FirstTech Super guide 2010/11 FirstTech was ranked 1st by advisers for Technical Support in the 2010 Wealth Insights Fund Manager Service Survey.
This Super guide has been developed to provide you with an easy reference tool when planning and reviewing your clients super, tax and retirement strategies. For additional facts, figures and information for the 2010/11 financial year, please refer to your FirstTech Pocket guide.
Contents 1. Key tax and superannuation thresholds 2010/11 6 1.1. Resident marginal tax rates 6 1.2. Low income tax offset 6 1.3. Senior Australians tax offset (SATO) 6 1.4. Taxation of superannuation member benefits 7 1.5. Taxation of super income stream benefits commenced from 1 July 2007 7 1.6. Taxation of super death benefits 8 1.7. Contributions caps 8 2. Getting money into super 10 2.1. How much can be contributed to super? 10 2.2. Contribution eligibility rules summary table 10 2.3. Adviser contribution checklist 11 2.4. Work test 11 2.5. Member contributions 11 2.6. Employer contributions 12 2.7. Mandated employer contributions 12 2.8. Voluntary employer contributions 12 2.9. Fund-capped contributions 13 2.10. Tax file numbers 13 2.11. Children and super contributions 14 2.12. Caution with rollovers 14 2.13. In specie contributions 15 2.14. Temporary residents 15 2.15. Contributions from personal injury payments 15 3. Super contribution tax concessions 17 3.1. Tax deductions for personal super contributions 17 3.2. Conditions for claiming a tax deduction for personal super contributions 17 3.3. Primary conditions 17 3.4. Additional conditions 19 3.5. Employer tax deductions for super contributions 21 3.6. Offset for spouse super contributions 22 3.7. Children and tax deductions for super 22 3.8. Government co-contribution for super contributions 22 3.9. Overview of employer and personal deductible contributions 26 4. Contributions caps and taxation of contributions 28 4.1. Contributions caps summary table 28 4.2. Concessional contributions cap 28 4.3. Concessional contributions 29 4.4. Non-concessional cap 30 4.5. Non-concessional contributions 31 4.6. Indexation of caps 32 4.7. Taxation of contributions 32 4.8. Contributions caps for constitutionally protected and defined benefit funds and funds with reserves 33 1
5. Administration of excess contributions 38 5.1. How does the ATO track member contributions? 38 5.2. Member responsibility to track contributions 38 5.3. Assessment notice 38 5.4. Commissioner s discretion 39 5.5. Release authority 39 6. CGT small business concessions and contributions to super 41 6.1. Capital gains tax concessions 41 6.2. Basic conditions for CGT relief 41 6.3. Additional eligibility rules for 15-year exemption 42 6.4. Contributing proceeds to super where 15-year exemption applies 42 6.5. Additional eligibility rules for $500,000 retirement exemption 43 6.6. Contributing capital gains to super where $500,000 retirement exemption applies 43 6.7. Additional eligibility rules for 50% (active asset) reduction 44 6.8. Additional eligibility rules for small business rollover 44 6.9. Lifetime CGT cap 44 6.10. Treatment of excess CGT contributions 44 6.11. Contribution rules for the CGT cap 45 6.12. Death and the small business CGT concessions 46 7. Moving super 48 7.1. Portability transferring super balances 48 7.2. Contribution splitting transferring recent contributions 50 7.3. Marriage breakdown transferring super to another spouse 52 8. Getting money out of super 53 8.1. Preservation 53 8.2. Preservation age 54 8.3. Conditions of release with nil cashing restrictions 54 8.4. Conditions of release with cashing restrictions 56 8.5. Compulsory cashing 61 8.6. In specie payments 61 9. Transition to retirement 62 9.1. Cashing restrictions for transition to retirement 62 9.2. Income streams for transition to retirement 62 9.3. Allowable commutations 63 9.4. Rolling back to accumulation 63 9.5. Priority of preservation components 63 9.6. Transition to retirement strategies 64 2
10. Taxation of super benefits 65 10.1. Taxation of super lump sums 65 10.2. Terminal medical condition payments 67 10.3. Taxation of super death benefits 67 10.4. Who is a dependant for tax purposes? 68 10.5. No low rate cap for death benefits 68 10.6. Untaxed element for certain death benefit lump sums 68 10.7. Deduction for increased amount (anti-detriment payment) of super lump sum death benefit 69 10.8. Taxation of disability super benefits 70 10.9. Taxation of salary continuance insurance benefits 71 10.10.Taxation of rollover super benefits 71 10.11. Untaxed plan cap amount 71 10.12. Taxation of super income stream benefits commenced from 1 July 2007 72 10.13. Taxation of super income stream benefits commenced prior to 1 July 2007 72 10.14. Determining the tax-free and taxable proportions of super benefits 73 10.15. Proportioning accumulation phase 74 10.16. Proportioning pension phase post 1 July 2007 pensions 75 10.17. Proportioning pension phase pre 1 July 2007 pensions 75 10.18. Pre July 1983 component 76 11. Retirement income streams 77 11.1. Introduction to super income streams 77 11.2. Taxation of retirement income streams 77 11.3. Types of super income streams that can be paid 77 11.4. Overview of new income stream standards 78 11.5. Minimum income percentage factors 79 11.6. Pro-rata rule and 1 June rule 79 11.7. What are the payment standards for account-based income streams? 79 11.8. Transition to retirement income streams 81 11.9. What are the payment standards for non-account-based (RCV) income streams? 81 11.10. What are the payment standards for lifetime income streams? 82 11.11. What are the payment standards for fixed term income streams? 83 11.12. Commutation rules 83 11.13. Social security and aged care treatment of income streams from 20 September 2007 84 11.14. Term allocated pensions 85 11.15. Life expectancy factors 87 12. Taxation of super income 90 12.1. Taxation of income in super vs other investment structures 90 12.2. Taxation of capital gains in super 90 3
