Australian Government, A Plan to Simplify Superannuation

A Plan to Simplify and Streamline Superannuation

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8. Untaxed schemes

This chapter deals with untaxed superannuation schemes; in particular benefit payments in untaxed schemes that arise from an untaxed source. These schemes generally apply only to public servants. The chapter describes the proposed taxation treatment when an untaxed scheme pays a benefit including a post-June 1983 untaxed element. Untaxed schemes may be hybrid schemes paying benefits including both amounts that arise from an untaxed source and other elements arising from a taxed source. These other elements (for example, a post-June 1983 taxed element) would be taxed in the manner outlined in Chapter 2.

Key Points

  • Lump sum payments arising from an untaxed superannuation source to an individual over the age of 60 would be taxed more concessionally than currently.
  • The proposed taxation treatment for lump sum benefit payments is:
    • For those aged 60 or over — a rate of 15 per cent would apply to the total of all payments up to an upper threshold ($700,000 — approximately the lump sum RBL) and the top marginal tax rate above that amount.
    • For those aged 55 to 59 — a rate of 15 per cent would apply for payments up to a lower threshold (the low-rate ETP threshold, currently at $129,751), 30 per cent above this amount up to the upper threshold ($700,000) and the top marginal tax rate above that amount.
    • For those aged under 55, a rate of 30 per cent would apply up to the upper threshold ($700,000) and the top marginal tax rate above this amount.
  • Pension payments arising from an untaxed superannuation source to an individual over the age of 60 would be taxed at marginal tax rates with a 10 per cent offset. Payments to those below age 60 would be taxed at marginal tax rates without an offset (as is the case currently).

8.1 Current benefit taxation arrangements

In some superannuation schemes run by the Australian Government and the State and Territory governments, no employer contributions are made until a benefit becomes payable and no contributions or earnings tax is paid. Only 10 per cent of all superannuation fund members are members of such schemes and they are nearly all public servants. The majority of such schemes are now closed to new members.

As no contributions or earnings tax is paid there should be a higher level of tax when benefits are paid to fund members. This ensures equity with other superannuation funds where contributions and earnings tax would have been paid. Reflecting this, these types of benefits are already subject to a higher level of tax than other benefits. This distinction would continue.

8.1.1 Lump sums

The lump sum payment of superannuation benefits is classified as an ETP and is divided into various components, each of which is subject to special tax treatment. These components are discussed in detail in Chapter 2. The difference in treatment for untaxed schemes arises with respect to the post-June 1983 component which will have an untaxed element if paid from an untaxed source.

The untaxed element of the post-June 1983 component is taxed at 15 per cent up to the low-rate threshold ($129,751 in 2005-06) and any amount over this threshold is taxed at 30 per cent up to the RBL. If the individual is under age 55, the entire component is taxed at 30 per cent up to the RBL. Amounts above the RBL are taxed as an excessive component. If the scheme is also paying any taxed elements (for example, in hybrid schemes) these would be taxed as outlined in Chapter 2.

Table 8.1: Summary of taxation of post-June 1983 untaxed element

Component

Assessable portion

Rate of tax

Post-June 1983 (untaxed element)

100%

Under age 55 — 30%

Age 55 and over

    Up to threshold ($129,751) — 15%

    Over threshold — 30%

Excessive component

100%

47%

8.1.2 Pensions

Pension payments received by a person from untaxed schemes in each year are included in the person’s assessable income and taxed at marginal rates.

A deduction is allowed for the return of contributions which were made towards the pension from the pensioner’s own after-tax income and certain other amounts. The annual deductible amount is determined by apportioning the undeducted purchase price of the pension over the expected term of the pension. The undeducted purchase price of the pension would normally comprise undeducted contributions made by the member.

Pensions paid from untaxed schemes do not receive the 15 per cent rebate of tax available to pensions paid from taxed schemes.

8.1.3 Reporting

Individuals must report details of ETPs and pensions in their tax return. These amounts are included in their income for tax purposes, potentially increasing the amount of tax they pay on other income.

All benefit payments must be reported to the ATO by the scheme for RBL purposes.

8.2 Proposed arrangements for benefits paid to individuals aged 60 and over

8.2.1 Lump sums

Under the proposed arrangements, the post-June 1983 untaxed element of a benefit paid from an untaxed scheme would be taxed at 15 per cent up to $700,000 (approximately the lump sum RBL) and the top marginal tax rate above that amount.

