Simplified Superannuation - Final Decisions
Simplified contribution rules
Taxation arrangements – deductible contributions (page 26)
The age-based limits on deductible contributions will be abolished. A limit on concessional deductible contributions of $50,000 per person per annum will apply from 1 July 2007. These contributions will be taxed at 15 per cent. The $50,000 threshold will be indexed to AWOTE but will only increase once the increase in the indexed amount is greater than $5,0002. This will make it easier for people to understand how much concessional contributions they can make each year.
Where the ATO identifies that a person’s deductible contributions have exceeded $50,000 in a financial year, the amount in excess of $50,000 will be effectively taxed at the top marginal tax rate plus Medicare levy (an additional 31.5 per cent on top of the original 15 per cent paid by the fund).
The new threshold will apply per person, irrespective of the number of employers contributing on behalf of the person.
The current work test of 40 hours in a 30 day period for contributions made by people aged 65 to 74 will continue.
Application to funded defined benefit schemes
The $50,000 cap will apply to contributions made to a funded defined benefit scheme (except for amounts paid into constitutionally protected funds, which are exempt from tax).
For the purposes of determining whether the $50,000 cap has been exceeded by members of such schemes, the ‘notional taxable contributions’ will be added to any other deductible contributions for each employee. The definition of ‘notional taxable contributions’ will be determined through further consultation.
Given the unique nature of defined benefit schemes, and the difficulty for members to reduce their contributions, a transitional arrangement will apply to members of these schemes. Existing members of defined benefit schemes (as of 5 September 2006) with notional contributions above the concessional contribution cap will be deemed as having contributions made at the maximum level of the cap for the individual. This arrangement will no longer apply if the scheme amends their rules to increase member benefits.
Treatment of late contributions
Some superannuation funds finance their benefits by making large one-off contributions. The trustee of the fund, with the consent of the contributor, can then elect for these contributions not to be taxable. Some funds also allow their members to elect whether their benefits are paid from a taxed or untaxed source. Where taxed benefits are paid, the concessional cap will be applied on the basis of the notional contributions for each year. Members of new schemes will be unable to elect whether their benefits are paid from a taxed or untaxed source.
Administrative arrangements for contributions tax (page 27)
Superannuation funds, except those that are untaxed, will report to the ATO all taxable contributions (including notional taxable contributions) made for the benefit of an individual.
It was proposed that any additional liability for tax on contributions over $50,000 per annum would be determined in respect of an individual but levied on superannuation funds. Following consultation on the plan, the Government has decided that any additional liability for tax will be levied on the individual. The individual will be able to elect for their superannuation fund to release monies to pay the tax. The ATO will be able to reduce the amount of excess contributions subject to tax in the event of inadvertent breaches of the cap.
Age-based limits and deduction rules (page 28)
Employers will be able to claim a full deduction for all contributions to superannuation funds made on behalf of their employees under age 75.
Contributions made by the self-employed will be treated in the same way as contributions made by employers for the benefit of employees. Superannuation contributions will be eligible for a full deduction until age 75.
Personal deduction eligibility
The rule that determines a person’s eligibility to claim a deduction for personal contributions will be simplified. The test will be changed so that it will only determine how much of a person’s assessable income and reportable fringe benefits is attributable to employment as an employee, mirroring the test currently used for determining eligibility for a Government co-contribution.
A person who wishes to claim a tax deduction for a superannuation contribution will need to notify their superannuation fund by the time they lodge their income tax return, or the end of the following financial year after the contribution was made, whichever is earlier. This notification cannot be varied after this time. This will ensure that the ATO will have the relevant information to count the contribution against the relevant cap and to determine eligibility for a co-contribution.
A transitional period will apply which will allow people aged 50 and over to make up to $100,000 of concessional contributions without breaching the cap. This period will apply in the financial years of 2007-08 to 2011-12. A person who turns 50 during that period will be able to take advantage of the transitional arrangements. For example, a person who turns 50 on 1 January 2010 will be able to make $100,000 of concessional contributions in each of the 2009-10, 2010-2011 and 2011-12 financial years. The $100,000 threshold will not be indexed.
From the 2012-13 financial year, the maximum amount of contributions taxed at 15 per cent will revert back to the indexed $50,000 amount.
Undeducted contributions (page 30)
The removal of benefits tax and RBLs will increase the concessions provided to superannuation. These changes, in conjunction with the tax exempt status of superannuation pension assets, will make superannuation an attractive vehicle in which to retain assets to avoid paying tax. There will also be an incentive for high-wealth individuals to transfer large amounts of assets currently held outside superannuation to the concessionally taxed superannuation system.
To ensure the concessions are targeted appropriately, a cap of $150,000 a year (this will remain at three times the level of the cap on concessional contributions and will increase as the concessional cap moves with indexation) on the amount of post-tax superannuation contributions a person can accrue will apply. To accommodate larger contributions, people under age 65 will be allowed to bring forward two years of contributions. For example, a person under age 65 would be able to make $450,000 in the 2007-08 financial year but will then be unable to make further post-tax contributions until the 2010-11 financial year.