13. Super estate planning 92 13.1. Taxation of super death benefits 92 13.2. Death benefit payments 92 13.3. Super not part of an estate 92 13.4. Compulsory cashing of benefits upon death 92 13.5. Form in which death benefits may be cashed 92 13.6. Can death benefits be paid in specie? 93 13.7. Who can be paid a super death benefit? 94 13.8. Who is a dependant? 94 13.9. Death benefit nominations 96 13.10. Reversionary pensions 97 13.11. Rollovers of super death benefits 97 13.12. Prescribed period for death benefit commutations 97 14. Insurance in super 98 14.1. Types of insurance which may be held in super 98 14.2. Taxation of insurance benefits 98 14.3. Will a contribution used to fund an insurance premium count towards the contributions caps? 98 14.4. Receipt of insurance proceeds in super 98 14.5. Total and permanent disability (TPD) 99 14.6. Post June 1994 invalidity component 99 14.7. Trauma insurance 99 14.8. Terminal illness 99 14.9. Self-insurance 99 14.10. Tax treatment of group insurance 100 14.11. Salary continuance insurance (SCI) comparison 102 15. Employer super issues 103 15.1. What is an employment termination payment (ETP)? 103 15.2. Genuine redundancy payments 103 15.3. Early retirement scheme payments 104 15.4. ETP checklist 105 15.5. Contributing ETPs into a super fund 105 15.6. Tax-free amount of genuine redundancy and early retirement scheme payments 105 15.7. Taxation of ETPs 106 15.8. Life benefit termination payments 107 15.9. Taxation of life benefit termination payments 107 15.10. ETP cap amount 107 15.11. Lower cap amount 108 15.12. Middle rate part 108 15.13. Upper cap amount 108 15.14. Transitional rules 108 15.15. Transitional termination payments 109 15.16. Directed termination payment (DTP) 110 15.17. Death benefit termination payments 110 15.18. Taxation of unused leave payments 110 15.19. Superannuation guarantee (SG) 111 15.20. The SGC 115 15.21. Choice of fund 117 15.22. Approved (Medicare) clearing house 120 15.23. Superannuation holding accounts special account (SHASA) 121 15.24. Tax deductions for employer contributions 121 15.25. Salary sacrifice agreements 121 4
16. Foreign super 123 16.1. Contributions caps and foreign super transfers 123 16.2. Transfer within six months 124 16.3. Transfer after six months 124 16.4. What if the individual receives a withdrawal directly from an overseas super fund? 124 16.5. Applicable fund earnings 124 16.6. Normal contribution rules and caps apply 126 16.7. UK pension transfers 126 17. Social security 127 17.1. Age pension 127 17.2. Age pension entitlements 128 17.3. Income test for age pension 128 17.4. Income test thresholds effective from 1 July 2010 129 17.5. What counts towards the income test? 129 17.6. Deeming 130 17.7. Deeming rates from 1 July 2010 130 17.8. Assets test 130 17.9. Assets test thresholds for age pension from 1 July 2010 131 17.10. Gifting 131 17.11. Super, income streams and social security 131 17.12. Social security categories of retirement income streams 133 17.13. Defined benefit income streams for social security 134 17.14. Income testing of retirement income streams 135 17.15. How do commutations affect the social security deductible amount? 138 17.16. Asset testing of retirement income streams 138 17.17. Exempt income streams 139 17.18. Assets test for asset tested (long-term) income streams 139 17.19. Assets test for asset tested (short-term) income streams 140 17.20. Assets test for defined benefit income streams 140 17.21. Retaining 100% asset test exemption 140 17.22. Retaining 50% asset test exemption 143 17.23. Aged care 146 17.24. Department of Veterans Affairs (DVA) service pensions 146 18. FirstTech flyers 148 Glossary of acronyms 149 Contacts for advisers inside back cover 5
1. Key tax and superannuation thresholds 2010/11 1.1. Resident marginal tax rates Resident individuals Income Rate $0 $6,000 0% $6,001 $37,000 15% over $6,000 $37,001 $80,000 $4,650 + 30% over $37,000 $80,001 $180,000 $17,550 + 37% over $80,000 $180,001+ $54,550 + 45% over $180,000 Note: Medicare levy may also apply where taxable income exceeds a certain level, or the Medicare levy surcharge applies. 1.2. Low income tax offset Taxable income (TI) Reduction in offset (RI) Maximum offset $0 $30,000 Nil $1,500 $30,001 $67,499 (TI $30,000) x 0.04 $1,500 RI $67,500+ $1,500 Nil 1.3. Senior Australians tax offset (SATO) Family situation Maximum tax offset level $ Taxable income shade-out threshold $ Taxable income cut-out threshold $ Single 2,230 30,867* 48,707 Couple (each) 1,602 26,680 39,496 Couple separated because of illness (each) 2,040 29,600 45,920 Notes: Other eligibility criteria: age pension age or service pension age or older on 30 June 2011 eligible to receive an age or service pension, even if no pension actually paid, and not in prison for the whole income year. For a whole-of-year couple, offset eligibility of each partner is determined by their combined taxable income level, ie less than $78,992 or less than $91,840 if illness-separated, whereas offset entitlement is calculated on the basis of individual taxable income. Offset reduces by 12.5 cents for each dollar of taxable income in excess of the shade-out threshold. Partnered senior Australians can transfer any unused portion of their tax offset to their partner. Please refer to the Senior Australians and pensioner tax offset calculator on the ATO website (partner must be eligible for senior Australians or pensioner tax offset). Medicare levy does not apply for taxable income below the shade-out threshold. * The 2010 Federal Budget has proposed reducing this threshold to allow for the fact that reduced LITO applies for taxable income over $30,000. 6