8.2.2 Pensions

It is proposed that pension payments would continue to be included in assessable income and taxed at marginal rates. However, pension payments (including where the pension commenced before 1 July 2007) would be eligible for a 10 per cent taxation offset — currently they are not eligible for any offset. A deduction would continue to be allowed for the return of contributions which were made towards the pension from the pensioner’s own after-tax income and certain other amounts.

8.2.3 Reporting

Individuals would still be required to include ETPs and pensions in their tax return. Schemes would not need to report benefit payments to the ATO for RBL purposes.

8.3 Proposed arrangements for benefits paid to individuals aged under 60

Currently, if a person aged 55 to 59 years receives a post-June 1983 untaxed benefit, the taxation treatment is exactly the same as for a person aged 60 or over. For a person aged less than 55, higher rates of tax are payable (see table 8.2 below).

8.3.1 Lump sums

Proposed arrangements for those aged under 60

For untaxed post-June 1983 elements paid to those aged 55 to 59, a rate of 15 per cent would apply for payments up to the low-rate ETP threshold (currently $129,751), a rate of 30 per cent above this amount up to $700,000 and the top marginal tax rate above that amount. For those aged under 55, a rate of 30 per cent would apply up to $700,000 and the top marginal tax rate above this amount.

Table 8.2: Comparison of current system to proposed system — post-June 1983 untaxed element

Taxpayers age

Current system

New system

Under 55

30%

Excessive component — 47%

30% up to $700,000

Top MTR above

Age 55-59

Up to threshold($129,751) — 15%

Over threshold — 30%

Excessive — 47%

Up to threshold($129,751) — 15%

Over threshold — 30%

Over $700,000 — Top MTR

Age 60 and over

Up to threshold($129,751) — 15%

Over threshold — 30%

Excessive — 47%

Up to $700,000 — 15%

Over $700,000 — Top MTR

8.3.2 Pensions

Proposed new arrangements for those aged under 60

Pension payments would continue to be included in assessable income and taxed at marginal rates. Unlike payments for those aged 60 and over, they would not be eligible for the proposed 10 per cent pension offset (until the recipient turns age 60).

8.3.3 Reporting

Individuals who receive benefit payments from untaxed schemes would be required to lodge a tax return and report these payments in the return as assessable income (as currently). Schemes would not need to report benefit payments to the ATO for RBL purposes.

8.3.4 Death benefits

Current arrangements

The rules relating to death benefits are the same whether they are paid from a taxed or untaxed superannuation fund (see section 2.4). Where the death benefit is paid to a non-dependant, the applicable tax rates reflect the source of the payment; that is, payments from an untaxed source are taxed at higher rates as they have not been subject to tax in the fund.

When a reversionary pension is paid on death, it is taxed at the recipient’s marginal tax rate less any deductible amount. Payments from untaxed schemes do not qualify for the pension rebate.

Proposed arrangements

Under the proposed arrangements, all lump sum death benefit payments would be tax free if paid to a dependant.

The taxation of death benefit payments as a reversionary pension would depend on the age of the primary and reversionary beneficiary. If the primary beneficiary was aged 60 or over on death, then payments to the reversionary beneficiary would be taxed at marginal tax rates less any deductible amount and less the 10 per cent offset (which would have been the tax treatment applying to the primary beneficiary before death). If the primary beneficiary was under age 60 at death, the pension would continue to be taxed at the reversionary beneficiary’s marginal tax rate (less any deductible amount), unless the reversionary beneficiary is aged 60 or over, in which case the 10 per cent offset would apply.

A pension would not be able to revert to a non-dependant on death; rather, death benefit payments to non-dependants would have to be made as a lump sum. Payments to non-dependants (irrespective of their age) would be taxed in the same manner as other superannuation fund payments to someone under age 55 (see section 8.3.1). That is, the post-June 1983 untaxed element would be taxed at 30 per cent up to $700,000 and the top marginal tax rate above that amount.

8.4 Rollovers to taxed schemes

8.4.1 Current arrangements

Currently, when a rollover is made from an untaxed scheme, any untaxed component is taxed as a taxable contribution in the receiving fund.

8.4.2 Proposed arrangements

It is proposed that the transferring fund would withhold tax at the top marginal tax rate for amounts above $700,000. The first $700,000 of the benefit to be transferred would be treated as a taxable contribution by the receiving fund. The remainder would form part of the exempt component in the receiving fund and not be taxed further. These arrangements recognise the difficulty of applying the concessional deductible tax cap to the entire rollover amount (as outlined in Chapter 4).

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Miscellaneous