand citizens were excluded from these arrangements. A benefit payment known as a departing Australia superannuation payment (DASP) was subject to tax withholding. Temporary or former temporary residents had all the conditions of release available to them. 58

61 The position from 18 December 2008 In short, the main changes are a new definition of temporary resident, the requirement for trustees to pay to the ATO superannuation benefits for former temporary residents as unclaimed moneys (with the member s right to claim back the benefit from the ATO), and from 1 April 2009 a limited number of conditions of release available to both temporary and former temporary residents. 1. Who is a temporary resident? A temporary resident is defined now as the holder of a temporary visa under the Migration Act Such a visa is for a specified period, until a specified event happens or while the holder has a specified status. The changes do not apply to an Australian citizen, a New Zealand citizen, a permanent resident or a holder of an Investor Retirement visa or a Retirement visa. 2. Requesting benefits A temporary resident who has left Australia and whose visa has ceased to be in effect can request cashing of his or her benefits, as a DASP. The trustee must cash the benefit, on being furnished with the prescribed evidence of the temporary visa having lapsed and the member leaving Australia. These arrangements are essentially unchanged. 3. Unclaimed money The ATO has to give a trustee a notice if it is satisfied that a former temporary resident (see 4 below) has a superannuation interest in the fund. The notice requires payment in respect of the former temporary resident s benefit to the ATO as unclaimed money. On payment to the ATO within the prescribed time, the trustee has no further liability to the member, and any insurance cover ceases. The member can apply, in the approved form, to the ATO for payment to them of the amount paid to the ATO. Interest is only payable in limited circumstances. Former temporary residents should therefore request cashing of their benefits as soon as they are able rather than having to apply for payment later from the ATO. 4. Who is a former temporary resident? A former temporary resident is defined as a person: who under the Migration Act 1958 was the holder of a temporary visa (except any visa prescribed in the Regulations), and who left Australia after starting to be a holder of the visa, and at least six months have passed since the later of the following events (or either of them occurred at the same time): the visa ceased to be in effect the person left Australia, and the person: is not the holder of a temporary or permanent visa, and is neither an Australian nor a New Zealand citizen, and has not made a valid application for a permanent visa that has not been finally determined under the Migration Act

62 5. Conditions of release From 1 April 2009, only the following conditions of release will apply to the benefits of temporary and former temporary residents: the request for benefits to be cashed (see 2. on page 59) death terminal medical condition permanent incapacity temporary incapacity the trustee is given a release authority to pay excess contributions tax, and the requirement to pay the benefit to the ATO as unclaimed money (see 3. on page 59). The other conditions of release; for example, relating to employment or the payment of an income stream on attaining preservation age, are only available to temporary or former temporary residents if they satisfied such a condition before 1 April These changes mean that from 1 April 2009, a trustee needs to know whether a member making a withdrawal request is or has ever been a temporary resident. 6. Other changes a) Tax withholding From 1 April 2009, the tax on the taxed element taxable component of a DASP increased from 30% to 35% and on the untaxed element from 40% to 45%. b) The list of visa subclasses, for the purpose of the definition of eligible temporary resident visa set out in Schedule 1AB to the SIS regulations, ceased to be effective on 1 July Reference will have to be made to the Migration Act 1958 for details of relevant visas. Refer to the ATO website for more information. 7. Taxation A DASP is not assessable income and is not exempt income. However, recipients are liable to pay income tax on the payment at the rates outlined in the table below. The appropriate tax must be withheld by the fund trustee making the payment. There are different procedures for requesting DASPs above and below $5,000. For guidance on how to request a DASP, go to the ATO s information page, Superannuation information for temporary residents departing Australia at DASPs tax treatment Tax component Rate of tax Tax-free Nil Taxable taxed element 35% Taxable untaxed element 45% 60

63 Severe financial hardship A person s severe financial hardship status is assessed by the fund trustee or RSA provider. Test 1 Based on written evidence provided by a Commonwealth department or agency: the person has received Commonwealth income support payments for a continuous period of at least 26 weeks the person was in receipt of those payments at the time of application, and the person is unable to meet reasonable and immediate family living expenses*. * This requirement is a subjective test assessed by the fund trustee. APRA has issued to all trustees guidelines on what may be considered to be reasonable and immediate family living expenses. Test 2 Person has reached preservation age plus 39 weeks. Based on written evidence provided by a Commonwealth department or agency, the person has received Commonwealth income support payments for a cumulative period of 39 weeks after the person has reached their preservation age. The person is not gainfully employed on either a part-time or a full-time basis on the date of the application. Persons who have reached their preservation age and have been receiving income support for more than 39 weeks (eg receiving income support for 39 weeks after reaching age 55) can use either Test 1 or Test 2. Examples of Commonwealth income support payments include: Newstart Allowance, Partner s Allowance and the Disability Support Pension. It excludes the Youth Allowance (for recipients who are undertaking full-time study) and Austudy payments. Cashing restrictions for severe financial hardship If a person meets the tests for severe financial hardship, the amount they can access from super is restricted as follows: for a person under age 55 the amount released from super in each 12-month period must be a single lump sum not less than $1,000 and not more than $10,000, and for a person age 55 or over there are no cashing restrictions. Compassionate grounds APRA has discretion to allow payment of preserved benefits in certain cases. Examples include: Payment on a loan is required to prevent foreclosure of a mortgage on principal residence. To cover expenses in relation to a dependant s death, funeral or burial. To pay for medical treatment, medical transport, or medical-related modifications to the person s principal home or vehicle for the member or a dependant. APRA administers the Government legislation that permits the early release of super under specified compassionate grounds. Although APRA must be satisfied that an application meets the criteria for early release of super, the final decision to pay out the benefit must be made by the trustee of the super fund. 61

64 Cashing restrictions under compassionate grounds The amount released from super for someone meeting the compassionate grounds condition of release must be: a single lump sum, not exceeding an amount that is reasonably required, and in the case of preventing foreclosure on a mortgage on a principal home, the amount released in each 12-month period must not exceed three months repayments plus 12 months interest. As a first step it is wise to contact the relevant super fund to make sure it will allow the early release of super on compassionate grounds. If the member s circumstances meet those outlined for the early release of super benefits on specified compassionate grounds, it will be necessary to complete an APRA application form. The form can be downloaded from the APRA website at or contact APRA on Termination of gainful employment (preserved amounts) Preserved amounts must be taken as a non-commutable life pension or non-commutable life annuity where a member has terminated gainful employment with an employer who had, or any of whose associates had, at any time, contributed to the regulated super fund in relation to the member. There are no cashing restrictions for restricted non-preserved benefits under this condition of release (refer to section 8.3). Temporary incapacity A superannuation fund may pay a benefit to a member suffering temporary incapacity. This condition of release is commonly applied to Salary Continuance Insurance (SCI) held within superannuation. Only benefits that are not minimum benefits (ie an insured SCI payment) can be released under this condition of release. Temporary incapacity is where the member: has ceased to be gainfully employed, or has temporarily ceased to receive income under a continuing gainful employment arrangement, and is suffering physical or mental ill health that caused the member to cease to be gainfully employed, and is not permanently incapacitated. Consequently, the temporary incapacity condition of release does not generally apply to a member s accrued benefits but instead is the mechanism which allows fund trustees to release salary continuance payments to eligible members. 62

65 Cashing restrictions for temporary incapacity The amount of super released under temporary incapacity must be taken as an income stream (with specific restrictions) cashed from the regulated super fund for: the purpose of continuing (in whole or part) the gain or reward which the member was receiving before the temporary incapacity, and a period not exceeding the period of incapacity from employment of the kind engaged in immediately before the temporary incapacity. This condition of release may not be satisfied even though the member is successful in claiming on their SCI policy, for example, if the member was on unpaid leave or unemployed immediately prior to temporary incapacity. This could result in the insurance proceeds being trapped in the superannuation fund and unable to be paid directly to the member. Income stream restrictions under temporary incapacity For the purposes of accessing super under temporary incapacity, the income stream must meet all of the following requirements: Cannot be commuted. Is paid at least monthly. Does not have a residual capital value. The total amount paid each month is fixed or varies during any period of 12 months by no more than: 5% per annum, or consumer price index (CPI) Compulsory cashing A member s benefits in a regulated super fund must be cashed as a lump sum or pension or rolled over to purchase an annuity as soon as practicable after the member dies. The compulsory requirement to cash member benefits in other circumstances (eg reaching age 65 and no longer working) was abolished from 10 May In specie payments A lump sum payment may be in the form of cash or in specie, subject to the particular fund s governing rules. An in specie payment is made with fund assets (eg shares) rather than money. When making an in specie payment, trustees must be able to substantiate the value of the relevant asset or assets for both SIS and taxation purposes. Payments that cannot be paid in specie are payments that relate to: severe financial hardship compassionate grounds, or a pension or annuity. Source: APRA Superannuation Circular No. I.C.2. 63

66 9. Transition to retirement From 1 July 2005, a new condition of release was introduced: reaching preservation age (currently age 55). This condition of release is also known as the transition to retirement condition of release. There are no work or retirement tests related to this condition of release. A person may or may not be working and still access super under this condition of release. There are important cashing restrictions for this condition of release Cashing restrictions for transition to retirement Under the transition to retirement condition of release, any preserved and/or restricted non preserved benefits must be taken as a certain type of income stream, which among other things does not allow lump sums to be paid (non-commutable) Income streams for transition to retirement Super may be accessed from preservation age using any of the following income streams, which are all generally non-commutable: Income stream A transition to retirement income stream (post 1 July 2007) A non-commutable allocated pension or annuity (pre 20 September 2007) A non-commutable pension or annuity Commutation May be commuted after meeting a full condition of release (eg age 65) May be commuted after meeting a full condition of release (eg age 65) Always non-commutable* * See the limited exceptions for commutations in section 9.3. Transition to retirement income stream A transition to retirement income stream is an account-based income stream or annuity commenced on or after 1 July The total amount of payments in any year are limited to a maximum of 10% of the account balance at the start of each financial year. This maximum payment is not required by legislation to be reduced on a pro-rata basis if the transition to retirement income stream is started or commuted part way through the year. The minimum income payments are shown in the table in section A transition to retirement income stream must meet the post 1 July 2007 income stream standards (see section 11.4). Non-commutable allocated pension or annuity A non-commutable allocated pension or annuity is an allocated pension or annuity commenced prior to 20 September 2007, which the trustee made non-commutable for the purposes of transition to retirement. 64

67 Non-commutable pension or annuity (formerly complying) A non-commutable pension or annuity is one of the following types of complying income streams: lifetime life expectancy, or term allocated. From 20 September 2007, generally only non-commutable annuities are available Allowable commutations The income streams above are all generally non-commutable. However, cash commutations may be made in the following circumstances: To pay a super contributions surcharge. To pay a non-member spouse under a Family Law payment split. To ensure a payment may be made under a Release Authority or Transitional Release Authority. To cash an unrestricted non-preserved benefit, following a condition of release with a nil cashing restriction, eg retirement or reaching age 65. Generally, the value of a commutation is not counted towards the 10% of account balance limit for transition to retirement income payments. Note: The last two commutation conditions generally do not apply to complying income streams, which remain non-commutable Rolling back to accumulation While there are restrictions on cash commutations, benefits in a transition to retirement income stream can be commuted to roll over to another non-commutable income stream or back to the super accumulation phase; for example, if the person returns full-time to the workforce. Benefits in complying non-commutable pensions and annuities (old lifetime, life expectancy and term allocated income streams) cannot be rolled back to accumulation after six months from commencement, but may be rolled over to directly purchase another complying income stream Priority of preservation components Where: a lump sum super payment is converted to a transition to retirement pension, or a transition to retirement pension is rolled back into super, or a lump sum payment is made from a transition to retirement pension, the amount will be taken to come from preservation components in the following order: 1. unrestricted non-preserved 2. restricted non-preserved 3. preserved. 65

68 Income payments will also be treated in this fashion, meaning any UNP amounts are the first to be paid out. To ensure the integrity of the preservation rules, a fund trustee can maintain the preservation components in a transition to retirement income stream as described above, or choose to fully preserve all amounts Transition to retirement strategies The term transition to retirement initially referred to the reaching preservation age condition of release. That term is now more closely associated with the strategies that have developed from the ability to access super while still working. The two most common transition to retirement strategies are: reduce working hours and top up cash flow with income from a pre-retirement pension, or continue working, salary sacrifice employment income, and top up cash flow from a pre retirement pension. More information is available in the RetireSmart education series Pre-retirement pensions pack which is available from FirstNet Adviser at colonialfirststate.com.au 66

69 10. Taxation of super benefits Taxation of super lump sums Taxation of super lump sums taxable component Age 60 and above Preservation age to 59 Below preservation age Taxable component taxed element Not assessable income and not exempt income (NANE) First $165,000 (low rate cap) Balance over $165,000 (low rate cap) Max tax rate Taxable component untaxed element Max tax rate 0% First $1.205 million (untaxed plan cap) 15% Balance over $1.205 million (untaxed plan cap) 45% 0% First $165,000 (low rate cap) 15% 15% $165,000 (low rate cap) to $1.205 million 30% (untaxed plan cap) Balance over $1.205 million (untaxed plan cap) 45% Whole component 20% First $1.205 million (untaxed plan cap) 30% Balance over $1.205 million (untaxed plan cap) 45% Note: For all non-zero tax rates, Medicare levy may also apply. Tax-free component In all cases, regardless of age, the tax-free component of a super lump sum is not assessable income and is not exempt income. No tax is paid on these amounts. Taxable component The taxable component of a super lump sum may be either a taxed element or an untaxed element. Taxed element The default position is that the taxable component is wholly a taxed element. A taxed super fund will generally not have super member benefits that have an untaxed element. Where an untaxed element is received by a taxed super fund, the receiving fund will deduct 15% tax on receipt of the funds, converting the amount to a taxed element. Untaxed element Specific provisions provide for limited situations where there is an untaxed element. Where a super benefit contains an untaxed element, that amount has not been subject to fund tax (up to 15%). For this reason, higher tax rates are applied to untaxed elements. Situations where there is an untaxed element Super benefits paid from untaxed super schemes contain an untaxed element where no contributions and earnings tax have been paid. These schemes are generally run by the Australian Government and State and Territory governments. These generally apply to public servants, and fall into two broad categories, public sector super schemes and constitutionally protected funds. Where a super benefit is paid from a super fund that came into operation on or before 5 September 2006, the trustees of certain untaxed super schemes may give the recipient written notice specifying an amount as the untaxed element. 67

70 Small super account payments. Superannuation holding account payments and SG shortfall amounts paid by the Commissioner of Taxation to the individual. Certain death benefit super lump sums that include insurance benefits paid from a taxed super scheme. See section 10.3 for taxation of super death benefits. Tax offset if under age 60 For people under the age of 60, the entire taxable component is assessable income. However, a tax offset is available to ensure that the maximum rate of tax paid does not exceed the rates in the table on the previous page. A super provider withholds tax at the maximum tax rates in the table on the previous page. Tax withheld is credited against tax debts, so if a person is on a lower marginal tax rate than the rates at which tax is withheld, they may be entitled to a refund when they lodge their tax return. Low rate cap The low rate cap for is $165,000, subject to indexation in later years and decreases according to individual circumstances. The low rate cap applies to people age 55 to 59. It is the amount of taxable component that receives a rebate so that the taxed element is effectively taxed at 0%, and the untaxed element is effectively taxed at 15% (special rules apply if both taxed and untaxed elements are received within the same financial year see decreases section). Warning! The flood levy applies to the taxable component of super withdrawals including that within the low rate cap of $165,000 for , which is subject to a tax rate of nil. Decreases A person s low rate cap for a financial year is reduced (but not below zero) by: the taxable component of super lump sum benefits received in previous financial years that received the low rate cap offset in those years, and taxable components of super lump sum benefits received in the same financial year, with the taxed element taking priority for the rebate. Example Tracey, age 58, receives a super lump sum benefit with both an untaxed element of $120,000 and a taxed element of $165,000 during She has not previously made any lump sum withdrawals from super. The taxed element will receive an offset resulting in nil tax paid. Tracey s low rate cap is reduced by $165,000 to zero. Since Tracey does not have a low rate cap to apply to the untaxed element, she is effectively taxed at 30% on the $120,000 untaxed element. Since the offsets are applied at the end of the financial year through Tracey s tax return, it does not matter in which order she receives the super lump sums. The offset will be applied to the taxed element first. Untaxed plan cap The untaxed plan cap for is $1.205 million. The untaxed plan cap applies to members of untaxed super plans. The cap is measured on a per plan basis. Untaxed elements in excess of the untaxed plan cap paid as super lump sums are taxed at the highest marginal tax rate of 45% (Medicare levy may also apply). 68

71 Indexation The low rate cap and untaxed plan cap are indexed annually to AWOTE, in $5,000 increments. That is, the indexation has to be at least $5,000 before the low rate cap will rise. Effect of super lump sums on other assessable income The tax-free component is not included in assessable income. Different rules apply to the taxable component depending on whether the element is taxed or untaxed and the age of the person. The untaxed element of a super lump sum will be included in a person s assessable income whereas the taxed element will only be included for people under 60. Super lump sums are considered to be in the top slice of a person s total assessable income. Therefore, super lump sums will not push other assessable income into a higher than normal tax bracket. The explanatory memorandum accompanying the Taxation Laws Amendment (Superannuation) Bill 1989 stated: Any potential rebatable amounts are presumed to form the top slice of taxable income and to fall within that slice in the order, working from the highest to the lowest Terminal medical condition payments From 1 July 2007, people with a terminal medical condition who withdraw superannuation lump sums under age 60 are not subject to tax on that lump sum. A payee will be taken to be assessed as suffering from a terminal medical condition if two medical practitioners (at least one of these is a specialist) certify that the member is suffering from an illness or has incurred an injury, that is likely to result in death of the person within a period of 12 months. A superannuation condition of release also applies to terminal medical illness. See section 8.3 for more information. Note: Once a person has advised his or her superannuation fund of their terminal medical condition they cannot roll over their super benefits. Terminal medical condition benefits may only be cashed out as either a lump sum or a pension. Budget announcement Super fund deductions for terminal medical condition benefits The Government has announced that it will be seeking to extend the number of benefits for which insurance premiums are deductible for complying super fund and retirement savings account providers to include terminal medical condition from 16 February At the time of writing, legislation to make this effective had not been introduced to Parliament. 69

72 10.3. Taxation of super death benefits Super death benefits paid to a dependant Age of deceased at time of death Type of death benefit Age of recipient Taxation of taxable component Taxed element Untaxed element Any age Lump sum Any age 0% NANE 0% NANE Age 60 and above Income stream Any age 0% NANE MTR less 10% tax offset Below age 60 Income stream Age 60 and above 0% NANE MTR less 10% tax offset Below age 60 Income stream Below age 60 MTR less 15% tax offset MTR (no tax offset) Super death benefits paid to a non-dependant* Age of deceased Type of death benefit Age of recipient Taxation of taxable component Taxed element Untaxed element Any age Lump sum Any age Max 15% Max 30% Any age Income stream Any age Not permitted from 1 July Death benefit income streams commenced prior to 1 July 2007 will be taxed as if received by a dependant. NANE: Not assessable income and not exempt income (not subject to tax). MTR: Marginal tax rate. For all non-zero tax rates, Medicare levy may also apply. For all payments, the tax-free component is NANE. These payments are not subject to tax. * Refer to section Taxation of child death benefit pensions Super income stream death benefits paid to a child under the age of 25 must cease once the child reaches age 25 (unless the child has a prescribed disability). The child must then commute the income stream as a tax-free superannuation lump sum at this point. Prior to age 25, the child has a number of options, as outlined in the table in section Who is a dependant for tax purposes? See section 13.8 for who a dependant is for tax purposes No low rate cap for death benefits The low rate cap is not applicable to super death benefits. If there is a taxable component paid to a non-dependant, the entire component is taxed Untaxed element for certain death benefit lump sums A lump sum super death benefit that is sourced wholly or partly from insurance proceeds may include an untaxed element, even if the fund itself is subject to tax on contributions and earnings. If the fund claims a tax deduction either for life insurance premiums paid or for a future liability to pay benefits, then the taxable component of the death benefit includes an untaxed element. 70