1.4. Taxation of superannuation member benefits The tax-free component is not assessable and not exempt income and is not subject to tax*. Taxation of super lump sums taxable component Age 60 and above Taxable component taxed element Not assessable income and not exempt income (NANE) Max tax rate Taxable component untaxed element Max tax rate 0% First $1.155 million (untaxed plan cap) 15% Balance over $1.155 million (untaxed plan cap) 45% Preservation age to 59 First $160,000 (low rate cap) Balance over $160,000 (low rate cap) 0% First $160,000 (low rate cap) 15% 15% $160,000 (low rate cap) to $1.155 million (untaxed plan cap) 30% Balance over $1.155 million (untaxed plan cap) 45% Below preservation age Whole component 20% First $1.155 million (untaxed plan cap) 30% Balance over $1.155 million (untaxed plan cap) 45% Note: For all non-zero tax rates, Medicare levy may also apply. Please refer to section 10.1 for more information. * NANE income is neither assessable income nor exempt income. It is ignored when working out your client s taxable income and their tax losses. This cap is indexed annually and is rounded to the nearest $5,000. 1.5. Taxation of super income stream benefits commenced from 1 July 2007 Age Taxable component taxed element 60 and above 0%. Not assessable income, not exempt income (NANE) Taxable component untaxed element MTR less a 10% tax offset Preservation age to 59 MTR less a 15% tax offset MTR (no tax offset) Below preservation age MTR (no tax offset) MTR (no tax offset) Note: For all non-zero tax rates, Medicare levy may also apply. See sections 10.3 and 10.8 for the taxation of super death benefits and disability super benefits. 7
1.6. Taxation of super death benefits The tax-free component is not assessable and not exempt income and is not subject to tax. Super death benefits paid to a dependant Age of deceased at time of death Type of death benefit Age of recipient Taxation of taxable component Taxed element Untaxed element Any age Lump sum Any age 0% NANE 0% NANE Age 60 and above Income stream Any age 0% NANE MTR less 10% tax offset Below age 60 Income stream Age 60 and above 0% NANE MTR less 10% tax offset Below age 60 Income stream Below age 60 MTR less 15% tax offset MTR (no tax offset) Super death benefits paid to a non-dependant** Age of deceased Type of death benefit Age of recipient Taxation of taxable component Taxed element Any age Lump sum Any age Max 15% Max 30% Untaxed element Any age Income stream Any age Not permitted from 1 July 2007. Death benefit income streams commenced prior to 1 July 2007 will be taxed as if received by a dependant. NANE: Not assessable income and not exempt income (not subject to tax). It is ignored when working out your client s taxable income and their tax losses. MTR: Marginal tax rate. For all non-zero tax rates, Medicare levy may also apply. For all payments, the tax-free component is NANE. These payments are not subject to tax. Please refer to Chapter 14 for information on the tax treatment of TPD and SCI. ** Refer to section 13.8. 1.7. Contributions caps This section does not include all the contributions caps. Please see Chapter 4 for more information. Concessional contributions cap Income year Amount of cap 2010/11 $25,000 /$50,000* * There is a transitional period between 1 July 2007 and 30 June 2012. If a person is age 50 or over on the last day of a financial year within the transitional period, the transitional cap of $50,000 will apply. Between 1 July 2007 and 30 June 2009 the transitional concessional cap was $100,000 pa. This cap is not indexed. This cap is indexed annually and is rounded down to the nearest $5,000 (unchanged from 2009/10). 8
Non-concessional contributions cap Income year Amount of cap 2010/11 $150,000/$450,000* * People under age 65 at any time in the financial year may effectively bring forward two years worth of non-concessional contributions, allowing them to contribute $450,000 at any time over a three-year period without exceeding the cap (unchanged from 2009/10). Note: If a person has invoked the two-year bring forward rule in a particular financial year, their non concessional cap will remain at three times the non-concessional cap in the first year. CGT cap Income year Amount of cap 2010/11 $1.155 million Note: The CGT cap is a lifetime limit and is indexed annually and rounded down to the nearest $5,000. See section 4.6 for more information. 9