From 1 July 2007, once a person turns age 65 they will be able to make $150,000 of post-tax contributions each financial year provided they satisfy the work test. This will ensure that people will not inadvertently breach the cap by not meeting the work test in the future two years. To simplify the operation of the cap, people aged 63 and 64 who contribute $450,000 will not be required to meet the existing work test in the two years after they make the contribution. The current rules prohibiting contributions by people aged 75 and over will remain.
Refund of excessive contributions
It was proposed to require contributions in excess of the cap to be returned to the individual. In addition, any earnings on that amount were to be taxed at the top marginal tax rate. Following consultation, the Government will not proceed with this proposal. Instead, contributions in excess of the cap will be taxed at the top marginal tax rate (plus Medicare levy). The liability for this tax will be levied on the individual who will nominate a superannuation fund to release monies to pay the liability. The balance of the excess contribution will be able to remain in the fund.
To limit inadvertent breaches of the cap, superannuation funds will be prohibited from accepting contributions in excess of maximum allowable post-tax contributions in a year (that is, $450,000 for people aged under 65). The ATO will have the discretion to reduce the amount of excess contributions subject to the tax if genuine inadvertent breaches arise. Individuals who make contributions in excess of the transitional limits outlined below will be able to withdraw these amounts without penalty prior to 1 July 2007.
Currently, superannuation funds report the amount of post-tax contributions to the ATO. The ATO will use this information from the funds to determine if a person has exceeded the annual cap.
Exemptions to the cap
The proposed plan indicated that the Government would consider exemptions to the cap. Contributions above the cap will be allowed in the following circumstances:
- the proceeds from the disposal of assets that qualify for the small business capital gains tax (CGT) exemptions (that is, the 15-year exemption and the $500,000 retirement exemption) up to a lifetime limit of $1 million (indexed). This will also apply to assets that would have qualified if they were not pre-CGT assets or if disposed after the permanent disablement of the owner including where the asset was owned for less than 15 years; and
- the proceeds from a settlement for an injury resulting in permanent disablement.
During the consultation period people requested that transitional arrangements be put in place for situations where a person has intended to make contributions above $450,000. There will be a transitional cap of $1 million for post-tax contributions made between 10 May 2006 and 30 June 2007. This will be available to all individuals eligible to contribute to superannuation in the relevant year and will include any contributions already made during that period. The annual cap on post-tax contributions of $150,000, and the ability to make larger contributions of up to $450,000, will commence on 1 July 2007.
Bert is 55 years old and made post-tax contributions of $150,000 between 10 May 2006 and 30 June 2006 and $450,000 in July 2006. Under the transitional arrangements, Bert can contribute a further $400,000 before 1 July 2007. From 1 July 2007, Bert can contribute $450,000 (and make no further contributions until 1 July 2010), or make annual post-tax contributions of $150,000 per annum.
Angelo is 63 and is planning to sell his family business, which he has operated for more than 15 years, in July 2008. Angelo will be able to contribute $1 million to superannuation from the proceeds of the sale, and a further $450,000 as the maximum post-tax contribution. He will not be permitted to make further post-tax contributions until 1 July 2010.
Angelo’s spouse Anna is 65 years old, has no superannuation and has jointly operated the family business with Angelo for the past 15 years. Anna will be able to contribute $1 million to superannuation from the proceeds of the sale of the business. As Anna is aged 65, Anna must meet a work test each year to contribute to superannuation and can make a maximum post-tax contribution of $150,000 per annum.
Contributions included in the post-tax contributions cap
The cap will generally apply to all post-tax contributions made on behalf of an individual. For example, contributions made directly by a person into their spouse’s account to qualify for the spouse contributions rebate will be counted against the receiving spouse’s cap.
Deductible contributions above the concessional cap will also count towards the post-tax contributions cap. This will ensure people cannot circumvent the post-tax cap by making excessive concessional contributions.
The Government co-contribution will not be included in the cap.
Other taxable contributions (page 31)
Transfers from overseas superannuation funds
Where a superannuation benefit is paid from an overseas fund more than six months after the individual becomes an Australian resident, a tax liability may arise. The tax liability arises in respect of an amount (the taxable amount) which reflects earnings on the overseas superannuation while the individual was an Australian resident.
- Where the benefit is paid directly to the individual, the taxable amount is included in their assessable income and taxed at their marginal tax rate.
- Where the benefit is transferred to an Australian superannuation fund, the member can elect to have the taxable amount instead treated as a taxable contribution in the Australian fund (and therefore subject to the 15 per cent tax on contributions).
It is proposed that where an individual elects for the taxable amount to be treated as a taxable contribution, then the taxable amount will remain taxed at the flat rate of 15 per cent when contributed to superannuation. This is appropriate as the taxable amount represents earnings on overseas superannuation during the relevant period. These earnings would have been taxed at 15 per cent if they had been in the Australian superannuation fund.
Other benefits (that is, the amount of the transfer exceeding the taxable amount mentioned above) will be regarded as post-tax contributions and count against the post-tax contributions cap.
Transfers from untaxed schemes
Transfers of untaxed benefits from an untaxed scheme into a taxed fund are currently subject to contributions tax when paid into the fund. This will generally continue. New withholding arrangements will apply to the transferring fund (the untaxed scheme) when transferring a benefit. These new arrangements are discussed in the untaxed Schemes section of this paper.
2 Indexation will be calculated on the base amount of $50,000. For example, when the amount becomes $55,000, indexation will be calculated on the non- rounded amount.