73 Where the lump sum super death benefit is paid to a dependant, the inclusion of an untaxed element is irrelevant, as no tax will be payable on the benefit. However, where a non-dependant receives a death benefit that includes an untaxed element, a higher rate of tax applies to that part of the benefit. Calculating the untaxed element Untaxed element = taxable component taxed element Taxed element = amount of service days lump sum super X death benefit service days + days to retirement where: W deceased s last retirement date (generally age 65), and Tax-free component W days to retirement is the number of days between the date of death and the service days is the number of days from the day the member joined the fund or, if a rollover amount was received by the fund with an earlier service period start date, that earlier start date to the date of death. For an employer sponsored fund, service days may commence when the member s employment commenced, if that was prior to the commencement of their fund membership. If the calculated result is negative (ie where the tax-free component is large in relation to the total benefit), the taxed element in the fund is nil and the whole of the taxable component is an untaxed element Deduction for increased amount (anti-detriment payment) of super lump sum death benefit A complying super fund can claim a tax deduction to ensure that the amount of death benefits paid to a spouse, former spouse or child (of any age) is not reduced as a result of contributions being taxed. Where the benefit is paid to the deceased s estate, the deduction is only available to the extent that the spouse, former spouse or child can reasonably be expected to benefit from the estate. The deduction is available to the fund if it increases a lump sum death benefit (or does not reduce the death benefit) so that the amount of the death benefit is the amount that the fund could have paid if no tax were payable on taxable contributions. The increased amount is called the tax saving amount (or anti-detriment amount). Calculating the anti-detriment amount To calculate the increased death benefit amount a trustee may: determine the actual amount of contributions tax deducted from the deceased member s account (the audit method) apply to the ATO for a private ruling, or use a formula, such as that set out in ATO ID 2007/219 below. Increased superannuation lump sum death benefit formula (0.15 x P) (R 0.15 x P) x C where: P = the number of days in component R that occur after 30 June R = the total number of days in the service period that occur after 30 June C = the taxable component of the lump sum, ignoring the increased benefit and excluding the actual (if any) insured amount for which deductions have been claimed under. Note: See section 13 for more detail on super estate planning. 71

74 10.8. Taxation of disability super benefits A disability super benefit is a super benefit where: the benefit is paid to a person because he or she suffers from ill health (whether physical or mental), and two legally qualified medical practitioners have certified that, because of the ill health, it is unlikely that the person can ever be gainfully employed in a capacity for which he or she is reasonably qualified because of education, experience or training. A disability super benefit may be paid as a lump sum or an income stream. A member must meet the permanent incapacity condition of release in the SIS Regulations to receive a disability super benefit. If the disability super benefit potentially includes an insurance payout, the member must also meet the insurer s definition of total and permanent disablement. Disability super benefits are taxed as super lump sums (see section 10.1) or super income streams (see sections and 10.13) as appropriate, with two modifications detailed on the following page. 15% tax offset Where a person under age 60 receives a disability super benefit paid as a super income stream, he or she is entitled to a 15% tax offset on the taxed element of the taxable component. Untaxed elements of taxable components do not receive the 15% tax offset. An untaxed element may occur where a disability super benefit is paid from an untaxed or unfunded super scheme. Untaxed elements are not created for disability super benefits paid from taxed funds. Modification for disability benefits If a person receives a lump sum disability super benefit, the tax-free component of the benefit is increased for the future service benefit broadly reflecting the period where they would have expected to have been gainfully employed. Historically, this extra tax-free benefit was only available to employees. Calculating the tax-free component of a disability lump sum: the sum of the tax-free component of the benefit worked out apart from using the disability formula, plus the amount worked out under the disability formula below (note: the tax-free component cannot exceed the amount of the benefit). days to retirement Amount of benefit x service days + days to retirement where: days to retirement is the number of days from the day on which the person stopped being capable of being gainfully employed to his or her last retirement day (generally age 65), and service days is the number of days from the day the member joined the fund or, if a rollover amount was received by the fund with an earlier service period start date, that earlier start date to the date of disability. For an employer sponsored fund, service days commence when the member s employment commenced, if that was prior to the commencement of their fund membership. The balance of the super benefit is the taxable component of the benefit. 72

75 Commencement of an account-based pension The commencement of an account-based pension with the same super trustee does not constitute a payment which allows the trustee to increase the tax-free component for someone who is permanently incapacitated. As a result, the tax-free and taxable component of the account-based pension at commencement will have the same components as the super interest which supports the pension Taxation of salary continuance insurance benefits Refer to section Taxation of rollover super benefits A super rollover benefit is generally a lump sum super benefit payment from a complying super plan or commutation of a super annuity that is paid to a complying super plan or to purchase a super annuity. These rollovers are made within the Australian super system. Some transactions known as rollovers prior to 1 July 2007 are now considered to be contributions, eg employment termination payments, overseas transfers and CGT exempt amounts (see section 2.12). The untaxed element of a rollover super benefit enters into the assessable income of the fund and is taxed at 15% upon rollover. Untaxed elements above $1.205 million (excess untaxed rollover amounts) are taxed at 46.5%. This tax on excess untaxed rollover amounts is withheld by the paying fund. Rollover super benefit Taxed element Untaxed element First $1.205 million (untaxed plan cap amount) Nil 15% Balance above $1.205 million (excess untaxed rollover amount) Nil 46.5% Untaxed plan cap amount The untaxed plan cap amount for a super plan for the income year is $1.205 million. This cap is indexed annually to AWOTE in $5,000 increments. Reductions and increases The untaxed plan cap amount is a per plan limit, ie a separate untaxed plan cap applies to each super plan from which a person receives super lump sum member benefits. The untaxed plan cap amount for each super plan is reduced by the total amount of each untaxed element of a super lump sum that a person has received, including rollovers (except internal rollovers). 73

76 Taxation of super income stream benefits commenced from 1 July 2007 Age Taxable component taxed element Taxable component untaxed element 60 and above 0%. Not assessable income, not exempt income (NANE) MTR less a 10% tax offset Preservation age to 59 MTR less a 15% tax offset MTR (no tax offset) Below preservation age MTR (no tax offset) MTR (no tax offset) Note: For all non-zero tax rates, Medicare levy may also apply. See sections 10.3 and 10.8 for the taxation of death benefit and disability super benefit income streams. 15% tax offset A 15% offset applies where: the taxable component forms part of the recipient s assessable income, and the recipient is aged preservation age (currently 55) to age 59, or the income stream is a death benefit, or the income stream is a disability super benefit. Tax offset = 15% x taxable component (taxed element). Prior to 1 July 2007, the offset was a maximum of 15% and may have been reduced if the pension was not fully rebatable. Non-rebatable pensions related to RBLs which were abolished on 1 July Previously partially rebatable or non-rebatable pensions now receive a full 15% tax offset Taxation of super income stream benefits commenced prior to 1 July 2007 Pensions and annuities commenced prior to 1 July 2007 will continue to be taxed as outlined below until a trigger event occurs (see section for trigger events). Taxation of pre 1 July 2007 pensions Gross assessable pension income less deductible amount equals Taxable pension income Tax on taxable pension income at marginal tax rate less 15% tax offset (15% x taxable pension income) equals Tax payable Annual deductible amount The deductible amount is the amount of pension/annuity income that can be received tax free each year by the pensioner/annuitant. 74

77 The formula for calculating the annual deductible amount is: where: UPP = undeducted purchase price. RCV = residual capital value (if any). RN = relevant number. UPP RCV RN It is possible in certain circumstances for the deductible amount to exceed the assessable pension/annuity income (referred to as unused deductible amount). If this is the case, the unused deductible amount can be carried forward to future income year(s) until it is fully utilised. The unused deductible amount generated from a particular pension/annuity can only be deducted from that pension/annuity income. It cannot be deducted against income from other sources or from another pension/annuity. Undeducted purchase price (UPP) The UPP is calculated as follows: Income streams commenced with super monies from 1 July 1994 = undeducted contributions + CGT exempt component + post June 1994 invalidity components. Income streams commenced with super monies prior to 1 July 1994 = undeducted contributions + pre July concessional. Residual capital value (RCV) The RCV is that part of the initial purchase price that will be returned to the pensioner or annuitant at the end of the contract. Certain types of income streams (such as complying or allocated income streams) will have a nil RCV. Relevant number (RN) The RN is calculated as follows: For fixed term pensions and annuities and term allocated pensions (TAPs), the relevant number equals the term of the pension. For lifetime pensions or annuities and allocated pensions and annuities, the relevant number is equal to the life expectancy of the pensioner/annuitant. If automatic reversionary beneficiaries exist, then the longest life expectancy is used. The life expectancy is determined by reference to tables issued by the Australian Government Actuary (see section 11.15) Determining the tax-free and taxable proportions of super benefits The tax-free and taxable proportions of a super benefit are determined by the tax-free and taxable proportions of the super interest from which it is paid. The super interest is valued at different times depending on whether it is in: accumulation phase pension phase post 1 July 2007 pension, or pension phase pre 1 July 2007 pension. Once the tax-free proportions and the taxable proportions are determined they are applied to the benefit being paid. 75

78 Tax-free component The tax-free component of a super interest is: the contributions segment, plus the crystallised segment (fixed at 30 June 2007). Contributions segment The contributions segment of a super interest consists of the contributions made after 30 June 2007, to the extent that they have not been and will not be included in the assessable income of the super provider, eg non-concessional contributions. Other contributions not included in the assessable income of the fund can be found in the two tables in section 4.5 with the exception of excess non-concessional contributions (which are included in the assessable income of the fund). Crystallised segment The crystallised segment of a super interest is a fixed dollar figure. It is the 30 June 2007 value of the following components: concessional post June 1994 invalidity undeducted contributions CGT exempt, and pre July Taxable component The taxable component of a super interest is the: Value of the super interest tax-free component eg concessional contributions and earnings Proportioning accumulation phase A super interest in the accumulation phase is valued just prior to the benefit payment to obtain the proportions of the lump sum (including a death benefit) or rollover. The percentage of taxfree and taxable components of the super interest is applied to the super benefit being paid. Example Just prior to taking a lump sum payment of $10,000, the components of the member s super interest are as follows: W W $60,000 tax free, and W W $40,000 taxable component. The $100,000 super interest is 60% tax free and 40% taxable. The $10,000 lump sum payment will be 60% tax free and 40% taxable. Note: If the member is age 60 or over, the taxable component will not be assessable income (not subject to tax). 76

79 Proportioning pension phase post 1 July 2007 pensions A super interest in pension phase, where the pension commenced on or after 1 July 2007, is valued at commencement of the pension. The proportions of tax-free and taxable components are applied to all payments made from the income stream, whether they are lump sum withdrawals or pension payments. Example The super interest used to purchase a pension on 2 July 2007 consisted of the following components: W W $60,000 tax free, and W W $40,000 taxable component. The pension is valued and proportioned at commencement (prior to fees and charges). The pension is 60% tax free and 40% taxable. Every income payment and commutation from this pension will be 60% tax free and 40% taxable Proportioning pension phase pre 1 July 2007 pensions A super interest in the pension phase, where the pension commenced before 1 July 2007, is valued and proportioned once when a trigger event occurs. Until a trigger event occurs, the pension is taxed as outlined in section Once a trigger event occurs, the pension is taxed as outlined in section and the proportions will apply to all future payments made from the income stream. Trigger events taxed super funds For taxed super funds, a trigger event is the earliest of: Attaining age 60 on or after 1 July For people age 60 or over prior to 1 July 2007 with pensions commenced prior to 1 July 2007, the trigger date was 1 July For others, the trigger date will be their 60th birthday. Full or partial commutation (including rollovers and cash lump sums). The trigger date is the date of commutation. Death. The trigger date is the date of death. Trigger events untaxed super schemes Full or partial commutation. The trigger date is the date of commutation. The ability to commute untaxed schemes is generally quite limited. Calculating the tax-free and taxable proportion upon a trigger event Upon a trigger event, the tax-free component of the pension is calculated as: Tax free = unused undeducted purchase price + pre July 1983 component* at trigger date. * Note: If the pension was commenced prior to 1 July 1994, a pre 1983 component is not added. See the difference in undeducted purchase price for pre 1994 pensions in section

80 Pre July 1983 component The pre July 1983 component of a pension at the time of a trigger event is calculated using the formula below. This formula is found in section 27AA of the Income Tax Assessment Act It is one of the few sections on super in the 1936 Act which was not replaced by a new section in the 1997 Act on 1 July 2007, which is why it still uses the old terminology. Pre July 1983 component is the lesser of: W W (ETP C IC NQ EC CGT) x Pre July 1983/total period OR W W (ETP C IC NQ EC CGT) undeducted contributions where: ETP = amount of the eligible termination payment. C = concessional component. IC = post June 1994 invalidity component. NQ = non-qualifying component. EC = amount of the excessive component. CGT = CGT exempt component. Pre July 1983 = number of whole days (if any) in the eligible service period that occurred before 1 July Total period = number of whole days in the eligible service period. 78

81 11. Retirement income streams Retirement income streams can take the form of pensions or annuities. There is generally little difference between a pension and an annuity as they are similar income streams but paid from different providers. Super funds generally provide pensions and an annuity is paid under a contract with a life company or registered organisation Introduction to super income streams A super income stream refers to those income streams that may be commenced using accrued super benefits, whether during the lifetime of the fund member (subject to preservation requirements) or to one or more of their dependants following the member s death. A superannuation income stream cannot be paid to an estate. A super income stream may be commenced within the same fund in which those benefits accrued, or it may be purchased with a super rollover benefit. In order to receive concessional taxation, an income stream must meet the relevant SIS standards. New minimum standards apply from 1 July Pensions that commenced before 20 September 2007 and meet the previous regulations are deemed to meet the new minimum standards. Note: This chapter is concerned only with the types and features of super pensions and annuities; it does not cover ordinary annuities Taxation of retirement income streams See sections and for the taxation of retirement income streams Types of super income streams that can be paid Before 1 July 2007 Pensions that commenced before 1 July 2007 and meet the previous regulations are deemed to meet the new minimum standards. Between 1 July 2007 and 19 September 2007 Income streams may commence under either the old or the new SIS regulations. This effectively provides a transitional period during which an income stream provider can choose when to offer income streams under the new regulations. From 20 September 2007 onwards Only those income streams that meet the new regulations that commenced on or after 20 September 2007 can be paid. The new payment standards are more flexible and less prescriptive than the old standards, giving super funds greater choice in the type of income stream offered. For example, provided it also meets the payment standards for an account-based income stream, a fund could offer an income stream that also meets the old standards for a term allocated pension (sometimes referred to as a TAP clone ). There are essentially four different types of super income streams that can be paid that meet the pension and annuity standards in the SIS regulations: Account-based income streams these are broadly equivalent to old allocated pensions and annuities except they only have a requirement for minimum income payments and do not have a maximum income payment requirement unless it is a 79

82 transition to retirement income stream. Transition to retirement income streams, which have additional payment standards, are a subset of these income streams. SMSFs may only provide account-based income streams. Non-account-based (RCV) income streams these are flexible income streams that do not have an identifiable account balance but may be commutable and have a residual capital value. There is no restriction on the term of the income stream, but there is a requirement for a minimum annual income payment. Lifetime (nil RCV) income streams there are two types of lifetime income streams available: the existing complying lifetime income stream and a new commutable lifetime income stream. Fixed term (nil RCV) income streams a commutable income stream payable for a fixed term based on the recipient s age at commencement. In all cases, the income stream cannot be added to through contributions or rollovers and neither the capital nor income can be used as security for borrowing. The table below outlines the key features of the new income stream standards. 80

83 11.4. Overview of income stream standards Income stream type Account based (allocated) Transition to retirement account based Term allocated 1 (TAP clone) Non-account based (RCV) Lifetime (nil RCV commutable) Fixed term (nil RCV commutable) Lifetime (nil RCV noncommutable) Term of income stream Payment rules Commutable RCV Until account balance exhausted Until account balance exhausted Term of between life expectancy and the number of years to reaching age 100 Flexible - could be fixed (of any term) or lifetime. Life of beneficiary/ reversionary Any term up to 100 less recipient s age at commencement Life of beneficiary/ reversionary Minimum payment per financial year Minimum payment 4% per financial year Maximum payment 10% per financial year Calculated payment each financial year based on remaining term May be varied + or 10% Must also satisfy account based pension minimum payment rules. Minimum annual payment per year (measured from commencement date) Minimum first year payment, then fixed percentage, CPI or AWOTE indexation Minimum first year payment, then fixed percentage, CPI or AWOTE indexation Annual payment can t fall, except if due to CPI indexation Yes, but generally a pro-rata minimum payment must have been made No, except where commutation involves unrestricted non-preserved, or a relevant condition of release is met No, except if commutation used to immediately purchase another eligible noncommutable income stream Yes N/A N/A N/A Yes up to 100% of the purchase price Payable by SMSF Yes Yes Yes No, unless fully backed by life office annuity Yes No No, unless fully backed by life office annuity 2 Yes No No, unless fully backed by life office annuity 2 No, except if commutation used to immediately purchase another eligible noncommutable income stream No No, unless fully backed by life office annuity 2 1 From 20 September 2007, term allocated income streams (TAP clones) can no longer be commenced, unless the purchase price is funded wholly from the commutation of an existing non-commutable income stream. 2 Where a SMSF had an existing income stream of this type commenced prior to 1 January 2006, it can continue to be paid. 81

84 11.5. Minimum income percentage factors Minimum payment amounts for account-based, allocated and market-linked (term allocated) pensions will be set at 75% of legislated minimums for and will then return to 100% in The minimum annual income payment for an account-based pension will be calculated as a percentage of the account balance as follows: Minimum annual payment Age Under 65 2% 3% 4% % 3.75% 5% % 4.5% 6% % 5.25% 7% % 6.75% 9% % 8.25% 11% 95 and more 7% 10.5% 14% Pro-rata rule and 1 June rule Where an income stream commences part way through the financial year, the minimum income payment is pro-rated based on the days remaining in the year. The 1 June rule may also apply, which means that no payments are required to be made until the following financial year for an account-based pension or annuity commenced after 1 June in a financial year What are the payment standards for account-based income streams? The payment standards for account-based income streams cover: the minimum annual income payment that must be made when the income stream may be commuted in whole or in part the circumstances in which the income stream may be transferred to a reversionary beneficiary, and the fact that the income stream cannot be used as security for borrowing. Account-based income stream minimum annual income payments In order to meet the payment standards, the terms of an account-based income stream must ensure that a minimum income payment is made at least annually. There is no maximum income payment that must be paid (unless it is a transition to retirement income stream where the maximum annual income payment is capped at 10% of the account balance). A fund may choose to impose a maximum payment under its own rules or it may permit any level of income payment in excess of the minimum to be drawn at the choice of the member. The minimum income amount (rounded to the nearest $10) is calculated as shown below. 82

85 Account-based income stream Minimum annual income = account balance x percentage factor where: Account balance Payments Percentage factor = initial purchase price on commencement of the income stream and account balance at each 1 July thereafter. = both income payments and any full or partial commutations. = determined from the recipient s age on commencement of the income stream and at each 1 July thereafter. See section Commutations Account-based income streams must generally be commenced with unrestricted non preserved benefits and may be commuted at any time (see section 11.8 for an exception for transition to retirement income streams). However, prior to either a full or partial commutation, either a pro-rated minimum income payment must have already been paid during the financial year or the remaining account balance is sufficient to ensure that at least the minimum annual payment could be paid. Commutations may also be made, regardless of the level of income payments made, to pay a: death benefit surcharge liability family law payment splitting amount cooling-off amount, or release authority amount. Income or commutation? As there is no maximum income payment for an account-based income stream, an investor must specify whether the amount of any benefit payment in excess of the minimum income amount is to be paid as an additional income payment or as a lump sum commutation. Where the investor is age 60 or over, there will be no difference in the taxation of the amount as all benefits are paid tax free. However, an investor under age 60 may wish to withdraw a super lump sum benefit to utilise their low rate cap ($165,000* in ). A full or partial commutation is a trigger event for pensions commenced before 1 July 2007 (refer to section 10.17). * This amount is indexed annually and rounded down to the nearest $5,000. How do commutations affect the social security deductible amount? From 1 July 2007, an individual will need to decide whether they wish large one-off withdrawals to be treated as pension income or a commutation. Where individuals wish to make a commutation, they will need to notify Centrelink if the withdrawal is in the nature of a commutation. If Centrelink is not notified, the payment will be treated as an income payment under the income test. Tip! The social security deductible amount is recalculated upon partial commutation of an income stream. In many cases it may be beneficial from a social security perspective for a large one-off withdrawal to be treated as income rather than a commutation. Reversions An account-based income stream may be reverted on the death of the recipient only to a dependant of the recipient. See sections 13.5 and 13.7 for more detail on the payment of super death benefits. 83