2. Getting money into super 2.1. How much can be contributed to super? There is generally no limit to the amount that may be contributed by, or on behalf of, a member within a financial year. However, the member will be personally liable to excessive tax on contributions made within a financial year that are in excess of contributions caps. For more information on contributions caps and taxation of excess contributions, see Chapter 4. Caution! There is one exception to no limits on contributions to super. The size of a single contribution will be limited if it is a fund-capped contribution (see section 2.9). 2.2. Contribution eligibility rules summary table The following table summarises the rules for when a person is allowed to contribute or receive contributions to a super fund for the 2010/11 financial year. Important! This is a summary table only. Please refer to the important notes following each table. This chapter looks at the eligibility to contribute to super. For further important considerations on contributions, please see the chapter on contributions caps. For further general information on superannuation contribution eligibility and taxation, please refer to the FirstTech superannuation contributions quick reference guide. Member s age at time of contribution Personal contribution made by the member (section 2.5) eg personal nonconcessional, personal concessional contributions Other contributions made by someone other than member or employer eg spouse contribution, co contribution Voluntary employer contribution (section 2.8) eg salary sacrifice, other employer contributions in excess of SG Under 65 Yes Yes Yes Yes Mandated employer contribution (section 2.7) eg 9% SG, contribution under industrial award 65 to 69 Work test (section 2.4) Work test (section 2.4) Work test (section 2.4) Yes 70 to 74 (section 2.4) Work test (section 2.4) No Work test (section 2.4) Yes 75 and over (section 2.4) No No No Yes Note: A fund may accept contributions in respect of a member if the trustee is reasonably satisfied that the contribution is in respect of a period that it would have otherwise been made. 10
2.3. Adviser contribution checklist W W Does the member need to meet the work test for the contribution to be made? Is the contribution limited because it is a fund-capped contribution? Does the fund require the member s tax file number for the contribution to be made? 2.4. Work test A member meets the work test if the member has been gainfully employed for at least 40 hours in a period of not more than 30 consecutive days in the financial year. The work test, if applicable, must be met prior to the contribution being made. The work test does not apply to people who at the time of the contribution are under the age of 65. From age 65, a member must meet the work test at some point in the financial year prior to making member contributions or receiving voluntary employer contributions. From age 75, a member may not make member contributions or receive voluntary employer contributions regardless of the member s work status. Mandated employer contributions may be made at any age without the member meeting the work test. The work test can be satisfied anywhere in the world. Gainfully employed Gainfully employed is employed or self-employed for gain or reward in any business, trade, profession, vocation, calling, occupation or employment. The concept of gain or reward envisages receipt of remuneration such as salary or wages, business income, bonuses, commissions, fees or gratuities, in return for personal exertion. The gain or reward must be tangible (charity work is not generally considered gainful employment). The trustee cannot take prospective employment into account. The member must have worked at least 40 hours within 30 consecutive days in the financial year before the trustee can accept the contribution (ref APRA circular 1.A.1). Age 75 Age 75 includes 28 days after the end of the month in which the member turns age 75. 2.5. Member contributions Important! The Superannuation Industry (Supervision) Regulations (SIS) eligibility rules define contributions as either employer or member contributions, unlike the tax rules, which define contributions as either concessional or non-concessional. Member contributions are contributions by, or on behalf of, the member to the fund but do not include employer contributions. A member contribution made by the member may be either concessional, where the member claims a tax deduction (if eligible), or non-concessional, where the member does not claim a tax deduction for the contribution (see section 3.2 for claiming tax deductions for personal super contributions). 11
Member contributions made by anyone other than the member are not tax deductible to the member. For example, eligible spouse contributions and Government co-contributions are not eligible for tax deductions. Member contributions may be made by or for non-residents if the non-resident provides the trustee with a valid Australian tax file number within 30 days of making the contribution. Caution! A self managed super fund (SMSF) may fail the active member test and lose its complying status if member or employer contributions are made to a non-resident member s account. For more information, please refer to Tax Ruling TR 2008/9 at www.ato.gov.au Refer to Chapter 4 for more detail on the different contribution types. 2.6. Employer contributions Employer contributions are contributions made by, or on behalf of, an employer-sponsor of the fund. An employer-sponsor is an employer who contributes to the fund for the benefit of a member of the fund who is an employee of the employer. Employer contributions can either be mandated or voluntary. 2.7. Mandated employer contributions Mandated employer contributions are contributions made by an employer on behalf of an employee that are either: used to satisfy employer superannuation guarantee (SG) obligations, which cease when the employee reaches age 70, or made to satisfy an obligation imposed by an award made or agreement certified by an industrial authority (there is no age limit on these mandated employer contributions). Budget announcement raising super guarantee age limit to 75 From 1 July 2013, the age limit for payment of super guarantee contributions will be increased from 70 to 75. This would bring the SG age limit in line with personal and voluntary employer contributions. At the time of writing, legislation to make this effective had not been introduced to Parliament. 2.8. Voluntary employer contributions Voluntary employer contributions are all employer contributions that are not mandatory employer contributions. Examples include salary sacrifice and voluntary employer contributions in excess of an employer s superannuation guarantee obligations. 12
