A Plan to Simplify and Streamline Superannuation
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References to superannuation funds also apply to Approved Deposit Funds (ADFs) and Retirement Savings Account (RSA) providers
For simplicity, this paper refers only to superannuation funds. It is intended that the proposals outlined in this paper apply equally to other types of superannuation entities such as ADFs and RSAs.
References to superannuation pensions also apply to superannuation annuities
For simplicity, this paper refers only to superannuation pensions. It is intended that the proposals outlined in this paper apply equally to superannuation annuities.
References to age pension
For simplicity, this paper refers only to age pensions. It is intended that the proposals outlined in this paper would apply equally to veterans, and related pensions.
A superannuation fund that provides retirement benefits based on accumulated contributions, and any investment earnings on those contributions, less taxes, administrative costs and other charges paid.
Pensions where payments must be at least annual and where withdrawals during the year must be between the maximum and minimum limits specified in the Superannuation Industry (Supervision) Regulations 1994. Allocated pensions are assessed against the lump sum RBL as they are not complying pensions, but are eligible for other tax concessions, such as the pension rebate.
A pension is complying if it meets the relevant standards specified in the Superannuation Industry (Supervision) Regulations 1994. Complying pensions include lifetime pensions, life expectancy pensions and market-linked pensions (since 20 September 2004). Complying pensions are assessed against the pension RBL.
Defined benefit scheme
A superannuation scheme that provides a retirement benefit usually based on salary and/or a pre-determined formula for calculating that benefit.
Includes a spouse (including opposite sex de facto), a child of the member (under 18 for tax purposes), a person who is in an interdependency relationship with the member and a person who is financially dependent on the member. An interdependency relationship exists between two people normally if:
- they have a close personal relationship;
- they live together;
- one or each of them provides the other with financial support; and
- one or each of them provides the other with domestic support and personal care.
Eligible service period
This is used to calculate the pre-July 1983 and post-June 1983 components of an ETP. Where an ETP is made by an employer, the eligible service period is the whole of the period of employment to which the payment relates. Where the ETP is made by a superannuation fund, the eligible service period is effectively the combined periods of employment and fund membership to which the payment relates.
Eligible termination payment (ETP)
Lump sum payments from superannuation funds, lump sum payments made in consequence of a termination of employment and certain similar payments. These payments are subject to special taxation rules. The lump sum payment is divided into various components, each of which is subject to special tax treatment. The different components could include the following:
- Concessional component (5 per cent of the retained amount of the component is included in assessable income and taxed at marginal rates).
- Post-June 1994 invalidity component (exempt from tax).
- CGT exempt component (exempt from tax). The ETP may have this component if the member rolled-over the proceeds of certain business assets for his or her retirement. The exemption only applies where the net value of assets of the business does not exceed $5 million. Individuals are allowed to claim an exemption on capital gains amounts up to a lifetime limit of $500,000.
- Non-qualifying component (included in assessable income and taxed at marginal tax rates). This component is the earnings on any non-ETP money that was used to purchase an annuity and that annuity is now a commutation or residual capital payment. It must have been purchased before 12 January 1987 if purchased as a deferred annuity, or 9 December 1987 if purchased as an immediate annuity.
- Undeducted contributions component, which is the amount of any contributions paid by the taxpayer or any other person where no deduction was allowable in respect of those contributions (exempt from tax).
- Excessive component, which is the amount of the payment that exceeds the RBL (taxed at 38 per cent when paid from a taxed source or 47 per cent when paid from an untaxed source).
- Pre-July 1983 component, which is that amount of the payment that relates to pre-July 1983 employment or fund membership (5 per cent of the retained amount of the component is included in assessable income and taxed at marginal tax rates).
- Post-June 1983 component, which is that amount of the payment that relates to post-June 1983 employment or fund membership. When taken as a lump sum after age 55, this component is taxed at 0 per cent up to the low-rate threshold ($129,751 in 2005-06) and any amount over this threshold is taxed at 15 per cent up to the RBL. Amounts above the RBL are taxed as an excessive component at 38 per cent. If the amount is from an untaxed source, it is taxed at 15 per cent up to $129,751, at 30 per cent up to the lump sum RBL and 47 per cent above that limit.
Hybrid superannuation scheme
A superannuation scheme that provides a retirement benefit based partially on accumulated contributions and investment earnings on those contributions and partially on a salary and/or a pre-determined formula.
Low-rate ETP threshold
The amount of the post-June 1983 component of an ETP subject to low tax. Where the component is a taxed element, it is taxed at 0 per cent; where it is an untaxed element, it is taxed at 15 per cent. The threshold is currently $129,751 and is indexed.
These are personal contributions to a superannuation fund to obtain superannuation benefits for the member, or the member’s dependants in the event of the member’s death. They could be either undeducted personal contributions or deductible personal contributions.
The age at which superannuation benefits can be accessed once the individual is retired. It is currently age 55. In the 1997-98 Budget, the Government announced an increase in the preservation age from 55 to 60 on a phased basis between the years 2015 and 2025. This will mean that for someone born before 1 July 1960, the preservation age will remain at 55 years, while for someone born after 30 June 1964, the preservation age will rise to 60 by 2025.
The RBL system caps the amount of superannuation and similar benefits that an individual can receive on a concessionally taxed basis. For the 2005-06 financial year, the pension RBL is $1,297,886 and the lump sum RBL is $648,946. Whether the lump sum or pension RBL applies will depend on the type of pension chosen and whether, overall, 50 per cent or more of total benefits are taken as a particular type of pension known as ‘complying pensions’.
The amount of the payment that exceeds the RBL, known as the excessive component, is taxed at 38 per cent when paid from a taxed source or 47 per cent when paid from an untaxed source, plus the Medicare levy.
Superannuation Holding Accounts Special Account
A reserve administered by the ATO whereby employers may make superannuation contributions for their employees in instances where the employer is unable to locate a superannuation fund account or RSA for the employee.
The prescribed minimum level of superannuation required under the Superannuation Guarantee (Administration) Act 1992 that an employer must contribute for eligible employees.
Undeducted purchase price
The undeducted purchase price is used to calculate the portion of pension income which is exempt from tax. The undeducted purchase price typically represents amounts used to purchase a pension for which no tax deductions have been claimed, such as a member’s own contributions from their after-tax income.
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