86 11.8. Transition to retirement income streams Transition to retirement income streams are a particular type of account-based income stream. They can be commenced with super benefits at any time after the recipient reaches their preservation age. In addition to the payment standards outlined in section 11.7, transition to retirement income streams: have a maximum annual income payment of no more than 10% of the account balance at the start of each financial year (or on commencement for the first year), and may, subject to the rules of the provider, only be commuted in cash once the recipient has met a condition of release such as permanent retirement after preservation age (55) or reaching age 65. For further detail on transition to retirement income streams, see section What are the payment standards for non-account-based (RCV) income streams? Non-account-based (RCV) income streams are flexible income streams that allow a retiree to invest in a guaranteed income stream with a residual value and no restrictions on term. These income streams: do not have an identifiable account balance may provide for an RCV, commutation value or withdrawal benefit that is no more than 100% of the purchase price (note that this is the only standard under which a non account-based income stream such as an annuity can provide an RCV), and must pay an annual income payment of at least a minimum amount. Non-account-based (RCV) income streams are most likely to be fixed term annuities. There are two choices for a retiree wishing to invest their super in a fixed term annuity: any term, with up to 100% RCV, but with each year s income payment of at least a minimum amount. In practice, the requirement for minimum income payments each year may constrain a client s choice of RCV and/or fixed term, or a term lasting up to age 100, with no RCV and only the first year s payment of at least a minimum amount (see section 11.11). The minimum annual income payment from a non-account-based (RCV) income stream (rounded to the nearest $10) is calculated as shown below. It is a similar calculation to that used for account-based income streams, with purchase price used in place of account balance. Non-account-based (RCV) income stream Annual minimum income = Purchase price x percentage factor where: Purchase price = the total amount paid as consideration to purchase the income stream. Percentage factor is determined from the recipient s age on commencement of the income stream and at each 1 July thereafter, using the table in section As with account-based income streams, a pro-rated income payment must be made in the first year and the 1 June rule continues to apply. 84

87 What are the payment standards for lifetime income streams? From 20 September 2007, there are two alternatives for the payment of a lifetime income stream, with the main difference between the two being the ability to commute. The first alternative continues the old standards for a complying lifetime income stream and is non-commutable other than in very limited circumstances. The second alternative is a very similar income stream that is, however, commutable. Payment standards for lifetime income streams Non-commutable lifetime Feature income stream Commutable lifetime income stream Term of the income stream Income payment Indexation Commutability Payable for the life of the beneficiary and that of any reversionary. Amount is fixed, with any variation specified in the contract/rules. Annual payment: W must be at least the amount of the previous year s payment, and W cannot decrease other than through CPI decreases. Commutable only in very limited circumstances. Payable for the life of the beneficiary. May then revert to a dependant. First year s payment must be at least the amount calculated using the relevant percentage factor. Income payments can only vary through: W fixed indexation W CPI indexation, or W AWOTE indexation. Commutable at any time provided a pro rated minimum payment is made. RCV No. No. Guaranteed period Use of capital Reversion Able to be used as security for borrowing Lesser of beneficiary s life expectancy and 20 years. Purchase price must be converted wholly into income payments. Reversion can be to a child at least until their 16th birthday, or to the earlier of the cessation of full-time studies or their 25th birthday. No. None specified. Not specified. Can only revert to a dependant. If the dependant is a child, the income stream may only revert to a child under age 18 or a financial dependant under 25, and the reversionary income stream must cease at age 25. The income stream may revert without restriction to a disabled child of any age. No. 85

88 What are the payment standards for fixed term income streams? Commutable fixed term income streams operate under the same standards as commutable lifetime income streams other than in respect of the term of the income stream. Payment standards for fixed term income streams Feature Commutable fixed term income stream Term of the income stream Income payment Indexation RCV Use of capital Reversion Able to be used as security for borrowing Payable for a fixed term that is no greater than age 100 minus age at commencement. First year s payment must be at least amount calculated using relevant percentage factor. Income payments can only vary through: W fixed indexation W CPI indexation, or W AWOTE indexation. No. Not specified. Can only revert to a dependant. If the dependant is a child, the income stream may only revert to a child under age 18 or a financial dependant under age 25, and the reversionary income stream must cease at age 25. The income stream may revert without restriction to a disabled child of any age. No Commutation rules Pre 20 September 2007 term allocated pensions and complying, lifetime and life expectancy income streams cannot be commuted except in the following circumstances (and where permitted by the trust deed): On the death of the primary or reversionary beneficiary where a lump sum payment is made to the legal personal representative or dependant(s). If the term is based on the longer of two spouses life expectancies, upon the death of both spouses. Within six months of commencement (provided that it was not funded from the commutation of another complying income stream). To purchase another complying income stream. To pay a surcharge liability. To make a payment split under family law. For a release authority or transitional release authority. Note: Financial hardship is not an exception to the non-commutable rules for complying income streams. 86

89 Rollovers of complying income streams In addition, a complying income stream (lifetime, fixed term, or TAP) may be rolled over after 1 July 2007 provided it is rolled over to an income stream: that meets one of the new standards (as set out in sections 11.3 to 11.11), and also meets the standards set out in the old regulations for complying fixed term or term allocated income streams. A complying fixed term or term allocated income stream can commence on or after 20 September 2007 from the commutation of another complying income stream provided that the new income stream also meets the new regulations. In the case of a new TAP, for example, this involves meeting the old TAP regulations and the new regulations. In practice, this means that the allowable term of the new TAP has to be chosen such that the total value of payments in each year is at least equal to the amounts determined using the percentage factors. Caution! Remember that even though the rollover may be permitted, a pre 20 September 2007 income stream that is rolled over on or after 20 September 2007 may lose any assets test exemption status for social security unless it satisfies the conditions set out in sections or Example Rolling over a complying lifetime pension to a TAP Tom has a SMSF in which he set up a complying lifetime pension for himself in 2000 as a result of potential excess benefits. The commutation value of his pension is $750,000 and he also has $120,000 in a solvency reserve in the fund supporting his pension. Tom requires regular actuarial advice in relation to his pension, which is proving costly and time consuming to administer. Subject to the rules of his complying lifetime pension to allow a rollover commutation, Tom can roll over to a TAP set up within his SMSF, provided that the TAP: meets the new standards for an account-based pension, as set out in section That is, it has minimum annual payments at least equal to the amount calculated using the new percentage factors; will pay a pro-rated minimum payment before any allowable commutation; cannot revert to an adult child and cannot be used as security for borrowing, and also continues to meet the standards set out in the old regulations for complying term allocated pensions. That is, it is of a fixed term that is based on Tom s age and life expectancy; annual payments are determined using relevant pension factors and the pension cannot be commuted other than in very limited circumstances Social security and aged care treatment of income streams from 20 September 2007 For details on social security and income streams, please see sections to

90 Term allocated pensions (TAP clones) TAPs are best described as a hybrid between allocated pensions and fixed term pensions and annuities. TAPs may also be referred to as growth pensions and market-linked income streams (MLIS). TAPs commenced on or after 20 September 2007 have lost their 50% assets test exemption for social security purposes (subject to exceptions on page 149) and are now fully asset tested (refer to Chapter 17). Consequently, many public offer funds no longer offer TAPs. TAPs commenced after 19 September 2007 must meet the account-based pension standards and may be more commonly found in SMSFs. Also, many SMSF members commenced defined benefit pensions (either lifetime or life expectancy complying pensions) as part of an RBL management strategy. Since RBLs were abolished, continuing this strategy may no longer be necessary and rollover to what is commonly referred to as a TAP clone (ie a pension commenced under fund rules that meet the old pension standards as well as the account-based pension standards) may be more cost effective. Like allocated pensions, TAPs can only be purchased with super monies and are account based products with the investor having a choice of investments including the ability to access growth investments. Payments are not guaranteed, meaning the investor bears the investment risk. Other features of TAPs are: the investor can choose the term from a specified range (see below) payments are made at least annually (with pro-rata payments required where the TAP commences on a day other than 1 July) no payment is required in the first year where the income stream commences on or after 1 June they cannot be transferred to another person except on the death of the primary or reversionary pensioner to the deceased s dependant(s) or LPR TAPs are generally non-commutable (see the commutation rules for complying income streams in section 11.12) must have a nil RCV (except on death), and the annual payment will be determined by reference to payment factors (see below). Term of TAPs and life expectancy income streams Unlike allocated pensions, TAPs have a fixed term. The investors of TAP and life expectancy pensions and annuities can choose a term as follows: Minimum term Pensioners are permitted to select a term not less than their (or their reversionary s) life expectancy rounded up. Maximum term Pensioners are permitted to select a term not exceeding the greater of: the pensioner s (or the reversionary spouse s) life expectancy as if they were five years younger, or 100 minus the pensioner s (or the reversionary spouse s) age at commencement. The life expectancy factors used in this calculation are shown in section

91 TAP payments Minimum annual payments from TAPs will be based on the payment factors (PF) at 1 July each year under the old standards. The payment factors for TAPs commenced from 20 September 2004 are provided in the table below. TAP PFs Term of TAP remaining rounded in whole years PF Term of TAP remaining rounded in whole years PF Term of TAP remaining rounded in whole years PF 70 or more or less Source: SIS Regulations 1994, Schedule 6. 89

92 Annual TAP income (old standards) Annual income = commencement day or 1 July account balance Payment factor +/ 10% The annual payment will be calculated by dividing the account balance on 1 July (or commencement day for the first year) of each year by the payment factor that corresponds to the remaining term of the income stream. The resulting amount will be rounded to the nearest $10. 10% flexibility A pensioner may vary the amount of pension income by plus or minus 10% of the annual calculation. Note: For , the Government amendment to minimum payment amounts (refer to section 11.5) will allow pension payments between 67.5% and 110% of the annual calculated payment. Rollovers A complying income stream such as a TAP may be rolled over after 1 July 2007 provided it is rolled over to an income stream: that meets one of the new standards (as set out in sections 11.3 to 11.11), and meets the standards set out in the old regulations for complying fixed term or term allocated income streams Life expectancy factors The 2005/07 Australian Life Tables on page 91 (Table 1) apply to pensions and annuities that commence from 1 January Amongst other things, these life expectancy factors are used in the calculation of the annual non-assessable amount for social security purposes and the taxation deductible amount for ordinary money annuities. Income streams commenced between 1 January 2005 and 31 December 2009 will continue to use the 2000/02 life expectancy tables (refer to Table 2 on page 92). 90

93 Table 1: Life expectancy table 2005/07 Age Males Females Age Males Females Age Males Females Source: Australian Government Actuary, Australian Life Tables 2005/07. 91

94 Table 2: Life expectancy table 2000/02 Age Males Females Age Males Females Age Males Females Source: Australian Government Actuary, Australian Life Tables 2000/02. 92

95 12. Taxation of super income Taxation of income in super vs other investment structures Investment Tax rate on income Super funds W 15% in accumulation phase within complying super fund. W 0% in pension phase within complying super fund. W 45% in non-complying funds. Companies 30%. Individuals/partnerships Discretionary trusts Individual or each partner s marginal rate of tax. Where the trustee distributes all income to each entitled beneficiary, tax is payable on the beneficiary s total assessable income, including the trust distributions, at each beneficiary s marginal tax rate Taxation of capital gains in super Date of asset acquisition Before 1 July 1988 Accumulation phase All assets of the fund owned on 30 June 1988 are deemed to have been acquired on 30 June Cost base is the greater of market value at 30 June 1988 or original purchase price. Maximum tax on capital gain is either: W 15% x (proceeds market value on 30 June 1988 indexed to 21 September 1999, ie cost base frozen at ), or W ² ³ x 15% x (proceeds original purchase price). Pension phase* Nil Before 21 September 1999 W ² ³ x 15% x (proceeds original purchase price), or W 15% x (proceeds indexed cost base frozen at 30 September 1999). Nil On or after 21 September 1999 W ² ³ x 15% x (proceeds original purchase price) Nil* * Current pension assets are exempt from capital gains tax. See ATO ID 2004/688 for issues around current pension assets. The one-third discount that super funds receive on capital gains is subject to the asset having been held for more than 12 months. If the fund chooses the CGT discount, capital losses will be applied against capital gains before applying the discount. If the fund chooses the indexation option, capital losses will be applied after calculating the capital gain using the indexed cost base, with indexation frozen at 30 September

96 13. Super estate planning Taxation of super death benefits See section 10.3 for the tax treatment of super death benefits Death benefit payments A super death benefit is a payment made upon the death of the member of a superannuation fund to one or more of the member s dependants or legal personal representative Super not part of an estate Super does not automatically form part of a person s estate. A member can, however, elect to include their super death benefit in their estate by completing a binding death benefit nomination. In this way, the member can provide for the distribution of their super death benefit in accordance with their will. Alternatively, and in the absence of any binding nomination, the trustee of a super fund may exercise their discretion and pay a super death benefit to the estate. Accordingly, the super death benefit will be paid in accordance with the deceased member s will. You should refer to paragraph 13.7 for further information on the options available to members who do not wish their super death benefit to form part of their estate. Warning Refer to paragraph 13.9 for recent developments in relation to super, estate planning and binding nominations Compulsory cashing of benefits upon death A member s benefits in a regulated super fund must be cashed as soon as practicable after the member dies. Cashing Cashed refers to the payment of a benefit from the super system. A benefit is cashed when the beneficiary accepts the money (or in the case of lump sums only, other assets representing the benefit), banks a cheque which is subsequently honoured or receives a credit by way of an electronic transfer from a fund in payment of benefits. Where the benefits of a deceased member of a SMSF are paid as a death benefit, the benefit cannot be transferred to the beneficiary s member account by way of journal entries in the books of the fund. Cashing necessarily involves the actual payment of the cash, assets or other consideration for the benefit of the beneficiary. See ATO ID 2002/141. As soon as practicable There is no legislative definition or APRA interpretation of how long as soon as practicable is for the purposes of compulsory cashing of super upon death Form in which death benefits may be cashed Benefits may be cashed in any one or more of the following forms: a single lump sum 94

97 an interim lump sum (not exceeding the amount of the benefits ascertained at the date of death) and a final lump sum (not exceeding the balance of the benefits as ascertained in relation to the member s death) one or more pensions (subject to restrictions) rollover for the purchase of one or more annuities (subject to restrictions). Restrictions on death benefit pensions and annuities If a member dies on or after 1 July 2007, a member s benefits may only be paid in the form of a pension or annuity to a dependent beneficiary of the member (subject to certain restrictions for children). Child beneficiaries age 18 or more If the dependant is a child age 18 or more, to pay a death benefit as an income stream, the child, at the time of death, must: be financially dependent on the member and less than 25 years of age, or have a disability that: is attributable to an intellectual, psychiatric, sensory or physical impairment or a combination of such impairments is permanent or likely to be permanent, and results in a substantially reduced capacity of the person for communication, learning or mobility; and the need for ongoing support services. Otherwise, the death benefit must be paid to the child as a lump sum. If death benefits are paid to a child of any age in the form of a pension or an annuity, the income stream must be cashed as a lump sum on the earlier of: the day on which the annuity or pension is commuted, or the term of the annuity or pension expires, and the day on which the child attains age 25 unless the child has a disability as described above. Note: Refer to section 13.8 for the definition of child. Commutation options for child death benefit pensions Commutation option Before age 25 At age 25 Commute as a tax-free superannuation lump sum Yes at any time Yes any remaining balance must be commuted by 25th birthday* Commute and roll over to child s accumulation account Commute and roll over to another income stream for the child No No No No * Unless the child has a disability as described above Can death benefits be paid in specie? Yes, where permitted under the fund s governing rules, a lump sum payment may be in the form of cash or in specie. The definition of lump sum allows a lump sum payment to be paid in the form of cash or in specie. An in specie payment is made with fund assets (eg shares in a publicly listed company) rather than money. When making an in specie payment, trustees must be able to substantiate the value of the relevant asset or assets for both SIS and taxation purposes. Death benefit pension payments cannot be paid in specie. 95

98 13.7. Who can be paid a super death benefit? The trustee can pay super death benefit from a super fund to one or both of the following: the member s legal personal representative (LPR), or one or more of the member s dependants. A particular fund s trust deed may be more restrictive about who a death benefit can be paid to. Remember to check the trust deed to see if any restrictions apply to the fund you are dealing with. If the member has died and the trustee, after making reasonable enquiries, has been unable to find either a legal personal representative or a dependant of the member, the trustee may cash the member s benefits in favour of another individual, subject to the fund s governing rules. The trustee must make a decision in relation to the benefit that is fair and reasonable in all the circumstances of all parties who have, or are likely to have, an interest in the death benefit. Interested parties who consider that the trustee s decision is unfair or unreasonable may have the matter dealt with by the Superannuation Complaints Tribunal (SCT). The SCT is not available to potential beneficiaries of SMSFs; however, general legal recourse is available. If the trustee is unable to find an appropriate beneficiary, the benefit must be dealt with under the unclaimed money provisions of the Superannuation (Unclaimed Money and Lost Members) Act 1999, administered by the ATO Who is a dependant? There are some differences in the definition of a dependant for super and tax purposes as shown in the table below. The super definition determines who can receive a super death benefit. The tax definition determines how a super death benefit will be taxed (ie as a dependant or non-dependant). Dependant Super Tax Spouse Married Yes Yes De facto Yes Yes Former No Yes Same sex Yes Yes Child (birth, step, ex-nuptial or adopted) Under age 18 Yes Yes Age 18 or over Yes No Financial dependant (full or partial) Yes Yes Interdependency relationship Yes Yes Spouse A spouse is a dependant regardless of whether the spouse was financially dependent on the member. A spouse includes the person at death to whom the member was married or with whom the member was in a de facto relationship or in a relationship that is registered under a law of a State or Territory (whether of the same sex or a different sex). Former spouses are dependants for tax purposes but not for SIS. 96

99 Child This includes any person, regardless of age, who at the member s death was the member s natural, step, adopted, ex-nuptial or current spouse s child, including a child who was born through artificial conception procedures or under surrogacy arrangements with the member s current or then spouse. A child for tax purposes does not include a child age 18 or over. Financial dependant A dependant includes any person who was financially dependent on the member at the time of the member s death. It is the trustee s responsibility to decide whether such a person was financially dependent on the member at the time of death. There is no need for one person to be wholly dependent upon another for that person to be a dependant for the purposes of the payment standards. Financial dependency can be established where a person relies wholly or in part on another for his or her means of subsistence. Nor must the recipient show a need for the money received from the deceased member in order to qualify as a dependant. Moreover, since partial financial dependency can generally be sufficient to establish a relationship of dependence, it is possible for two persons to be dependent on each other for the purposes of the payment standards. Source: APRA Superannuation Circular I.C.2. paragraph 16. A financial dependant for tax purposes may differ to the above. Interdependency relationships A dependant includes a person who was in an interdependency relationship with the deceased member at the time of death. An interdependency relationship between two people is characterised by: a close personal relationship living together financial support domestic support personal care of a type and quality above the care and support that might be provided by a mere friend or flatmate. An interdependency relationship may include a partner who does not meet the definition of a spouse. An interdependency relationship may also exist where there is a close personal relationship between two people but they do not live together; where they provide financial support, domestic support or personal care due to one or both of them having a physical, intellectual or psychiatric disability, or they are temporarily living apart due to one (or both of them) temporarily working overseas or serving a gaol sentence. Examples include same sex couples, an adult child residing with and caring for an elderly parent and sisters residing together. In establishing whether such a relationship exists, all of the circumstances of the relationship are taken into account, including (where relevant): the duration of the relationship whether or not a sexual relationship exists the ownership, use and acquisition of property the degree of mutual commitment to a shared life the care and support of children 97

