Australian Government, A Plan to Simplify Superannuation

A Plan to Simplify and Streamline Superannuation

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Appendix B: Examples of how the proposed changes would make superannuation simpler and more streamlined for individuals

Example 1: Jim is 63 years of age and decides to retire with $140,000 in superannuation

Now

Jim is 63 years of age and decides to retire. He has $140,000 in superannuation. Jim can choose to take a lump sum, a pension or a combination of both. Jim thinks about his options and decides to take the $140,000 as a lump sum payment.


This lump sum payment is an ETP. Jim’s superannuation fund determines the pre-July and post-June 1983 components based on his eligible service period. The superannuation fund also determines the amount of undeducted contributions.


Jim receives the post-June 1983 component tax free up to the low-rate threshold ($129,751 for 2005-06) and is taxed at 15 per cent for any amounts above the threshold. Jim needs to include 5 per cent of any pre-July 1983 component in his assessable income to be taxed at his marginal tax rate.


Jim also needs to report the ETP on his tax return and this affects his total income and tax rate.


Finally, Jim’s lump sum payment is assessed against the lump sum RBL and added to any superannuation benefits and employer termination payments which Jim may have already been paid. If the ATO determines there is an excessive component, this must also be included in Jim’s tax return and it would be taxed at 38 per cent plus the Medicare levy.

Proposal

Jim takes his $140,000 in superannuation as a lump sum and pays no tax. He does not need to disclose the ETP on his tax return.


Jim could also choose to leave some of his superannuation money in his account and take a series of lump sum payments. All of these lump sum payments would be tax free.

Example 2: Larry is 67 years of age with $800,000 in superannuation and has ceased work

Now

Larry is 67 years of age, decides to retire and has $800,000 in superannuation. Because Larry is no longer working, he must take his superannuation now.


Larry needs to decide whether to take a lump sum, a pension or a combination of both. Larry thinks about his options and decides to take a lump sum of $200,000 and a life expectancy pension of $600,000.


Larry’s lump sum payment is an ETP and is divided into the various ETP components. Larry has a concessional component and a pre-July 1983 component rolled over from a previous superannuation fund. Larry’s concessional component is calculated first. The fund then determines the pre-July and post-June 1983 components based on Larry’s eligible service period. Larry’s undeducted contributions also form another component.


The post-June 1983 component is taxed at 0 per cent, up to the low-rate threshold. Any amount above the threshold is taxed at 15 per cent.


The lump sum payment needs to be reported on Larry’s tax return, and Larry also needs to include 5 per cent of the concessional component and 5 per cent of the pre-July 1983 component in his assessable income on his tax return to be taxed at his marginal tax rate.


The annual deductible amount of Larry’s pension is based on the amount of undeducted contributions, Larry’s life expectancy and could include his concessional and pre-July 1983 component because of the previous rollover.

Larry's pension income also needs to be included in his tax return. These payments are taxed at Larry’s marginal tax rate, and Larry can also claim the 15 per cent pension rebate.


Larry's lump sum payment and pension is assessed against the pension RBL. If the ATO determines there is an excessive component, then Larry will need to include this in his tax return to be taxed at 38 per cent plus the Medicare levy. Larry’s pension rebate of 15 per cent will also be reduced.

Proposal

Larry’s lump sum payment would be tax free and his pension payments would be tax free. Larry would not need to report these payments on his tax return. If he wished, Larry could decide to not draw down on his superannuation at all until some later time.

Example 3: Deidre is 59 years of age and thinking of retiring

Now

Deidre is 59 years of age and has been thinking about retiring and taking her superannuation as a pension.


Under the current system, Deidre would calculate an annual deductible amount for her pension based on her undeducted contributions and her life expectancy. This amount would be excluded each year from Deidre’s assessable income.


Deidre’s pension income would then be taxed at her marginal tax rate and Deidre would have to include these payments in her tax return. Deidre may also be eligible for the 15 per cent pension rebate.


Deidre’s pension would also be assessed for RBL purposes, and if Deidre’s pension was higher than the RBL, her 15 per cent pension rebate would be reduced.

Proposal

Deidre decides to defer taking her superannuation until she reaches at least age 60 as she would then receive her superannuation pension payments tax free and would not be required to report these payments on her tax return.

Example 4: Geeta is 62 years of age, retired due to disability and purchases a lifetime pension

Now

Geeta retires at 62 years of age because of invalidity (a permanent disability) and rolls over her lump sum payment to purchase a lifetime pension.


Geeta calculates an annual deductible amount for her pension based on her undeducted contributions, the post-June 1994 invalidity component and her life expectancy. This amount is excluded each year from Geeta’s assessable income.


Geeta includes her pension payments in her tax return as they are assessable income and are taxed at her marginal tax rate. Geeta also receives the 15 per cent pension rebate.


Geeta’s pension is a complying income stream, and is therefore assessed against the pension RBL. If the ATO determines there is a component of Geeta’s pension above the pension RBL, her 15 per cent pension rebate would be reduced.

Proposal

Geeta’s pension payments would be tax free and would not be included in her tax return.

Example 5: Andrew is 65 years of age and retires with his superannuation in an untaxed scheme

Now

Andrew retires with a superannuation balance of $830,000. Andrew decides to take a lump sum payment of $200,000 and the remainder of his superannuation balance as a pension. Andrew’s superannuation fund is an untaxed scheme.


Andrew's lump sum payment is an ETP, and his superannuation fund calculates the pre-July and post-June 1983 components of the lump sum based on Andrew’s eligible service period. Andrew has a concessional component rolled over from a previous superannuation fund, and the fund also determines the amount of undeducted contributions.


Andrew needs to include 5 per cent of the concessional component and 5 per cent of the pre-July 1983 component in his assessable income on his tax return to be taxed at his marginal tax rate.


The post-June 1983 untaxed component will be taxed at 15 per cent up to the low-rate threshold ($129,751 for 2005-06) and at 30 per cent for any amount above the low-rate threshold, plus the Medicare Levy.


The annual deductible amount of Andrew’s pension is calculated based on his undeducted contributions, life expectancy and could include his concessional component and pre-July 1983 component because of the previous rollover.


Andrew's pension income also needs to be included in his tax return. These payments are taxed at Andrew’s marginal tax rate. Andrew will not be eligible for the 15 per cent pension rebate as his pension is paid from an untaxed source.


Andrew's lump sum payment and pension is assessed against the pension RBL as he has taken more than 50 per cent of his total benefit as a pension. These amounts are added to any superannuation benefits and employer termination payments that Andrew has already been paid. If the ATO determines there is an excessive component, Andrew will need to include this amount in his tax return to be taxed at 47 per cent, plus the Medicare Levy.

Proposal

Andrew’s superannuation fund would calculate two components for the lump sum payment. The exempt component (which includes Andrew’s pre-July 1983 component, concessional component and undeducted contributions) would be paid tax free to Andrew. As Andrew’s lump sum payment would be less than $700,000, the taxable component would be taxed at 15 per cent.


Andrew’s pension payments would continue to be included in his assessable income and be taxed at marginal rates. However, they would be eligible for a 10 per cent taxation offset.

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Miscellaneous