A Plan to Simplify and Streamline Superannuation
This chapter describes the current rules and the proposed taxation arrangements when contributions are made to taxed superannuation funds. Different rules would apply to untaxed superannuation schemes. Untaxed superannuation schemes generally only apply to public servants and are discussed in Chapter 8.
Table 4.1: Comparison of taxation on deductible contributions under current system and proposed system
Current contribution rules (as at 1 July 2005) (a)
Contributions below the age-based limits
<35 years $14,603 pa
35 — 49 years $40,560 pa
50 — 69 years $100,587 pa
15% contributions tax
Contributions above the age-based limits
15% contributions tax plus 30% deduction denied
Proposed contribution rules (as at 1 July 2007) (b)
Concessional contributions limited to $50,000 pa
(a) Contributions are deductible up to the age-based limits.
(b) Contributions would be fully deductible. The ATO would identify any contributions made above this limit. These contributions would be taxed at the top marginal tax rate.
Contributions to superannuation are subject to tax in the superannuation fund when made by an individual’s employer, including through salary sacrifice arrangements, or when made by a self-employed individual and certain other persons (if they are eligible to, and claim, an income tax deduction for the contribution). Some other less common contributions to superannuation are also subject to tax (see section 4.6).
Contributions are taxed at a rate of 15 per cent. In addition, if an employer makes a contribution above an individual’s age-based limit, the contribution is still taxed at 15 per cent but the employer is denied a 30 per cent deduction on that contribution.
These amounts may be subject to tax when withdrawn from superannuation.
It is proposed to streamline the rules for deductible contributions. This involves removing the age-based limits on deductible contributions.
Under the proposed arrangements, a limit on concessional deductible contributions of $50,000 per person per annum would apply. These contributions would be taxed at 15 per cent.
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 would be taxed at the top marginal tax rate.
The new threshold would apply per person, irrespective of the number of employers contributing on behalf of the person.
Given the removal of the RBL and tax on benefits, this limit on deductible contributions would play a key role in the fiscal sustainability of the system.
Application to funded defined benefit schemes
In funded defined benefit schemes, contributions are generally not allocated to the account of a specific employee. Rather, employees are entitled to a specified amount upon retirement, usually related to the salary of the employee and the number of years of service.
Where employer funding occurs, these contributions (together with any other deducted contributions) would continue to be treated as deductible contributions and taxed at the concessional 15 per cent rate, except for amounts paid into constitutionally protected funds, which are exempt from tax.
In addition, for the purposes of determining whether the $50,000 cap has been exceeded by members of such schemes, superannuation benefits accruing to an employee during a year in a funded defined benefit scheme, that is notional taxable contributions, would also be added to any other deductible contributions in accumulation schemes for each employee. This would be the subject of consultation with interested parties.
Untaxed defined benefit schemes are discussed in Chapter 8.
Assessments by the ATO would be based on information provided by superannuation funds.
The 15 per cent contributions tax is currently collected by treating taxable contributions as income of a superannuation fund. The tax payable can be reduced by superannuation funds through the application of imputation and other credits. These arrangements would remain unchanged.
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. Superannuation fund reporting requirements would provide the ATO with enough information to assess contributions tax liabilities as funds, except those that are untaxed, would report all taxable contributions (including notional taxable contributions) made for the benefit of an individual.
Where taxable contributions (including notional taxable contributions) for an individual exceed $50,000 per annum and are made to more than one superannuation fund, the most practical fund(s) on which to levy the tax would need to be determined. It is anticipated that there would be few instances where this would be necessary.
Further details on the administrative arrangements would be determined in consultation with the superannuation industry.
4.4.1 Current arrangements
Employers are entitled to a tax deduction for contributions to superannuation made on behalf of employees, up to the age-based deduction limits. For the 2005-06 financial year, the age-based deduction limits are $14,603 for individuals under the age of 35, $40,560 for individuals aged 35 to 49 and $100,587 for individuals aged 50 to 69. This requires employers to monitor the contributions paid to their employees to ensure they are not over the limit.