100 the reputation and public aspects of the relationship (such as whether the relationship is publicly acknowledged) the degree of emotional support the extent to which the relationship is one of mere convenience, and any evidence suggesting that the parties intend the relationship to be permanent. The existence of a statutory declaration signed by one of the persons to the effect that the person is, or (in the case of a statutory declaration made after the end of the relationship) was, in an interdependency relationship with the other person Death benefit nominations The payment of a death benefit is ultimately a matter of trustee discretion, subject to the payment standards and the governing rules of the fund. The trustee s decision must be fair and reasonable. Non-binding death benefit nomination Some super funds may permit members to make death benefit nominations which are non binding. In such cases, members simply provide trustees with guidance regarding their preferred death benefit recipients, with trustees making the eventual decision in the light of all the relevant circumstances. Binding death benefit nomination A trustee may instead provide greater certainty to members in making death benefit nominations by allowing the members to determine, with substantial certainty, the persons to whom death benefits would be paid. Provided the trust deed allows binding death benefit nominations and the regulations are complied with, a member s valid nomination binds the trustee. Binding death benefit nomination notices must: be signed and dated by the member be witnessed appropriately by two individuals who are not nominated beneficiaries or the member specify the proportion of the benefit to be paid to each nominated beneficiary only nominate beneficiaries who are either dependants or the legal personal representative of the deceased member s estate, and be sufficiently clear and unambiguous for the trustee to act upon. Other important issues involved with binding death benefit nominations are: the nominated beneficiaries must be either dependants or the LPR at the date of the member s death the maximum term that an unchanged notice can remain in effect is three years there may be provision for the governing rules of the fund to fix a shorter term, and binding death benefit nominations do not cover the form of the super death benefit (ie lump sum or pension). Note: For the purposes of a family provision claim, a distribution made to a beneficiary as a result of a binding or non-binding death benefit nomination may not prevent the Court from making a determination that a member s super death benefit should form part of the member s notional estate. This does not impact a trustee s ability to make a payment in accordance with a member s valid binding nomination; however, this may have implications for the recipients of those benefits. Members should seek their own legal advice before making a will. 98

101 Non-lapsing death benefit nomination As an alternative to a binding death nomination, some funds now provide members with the ability to make a non-lapsing death benefit nomination. A valid non-lapsing death benefit nomination notice will bind the trustee (in the same way as a binding death benefit nomination). To be valid, the trustee must consent to the nomination, all beneficiaries nominated must be SIS dependants (or the member s legal personal representative) and any additional conditions specified in the trust deed must also be complied with. Importantly, a non-lapsing death benefit nomination is not automatically subject to the ranges of specific requirements that apply to binding death benefit nominations. Therefore, requirements including a three-year maximum term and witness signatures on the nomination may not apply. SMSFs and death benefit nominations The above discussion on binding death nominations and non-lapsing death benefit nominations does not generally apply to SMSFs. The legislation relating to binding death nominations specifically excludes SMSFs, therefore neither these provisions nor those relating to non-lapsing death benefit nominations apply to SMSFs. It is therefore open to an SMSF to accept from a member a binding nomination that, for example, does not lapse or is not required to be witnessed. However, such a nomination must still nominate only the dependants or legal personal representative of the member and should specify the proportion of the benefit each is to receive and be in writing. This principle has been confirmed by the ATO in SMSF Determination SMSFD 2008/3. Furthermore, the governing rules of the fund must make specific provision for a member of the SMSF to make a binding death benefit nomination. Regard should be given to whether the rules should also make provision for administrative or procedural matters in relation to the binding nominations. For example, the rules may require the nomination to be made in a specific form or may in fact set a time limit on the validity of the binding nomination. Stronger Super proposal The Government s response to the Cooper Review supports: Binding death nominations being invalidated automatically when certain life events occur (these life events could be determined by existing state rules governing invalidation of testamentary dispositions). Examples of life events may include marriage or divorce. The maximum term for binding death nominations should be extended to five years Reversionary pensions A pensioner may commence a pension as a reversionary pension. Where a pension will continue to a reversionary pensioner upon the death of the primary beneficiary, there is no need for the primary beneficiary to make a binding death benefit nomination. For members who pass away on or after 1 July 2007, the reversionary beneficiary must be a SIS dependant of the deceased, subject to the new restrictions for pensions paid to adult children (see sections 13.5 and 13.8). 99

102 Rollovers of super death benefits A child may commute a death benefit income stream but is not able to roll over a death benefit income stream. This is because the definition of a rollover super benefit specifically excludes benefits that arise from the commutation of a death benefit income stream by a person who was not the spouse of the deceased. Only the spouse of a deceased member is able to commute and roll over a death benefit income stream after the prescribed period. Such a commutation by a spouse is treated as a super member benefit in the spouse s hands, meaning it may be rolled over to either another super income stream or to an accumulation account Prescribed period for death benefit commutations The commutation of a death benefit income stream will be treated in one of two ways in the hands of the beneficiary, depending on the timing of the commutation. This will affect the tax treatment of the benefit. Within prescribed period The commutation of a death benefit income stream will be treated as a super death benefit in the hands of the beneficiary if the benefit is paid within the latest of: six months after the death of the deceased person, or three months after the grant of probate of that deceased person s will or letters of administration of that deceased person s estate, or if the payment of the benefit is delayed because of legal action about entitlement to the benefit six months after the legal action ceases, or if the payment of the benefit is delayed because of reasonable delays in the process of identifying and making initial contact with potential recipients six months after that process is completed. The Commissioner has discretion to make a decision that the benefit is a super death benefit if paid outside of the prescribed period above. Super death benefits are taxed as shown in section Outside of prescribed period The commutation of a death benefit income stream will be treated as a superannuation member benefit in the hands of the beneficiary if the benefit is paid after the latest of the four dates outlined above. The Commissioner of Taxation has discretion to make a decision that the benefit is a superannuation death benefit if paid outside of the prescribed period above. Superannuation member benefits are taxed as shown in section 10.1 (lump sums) or (income streams). As detailed in section 13.11, only a spouse may roll over a superannuation death benefit income stream. 100

103 14. Insurance in super Types of insurance which may be held in super There are four types of insurance (discussed in sections 14.2 to 14.5) that are able to be held by a super fund trustee for members of a super fund. Insurance cover is usually provided pursuant to an insurance policy negotiated between the trustee of the super fund and an insurer. Insurance may be available through a personal super product, or through a group arrangement, such as an employer super master trust, or an industry or corporate super scheme. The taxation implications of an insurance payout through super will vary depending on the type of insurance. It is important to note that this Guide does not deal with situations where insurance is taken out by super fund trustees that involves proceeds being paid somewhere other than for a specific member s benefit (for example, to a fund reserve). Different rules and tax treatment may apply in those situations Life insurance Life insurance proceeds are payable to the trustee upon the death of an insured member and then form part of the member s overall benefit within the fund. Under many policies, a terminal illness benefit applies, which allows all or part of the insured amount to be payable to the trustee early if the member becomes terminally ill. Access to proceeds A member s benefits become payable to certain beneficiaries or the member s legal personal representative upon death. A member who becomes terminally ill is also able to access part or all of their benefit under the terminal medical condition condition of release (see section 8.3 Conditions of release with nil cashing restrictions) Total and permanent disability (TPD) insurance TPD insurance proceeds are payable to the trustee (and form part of a member s overall benefit in the fund) if an insured member becomes permanently disabled in accordance with the TPD policy definition. TPD policies can use of a number of definitions used to measure TPD status. Two common definitions are: Any occupation (the most common definition found in policies held within super). Own occupation. See section 8.3 for an explanation of any occupation and own occupation definitions of TPD. Access to proceeds A member will generally need to meet the permanent incapacity condition of release to access their super benefit in the event of TPD (see section 8.3 Conditions of release with nil cashing restrictions). This condition of release is closely aligned to the requirements of most any occupation TPD policies. However, clients holding TPD cover through super with other policy definitions (in particular own occupation TPD policies) may find they cannot meet the permanent incapacity condition of release even if the insurance proceeds are paid to the fund. Alternatively, some members may be able to satisfy an alternative condition of release (eg retirement). 101

104 14.4. Income protection insurance Income protection insurance proceeds (replacing up to 85% of income from personal exertion) are payable to the trustee if an insured member becomes totally but temporarily disabled. As with TPD cover, there are a variety of definitions used by insurers to measure disability. These include a duties-based definition and an hours-based definition. A number of choices apply to income protection policies, depending upon the provider. These include the waiting period (generally 14 days to two years) and benefit period (generally between two years and the number of years to reaching age 65). Access to proceeds A member will generally need to meet the temporary incapacity condition of release to access income protection proceeds from their super fund. This condition of release is broad enough to align closely with most income protection policy definitions, and allows the fund to pay a non-commutable income stream limited to the level of income the member was receiving prior to becoming incapacitated. Because of this restriction, policies that pay an agreed amount regardless of the income being received at the time of incapacity or pay additional lump sum benefits (for example, a rehabilitation benefit) may lead to some proceeds being inaccessible by the member Trauma insurance Trauma insurance proceeds are payable to the trustee (and form part of a member s overall benefit in the fund) if an insured member suffers a medical condition or other trauma event covered under the policy. Trauma insurance is not widely offered within super because of questions around whether the offering of such insurance is in line with the sole purpose test. However, SMSF Determination SMSFD 2010/1 clarifies this matter for SMSFs. A trustee of a SMSF can purchase a trauma insurance policy and still satisfy the sole purpose test provided: any benefits payable under the policy are payable to the trustee and will form part of the fund s assets until the member satisfied a condition of release, and the purchase of the policy is not made to secure a benefit for another person, such as a fund member or their relative. Access to proceeds There is no condition of release available in super that specifically allows members who have suffered a trauma event to access their benefits. Where a member holds trauma cover through super and a benefit is paid to the trustee, the member would therefore need to satisfy another condition of release, such as permanent incapacity or retirement, to access their benefits. This will in some cases lead to members being unable to access trauma insurance benefits that have been paid into their superannuation account. 102

105 14.6. Taxation of insurance premiums The deductibility of insurance premiums for super fund trustees is shown in the following table. Insurance type Non-super: tax treatment of premiums Super: tax treatment of premiums Life cover (including Not deductible* Deductible to the fund terminal illness) TPD cover Not deductible* Any occupation cover: generally fully deductible to the fund. Own occupation cover: Proportion of premium used to fund any occupation component generally deductible to the fund. Remainder not deductible to the fund.** Income protection Generally deductible to Deductible to the fund the policy owner Trauma cover Not deductible to the policy owner* Not deductible to the fund Refer to Budget announcement in section * Excludes situations where cover is held for a revenue purpose or where cover is paid for by the employer but owned by the individual. **For more information please refer to the consultation paper titled Deductions for the cost of total and permanent disability insurance provided through superannuation at Alternative future service deduction Instead of claiming a tax deduction for insurance premiums during a financial year, a fund trustee can elect instead to claim a tax deduction for the future service portion of eligible benefits (consisting at least partially of insurance proceeds) that it pays out, including: A superannuation lump sum death or disability benefit. A superannuation income stream death or disability benefit. A series of income protection payments. If made, this election applies to all fund members. The tax deduction available is calculated as follows: Benefit amount x future service days / total service days where: benefit amount is the total value of the super lump sum or pension commenced, or in the case of income protection benefits the amount of payments during the year future service days is the number of days from the date of termination of employment (or inability to be gainfully employed) to the member s last retirement date total service days is the existing service period of the superannuation benefit plus future service days A trustee can elect to apply the future service deduction instead of claiming a tax deduction for insurance premiums in any financial year (even if deductions have been claimed for premiums in previous years). However, once this election is made, it is generally irrevocable and applies in all future years. Where insurance proceeds are paid out as a death or disability benefit, the trustee can only claim this future service deduction if the benefit is paid as a consequence of the member 103

106 terminating employment. This requirement does not apply where the future service deduction is claimed as a result of income protection benefits being paid from the fund Taxation of insurance benefits Taxation of insurance proceeds received by trustees Exemptions apply to ensure that insurance proceeds for cover held on a member s behalf through super are not assessable income, or an assessable capital gain of, a super fund trustee who receives them. Life insurance, TPD insurance and trauma insurance held on a member s behalf through super are all capital in nature and proceeds are therefore not ordinary assessable income. In addition, any capital gain that would apply where these proceeds are paid to a fund trustee is ignored. Income protection insurance held on a member s behalf through super is not assessable income, and the fund trustee cannot claim a tax deduction for proceeds paid on to a member. Tax components and insurance proceeds Where life insurance, TPD insurance or trauma insurance proceeds are received by a trustee in respect of a member, the tax components that the proceeds take are determined by the superannuation interest into which they are paid. If paid into an accumulation account (in a taxed super fund), these proceeds will initially be allocated to the taxable component (taxed element). If paid into an existing account-based pension instead, these proceeds will be allocated according to the existing proportions of the pension interest. For this reason, it can be an advantage where a member has an accumulation account and an account-based pension for insurance proceeds to be paid into their pension. Where this is to occur, however, it is important for premiums to be paid from the pension. Importantly, these tax components may be modified where a lump sum death or disability benefit is paid or rolled over. For further details, see the following sections: Section 10.3 Taxation of super death benefits. Section 10.8 Taxation of disability super benefits. Income protection insurance proceeds do not generally form part of a member s balance and are not allocated to one or more tax components. When paid out to a member under the temporary incapacity condition of release, income protection proceeds are not considered a superannuation benefit. Taxation of insurance proceeds paid from super For specific taxation rates on insurance benefits paid from super, see the following sections: Section 10.3 Taxation of super death benefits. Section 10.8 Taxation of disability super benefits. Section Salary continuance insurance (SCI) comparison. For specific taxation rates on insurance benefits paid directly from an employer, see the following sections: Section 15.9 Taxation of life benefit termination payments. Section Death benefit termination payments. 104

107 14.8. Insurance premiums and contribution caps Contributions that are made to super in order to fund insurance premiums will count against relevant contribution caps. This includes contributions made to standalone insurance offerings held within a superannuation environment. Contributions made by an employer, or personal concessional contributions will count against a member s concessional contributions cap, while after tax contributions used to fund premiums will count against a member s non-concessional contributions cap Self-insurance A fund s current or contingent liability to provide death or disability insurance can often be provided at least in part by the assets of the fund. SMSFs are not Registrable Superannuation Entity (RSE) licensees and may self-insure. RSE licensees are not permitted to self-insure. A self-insuring SMSF would not seek to hold excessive external insurance policies. In circumstances where the SMSF trustee elects to self-insure risks, the SMSF is entitled to a deduction equivalent to the arm s length premium which would have been payable had the liability been externally insured. In order to claim this deduction, the SMSF must obtain an actuarial certificate (generally on or before it lodges its tax return for the relevant financial year). The certificate must certify that the death and disability benefit liability is not covered by an insurance policy, and that the insurance premium has been determined on an arm s length basis Tax treatment of group insurance Group insurance is available either through a super policy or a non-super policy owned by an employer. Each alternative has various implications that should be understood to ensure that the cover suits the needs of both employer and employees. All insurance benefits Super policy Ownership W The policy is owned by the trustee of the super fund. Lives insured Claims W The lives insured are members of the super fund. W When a claim is approved, the insurer pays the proceeds to the trustee (who then distributes them accordingly). Non-super policy W The policy is owned by the employer. W The contract of insurance is between the insurer and the employer. Employees are listed as the lives insured. W There may be a separate contract between the employee and employer requiring the employer to provide insurance cover as a condition of employment. W When a claim is approved, any proceeds are paid to the employer, who in turn pays the employee and/or the employee s dependants. 105

108 Death benefits Payment of insurance premium Receipt of insurance proceeds Payment of lump sum benefits Super policy W Tax deductible to super fund. W Contributions made to fund insurance premiums are subject to the member s relevant contribution cap 1. W Fringe benefits tax (FBT) not payable. W Non-assessable to the super fund. W Made by the super fund to the member s dependants 3 or estate. W May be increased by an amount to reflect tax paid on contributions (known as anti-detriment payments) 4. W Non-deductible to the super fund (excludes anti-detriment payments). W Payments to tax dependants 3 (directly or via the estate) are not subject to tax. W Payments to tax non-dependants 3 are subject to super benefits tax of either 15% 6 or 30% 6. Non-super policy W Tax deductible to employer. W No caps on premiums. W FBT not payable 2. W Assessable as income to the employer. W Made by the employer to the employee s beneficiaries or estate. W Tax deductible to the employer. W Payments to tax dependants 3 (directly or via the estate) are not subject to tax up to $165,000 5, with the remainder taxed at the highest marginal tax rate (Medicare levy may also apply). W Payments to tax non-dependants 3 are taxed at 30% 6 up to $165,000 5, with the remainder taxed at the highest marginal tax rate (Medicare levy may also apply). TPD benefits Super policy Payment of insurance premium Receipt of insurance proceeds Payment of benefits W Tax deductible to super fund*. W Contributions made to fund insurance premiums are subject to the member s relevant contribution cap 1. W FBT not payable 2. W Generally non-assessable to the super fund. W Made by the super fund to the member. W Non-deductible to the super fund. W Benefit payment may include an increased tax-free component. W Taxable component not subject to tax if member age 60 or more. W Taxable component subject to super benefits tax if member under age 60. Non-super policy W Tax deductible to employer. W No caps on premiums. W FBT not payable 2. W Assessable as income to the employer. W Made by the employer to the employee. W Tax deductible to the employer. W Benefit payment may include an increased tax-free component. W Taxable component under $165,000 5 taxed at 15% 6 or 30% 6, depending upon age of employee. W Taxable component over $165,000 5 taxed at highest marginal tax rate (Medicare levy may apply). 1 Concessional and non-concessional contributions are subject to caps, see sections 4.2 and FBT is not payable on insurance premiums paid by the employer provided the employee is not a party to the insurance contract. 3 For SIS dependants and tax dependants, see section A fund may claim a tax deduction for the payment of an increased death benefit, see section Employment termination cap amount of $165,000, see section Depending on whether the taxable component comprises either a taxed element or an untaxed element. Medicare levy may also apply. * TPD insurance premiums are deductible only to the extent the TPD policy has the necessary connection to a liability of a fund to provide disability superannuation benefits. A deduction under Subdivision 295-G is only available for premiums paid by a super fund for an any occupation policy, rather than also for an own occupation policy. 106

109 Salary continuance insurance (SCI) comparison Super Non-super Type of policy SCI with benefit period to age 65 SCI (employer owns policy) SCI (employee owns policy) Deductibility of insurance premium Premium fully tax deductible to fund trustee provided that the benefits payable under the terms of the insurance policy comply with the requirements* of the SIS Act. Premium deductible to the employer as an expense incurred in the course of running a business. Premium deductible to the employee as an expense incurred in deriving assessable income. FBT on insurance premium FBT does not apply to super contributions made by the employer to pay for the premium. FBT does not apply provided the employee does not have rights or entitlements to benefits under the contract. FBT does not apply (not an employment benefit). Capacity to make benefit payment to beneficiary Fund s trust deed, sole purpose test and conditions of release and cashing restrictions*. A contract, such as an employment contract, between the employer and the employee covering the circumstances in which SCI proceeds will be paid to the employee. Part of the contract of insurance. Assessment of insurance proceeds to policy owner Non-assessable to fund trustee. Assessable to employer. Assessable to employee see tax assessment below. Deductibility of benefit payment from policy owner to beneficiary Non-deductible to fund trustee. Deductible to employer. Not applicable. Taxation of SCI benefit payments SCI benefit payments are not super benefits and are assessed as ordinary income and taxed at marginal income tax rates in the hands of the employee. No 15% tax offset is available. * These requirements, expressed in the SIS conditions of release and cashing restrictions, are that the benefit must be paid as a non-commutable income stream for the purpose of continuing the gain or reward the member was receiving before the incapacity, for a period not exceeding the period of incapacity. See section

110 15. Employer super issues What is an employment termination payment (ETP)? ETPs are taxed differently from other kinds of payments made on termination of employment. A payment is an ETP if: it is received by the taxpayer in consequence of the termination of the taxpayer s employment a life benefit termination payment, or it is received by a taxpayer after another person s death, in consequence of the termination of the other person s employment a death benefit termination payment, and it is received no later than 12 months after the termination, and it is not a payment specifically excluded (see the table in section 15.4). Exemptions from the 12 month rule Genuine redundancy and early retirement scheme payments above the tax-free amount (refer to section 15.6) are ETPs and are exempt from the 12 month rule. The Commissioner of Taxation may also determine, in writing, that the 12 month rule does not apply if the Commissioner of Taxation considers the time between the employment termination and the payment to be reasonable, having regard to the following: The circumstances of the employment termination, including any dispute in relation to the termination. The circumstances of the payment. The circumstances of the person making the payment. Any other relevant circumstances Genuine redundancy payments A genuine redundancy payment is so much of a payment received by an employee who is dismissed from employment because the employee s position is genuinely redundant as exceeds the amount that could reasonably be expected to be received by the employee in consequence of the voluntary termination of his/her employment at the time of the dismissal. A genuine redundancy payment must satisfy all of the following conditions: The employee is dismissed before the earlier of the following: the day he or she turned 65, and if the employee s employment would have terminated when he or she reached a particular age or completed a particular period of service the day he or she would reach the age or complete the period of service (as the case may be). If the dismissal was not at arm s length the payment does not exceed the amount that could reasonably be expected to be made if the dismissal were at arm s length. 108