2.9. Fund-capped contributions Fund-capped contributions are all member contributions except: personal contributions where a tax deduction will be claimed* (see section 3.2 for claiming tax deductions for personal super contributions) directed termination payments (see section 15.16) contributions arising from structured settlements or orders made for personal injuries contributions that count toward and are within the member s lifetime capital gains tax (CGT) cap (see section 6.9), or payments by the Commissioner of Taxation of SG shortfall component for SG purposes, transfers from the Superannuation Holding Account and Government co-contributions. * In the case of personal deductible contributions, a person has 30 days from the date of the contribution to submit a valid notice (see section 3.3) of their intention to claim a tax deduction (if applicable), otherwise the fund must return the excess fund-capped contribution. If the valid notice is submitted, the contribution is no longer a fund-capped contribution. Return of excess fund-capped contributions To help prevent a person from accidentally contributing more than the non-concessional contributions cap, super funds are required to return single fund-capped contributions that exceed: W W $150,000 if the member is age 65 or over on 1 July of the financial year, or W W $450,000 if the member is less than age 65 on 1 July of the financial year. The fund is required to return the excess fund-capped contribution within 30 days of receipt of the excess contribution plus fees and adjusted for market movement. Important! Super funds are not required to aggregate the total of member contributions received for a person either within the fund or across other funds. The requirement for funds to refund excess fund-capped contributions only applies to single contributions that exceed the limits above. For example, if a fund received a single $500,000 member contribution for a member under age 65, $50,000 would have to be refunded. If a fund received five $100,000 member contributions within a financial year, for a member under the age of 65, the fund would not be required to return any of the contributions. 2.10. Tax file numbers If the fund does not have a member s tax file number (TFN) on record, a member has 30 days from the date of the member contribution to supply the fund trustee with a TFN, otherwise the fund trustee must refund the contribution. A super fund does not have to return employer contributions where a TFN has not been quoted; however, this will trigger no-tfn contributions tax (see section 4.7). 13
2.11. Children and super contributions Anyone under age 65, including children (ie under age 18), can contribute to super without meeting a work test. Children are subject to the same contributions caps as adults. Eligibility to contribute to super by or for children Super contribution for a child under age 18 which is made by: Employer of child Child Anyone other than employer or child (eg parent) Tax deduction available? Yes for employer Only if child has derived income in the income year from: W carrying on a business, or W employment activities. A child must also meet all other requirements for claiming a personal tax deduction. No Tax status of contribution Concessional W Concessional if tax deduction claimed, or W non-concessional if tax deduction is not claimed. Non-concessional Contributions tax applied to contribution Max 15% W Max 15% if concessional, or W 0% if non-concessional. 0% Between 1 July 2002 and 1 September 2004 child contributions to child accounts (old Part 4A and reg 7.04(1)(e) of the SIS regulations) were subject to restrictions. 2.12. Caution with rollovers Some rollovers are now contributions From 1 July 2007, some transfers that would have previously been considered a rollover are now considered to be contributions. This means the contribution rules must be met. Generally, transfers originating from outside the Australian super system are treated under SIS as contributions, and are subject to contribution rules. Examples of transfers from outside the super system include: a directed termination payment from an employer a transfer from an overseas super fund, and amounts from the small business CGT 15-year or retirement exemptions which are transferred into super. Important! If the member is age 65 or over, they will need to meet the work test to make transfers from outside the Australian super system. If the member is age 75 or over, they will not be able to make a transfer from outside the Australian super system regardless of their work status. 14