The treatment of contributions to superannuation by the self-employed (and certain other persons who are also eligible to claim a tax deduction for their contributions) is dealt with in Chapter 5.
Contributions by or for individuals aged 70 or over
Individuals aged 70 to 74 can contribute to superannuation where they meet the work test requirements, but cannot claim a deduction for such contributions. Further, employers can not claim a deduction for superannuation contributions made on behalf of a person over the age of 70, unless these contributions are required under an industrial award.2
Personal deduction eligibility
The rule that determines a person’s eligibility to claim a deduction for personal contributions is complex. It currently involves determining the level of employer superannuation support a person receives (or should receive) during the income year.
4.4.2 Proposed arrangements
It is proposed that age-based deduction limits be abolished. Employers would be able to claim a full deduction for all contributions to superannuation funds made on behalf of their employees under age 75.
The proposed removal of age-based limits would provide scope for employees under age 35 to make larger contributions to superannuation through salary sacrifice arrangements, as their employers would be able to claim a full tax deduction for all contributions. The current age-based limit for individuals less than age 35 is $14,603 per annum, compared to the proposed limit of $50,000 per annum.
Under the plan, contributions made by the self-employed would be treated in the same way as contributions made by employers for the benefit of employees. Superannuation contributions would be eligible for a deduction until age 75. This is dealt with more fully in Chapter 5.
Personal deduction eligibility
It is proposed that the rule that determines a person’s eligibility to claim a deduction for personal contributions be simplified. The test would be changed so that it would 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.
Under current arrangements, the age-based deduction limit for people aged 50 and over is $100,587. The proposal is to introduce a uniform concessional contributions limit of $50,000 to be taxed at the concessional 15 per cent rate. A transitional period for people aged 50 and over is proposed. Table 4.2 sets out the amounts individuals aged 50 and over during the transitional period would be able to continue to contribute to superannuation at the concessional tax rate of 15 per cent. Deductible contributions above this amount would be taxed at the top marginal rate. These transitional arrangements would allow people who are planning to retire in the immediate future to continue to make larger contributions at concessional rates.
Table 4.2: Transitional arrangements
Individuals aged 50 and over
Not all contributions are currently subject to tax in a superannuation fund. Personal undeducted contributions, which are made from an individual’s after-tax income, would remain tax free when contributed to, and withdrawn from, superannuation. Undeducted contributions would also remain eligible for the Government co-contribution.
Once in the fund, the earnings on all contributions are subject to the concessional 15 per cent earnings tax which represents a significant concession designed to encourage and support retirement savings. The removal of benefits tax and RBLs would increase the concessions provided to superannuation.
These proposed changes, in conjunction with the current tax exempt status of superannuation pension assets, would make superannuation an attractive vehicle in which to retain assets to avoid paying tax. There would 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 (three times the proposed concessional contributions limit) on the amount of post-tax superannuation contributions a person can make would apply. In addition, the Government will consider whether the cap should be averaged over three years to allow people to accommodate larger one off payments.
This cap is expected to impact on very few people. If the proposals in this paper are adopted, this restriction would apply from Budget night, 9 May 2006.
4.5.1 Refund of excessive contributions
Contributions in excess of the cap would be returned to the individual. Any earnings on the excess would be effectively taxed at the top marginal tax rate.
The ATO would collect the necessary information on contributions in order to determine when a person has exceeded the annual cap. This would trigger a return of the excessive contributions and earnings.
Rules would be developed to determine which contributions are refunded in the case of multiple contributions and funds.
4.5.3 Exemptions to the cap
Scope would be provided for certain exemptions to the cap, such as the CGT exempt component from the sale of a small business (Subdivision 152-D of the Income Tax Assessment Act 1997).
4.5.4 Defined benefit funds
Special rules may be needed for defined benefit funds and would be developed in consultation with industry.
4.6.1 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 would 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.
4.6.2 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 Chapter 8.
2 SG contributions are not required for employees aged 70 and over.