111 At the time of the dismissal, there was no arrangement between the employee and the employer, or between the employer and another person, to employ the employee after the dismissal. The ATO has issued a Taxation Ruling TR 2009/2 which provides a detailed outline of the requirements for a payment to qualify as a genuine redundancy payment. This can be downloaded from law.ato.gov.au Exclusions A genuine redundancy payment does not include any part of a payment that was received by the employee in lieu of super benefits to which the employee may have become entitled at the time the payment was received or at a later time Early retirement scheme payments An early retirement scheme payment is the sum that exceeds the amount that could reasonably be expected to be received by the employee in consequence of the voluntary termination of his or her employment at the time of the retirement. An early retirement scheme payment must satisfy all of the following conditions: The employee retires before the earlier of the following: the day he or she turned 65 if the employee s employment would have terminated when he or she reached a particular age or completed a particular period of service the day he or she would reach the age or complete the period of service (as the case may be). If the retirement is not at arm s length the payment does not exceed the amount that could reasonably be expected to be made if the retirement were at arm s length. At the time of the retirement, there was no arrangement between the employee and the employer, or between the employer and another person, to employ the employee after the retirement. All the employer s employees who comprise such a class of employees as the Commissioner of Taxation approves may participate in the scheme. The employer s purpose in implementing the scheme is to rationalise or reorganise the employer s operations by making any change to the employer s operations, or the nature of the workforce, that the Commissioner of Taxation approves. If the above two points do not apply, the Commissioner of Taxation is satisfied that special circumstances exist in relation to the scheme that make it reasonable to approve the scheme. Before the scheme is implemented, the Commissioner of Taxation approves in writing that the scheme is an early retirement scheme for the purposes as set out in this section. Exclusions An early retirement scheme payment does not include any part of the payment that was paid to the employee in lieu of super benefits to which the employee may have become entitled at the time the payment was made or at a later time. 109

112 15.4. ETP checklist The following checklist will help determine whether any part of an employer lump sum payment is an ETP. These payments are ETPs W Unused rostered days off. W Payments in lieu of notice. W Unused sick leave (if it does not form part of the tax-free bona fide redundancy or approved early retirement payment). W A gratuity or golden handshake. W Compensation for loss of job. W Compensation for wrongful dismissal. W Because of the employee s invalidity (permanent disability, other than compensation for personal injury). W Genuine redundancy and early retirement scheme payments in excess of the tax-free amount. W Payment for loss of future super payments. W Certain payments made on the death of an employee. These payments are not ETPs W Super benefits. W Payment of a pension or annuity. W Unused annual leave and/or leave loading. W Unused long service leave. W Genuine redundancy and early retirement scheme payments that are within the tax-free amount (if the payment is over the tax-free amount, the excess is an ETP). W Foreign termination payments. W A payment made by a company or trust to an individual of an amount exempt from CGT under the small business CGT retirement exemption. W An advance or loan. W A deemed dividend. W Compensation for personal injury. W Payment for restraint of trade. W Commutation of a pension from a constitutionally protected fund or super provider applied in paying super contributions surcharge. W An amount included in assessable income under an employee share scheme. W Salary, wages and allowances owing to the employee, for work done or leave already taken Contributing ETPs into a super fund The types of payments listed in the right hand column above are not ETPs. The payments in the left hand column above are ETPs, and generally cannot be contributed directly into a super fund from 1 July Some exceptions apply see section Remember that if an ETP is a transitional termination payment, it may be directed into superannuation (called a directed termination payment) and treated as a contribution (someone age 65 or over will need to meet the work test) and the taxable component may count toward the person s concessional contributions cap (see sections 2.12, and 15.15) Tax-free amount of genuine redundancy and early retirement scheme payments A genuine redundancy payment or early retirement scheme payment received by an employee is not subject to tax based on the first $8,435 + ($4,218 x each completed year of service). The tax-free amount is not classified as an ETP and cannot be directed to a super fund. The amount of a payment in excess of the tax-free part: is an ETP cannot be directed to a super fund or annuity as a directed termination payment unless it is a transitional termination payment (refer to section 15.15), and if directed to a super fund, is a preserved benefit. 110

113 Tip! Consider making a non-concessional contribution to super (subject to eligibility) with this tax-free amount. Refer to section 2.4 for more information. Your client may be eligible for a Government co-contribution too. Please refer to section 3.8 for more information Taxation of ETPs Proportioning Since employment termination payments have not been taxed, 100% of an ETP will be taxable. Taxable component of ETP = ETP tax-free component. The only exception is where there is an invalidity segment or pre July 1983 segment, where a tax-free component will be calculated. The tax-free component in all cases is not assessable income and is not exempt income. Tax-free component of ETP = invalidity segment + pre July 1983 segment. Invalidity segment An ETP includes an invalidity segment if: the payment was made to a person because he or she stops being gainfully employed, and the person stopped being gainfully employed because he or she suffered from ill-health (whether physical or mental), and the gainful employment stopped before the person s last retirement day, and two legally qualified medical practitioners have certified that, because of the ill-health, it is unlikely the person can ever be gainfully employed in a capacity for which he or she is reasonably qualified because of education, experience or training. Invalidity segment calculation ETP x days to retirement employment days + days to retirement where: days to retirement = the number of days from the day on which the person s employment was terminated to the last retirement day. employment days = the number of days of employment to which the payment relates. Pre July 83 segment An ETP includes a pre July 1983 segment if any of the employment to which the payment relates occurred before 1 July The pre July 1983 segment is part of the tax-free component of the ETP. 111

114 Pre July 1983 segment calculation ETP invalidity segment X Number of days of employment to which the payment relates that occurred before 1 July 1983 Total number of days of employment to which the payment relates Life benefit termination payments A life benefit termination payment is an ETP made by an employer that is received by the employee in consequence of the termination of the taxpayer s employment, no later than 12 months after the termination (refer to section 15.1 for exceptions to this rule) Taxation of life benefit termination payments Employment termination payments Age Over preservation age (PA) Maximum rate of tax taxable component First $165,000 (ETP cap amount) 15% Above $165,000 Under PA First $165,000 (ETP cap amount) 30% Highest MTR Above $165,000 (ETP cap amount) Highest MTR Transitional termination payments Over PA First $165,000 (lower cap amount) 15% $165,000 to $1 million 30% Above $1 million (upper cap amount) Highest MTR Under PA First $1 million (upper cap amount) 30% Above $1 million (upper cap amount) Highest MTR Directed termination payments Any age W Assessable income of receiving super fund. W Not assessable income and not exempt income of individual. 15% (paid by receiving fund) Note: For all non-zero tax rates, Medicare levy may also apply (except for DTPs). PA means Preservation Age and is assessed on the last day of the financial year. The taxable component of a DTP that exceeds the $1 million cap will count towards the concessional cap ETP cap amount The ETP cap amount for the income year is $165,000 (indexed annually to AWOTE, in $5,000 increments if the indexation amount is at least $5,000). However, the amount of a particular ETP that is subject to the lower rates of tax (15% and 30%) referred to in section 15.9 is the amount of the taxable component of the payment that does not exceed the lesser of: the ETP cap amount reduced (but not below zero) by the amount of the taxable component of each life benefit termination payment received earlier in the income year, and the ETP cap amount, reduced (but not below zero) by the amount of the taxable component of each life benefit termination payment received earlier due to the same employment termination, whether in the income year or earlier income year. 112

115 Only payments up to the ETP cap amount can be received at concessional taxation rates for any one termination. This ensures that individuals can not seek to pay less tax by having their ETP paid to them in instalments over two or more years. Tip! The ETP cap will not be reduced for ETPs paid in different income years which are in relation to different employment terminations Lower cap amount The lower cap amount is $165,000 for if no previous transitional termination payments or DTPs have been received. The lower cap amount has a separate legal definition to the life benefit ETP cap amount (for non-transitional ETPs) and the super benefit low rate cap amount. The lower cap amount is the person s ETP cap for the year ($165,000 in ) reduced (not below zero) by: taxable components of transitional termination payments received prior to a person s preservation age + taxable components of directed termination payments received before or after preservation age ($1 million ETP cap) (not less than zero), and the portion of all transitional termination payments received for which the person was entitled to a tax offset that limits tax to 15% Middle rate part The middle rate part is the amount in excess of the lower cap and below the upper cap. For , this will be the amount of the taxable component between $165,000 and $1 million, if no previous transitional termination payments have been received. If the lower and upper cap amounts have been reduced by previous payments, the middle rate part is then calculated based on these reduced figures Upper cap amount The upper cap amount is $1 million and is applicable to transitional termination payments. It is not indexed and may be reduced by: taxable component of earlier transitional termination payments received in any financial year taxable component of earlier DTPs received in any financial year Transitional rules There are transitional rules in place from 1 July 2007 until 1 July 2012 that apply to ETPs. The transitional rules provide two benefits relating to transitional termination payments: if a transitional termination payment is taken as a cash lump sum it may be taxed more concessionally than a normal life benefit termination payment (depending on the amount received) a transitional termination payment may be contributed directly (rolled) into super between 1 July 2007 and 1 July 2012 as a DTP. Normal ETPs received on or after 1 July 2007 cannot be rolled into super. 113

116 Caution! Remember, that if a rollover of an ETP is permitted, it is treated as a DTP contribution (someone age 65 or over will need to meet the work test) and a portion of the taxable component may count toward the person s concessional contribution cap (see sections 2.12, 4.3 and 15.16) Transitional termination payments Transitional termination payments are life benefit termination payments received on or after 1 July 2007 that relate to pre 10 May 2006 entitlements. For a life benefit termination payment to qualify as a transitional termination payment, the following criteria must all be met: The life termination payment is received on or after 1 July 2007 but before 1 July The payment is received by the taxpayer because they are entitled to it under: a written contract, or a law of the Commonwealth, a State, a Territory or another country, or an instrument under such a law, or a workplace agreement within the meaning of the Workplace Relations Act The entitlement is provided for under that contract, law, instrument or agreement as in force just before 10 May A life benefit termination payment is a transitional termination payment only to the extent that the contract, law or agreement as in force just before 10 May 2006 specifies: the amount of the payment, or a way to work out a specific amount of the payment. A specific amount can be worked out by a method or formula or by provision for the taxpayer or another person (or entity) to make a choice between forms of payment. Example: A specific amount of a life benefit termination payment that Bob receives on 1 July 2007 can be worked out from the terms of his written contract if the contract provided (before 10 May 2006) for him to choose between payment in the form of a cash amount of $100,000 or the transfer to him of 10,000 shares in a specified company. Caution! It is not easy to meet the requirements of a transitional termination payment. ETPs made under a workplace agreement, entered into after 10 May 2006, are not transitional termination payments, even where the terms under which the payments are made are the same as the terms under a workplace agreement in place just before 10 May See ATO ID 2007/163 at law.ato.gov.au Taxation of transitional termination payments See the table in section 15.9 for the tax rates on transitional termination payments. If a person receives or rolls over more than one transitional termination payment during the transitional period, then the lower and upper caps will be adjusted accordingly. If someone received a transitional as well as a non-transitional termination payment, separate caps would apply. 114

117 Directed termination payment (DTP) A transitional termination payment contributed directly to super is referred to as a DTP. Individuals have 30 days after the receipt of a pre-payment statement to direct their employer to use all or part of the payment to make a payment to a super fund. See the table in section 15.9 for the tax rates on DTPs. The taxable component in excess of $1 million of DTPs will count towards the person s concessional contribution cap. This is a lifetime cap of $1 million (not indexed) and is reduced by any earlier transitional termination payments paid directly to the person. A DTP is a contribution for super purposes so the work test must be satisfied for those people age 65 or over who wish to direct their payments to a super fund. This is a significant change from prior to 1 July 2007 where employer ETPs were generally considered to be rollovers and could be rolled over at any age Death benefit termination payments A death benefit termination payment is an ETP made by an employer to a deceased employee s beneficiaries. It is received by a taxpayer after another person s death, in consequence of the termination of the other person s employment. It must be received no later than 12 months after the termination. Taxation of death benefit termination payments Paid to Age Maximum rate of tax taxable component (untaxed element) Dependant Any age First $165,000 (ETP cap amount) Not subject to tax Above $165,000 Highest MTR Non-dependant Any age First $165,000 (ETP cap amount) 30% Above $165,000 Highest MTR Note: For all non-zero tax rates, Medicare levy may also apply. The ETP cap amount is indexed annually and rounded down to the nearest $5, Taxation of unused leave payments Payments made to an employee on termination of employment for unused annual leave or for unused long service leave payments are not ETPs. However, certain parts of these payments may be entitled to concessional tax treatment in the circumstances described in the following tables: Unused annual leave period of accrual Assessable portion Maximum rate Tax withheld by employer General retirement or termination: accrual before 18 August % 30% Yes accrual on or after 18 August % Marginal Yes Genuine redundancy, invalidity or early retirement: all accruals 100% 30% Yes 115

118 Unused long service leave period of accrual Assessable portion Maximum rate Tax withheld by employer General retirement or termination: accrual before 16 August % Marginal No accrual 16 August 1978 to 17 August % 30% Yes accrual on or after 18 August % Marginal Yes Genuine redundancy, invalidity or early retirement: accrual before 16 August % Marginal No accrual on or after 16 August % 30% Yes Note: For all non-zero tax rates, Medicare levy may also apply. The assessable portions of unused leave payments are added to the client s other income and a tax offset will apply to ensure the tax rates above are the maximum tax rates levied. The period of accrual is calculated in days as a proportion of total service. If your client has used long service leave, the proportion of leave subject to the concessional rate will be reduced. These amounts are not an ETP and cannot be directed (rolled over) to a super fund. Alternatively, the net proceeds may be contributed to super if the person satisfies the relevant eligibility criteria. Access to the proceeds that are contributed to super in this way will subsequently depend upon the person meeting a condition of release Superannuation guarantee (SG) The SG is the minimum super support that an employer must provide for their employees in order to avoid the superannuation guarantee charge (SGC). Employers are generally entitled to a tax deduction for this support. Who does it apply to? Generally employers are those who: exercise some control over how, when and where work is done are responsible for payment of wages or salary, or have the power to dismiss or hire. It includes employers who are tax-exempt organisations and family companies/trusts who pay salary and wages. Exemptions Salary or wages paid to the following employees are exempt from the SG as follows: Employees paid less than $450 in a month. Employees age 70 or over (refer to 2010 Budget announcement in section 2.7). Part-time employees under 18 years of age (working 30 hours, or less, each week). Resident employees paid by non-resident employers for work done outside Australia. Non-resident employees paid solely for work undertaken outside Australia. Foreign executives who hold certain visas or entry permits, as prescribed by the Regulations. 116

119 Employees paid for work of a domestic/private nature for not more than 30 hours each week, eg part-time nanny or housekeeper. Employees who opted out of receiving SG contributions under old section 19(4) of the Superannuation Guarantee Administration Act 1992 (SGAA), prior to 1 July 2007, because their accumulated super entitlements or actual payments received exceeded their pension RBL. These elections were and remain irrevocable. Such elections cannot be made on or after 1 July 2007 with the abolition of RBLs and the repeal of section 19(4) from that date. Employees employed under the Community Development Employment Program. Employees in their capacity as members of the Defence Force Reserves. Contractors are generally classified as employees for SG purposes if the contract is wholly or principally for labour. Cases where the SG may not apply include if the person who the contract with is free to hire other people to perform the work, even if the person ends up performing the work himself or herself. A director is not automatically considered to be an employee of a company. Directors must also be entitled to payment for services to come within the expanded SG meaning of employee. Employer contributions to non-paid directors would therefore appear to be nondeductible. However, the ATO considers non-paid directors are employees if they meet the activity requirements outlined below, ie be: a. an employee for SG purposes, or b. engaged in producing the employer s assessable income, or c. an Australian resident who is engaged in the business of the employer. For further guidance on the treatment of contractors see: ATO SGR 2005/1: Who is an employee? available at law.ato.gov.au Employer SG reporting Under SG arrangements, employers are no longer required to report to employees on SG contributions made after 1 January Payment rate 9% of each eligible employee s ordinary time earnings (OTE) is to be paid to a complying super fund. From 1 July 2008, all employers are required to determine their SG obligation by applying the super guarantee percentage to the relevant employee s OTE. Lower earnings bases can no longer be used Budget proposal Super contribution information disclosure from 1 July 2012 The Government has reconfirmed its election commitment to ensure employees receive information through their payslips on the amount of super contributions paid into their super account. In addition, the Government plans to require super funds to notify employees and employers on a quarterly basis if regular contributions cease. 117

120 Ordinary time earnings Employee remuneration OTE (1) Salary or wages (2) Salary, wages Yes Yes Commission Yes Yes Casual employee Shift loadings Overtime Shift loading Yes Yes Benefits subject to fringe benefits tax No No Work paid at piece-rates no ordinary hours stipulated Yes Yes Workers compensation payments Returned to work Not working Director s fees Yes Yes Payments for performance in, or provision of services in relation to, entertainment, sport, promotions, films, discs, tapes, TV or radio Yes Yes Payments to a contractor who is an employee under the Superannuation Guarantee Administration Act (labour component only) Yes Yes Payments for domestic or private work under 30 hours per week No No Overtime Simple overtime situation, ie work in excess of ordinary hours of work No Yes Overtime where agreement prevails over award Ordinary hours retained Distinction between ordinary and other hours removed Overtime where no ordinary hours of work specified Yes Yes Bonuses Performance bonus Yes Yes Christmas bonus Yes Yes Ex-gratia bonus paid in respect of ordinary hours of work Yes Yes Bonus paid in respect of overtime only No Yes Allowances and expenses Expense allowance expected to be fully expended No No Allowance by way of unconditional extra payment Yes Yes Danger allowance Yes Yes Retention allowance Yes Yes Doctors hourly on-call allowance in relation to ordinary hours of work Yes Yes Reimbursement of expenses, including travel costs and petty cash No No Yes No Yes No No Yes Yes Yes Yes No Yes Yes 118

121 Employee remuneration OTE (1) Salary or wages (2) Leave Pay for annual, long service or sick leave taken Yes Yes Annual leave loading No Yes Pay for parental leave, including adoption leave No No Pay for leave from usual employment to engage in eligible community service (eg jury duty, SES service) or Defence Force Reserves service No No Payments on termination of employment Payments for unfair dismissal No No Payments in lieu of notice Yes Yes Payments of unused annual, long service or sick leave No Yes Redundancy payments No Yes Other payments Dividends No No Partnership and trust distributions No No Payments for entering into a restraint of trade agreement No No Source: and SGR 2009/2. Note: We recommend that employers seek legal advice on what constitutes OTE to ensure SG obligations are met. Penalties for not meeting SG obligations may be costly. Maximum earnings base The maximum earnings base of an employee for which an employer is obliged to make SG contributions is $43,820 per quarter ($175,280 pa) for (indexed to AWOTE on 1 July each year). Minimum earnings base The minimum earnings base for which an employer is obliged to make SG contributions is $450 per month. (This figure is not indexed.) Remuneration taken into account for SG If SG contributions are being made before the cut-off dates for each quarter, the remuneration marked Yes in the OTE column (1) in the table above, should be used to calculate the minimum SG contribution. If an employer has a SG shortfall (they have not made the SG contributions by the cut-off date) for any employee, the remuneration marked Yes in the salary or wages column (2) should be used to calculate their SG shortfall. Government proposal Increasing super guarantee rate to 12% The SG rate will be increased gradually with initial increments of 0.25 percentage points on 1 July 2013 and 1 July Further increments of 0.5 percentage points will apply annually up to , when the rate will be set at 12%. 119