2.13. In specie contributions In specie contributions are those made using assets other than cash. They may be made at any time by a person who is not a related party of the fund provided that all other relevant SIS provisions are met and subject to the trust deed. A person who is a related party of the fund can make an in specie contribution provided that the asset contributed is one that the fund is permitted by SIS to acquire from a related party (eg listed shares or business real property acquired at market value). The market value of the asset being contributed in specie determines the amount of the contribution to be counted towards the relevant contributions cap. Warning: The ATO has issued a Taxpayer Alert (TA 2008/12) on non-cash contributions to superannuation funds. This alert outlines the ATO s concerns with using in specie payments or arrangements designed to allow a member of a super fund to avoid the superannuation contributions caps. For more information download this alert from www.ato.gov.au 2.14. Temporary residents From 1 April, 2009, only limited conditions of release are available to temporary or former temporary residents (see section 8.4). Therefore, superannuation trustees should be aware if an application for membership of a super fund is in respect of a temporary resident. 2.15. Contributions from personal injury payments Payments arising from structured settlements or orders for personal injuries may be contributed to superannuation and are excluded from the non-concessional contributions cap (refer to section 4.5). However, for this exclusion to apply, a number of conditions must be met in relation to the type and administration of the payment. If these conditions are not met, the amount contributed may be included in the client s non-concessional contributions cap and, as personal injury payments can be large in value, may result in excess contributions tax. Contributions of personal injury payments can be excluded from a client s non-concessional cap if they meet all the requirements of section 292-95 of ITAA 1997, as follows: Type of payment 1 The payment is for the settlement of a claim for compensation or damages for, or in respect of, personal injury suffered by the client and the claim is based on the commission of a wrong, or on a right created by statute. The settlement must take the form of a written agreement between the parties to the claim (whether or not the agreement is approved or endorsed by a court), or 2 The payment is for the settlement of a claim in relation to a personal injury suffered by the client under a law of the Commonwealth or of a State or Territory relating to workers compensation, or 3 The payment is made following an order of a court for compensation or damages for, or in respect of, personal injury suffered by the client and the claim is based on the commission of a wrong, or on a right created by statute. The order cannot be one approving or endorsing an agreement as set out in point one above. 15
A claim for compensation or damages referred to above has to be made either by the client or their legal personal representative (LPR). Note that if a claim is both: for compensation or damages for personal injury, and for some other remedy (eg compensation or damages for loss of, or damage to, property) only the amount of the payment that relates to compensation or damages for personal injury and identified in a settlement agreement or court order as being solely in payment of that compensation or those damages, can be contributed to super as a personal injury payment. The above definitions may result in a relatively broad interpretation of which payments are made for, or in respect of personal injury and could include amounts paid for pain and suffering, for loss of future earnings, for future medical expenses, home modifications etc. However, specific legal advice should be sought to ascertain exactly which amounts paid to a particular client are eligible personal injury payments. Administration requirements The contributions must be made within 90 days of the later of the following: the day the client received the personal injury payment the day an agreement for settlement of the personal injury payment was entered into the day on which a court order for the personal injury payment was made. Two legally qualified medical practitioners have certified that, because of the personal injury, it is unlikely that the client can ever be gainfully employed in a capacity for which they are reasonably qualified because of education, experience or training. This effectively means that the client must be totally and permanently disabled to make a personal injury payment to super that is excluded from their non-concessional cap. Either before or when the contribution is made, the client or their LPR provides a completed contributions for personal injury form to their super fund. In addition to gathering details relating to the payment, the contributions for personal injury form requires a declaration by the client or their LPR that the contributions were derived from a personal injury payment received by the client or the LPR and that the contributions meet the requirements of section 292-95 of ITAA 1997 (and as outlined above). We would therefore suggest that, in providing advice to a client about the contribution of personal injury payments, financial advisers recommend that the client also seek legal advice as to whether they meet the requirements of section 292-95 of ITAA 1997. 16