122 SG rate increase proposed SG timeline Year SG rate (%) / / / / / / /20 12 At the time of writing, legislation to make this effective had not been introduced to Parliament. Salary sacrifice and SG The amount of SG an employer is required to pay in relation to an employee is calculated based on their OTE. By entering into a salary sacrifice arrangement (SSA) an employee will reduce his or her OTE and will reduce the amount of SG their employer is required to pay. An employer could still make contributions based on the employee s pre-salary sacrifice earnings; however, they are not obliged to do so under SG laws. Unless the employee is covered by an award or agreement, which specifies the amount of employer super contributions or that SG is based on pre-sacrifice salary, an employer could use the amount contributed under salary sacrifice to a complying superannuation fund to meet its SG obligation. If the salary sacrificed super contribution is more than the SG amount the employer is required to pay, then the employer would not be required to pay an amount in addition to the salary sacrificed amount to meet its SG obligation The SGC What are the penalties? If the minimum level of super support is not contributed to a fund before the cut-off date for that quarter, or the employer does not contribute to the employee s chosen fund, then the employer will be subject to the SGC and the following penalties apply: The charge is not tax deductible unlike most super contributions. Interest at the nominal rate of 10% pa is payable, plus an administration fee. The shortfall calculation is based on an employee s salary or wages (not OTE) which may be more than the ordinary time earnings. Further penalties for late payment (such as the general interest charge) and failure to provide a SG statement apply and are not tax deductible. 120

123 Tip! Tax Laws Amendment (2008 Measures) No. 2 Act extended the date by which late contributions can be used to offset the SGC to up to four years after the end of the relevant quarter. The employer must still lodge a SGC statement and will still be liable for the administration fee and interest component of the SGC. If an employer incurs a SGC, the employer must: lodge a SG return with the ATO, and pay the shortfall to the ATO (not the super fund). Calculating the SGC The SGC includes: The total of an employer s individual SG shortfall This is based on the individual shortfall percentage that is the difference between the charge percentage and the actual percentage of support. In other words, the difference between the required contribution and the contribution actually made. Additionally, a penalty for any non-compliance to choice of fund will increase an employer s individual SG shortfall. Non-compliance to choice of fund includes making the correct amount of SG contributions but directing them to the wrong fund. The amount of any increase is subject to a maximum of $500 for a notice period calculated as follows: 25% x [notional quarterly shortfall actual quarterly shortfall]. Notional quarterly shortfall is effectively the amount contributed to the wrong fund. Interest component An interest component of 10% per annum of the total of an employer s individual SG shortfall. Interest is calculated from the start of the relevant quarter until the SGC is paid to the ATO (inclusive). A fixed administration fee $20 is charged for each employee for whom there is a shortfall. SGC example If each employee s salary and wages for a quarter was $10,000 and there are 20 employees, and the employer only pays 6% SG instead of 9%, and the employer pays the SGC 137 days after the start of the relevant quarter, the SGC will be: 1. Individual SG shortfall = 3% x $10,000 x 20 = $6, Interest component = 10% x (137/365 days) x $6,000 = $ Administration fee = $20 x 20 = $400 Total SGC = $6, The late payment general interest charge may also apply. 121

124 Offsetting the SGC Certain late employer SG contributions (ie made after the cut-off dates in column 2 below) may be used to offset the SGC incurred. Tax Laws Amendment (2008 Measures) No. 2 Act has extended the date by which an employer can make late contributions to offset the SGC to up to four years after the end of the relevant quarter. SG quarter Cut-off date for SG contributions 1 July 30 September 28 October 28 November 1 October 31 December 28 January* (Saturday) 28 February 1 January 31 March 28 April* (Saturday) 28 May 1 April 30 June 28 July* (Saturday) 28 August Due date for lodgement of SG statement and payment of SGC * Where a due date falls on a day that is not a business day (ie the due date is a Saturday, Sunday or public holiday) lodgement or payment may be made on the first business day after the due date without incurring a penalty or general interest charge (GIC). Notes: To claim a tax deduction for the financial year, contributions for the 1 April to 30 June quarter must be made by 30 June rather than 28 July. An employer may not deduct a contribution that is used to offset a liability to pay the SGC. Handy ATO super guarantee tools The ATO has released some calculators/tools for employers to use to help manage their SG obligations, which you may find useful. The tools determine: SG eligibility amount of SG contributions SGC and statement The links are as follows: ATO SG eligibility calculator (answers questions about a particular employee to find out if the employer must make SG contributions for her/him) ATO SG contributions calculator (input details of earnings base for each employee and calculator and it works out the employer s SG liability) SGC and statement calculator (works out the SGC, including reductions from late offsetting contributions and produces an SG statement to send to the ATO) Choice of fund The choice of fund legislation first took effect on 1 July 2005 and it requires a new eligible employee who commences work to be offered a choice of fund by their employer within 28 days. On 1 July 2006, the class of eligible employees was broadened and it includes employees covered by old State-based awards. An eligible employee can choose a fund once each year. Who may choose their own fund? Not all employees must be given a choice. The legislation specifically excludes: employees covered by a range of employment agreements that specify a super fund government employees in unfunded public sector super schemes 122

125 government employees who are members of the Commonwealth Superannuation Scheme (CSS) or the Public Sector Superannuation Scheme (PSS), other than PSSAP members employees who remain a member of a defined benefit fund that is in surplus or who have accrued their maximum benefit. The employers of individuals covered by these exclusions may be able to make contributions according to the relevant award, agreement etc and still be in compliance with the choice rules. This will be determined by the wording of the particular instrument. Employers should seek legal advice from a workplace or industrial relations lawyer. As a result of a range of industrial relations reforms, many employees now will be covered by Federal industrial awards or an equivalent. This includes employees who work for a constitutional corporation and were in the past covered by a State industrial award. Employees who are covered by a Federal award are eligible for choice of fund. What contributions does choice cover? Choice of fund only applies to an employer s SG contributions from 1 July Legally, an employer does not have to extend choice to cover salary sacrifice or voluntary employer contributions in excess of their SG obligations, but for practical purposes, many may choose to do so. Which funds can be chosen? Any complying super fund or RSA can be chosen by an employee this is an unlimited choice regime. The fund could include an in-house corporate fund, a corporate master trust, a retail personal fund, an industry fund, a super wrap or master trust, a SMSF, or a small APRA fund. The only requirement is that it must be willing to accept contributions from the person s employer. How does an employee choose their fund? An employee can choose a fund in two ways: by responding in writing to a standard choice form given to them by their employer, or by providing a written notice to their employer requesting that contributions are made to the employee s chosen fund. The standard choice form must be provided by an employer within 28 days of a new employee commencing employment. It must state that the employee may choose any fund and include the name of the employer s default fund plus any additional information required under the regulations. The employee s written notice must set out the contact details for their chosen fund, evidence that the fund will accept contributions and any other information required by the regulations. The standard choice form The standard choice form is available at What happens if a person doesn t make a choice? If an employee doesn t make a choice or chooses a fund that the employer cannot contribute to, then the employer can make contributions to a default fund. The default fund is specified on the employer s standard choice form. Circumstances in which an employer may reject an employee s choice There are two circumstances where an employer may reject a fund chosen by an employee: 1. Where an employee fails to provide certain information, ie the written notice and a written statement setting out contact details for the fund, any other prescribed information and 123

126 written evidence that the fund will accept the contribution made by the employer for the benefit of the employee. 2. Where an employee has chosen another fund in the previous 12 months. The employer default fund A default fund is the fund to which an employer must pay contributions if an employee does not make their own valid choice. If employees are covered by a Federal award, the default fund the employer must use may be specified in that award. Updated Federal awards came into effect on 1 January 2010, so an employer should check whether such an award applies to their employees and whether it specifies a default fund they must use. If a Federal award does not specify a default superannuation fund for the employer to use, or if an employee is not covered by a Federal award or other industrial arrangement that specifies a fund the employer must use, the employer may be able to use another super fund as a default fund for the purposes of choice (as long as it satisfies the default fund requirements below). Even if all employees make a choice of fund, an employer needs to have a default fund in case any contributions are returned to the employer. Additionally, the employer must state the name and select other details of the default fund on the standard choice form it is required to give to every new employee within 28 days of them commencing employment. How does an employer change the default fund? If eligible to do so, an employer may change their default fund at any time by giving all employees a standard choice form within 28 days of making the change. The employer must state the details of the new default fund and the old default fund on the standard choice form. Are there any conditions on the default fund? Yes. While the employer can choose any complying fund as the default, it must be one that provides a minimum level of death only life insurance cover to its members as prescribed by the legislation. Stronger Super default funds Following a transition period, MySuper products will be the only products eligible to act as default funds for both Superannuation Guarantee and award purposes. A similar transitional approach will apply to the conversion of existing default funds to MySuper funds. The transition period(s) is still to be determined by the Government. For more information, refer to the FirstTech Cooper Review Government Response briefing on the FirstTech website. Minimum life insurance requirement The employer s default fund is required to offer a minimum level of death cover at a premium of at least $0.50 per week or an age-based benefit level as shown in the following table. 124

127 Minimum life insurance requirements for default fund Age 20 to 34 $50, to 39 $35, to 44 $20, to 49 $14, to 55 $7, or more Nil Level of insurance cover Defined benefit schemes will meet the insurance requirements where they provide a death benefit with a future service component at least equal to the dollar levels of cover shown above. Exceptions to the minimum life insurance requirement: A three-year transition period an employer who made contributions up to 1 July 2005 to a fund that does not meet the insurance requirement, and continued to make contributions to the same fund after 1 July 2005, had three years from 1 July 2005 until 30 June 2008, to begin paying contributions to a fund which meets the insurance requirement. This exemption also applied to the employer if their original fund was replaced by a successor fund. This exemption has now expired. Default fund contributions made by an employer under a Federal award will automatically meet the insurance requirements, as will contributions made by employers to RSAs and capital guaranteed funds. Insurance cover provided by an employer for an employee outside of super that is at least equal to the minimum level of cover required will satisfy the insurance requirement. If an employer cannot obtain insurance for an employee due to the employee s health, occupation or other circumstances determined by an insurer, then no minimum insurance is necessary. If an employee s super death benefit (insurance plus account balance) is at least $50,000 under the rules of the fund, the minimum insurance requirement does not apply. What are the penalties for the employer not complying with choice of fund? An employer who fails to offer a choice to employees or who contributes to a fund other than one chosen by an employee will be subject to a financial penalty. See how this penalty affects an employer s super guarantee shortfall in section Does choice also apply to an employee s existing super benefit? No, choice only applies to contributions made by an employer on or after 1 July 2005, it does not apply to amounts already contributed on behalf of an employee. Instead, the portability rules cover existing benefits. See section 7.1 for more details on portability. Will an employer be liable for the choices made by employees? No. The legislation specifically removes any liability from an employer in relation to complying with the choice of fund rules. The requirements for minimum insurance cover in the default fund and an enhanced disclosure regime address these aspects. Employers should be careful not to inadvertently provide financial advice or do anything outside their obligations to comply with choice of fund, otherwise this protection will not apply. 125

128 Small business superannuation clearing house From 1 July 2010, small business owners who have less than 20 employees are able to use this facility as a free superannuation clearing house to satisfy their superannuation guarantee (SG) obligations including managing employee choice of fund. This facility will allow eligible employers to make SG payments to an approved clearing house and satisfy their SG obligations. SG contributions made to other clearing houses will only result in SG obligations being met when the correct amount is received by a complying superannuation fund or RSA. The small business superannuation clearing house operates as follows: Employers will satisfy their SG obligations when the correct amount of employer contributions are made to the clearing house will then forward the amount to the designated superannuation funds. The clearing house will also manage the employer s choice of fund obligation once the employer provides details of the employee s chosen fund. Eligible small businesses must register to use the clearing house. Businesses who are existing corporate super clients can continue to use their existing clearing house facility or opt to take up this new option. This should not affect advisers who continue to provide corporate super advice on establishing default super funds and insurance, and assist businesses to meet their ongoing superannuation obligations Superannuation holding accounts special account (SHASA) The SHASA, previously known as the superannuation holding accounts reserve (SHAR), is a special account administered by the ATO. A small number of employers used the SHASA to meet their SG obligations for their employees. The SHASA is not a trust fund or an alternative super fund. It is a holding mechanism designed to protect employees small super amounts until they can be transferred into a complying super fund or RSA. The SHASA has been closed to employer deposits since 1 July From this time, employers are not allowed to make a deposit into the SHASA for employees to satisfy their SG or choice of super fund obligations. This is why it is essential that an employer has a default fund in place Tax deductions for employer contributions Please refer to section 3.5 for information on tax deductions for employer contributions Salary sacrifice arrangement An effective salary sacrifice arrangement (SSA) involves an employee agreeing to forgo part or all of their future remuneration in return for the employer making an employer contribution into superannuation on behalf of the employee. Amounts sacrificed pursuant to an effective SSA do not form part of the employee s assessable income and will not be taxed at their marginal tax rate. The contribution will be subject to contributions tax of 15% when received by the super fund and will count towards the employee s personal concessional contributions cap. Salary sacrifice contributions are tax deductible to the employer and there is no limit to the amount of deduction; however, contributions in excess of the employee s concessional cap are subject to excess concessional contributions tax of 31.5%. 126

129 If a SSA does not apply in respect of future remuneration (eg the employee salary sacrifices salary already earned), the SSA is ineffective, meaning that: the contributions are taxed at the employee s MTR, the contribution is treated as a non-concessional contribution the employer is not entitled to a tax deduction for a super contribution. A SSA is generally provided under the employee s employment contract; there is no specific statutory provision on its operation including the obligation to provide salary sacrifice contributions and their amount or timing. Examples of an effective SSA include: forgoing future entitlements to salary and wages for super contributions, such as agreeing with an employer on 1 July 2011 to salary sacrifice to super a certain amount of salary for the remainder of the year, or electing to salary sacrifice to super all or part of a discretionary bonus entitlement prior to being advised of the amount of the entitlement. Examples of an ineffective SSA include: salary sacrificing a discretionary bonus where all the conditions required for the payment of the bonus have been met, for example where the employer has advised the employee of the amount of bonus payable, or salary sacrificing annual and/or long service leave entitlements that have already been accrued, including on termination of employment. Salary sacrifice and fringe benefits tax Superannuation contributions made under a SSA on behalf of an employee are not fringe benefits. An employee may enter into an effective SSA for the employer to contribute to the complying superannuation fund of an associate (such as a spouse) of the employee. Payments made by an employer in such circumstances will be a fringe benefit for the employee and subject to fringe benefits tax (FBT). Salary sacrifice and RESCs Contributions made under an effective SSA are reportable employer super contributions (RESCs). A RESC is an employer contribution where the employee has (or might have) the capacity to influence the amount of the contribution or the way it is made, so as to reduce their assessable income. RESCs must be reported by an employer on the employee s Payment Summary, and are included as income for the purposes of eligibility for various government benefits, including the government co-contribution. 127

130 16. Foreign super For individuals who are either migrating or returning to Australia it may be possible to arrange the transfer of retirement benefits from an overseas fund to an Australian complying super fund even though actual withdrawal may be prohibited until retirement. The overseas treatment of such a transfer should be investigated with a taxation consultant specialising in the relevant country s tax laws. The treatment of the transfer from an Australian taxation perspective is outlined below. An Australian taxpayer may receive a super lump sum from a foreign super fund. A foreign super fund is a fund that is not an Australian super fund and is not centrally managed in Australia. Super lump sums transferred from overseas super funds into Australia are taxed in Australia at varying rates depending upon: when the transfer is received in Australia (before or after six months of Australian residency) whether your client makes an election regarding applicable fund earnings the non-concessional contributions caps (refer to Chapter 4), and the age of your client in the financial year the transfer occurs (this will affect contributions caps and work test requirements) Contributions caps and foreign super transfers Transfer received by Australian super fund Within six months* After six months* no election After six months* with election Applicable fund earnings (growth component) Balance of transfer Tax treatment Counts toward Tax treatment Counts toward W Not assessable to fund W Not assessable to individual W Not assessable to fund W Assessable to individual at MTR (Medicare levy may also apply) W Assessable to fund at 15% W Not assessable to individual Non-concessional cap Non-concessional cap Does not count toward either non-concessional or concessional caps W Not assessable to fund W Not assessable to individual W Not assessable to fund W Not assessable to individual W Not assessable to fund W Not assessable to individual Non-concessional cap Non-concessional cap Non-concessional cap * Of the date the member becomes a tax resident of Australia. 128

131 16.2. Transfer within six months If the transfer/withdrawal of overseas retirement benefits takes place within six months from the date the member becomes a tax resident of Australia and the benefit relates only to service overseas whilst a non-resident, then the transfer is not assessable to the super fund or the individual. 100% of the transferred amount is treated as a non-concessional contribution in the receiving Australian super fund and subject to preservation Transfer after six months Election to have applicable fund earnings taxed within super fund If a transfer is completed after six months of tax residency, applicable fund earnings are subject to tax. Since 1 July 2004, members have had the right to elect to have applicable fund earnings taxed in the super fund at the more concessional rate of 15% rather than personally at their marginal tax rate. Caution! The election form is available at by entering NAT in the search box. The election form, if used, must accompany the contribution to the super fund. The entire overseas super balance must be transferred to the Australian super fund to be entitled to use this election form. However, since 1 July 2007 two anomalies exist: If the transfer exceeds the member s non-concessional cap, the fund trustee must return the excessive contribution within 30 days. If the transfer was carried out over a couple of days, the non-concessional caps would mean that the excessive amount would be taxed to the individual at 46.5%. In the absence of an election by the individual, the applicable fund earnings will be treated as assessable income of the individual and taxed at their marginal tax rate What if the individual receives a withdrawal directly from an overseas super fund? The same taxation applies as outlined in section 16.1 to the applicable fund earnings (growth of the fund since becoming a tax resident of Australia), but the individual does not have the choice to have it taxed concessionally at 15% because it is not being directed to an Australian super fund Applicable fund earnings Applicable fund earnings are generally the earnings on the foreign super fund while the person was an Australian resident. There are two methods for calculating applicable fund earnings according to the member s pattern of Australian tax residency. 129

132 Method 1 If the member has been an Australian resident at all times F Relevant period T F = date of fund membership with foreign super fund. T = date of transfer of foreign super fund to Australian super fund. Relevant period is from date F to date T. The member is resident of Australia during all of period F to T. The applicable fund earnings will be calculated as: Gross amount of the foreign super transfer (before any foreign tax) less contributions made to the foreign super fund in the relevant period less transfers from other foreign super funds into the foreign super fund in the relevant period plus any previously exempt fund earnings. Method 2 If the member has not been an Australian resident at all times F R Relevant period T F = date of fund membership with foreign super fund. T = date of transfer of foreign super fund to Australian super fund. R = date of Australian residency. Relevant period is from date R to date T. The member is not a resident of Australia during all of the period F to T. The applicable fund earnings will be calculated as: Gross amount of the foreign super transfer (before any foreign tax) less amount of foreign super fund vested in the member just before date R less contributions made to the foreign super fund in the relevant period less transfers from other foreign super funds into the foreign super fund in the relevant period multiplied by the proportion of total days during relevant period when member was an Australian resident plus any previously exempt fund earnings. Previously exempt fund earnings A transfer from one overseas super fund to another overseas super fund previously triggered assessment of the growth component to an Australian tax resident. The rules since 1 July 2004 make these transfers exempt until they are eventually transferred into Australia. These previously exempt amounts are only included in assessable income in Australia upon transfer of the fund into Australia. Tax treatment of transfers after six months See the table in section 16.1 for the treatment of transfers of foreign super funds into Australia. 130

133 16.6. Normal contribution rules and caps apply The normal non-concessional contributions caps will apply to the transfer of overseas pensions into Australian super funds as outlined in the table above. Additionally, if the member is age 65 or over, they will need to meet the work test to contribute an amount of foreign super UK pension transfers The above Australian tax rules apply to transfers and withdrawal of foreign super from any country. Looking specifically at the UK taxation of transfers of UK pensions into Australia, there are special rules to take note of. On 6 April 2006, as part of the broad pension reform being undertaken in the UK, new UK regulations became effective. From this date, any money transferred from UK registered pension schemes to Australian super funds will be subject to penalty tax of up to 55% in the UK unless the Australian fund is a qualifying recognised overseas pension scheme (QROPS). For further information on UK pension transfers, refer to the FirstTech booklet on UK pensions on FirstNet Adviser. 131

134 17. Social security Age pension To receive an age pension, certain eligibility requirements including basic age and residency conditions must be met. Age Men born before 1 July 1952 are eligible at age 65. Women born before 30 June 1947 have already reached the qualifying age for Age Pension. For women born between 1 January 1946 and 1 July 1947, see table below. Women born between 1 July 1947 and 31 December ½ 1 January 1949 and 30 June Eligible for Age Pension at age For both men and women born on or after 1 July 1952 see table below. People born between 1 July 1952 and 31 December ½ 1 January 1954 and 30 June July 1955 and 31 December ½ 1 January 1957 and later 67 Source: Centrelink Guide to Australian Government Payments. Eligible for Age pension at age Australian resident To qualify for the age pension a person must also be an Australian resident who: has resided in Australia for a continuous period of at least 10 years, or has resided in Australia for a total of over 10 years of which at least five years was of continuous residence. Certain people may have a qualifying residence exemption (including refugees or persons who arrived under a special humanitarian program). Residence in certain countries with which Australia has a reciprocal agreement may count towards Australian residency. For example, a woman who is widowed in Australia and has 104 weeks continuous residence immediately prior to the claim may be eligible if her deceased partner was also an Australian resident. 132

135 17.2. Age pension entitlements Centrelink applies means testing procedures to determine a person s age pension entitlement. Both an income test and an assets test are applied. The age pension entitlement of a person is then taken to be the lower of the pension entitlements determined using each of the two means tests. No means testing is applied to pensioners who are blind. The maximum rates of age pension that single pensioners and pensioner couples may receive are outlined in the following table. Pension reform and transitional arrangements Transitional arrangements have been introduced following pension changes on 20 September The transitional arrangements ensure that anyone receiving a pension prior to this date will not be worse off. For more information, please refer to FirstTech Strategic Update 58. Maximum age pension entitlements From 20 March 2011* 20 September 2011 Family situation Post Transitional pf Single pensioners $ $ Pensioner couples (per person) $ $ Illness separated couples (per person) $ $ * These rates are current as at 20 March 2011 and are adjusted twice a year on 20 March and 20 September. For current thresholds, refer to Pension Supplement A Pension Supplement is added to the regular fortnightly payment made to recipients of Age Pension, Carer Payment, Wife Pension, Widow B Pension, Bereavement Allowance, Disability Support Pension (except if aged under 21 without children) and to certain other income support payment recipients if the person has reached age pension age. The maximum Pension Supplement combines the value of Telephone Allowance, Utilities Allowance, the GST Supplement and Pharmaceutical Allowance and an additional amount into a single payment. The maximum Pension Supplement is currently $57.70 a fortnight for singles and $87.00 a fortnight for couples, combined. The minimum Pension Supplement is an amount below which the Pension Supplement does not fall until income or assets reach a level that would otherwise reduce a total pension including Pension Supplement to nil. The minimum amount is currently $31.00 a fortnight for singles and $46.80 for couples combined Income test for age pension The income test is used to reduce the amount of age pension that a person is entitled to receive where their assessable income for income test purposes exceeds a certain threshold. The age pension entitlement will gradually reduce to nil on a sliding scale based on the amount by which the person s assessable income exceeds the threshold. For current income test thresholds, refer to 133

136 17.4. What counts towards the income test? The following chart provides a guide to what counts towards the social security income test for pensions. Financial investments Deemed income taken into account for income test purposes (see deeming rules) W Short-term asset tested income streams (eg five years or less). W Cash. W Bank, building society and credit union accounts. W Cheque accounts. W Term deposits. W Loans and debentures. W Government bonds. W Friendly society bonds. W Listed shares and unlisted shares in public companies. W Insurance bonds. W Managed investments. W Assets in super and rollover funds held by anyone of pension age. W Gold, silver and platinum bullion. W Deprived assets (gifting rules). Assets with special rules Other assets Other income Generally taken into account for income test purposes W Income streams other than short-term asset tested income streams. Income from: W Rental properties. W Farms. W Private companies. W Private trusts. W Businesses and partnerships. Plus items listed in column four. Generally disregarded for the income test unless actual income is derived W Principal home. W Home contents. W Holiday home. W Cars. W Boats. W Caravans. W Antiques. W Stamp collections. W Assets in super and rollover funds held by anyone under pension age. W Standard life insurance (ie whole of life and endowment policies). W Funeral bonds (up to $11,000 for a single bond). W Jewellery. W Accommodation bond paid to an aged care facility. W FHSAs. W Gifts within allowable limits. Taken into account for income test purposes W Any money, profits or valuable consideration earned, derived or received. W Salary, wages, allowances. W Fees, royalties. W Periodic compensation payments. W Foreign pensions. W Salary sacrifice super contributions. W ETPs assessed under income maintenance rules for DSP. W Leave payments Deeming Deeming provisions are applied for income test purposes. Deeming assumes a certain amount of income on financial investments. The amount of assumed income is then counted for income test purposes regardless of the actual income earned on the investments. The rates used to calculate the amount of assumed income for income test purposes are outlined in the following table in section

137 17.6. Deeming rates from 1 July 2011 Financial assets of single pensioner First $44,600 3% Excess over $44, % Financial assets of pensioner couple First $74,400 3% Excess over $74, % Financial assets of an allowee couple First $37,200 (each) 3% Excess over $37,200 (each) 4.5% Deeming rate* Deeming rate* Deeming rate* * The rates and thresholds are current as at 1 July 2011 and are subject to review by the Commonwealth Department of Family and Community Services and are varied from time to time. For current thresholds, refer to Member of a couple A person is a member of a couple if they are living with another person as their partner, whether they are married or in a same-sex or de facto relationship. Irrespective of whether one or both are applying for a payment, the couple income and assets test is applied. Where there is a pensioner/allowee couple, 50% of the joint income is applied to each member of a couple, regardless of who earns the income. For an allowee couple, the personal income of each allowee only affects the partner s payment when it is in excess of the allowee income cut-off limit Assets test The assets test is used to reduce the amount of age pension that a person is entitled to receive where the value of their assets counted for assets test purposes (generally all assets other than the principal home) exceeds a certain threshold. A person s age pension entitlement will reduce to nil on a sliding scale based on the amount by which the person s assessable assets exceed the threshold. To determine the actual rate of pension payable, the full pension rate is reduced by $1.50 per fortnight (taper rate) for each $1,000 by which assets counted for assets test purposes exceed the relevant full pension threshold shown in the following table. For current assets test thresholds, refer to 135

138 17.8. What counts towards the assets test? The following chart provides a guide to what counts towards the social security assets test for pensioners. Assets are generally assessed at market value. Financial investments Assets with special rules Other assets W Short-term asset tested income streams (eg five years or less) W Cash W Bank, building society and credit union accounts W Cheque accounts W Term deposits W Loans and debentures W Government bonds W Friendly society bonds W Listed shares and unlisted shares in public companies W Insurance bonds W Managed investments W Assets in super held by anyone of pension age W Gold, silver and platinum bullion W Deprived assets (gifting rules) Generally taken into account for assets test purposes W Account balance of income streams other than shortterm asset tested income streams W Rental properties W Farms W Private companies W Private trusts W Businesses and partnerships W Home contents W Holiday home W Cars W Boats W Caravans W Antiques W Stamp collections W Jewellery W Standard life insurance (ie whole of life and endowment policies) Generally disregarded for the assets test W Principal home W Assets in super held by anyone under pension age W Funeral bonds (up to $11,000 for a single bond) W Accomodation bond paid to an aged care facility W FHSA W Retirement village entry contribution above the extra allowable amount W Gifts within allowable limits Gifting Gifts beyond allowable limits are considered deprived assets which are asset tested for five years and are subject to the deeming rules. Two tests apply when gifting assets, that is: clients may gift up to $10,000 per financial year, and subject to a limit of $30,000 over a rolling five-year period. The extent to which Centrelink will treat a gift as a deprived asset depends on the value of financial gifts made in any one financial year (rule 1) plus the value of any financial gifts made in the previous four financial years (rule 2). To prevent double counting, the rules then make an adjustment for financial gifts that are already being treated as a deprived asset. For example, if a client gifted $10,000 a year for the next three years (1 July 2011 to 30 June 2014), they would be unable to gift anything for the two years after 1 July 2014 without deprivation occurring. This is because they will have reached their gifting limit under rule

139 Super, income streams and social security Means testing of super accumulation phase Under age pension age Assets held in the accumulation phase of super are disregarded by the social security income and assets tests until age pension age (see sections 17.1 and for age for Centrelink and DVA service pension ages). Lump sums withdrawn from super are not income tested. However, the income and assets tests may apply where the funds are subsequently invested (eg term deposits or shares). Age pension age and over Once an individual reaches age pension or service pension age, investments in super funds, approved deposit funds, deferred annuities and RSAs are treated as financial investments for means testing purposes. Therefore, super assets are then subject to deeming rules (see section 17.6) for income test purposes, and the market value is assessed for the assets test. Some exceptions to this rule apply. Exemptions from means testing may be requested through a Centrelink Financial Information Services Officer if the member cannot meet a condition of release from their super accumulation fund. Social security general assessment of salary sacrifice income From 1 July 2009, Centrelink clients who salary sacrifice wages into super are not entitled to a reduction to their Centrelink assessed income. This includes couples where one member is age pension age and the other is under age pension age and salary sacrificing or are applying for the low income health care card. This change in policy is noted in the Guide to Social Security Law : For employees under age pension age, amounts of salary voluntarily sacrificed into superannuation are, until 1 July 2009, NOT income for social security purposes. As a consequence, all employer contributions to superannuation on behalf of an employee under age pension age are NOT assessed as income before 1 July From 1 July 2009, salary voluntarily sacrificed into superannuation by those under age pension age will be assessable as income. For employees of age pension age, an amount of salary voluntarily sacrificed into superannuation IS income for social security purposes. If a person is over age pension age, any contributions made to a superannuation fund after the date of grant add to the balance in the fund as they are made and thus increase the value of the investment that is subject to deeming. For self-employed people, an amount of salary voluntarily sacrificed into superannuation IS income. The amount of salary sacrificed into superannuation is treated as if it was business profits or a wage paid directly to them. Source: Section Guide to Social Security Law, Means testing of retirement income streams The social security treatment of retirement income streams is based on a three category framework below. Retirement income streams are classified into one of three separate categories for means testing purposes: Assets test exempt (includes 100% and 50% assets test exempt income streams). Asset tested (long-term). Asset tested (short-term). 137

140 These are then assessed according to the rules that apply to the relevant category. All products providing similar features or benefits are treated in a consistent manner, irrespective of the name of the product used (ie annuity or pension ) or whether it is sourced from super or ordinary money. 138

141 Social security categories of retirement income streams Category Characteristics Product types Assets test exempt (commenced prior to 20 September 2007) This category includes income streams payable for the lifetime of one or more persons or for a fixed term based around life expectancy. Lifetime income streams in this category must meet all the requirements listed below: W Income payments must be made at least annually throughout the life of the beneficiary. W Cannot be commuted except in limited circumstances. W Cannot have a RCV. W The purchase price of purchased pensions must be wholly converted to income payments. W Payments must be fixed at the start (limited indexation is allowed each year maximum of 5% or CPI plus 1%). W Income payments cannot decrease, except after an allowable commutation. W Cannot be transferred to another person except on death to a reversionary beneficiary, or in some cases to the estate. W Cannot be used as security for borrowing. W Lifetime annuities and pensions may have a guaranteed minimum payment term of either the life expectancy of the beneficiary at commencement or 20 years (whichever is the lesser). Defined benefit pensions special rules currently place most of these income streams in this category. Life expectancy pensions must meet the first eight points above, but rather than being paid over a lifetime they are required to be paid for a specified term. Term allocated pensions must meet the requirements set out in section W Lifetime pensions and annuities purchased prior to 20 September W Life expectancy pensions and annuities purchased prior to 20 September W Term allocated pensions purchased prior to 20 September W Defined benefit pensions that are commenced at any time (20 September 2007 date does not apply). W Income streams the Secretary has determined in writing meet the requirements. The above products which meet the conditions in the column to the left will be assets test exempt. Assets test exempt pensions or annuities purchased prior to 20 September 2004 receive 100% assets test exemption. Assets test exempt pensions or annuities purchased on or after 20 September 2004 and prior to 20 September 2007 receive 50% assets test exemption. 139

142 Category Characteristics Product types Asset tested (long-term) Asset tested (short-term) Income streams that are not assets test exempt income streams, which have: W a term of more than five years, or W where the life expectancy of the recipient is five years or less at commencement of the income stream, the term is greater than or equal to life expectancy. All income streams which are not classified as assets test exempt or asset tested (long term). These income streams generally have fixed terms of five years or less. W All lifetime, life expectancy and term allocated pensions and annuities purchased on or after 20 September 2007 or which do not meet all the conditions for assets test exempt income streams. W All allocated annuities and pensions. W Account-based pensions and annuities purchased on or after 20 September W Non-account-based pensions and annuities commenced on or after 20 September Short-term annuities and pensions, with or without an RCV, with a fixed term of five years or less Defined benefit income streams for social security Defined benefit income streams are not purchased income streams. Most defined benefit income streams are assets test exempt if they meet the standards (below) of a complying assets test exempt income stream. If a defined benefit income stream does not meet these standards (eg they are commutable) then they are 100% asset tested. Refer to section for an explanation of assessable asset value. An income stream is a defined benefit income stream for social security purposes if: it is a pension under the Superannuation Industry (Supervision) Regulations 1994 (SIS regs), and in the case of an income stream arising under a super fund established on or after 20 September 1998 the income stream is a lifetime pension, and in the case of an income stream arising under a super fund established before 20 September 1998 the income stream is provided under rules that meet the standards determined, by legislative instrument, by the Minister, and in any case the income stream is attributable to a defined benefit interest. Defined benefit interest A super interest is a defined benefit interest if it is: an interest in an unfunded public sector super scheme that has at least one defined benefit member, or an interest that entitles the member who holds the interest, when benefits in respect of the interest become payable, to be paid a benefit defined, wholly or in part, by reference to one or more of the following: the amount of the member s salary at the date of the termination of the member s employment, the date of the member s retirement, or another date the amount of the member s salary averaged over a period 140

143 the amount of the salary, or allowance in the nature of salary, payable to another person (for example, a judicial officer, a member of the Commonwealth or a State parliament, a member of the Legislative Assembly of a Territory), or specified conversion factors. However, a super interest is not a defined benefit interest if the only benefits defined by reference to any of the amounts or factors mentioned above are benefits payable on death or invalidity Income testing of retirement income streams Generally, gross pension income less a social security deductible amount is assessed for the income test. Income test treatment of purchased income streams Category Income test Assets test exempt Annual payment eg pre 20 September 2007 lifetime, pre 20 September 2007 life expectancy or pre 20 September 2007 term allocated pensions Asset tested (long-term) eg allocated pensions, post 20 September 2007 lifetime, post 20 September 2007 life expectancy or post 20 September 2007 term allocated pensions Asset tested (short-term) Purchase price Relevant number Annual payment Purchase price Com RCV Relevant number Deemed Annual payment = the amount payable to the person for the financial year under the income stream. Com = commuted amounts. RCV = residual capital value. Relevant number = the life expectancy of the beneficiary at commencement for income streams based on life expectancy (eg lifetime, life expectancy and allocated income streams), or the term of the income stream for fixed term income streams (eg term allocated pension). Note: Details of each formula above are discussed in the following sections. If a reversionary beneficiary s life expectancy is longer then it is used to calculate the deductible amount. Allocated income stream reporting to Centrelink For Centrelink reporting purposes the gross annual nominated payment of an allocated income stream is equal to the sum of actual payments received, plus payments to be received, in the financial year grossed up to reflect an annual amount, ie an amount which reflects what the client would have received for a full financial year had their payments not been pro-rated. Gross annual nominated payment calculation Sum of all payments already received and to be received during the financial year x Number of days in financial year Number of days from commencement until 30 June 141

144 Income testing of assets test exempt income streams The amount of annual income counted for income test purposes is calculated as shown in the previous table. This formula is used regardless of whether the source of funds is super or ordinary money. In the unlikely event of a commutation, an adjustment to the purchase price must be made as in the formula for an asset tested (long-term) income stream. Income testing of asset tested (long-term) income streams The amount of annual income counted for income test purposes is calculated as shown in the previous table. This formula is used regardless of whether the source of funds is super or ordinary money. The non-assessable amount includes an adjustment not only for commuted amounts but also for any RCV. This is in contrast to the formula for assets test exempt income streams where an RCV is not permitted and commutation is very restricted. Income testing of asset tested (short-term) income streams Deeming rules are used to calculate the amount of assessable income counted for income test purposes for all asset tested (short-term) income streams. Individuals are deemed to earn a specified rate of return on the value of these investments, regardless of the actual income earned. The relevant deeming rates are applied to the assessable asset value of the income stream as determined under the assets test. Further information regarding deeming rates and thresholds can be found in section Income testing of defined benefit income streams Income test for social security defined benefit income streams The income from a social security defined benefit income stream that is assessable for the income test is: Assessable income for income test = annual income deductible amount where: annual income means the amount payable to the person for the year from the income stream. Deductible amount for social security defined benefit income streams The deductible amount of a defined benefit income stream has three possible definitions: 1. Prior to 1 July 2007 The deductible amount in relation to an income stream acquired prior to 1 July 2007 is the tax deductible amount of the income stream under subsection 27H(2) of ITAA Deductible amount = Undeducted purchase price Relevant term or life expectancy In many cases, defined benefit income streams did not have a deductible amount, as the pension was not a purchased pension. Defined benefit income streams acquired prior to 1 July 2007 will retain the original deductible amount for social security purposes unless: 142

145 the income stream is partially commuted on or after 1 July 2007 the new deductible amount will be used irrespective of whether it is lower than the deductible amount prior to the commutation the primary beneficiary dies and the income stream reverts to a reversionary beneficiary on or after 1 July 2007 the new deductible amount will be used irrespective of whether it is lower than the deductible amount prior to reversion the person is age 60 on 1 July 2007 or turns age 60 after 1 July 2007 called the trigger day for social security purposes. Transitional rules will apply from the trigger day. 2. On or after 1 July 2007 The social security deductible amount for defined benefit income streams acquired from 1 July 2007 is the sum of the amounts that are the tax-free components of the payments received from the defined benefit income stream during the year. The tax-free proportion of a pension is fixed at commencement. This means that, in most cases, if pension payments are indexed, the deductible amount will increase in the same proportion as any increase in the pension payments. 3. Transitional deductible amount The transitional rules apply where: a person has received at least one payment from a defined benefit income stream before 1 July 2007, and is still receiving payments from the income stream on or after 1 July 2007 the person receives an income support payment for a continuous period starting before, and ending on or after, the later of the person s 60th birthday or 1 July 2007 (the trigger day) the amount of the income support payment received before the person s trigger day was affected by the social security deductible amount of the income stream, and if the person s trigger day is after 1 July 2007, the income stream has not been partially commuted on or after 1 July 2007 and before the person s trigger day. From the trigger day onward, the deductible amount of a defined benefit income steam is the greater of the following amounts: The original deductible amount. The sum of the amounts that are the tax-free components worked out under the transitional proportioning rules. Where the payments from a defined benefit income stream are indexed periodically, and the original deductible amount is greater than the sum of the tax-free components on the trigger day, the current deductible amount will be retained until the sum of the tax-free components exceeds the original deductible amount. However, at the point in time that the tax-free components exceed the original deductible amount, the deductible amount will remain as the sum of the tax-free amounts. 143

146 How do commutations affect the social security deductible amount? Since 1 July 2007, individuals have more flexibility in the amount of pension income that may be withdrawn from an income stream. Generally, there will be no maximum annual income that must be drawn down from account-based income streams (except pre-retirement income streams). An individual will need to decide whether they wish one-off withdrawals to be treated as irregular pension income or a lump sum commutation. For more information, please refer to FirstTech Strategic Update 66 January/February Where individuals wish to make a withdrawal they will need to notify Centrelink if the withdrawal is in the nature of a commutation or an income payment. The relevant number does not change on commutation. Tip! Centrelink/DVA must be notified of the type of withdrawal within 14 days. The social security deductible amount is recalculated upon partial commutation of an income stream. The original relevant number continues to be used for the recalculation of the deductible amount Asset testing of retirement income streams Type of income stream Time of commencement Defined benefit interest Any time 100%* Complying income stream purchased Prior to 20 September % Complying income stream purchased On or after 20 September 2004 and before 20 September 2007 Complying income stream purchased On or after 20 September % Social security assets test exemption * As defined under reg 1.03AA, generally interests in unfunded public super schemes and interests in salaryrelated defined benefit plans. Defined benefit interests are not purchased income streams. Their 100% assets test exempt status has continued since 20 September Refer to section for an explanation of asset tested defined benefit income streams. All income streams commenced from 20 September 2007 will be fully assessable under the social security assets test. Complying income streams commenced before 20 September 2004 will continue to be 100% assets test exempt. Complying income streams commenced between 20 September 2004 and 19 September 2007 will continue to be 50% assets test exempt. Income streams with a full or partial assets test exemption that are voluntarily rolled over after 20 September 2007 will become fully asset tested. The income test assessment of account-based and purchased income streams with the amount of the income payment less a deductible amount based on purchase price (less commutations) and relevant number continues unchanged. 50% 144