3. Super contribution tax concessions 3.1. Tax deductions for personal super contributions From 1 July 2007, if the criteria outlined below are met, a person may claim a tax deduction for 100% of personal contributions made to super. Personal contributions, where a tax deduction is claimed, are concessional contributions, which are subject to a person s concessional contributions cap. Excess concessional contributions are taxed an additional 31.5%. See section 4.7. 3.2. Conditions for claiming a tax deduction for personal super contributions The following primary conditions must be met to claim a tax deduction for a personal super contribution: The taxpayer makes a personal contribution to a complying super fund or RSA for themselves, for the purpose of providing super benefits. The taxpayer may only deduct the contribution for the income year in which the contribution is made. The taxpayer must submit a valid notice to the fund trustee (see Taxpayer s valid notice in section 3.3). The fund trustee must have given the taxpayer an acknowledgement of receipt of the valid notice. The taxpayer must have made the contribution on or before the day that is 28 days after the end of the month in which they turn age 75. Additional conditions must be met only if: the taxpayer is an employee, at any time during the income year the taxpayer is under age 18, or the contribution is sourced from the sale of an active asset, where the small business CGT concessions apply. 3.3. Primary conditions Taxpayer s valid notice To deduct the contribution, or a part of the contribution, a taxpayer must have given the trustee of the fund a valid notice of their intention to claim the deduction, and the trustee must have given the taxpayer an acknowledgement of receipt of the notice. A valid notice, the approved form (ATO NAT 71121), can be found at www.ato.gov.au It is not compulsory to use the ATO version of this form. These notifications can be made to the super fund in various ways and funds may create their own form for their members to use. The ATO form sets out the minimum data requirements. Timing The notice must be given to the fund provider before the earlier of: the day the taxpayer lodges their income tax return for the income year in which the contribution was made, or the end of the next income year following the year of the contribution. 17
Budget announcement successor fund transfers The Government has announced plans to allow a claim for a deduction for eligible contributions to be made to successor superannuation funds. This measure would allow a deduction notice to be lodged with a successor fund where the relevant contributions were actually made to the transferring fund. Accordingly, it addresses a current inequity in superannuation laws which deny investors a perfectly legitimate tax deduction due to circumstances mainly out of their hands. Usually, investors do not have any control over the transfer of their current benefits from one super fund to another if it is based on a successor fund transfer. At the time of writing, legislation to make this effective had not been introduced to Parliament. What makes a taxpayer s notice invalid The taxpayer s notice is not valid in any of the following circumstances: the notice is not in respect of the contribution the notice includes all or a part of an amount covered by a previous notice when the taxpayer gave the notice: they were not a member of the fund, or the trustee no longer holds the contribution, or the trustee has begun to pay an income stream based in whole or part on the contribution before the taxpayer gave the notice: the taxpayer had made a contributions splitting application in relation to the contribution, and the trustee had not rejected the application. A taxpayer cannot deduct more for the contribution (or a part of the contribution) than the amount stated in the notice. Important! Don t let your client lose their tax deduction. The notice to claim a tax deduction will be considered invalid if the trustee has begun to pay an income stream based in whole or part on the contribution. This applies regardless of whether a residual amount equal to or in excess of the amount sought as a tax deduction is left in the accumulation account. This means, if you are planning to commence any kind of pension for a client, remind the client to send the trustee a valid notice of intention to claim any tax deductions for personal super contributions prior to commencing the pension. The trustee must acknowledge the notice then it is safe to commence the pension. If the notice is not submitted and acknowledged prior to commencing the pension, the client will lose their eligibility to claim the tax deduction. Variations A taxpayer cannot revoke or withdraw a valid notice in relation to the contribution (or a part of the contribution). 18
A taxpayer can vary a valid notice, but only so as to reduce the amount stated in relation to the contribution (including to nil). However, a taxpayer cannot vary a valid notice after the earlier of: the day the taxpayer lodges their income tax return for the income year in which the contribution was made, or the end of the income year following the year of the contribution. A notice can still be varied after these time limits where: the notice is being varied as a result of the ATO not allowing a deduction, and the notice is reducing the amount of a previous notice by the amount that it is disallowed. A variation is not effective if, when the taxpayer makes it in the same circumstances as the original notices: they were not a member of the fund the trustee no longer holds the contribution, or the trustee has begun to pay an income stream based in whole or part on the contribution. Acknowledgement of notice The trustee must, without delay, give the taxpayer an acknowledgement of a valid notice. The trustee may refuse to give the taxpayer an acknowledgement if the value of the member s account, at the time the trustee receives the notice, is less than 15% of the contribution. 