147 The assets test treatment of retirement income streams is outlined below: Income stream category Assets test value Assets test exempt Purchased prior to 20 September 2004 or defined benefit pension TAPs purchased 20 September 2004 to 19 September 2007 Life expectancy and lifetime income streams purchased 20 September 2004 to 19 September % exempt (zero value counted) 50% exempt (50% value counted) 50% x [(PP Com) ((PP Com RCV) x TE/RN)] Asset tested (long-term) Account-based income streams Account balance 100% RCV PP Com <100% RCV [(PP Com) ((PP Com RCV) x TE/RN)] Asset tested (short-term) 100% RCV PP Com <100% RCV (PP Com) [((PP Com RCV)x x TE/RN)] Note: Details of each formula are discussed in the following sections. PP = purchase price RN = relevant number Com = commuted amounts TE = term elapsed RCV = residual capital value Exempt income streams Assets test exempt income streams commenced before 20 September 2004 are 100% exempt from the assets test applied by Centrelink and the Department of Veterans Affairs (DVA). This exemption will continue past 20 September 2007 if there are no commutations or rollovers. Purchased complying lifetime, life expectancy and term allocated income streams from 20 September 2004 up to and including 19 September 2007 are generally only 50% assets test exempt. It is important to remember that the post 20 September 2004 rules apply only to income streams that are purchased. A purchased pension has an identifiable account balance, eg a TAP. A non-purchased pension does not have an identifiable account balance, eg public sector super defined benefit schemes. These pensions remain 100% assets test exempt and are 100% assets test exempt regardless of the date of commencement Assets test for asset tested (long-term) income streams Under the assets test, any holder of an income stream who has an account balance (such as an allocated pension or allocated annuity) will have their remaining account balance assessed for assets test purposes. 145

148 Assets test for asset tested (short-term) income streams The method of calculation is the same as for lifetime and guaranteed term income streams in the asset tested (long-term) category above Assets test for defined benefit income streams If the pension payable from the fund meets the conditions for assets test exempt income streams, there will be no asset value for the assets test. The assessable asset value used for the assets test treatment of defined benefit income streams that are not assets test exempt income streams is calculated as: Annual payment x pension valuation factor #. # Factors as set out in schedule 1B, SIS Regulations. If a defined benefit income stream was assets test exempt before 20 September 2007, this exemption status will remain after 20 September Retaining 100% assets test exemption The following income streams receive 100% assets test exemption: Income stream Date of commencement Assets test exempt lifetime income stream Prior to 20 September 2004 (exception: defined benefit income streams may commence at any time) Assets test exempt life expectancy income stream Prior to 20 September 2004 Caution! If a 100% assets test exempt income stream was acquired before 20 September 2004 and the primary beneficiary dies on or after 20 September 2004, the 100% assets test exemption will only continue to a reversionary beneficiary if the remaining term of the original pension (in years) at the time of death is equal to the life expectancy (in years) of the reversionary beneficiary. Commutation and rollover Only in limited circumstances will 100% assets test exemption continue upon commutation or rollover. Upon commutation or rollover, the resulting new income stream will continue to receive a 100% assets test exemption only if: all the primary conditions are met, and one of the additional sets of conditions is met. 146

149 Primary conditions for retaining 100% assets test exemption: the original income stream is a lifetime or life expectancy assets test exempt income stream, and the original income stream was purchased prior to 20 September 2004, and the original income stream is commuted, in part or in full, to purchase a new lifetime or life expectancy assets test exempt income stream on or after 20 September 2004, and at least one of the additional sets of conditions is met. Additional sets of conditions for retaining 100% assets test exemption In addition to the primary conditions, one of the following sets of conditions must also be met to retain 100% assets test exemption upon a commutation and rollover: 1 Commutation resulted from reversionary beneficiary pre-deceasing primary beneficiary Where: the original income stream was reversionary (ie income stream payments were calculated on the basis of the life expectancy of the reversionary beneficiary), and the reversionary beneficiary died before the primary beneficiary. The new income stream will continue to be 100% assets test exempt. Note: This exemption is only allowed once. 2 Commutation resulted from divorce or separation of primary and reversionary beneficiaries Where: the original income stream was reversionary (ie income stream payments were calculated on the basis of the life expectancy of the reversionary beneficiary), and the reversionary beneficiary and primary beneficiary were members of a couple (as defined in the Social Security Act 1991) together at the commencement of the pension, and the primary beneficiary and reversionary beneficiary are no longer members of a couple together. The new income stream will continue to be 100% assets test exempt. Note 1: This exemption is only allowed once. Note 2: For income streams affected by payment splitting following marriage breakdown by the Family Court or a super agreement, please refer to number 6 in this section. 3 Commutation resulted from defined benefit pension without actuarial certificate Where: the original income stream was a defined benefit pension (as defined in the Social Security Act 1991; please see section 17.12), and the original income stream was provided by a regulated super fund, and the Secretary of the Department of Families, Community Services and Indigenous Affairs was not satisfied that there was a current actuarial certificate in force, stating that in the actuary s opinion there was a high probability that the fund was able to pay the original income stream. The new income stream will continue to be 100% assets test exempt. Note: This exemption is only allowed once. 147

150 4 Commutation resulted from immediate annuity failing to meet requirements Where: the original income stream was an immediate annuity, and the Secretary of the Department of Families, Community Services and Indigenous Affairs was not satisfied that there was a current actuarial certificate in force, stating that in the actuary s opinion there was a high probability that the fund was able to pay the original income stream, or the original income stream failed to satisfy relevant standards published by APRA about minimum surrender values and paid up values. The new income stream will continue to be 100% assets test exempt. Note: This exemption is only allowed once. 5 Commutation resulted from transfer to successor fund Where: the original income stream was transferred on or after 20 September 2004 to a successor fund, and the original income stream was provided by a regulated super fund. The new income stream will continue to be 100% assets test exempt. 6 Commutation resulted from a payment split Where: the original income stream was commuted to pay an amount to the spouse or former spouse of the primary beneficiary under a payment split under Part VIIIB of the Family Law Act The new income stream will continue to be 100% assets test exempt. 7 Commutation resulted from Family Court order or injunction Where: the original income stream was commuted to pay an amount under an order or injunction under the Family Law Act 1975 that relates specifically to the original income stream. The new income stream will continue to be 100% assets test exempt. 8 Commutation resulted from payment of super contributions surcharge debt Where: the original income stream was commuted to pay a super contributions surcharge debt. The new income stream will continue to be 100% assets test exempt. 9 Commutation resulted from payment of hardship amount Where: the original income stream was commuted to pay a hardship amount. The new income stream will continue to be 100% assets test exempt. 10 Commutation resulted from closure of SMSF Where: the original income stream was provided by a SMSF, and the commutation resulted from the closure of the SMSF, and the closure of the SMSF was due to: 148

151 the death of the primary beneficiary of the original income stream, or the administrative responsibilities of the SMSF were too onerous due to the age or incapacity of a trustee. The new income stream will continue to be 100% assets test exempt. 11 Commutation resulted from compulsory cashing Where: the commutation resulted from the compulsory cashing of the original income stream upon the death of the primary beneficiary, and the death benefit is paid in the form of an income stream to a dependant of the deceased (subject to restrictions for children over age 18), and the new income stream is purchased on or after 1 July 2007 and before 20 September The new income stream will continue to be 100% assets test exempt Retaining 50% assets test exemption The following income streams receive 50% assets test exemption: Income stream Assets test exempt lifetime income stream Assets test exempt life expectancy income stream Assets test exempt allocated income stream Date of commencement On or after 20 September 2004 and before 20 September 2007 (exception: defined benefit income streams may commence at any time) On or after 20 September 2004 and before 20 September 2007 On or after 20 September 2004 and before 20 September 2007 Commutation and rollover 50% assets test exemption will continue for the life of a pension unless it is commuted or rolled over. Only in limited circumstances will the 50% assets test exemption continue upon commutation or rollover. Upon commutation or rollover of a 50% assets test exempt income stream, the resulting new income stream will continue to receive a 50% assets test exemption only if: all the primary conditions are met, and one of the additional sets of conditions is met. Primary conditions for retaining 50% assets test exemption To retain 50% assets test exemption, the original income stream must be: a lifetime, life expectancy or term allocated assets test exempt income stream, and purchased from 20 September 2004 and before 20 September 2007, and commuted, in part or in full, to purchase a new income stream on or after 20 September 2007, and meet one of the additional sets of conditions. 149

152 Additional sets of conditions for retaining 50% assets test exemption In addition to the primary conditions, one of the following sets of conditions must also be met: 1 Commutation resulted from reversionary beneficiary pre-deceasing primary beneficiary Where: the original income stream was reversionary (ie income stream payments were calculated on the basis of the life expectancy of the reversionary beneficiary), and the reversionary beneficiary died before the primary beneficiary. The new income stream will continue to be 50% assets test exempt. Note: This exemption is only allowed once. 2 Commutation resulted from divorce or separation of primary and reversionary beneficiaries Where: the original income stream was reversionary (ie income stream payments were calculated on the basis of the life expectancy of the reversionary beneficiary), and the reversionary beneficiary and primary beneficiary were members of a couple (as defined in the Social Security Act 1991) together at the commencement of the pension, and the primary beneficiary and reversionary beneficiary are no longer members of a couple together. The new income stream will continue to be 50% assets test exempt. Note 1: This exemption is only allowed once. Note 2: For income streams affected by payment splitting following marriage breakdown by the Family Court or a super agreement, please refer to number 6 on the following page. 3 Commutation resulted from defined benefit pension without actuarial certificate Where: the original income stream was a defined benefit pension (as defined in the Social Security Act 1991; please see section 17.12), and the original income stream was provided by a regulated super fund, and the Secretary of the Department of Families, Community Services and Indigenous Affairs was not satisfied that there was a current actuarial certificate in force, stating that in the actuary s opinion there was a high probability that the fund was able to pay the original income stream. The new income stream will continue to be 50% assets test exempt. Note: This exemption is only allowed once. 4 Commutation resulted from immediate annuity failing to meet requirements Where: the original income stream was an immediate annuity, and the Secretary of the Department of Families, Community Services and Indigenous Affairs was not satisfied that there was a current actuarial certificate in force, stating that in the actuary s opinion there was a high probability that the fund was able to pay the original income stream, or 150

153 the original income stream failed to satisfy relevant standards published by APRA about minimum surrender values and paid up values. The new income stream will continue to be 50% assets test exempt. Note: This exemption is only allowed once. 5 Commutation resulted from transfer to successor fund Where: the original income stream was transferred on or after 20 September 2004 to a successor fund, and the original income stream was provided by a regulated super fund. The new income stream will continue to be 50% assets test exempt. 6 Commutation resulted from a payment split Where: the original income stream was commuted to pay an amount to the spouse or former spouse of the primary beneficiary under a payment split under Part VIIIB of the Family Law Act The new income stream will continue to be 50% assets test exempt. 7 Commutation resulted from Family Court order or injunction Where: the original income stream was commuted to pay an amount under an order or injunction under the Family Law Act 1975 that relates specifically to the original income stream. The new income stream will continue to be 50% assets test exempt. 8 Commutation resulted from payment of super contributions surcharge debt Where: the original income stream was commuted to pay a super contributions surcharge debt. The new income stream will continue to be 50% assets test exempt. 9 Commutation resulted from payment of hardship amount Where: the original income stream was commuted to pay a hardship amount. The new income stream will continue to be 50% assets test exempt. 10 Commutation resulted from closure of SMSF Where: the original income stream was provided by a SMSF, and the commutation resulted from the closure of the SMSF, and the closure of the SMSF was due to: the death of the primary beneficiary of the original income stream, or the administrative responsibilities of the SMSF were too onerous due to the age or incapacity of a trustee. The new income stream will continue to be 50% assets test exempt. 151

154 11 Commutation resulted from compulsory cashing Where: the commutation resulted from the compulsory cashing of the original income stream upon the death of the primary beneficiary, and the death benefit is paid in the form of an income stream to a dependant of the deceased (subject to restrictions for children over age 18), and the new income stream was purchased on or after 1 July 2007 and before 20 September The new income stream will continue to be 50% assets test exempt. 12 Commutation of term allocated income stream Where: A term allocated income stream is commuted to purchase another term allocated income stream. The new term allocated income stream will continue to be 50% assets test exempt. Permanent extension of Centrelink debt relief measures for 100% assets test exempt income streams within SMSFs Under normal social security rules, where a 100% assets test exempt (ATE) defined benefit pension paid by a SMSF fails an annual high probability test, it is then treated as if it had never been an ATE income stream. This can lead to a substantial debt being raised against a client by Centrelink. To provide relief during the global financial crisis, the Government announced that for 2008/09 and 2009/10, a 100% ATE pension that fails the high probability test will become fully asset tested, but any social security debt as a result of failing this test will be waived. Further relief was provided for SMSFs from 27 November 2009, which allows any social security debt created to also be waived where: the client s SMSF is paying a 100% ATE pension, and the client provides an actuarial certificate confirming that the income stream does not satisfy the high probability test, and the client rolls over their pension in full (including any reserves) into a term allocated pension within the SMSF. This new term allocated pension will be fully asset tested. The Government has now made the above debt relief a permanent measure. Similar measures also apply for members of Small APRA Funds (SAFs). This permanent debt relief does not apply to members of large super funds or SMSF pension members who roll their benefit over to a large super fund to commence a term allocated pension Aged care All income streams commenced from 20 September 2007 onwards are fully assessable under the aged care assets test. Complying income streams commenced before this date will continue to be 100% exempt, including for those individuals who have yet to enter an aged care facility. For more information on aged care, refer to the FirstTech residential aged care booklet or the FirstTech aged care quick reference guide available on FirstNet Adviser at 152

155 Department of Veterans Affairs (DVA) service pensions A service pension is payable to eligible veterans, their partners, and widows and widowers. A person cannot receive a service pension from DVA as well as an age pension or any other social security pension or benefit (except Family Tax Benefit) from the Family Assistance Office. For service pension purposes, a veteran is a person who has qualifying service. Eligible veterans include Australian Veterans, Commonwealth Veterans, and Allied Veterans among others. There are different eligibility requirements to receive a service pension from the DVA, including different ages for the commencement of benefits. Males become eligible to receive a service pension on reaching age 60. Qualifying age for a female depends on their date of birth. The female qualifying age is being raised by six months every 18 months so that by 1 January 2014 female and male qualifying ages will be the same. The table below shows when females qualify. Female veterans with qualifying service service pension age Date of birth Qualify at age 1 January 1951 to 30 June July 1952 to 31 December years 6 months 1 January 1954 and later 60 Salary sacrifice and service pension DVA takes into account any income received in the form of salary sacrifice in assessing income for the purposes of calculating rates of income support pension (including service pension). If a person s cash salary is reduced by sacrificing part of the salary to other benefits, the salary sacrificed would continue to be assessed as income. The sacrificed amounts still satisfy the Veterans Entitlements Act 1986 (VEA) definition of income, being amounts earned, derived or received for the person s own use or benefit. In some instances, such as with super, the sacrificed amounts are deferred and may not be received for several years. Nevertheless, as they are earned and derived from the person s employment, they are assessed as income at the time they are earned. The VEA provides for no specific exclusion from the definition of income for salary sacrifice for those under pension age. 153

156 18. FirstTech flyers The following is a list of flyers available on the FirstTech page of FirstNet Adviser at colonialfirststate.com.au Adviser flyers Government co-contributions Redundancy what you need to know Taxation of overseas super and pension transfers Salary continuance insurance (SCI) comparison Tax treatment of group insurance Adviser service fee deductibility Superannuation end of financial year FAQs RetireSmart education series Pre-retirement pensions Spouse super strategies Adviser guide Client flyer Adviser guides Pocket guide Residential aged care booklet Small business CGT flowchart SMSF acquisition rules flowchart Superannuation contributions a quick reference guide Superannuation benefits a quick reference guide Super thresholds flyer UK pension guide Centrelink and DVA rates and thresholds guide Aged care quick reference guide Superannuation death, disability and terminal illness guide Income test quick reference guide Non-resident clients foreign income quick reference guide SMSF resources SMSF investment rules SMSF acquisition rules In-house asset transitional rules Super borrowing rules update May 2011 SMSF and pensions Defined benefit pension in a SMSF Pension assets test exemption End of financial year tips and traps Technical articles FirstTech Strategic Update Edition 58: Social security income test changes on

157 Glossary of acronyms ADF Approved Deposit Fund APRA Australian Prudential Regulation Authority ATE Asset Test Exempt ATO Australian Taxation Office AWA Australian Workplace Agreement AWOTE Average Weekly Ordinary Time Earnings CGT Capital Gains Tax CPI Consumer Price Index CSS Commonwealth Superannuation Scheme DASP Departing Australia Super Payment DSP Disability Support Pension DTP Directed Termination Payment DVA Department of Veterans Affairs EM Explanatory Memorandum ETP Employment Termination Payment FBT Fringe Benefits Tax FHSA First Home Saver Account IR Industrial Relations ITAA Income Tax Assessment Act LPR Legal Personal Representative MLIS Market-linked Income Streams MTR Marginal Tax Rate NANE Not Assessable and Not Exempt OTE Ordinary Time Earnings PDS Product Disclosure Statement PF Payment Factor PSI Personal Services Income PSSS Public Sector Superannuation Scheme PVF Pension Value Factors QROPS Qualifying Recognised Overseas Pension Scheme RBL Reasonable Benefit Limit RCV Residual Capital Value RESC Reportable Employer Superannuation Contribution RFB Reportable Fringe Benefits RN Relevant Number RNP Restricted Non-preserved RSA Retirement Savings Account RSE Registrable Superannuation Entity SCI Salary Continuance Insurance SCT Superannuation Complaints Tribunal SG Superannuation Guarantee SGAA Superannuation Guarantee Administration Act SGC Superannuation Guarantee Charge SHAR Superannuation Holding Accounts Reserve SHASA Superannuation Holding Accounts Special Account SIS Superannuation Industry (Supervision) Act and/or Regulations SMSF Self Managed Super Fund 155

158 SSA TAP TFN TPD UNP UPP VEA Salary Sacrifice Arrangement Term Allocated Pension Tax File Number Total and Permanent Disablement Unrestricted Non-preserved Undeducted Purchase Price Veterans Entitlements Act 156

159 Contacts for advisers Your feedback on this guide may be sent to: FirstTech FirstNet Adviser colonialfirststate.com.au Colonial First State Adviser Service Centre For client and account information, status of transactions, product features, and to order extra copies of this guide Australian Taxation Office super infoline For super benefits, lost members register, and superannuation guarantee Website Centrelink Employment services Retirement services Website Department of Veterans Affairs General enquiries Website Aged care Information line Website Government Reviews Stronger Super Future of Financial Advice Australia s Future Tax System strongersuper.treasury.gov.au futureofadvice.treasury.gov.au taxreview.treasury.gov.au

160 For adviser use only. Issued on 1 July 2011 by Colonial First State Investments Limited ABN , AFS Licence The subject matter of this guide is not advice and is information only. The information reflects Colonial First State s understanding of the relevant legislation and official government publications as at 1 July 2011, and is based on its continuance for the entire income year unless stated otherwise. While every effort has been made to ensure that the information is accurate and reliable, this is not guaranteed in any way by Commonwealth Bank of Australia, Colonial First State or any subsidiary. The information is for adviser use only and is not a substitute for clients seeking advice. Clients should direct enquiries in respect of their own particular circumstances to their financial adviser or tax accountant before acting on the information contained in this guide /FS2589/0711