3.4. Additional conditions 10% rule for employees If a person is an employee at any time during the income year, the 10% rule must be met for the person to be eligible to claim a tax deduction for personal super contributions. The 10% rule is: No more than 10% of: the total of assessable income for the income year, plus reportable fringe benefits (RFB) for the income year, plus reportable employer superannuation contributions (RESC) for the income year must be attributable to employment. Assessable income (from employment) + RFB + RESCs Assessable income (from all sources) + RFB + RESCs < 10% Note: Employment is where the person is treated as an employee for SG purposes. A person may be treated as an employee for SG purposes even where they do not receive any SG support (eg employee earning less than $450 per month). Important! The 10% rule only has to be met if, in the income year in which the contribution is made, the taxpayer is treated as an employee for SG purposes. For example, someone who is totally self-employed, unemployed or living off investment earnings only, would not have to meet the 10% rule. 19
Assessable income Assessable income is income before deductions. Salary sacrifice will reduce assessable income. Deductions for personal super contributions will reduce taxable income, but will not reduce assessable income. Reportable employer superannuation contributions (RESC) A RESC is, for an individual for an income year, an amount contributed by an employer or associate of the employer for the benefit of an individual to a superannuation fund or RSA, to the extent that either or both of the following applies: the individual has or had the capacity to influence the size of the amount the individual has or had the capacity to influence the way the amount is contributed so that his or her assessable income is reduced. Maximum earnings test All amounts that are attributable to the employment activity are taken into account as assessable income in the 10% test. These include: the salary or wages (as used in its ordinary meaning) from the activity allowances and other payments earned by an employee the other payments, such as commission, director s remuneration and contract payments, that are treated as salary or wages by section 11 of the SGAA for those persons who engage in an employment activity in a capacity other than a common law employee an employment termination payment received by a person in consequence of the termination of their employment, and workers compensation and like payments made because of injury or illness received by a person while holding the employment, office or appointment the performance of which gave rise to the entitlement to the compensation payments. In the application of the maximum earnings test, the relevant employment activity need not be an activity in Australia. For a non-resident, the income attributable to employment outside Australia is not assessable income in Australia and so will not be counted in the maximum earnings test. A non-resident with Australian sourced income that is not attributable to employment activities may therefore be able to deduct a personal superannuation contribution made to an Australian superannuation provider against their Australian sourced income. However, the employment income of an Australian resident employed overseas by a foreign employer will be counted in the maximum earnings test if the income is assessable income. Source: ATO Tax Ruling 2010/1, paragraphs 64 66. Age-related conditions If a taxpayer is under the age of 18 at the end of the income year in which they make a contribution, the child must have derived income in the income year: from the carrying on of a business, or attributable to activities where the child is treated as an employee for SG purposes to be eligible to claim a tax deduction for the super contribution. If a taxpayer is aged 65 or more and under 75, he/she must satisfy the work test in order for the super fund to accept the contribution. 20
Contributions sourced from the sale of a small business A person cannot claim a tax deduction for CGT contributions that count toward their lifetime CGT cap. If an amount arising from a CGT small business exemption is contributed by someone age 55 or over as a personal contribution, they may claim a tax deduction, but the contribution will count toward the concessional cap. 3.5. Employer tax deductions for super contributions From 1 July 2007, employers may claim a tax deduction for 100% of any super contributions made on behalf of employees to a complying super fund. The age-based limits that previously applied were abolished from 1 July 2007. While there is no longer any limit on the amount of contributions which an employer may claim as a tax deduction, an employee is unlikely to want their employer(s) to make contributions in excess of their concessional contributions cap because of the excess tax imposed on the individual. An employer may claim a 100% tax deduction for super contributions made on behalf of employees either: on or before the day that is 28 days after the end of the month in which the employee turns 75, or where the employer was required to make the contribution by an industrial award, determination* or notional agreement preserving State awards that is in force under an Australian law. * An award or determination does not include an industrial agreement, such as an Australian Workplace Agreement, Collective Agreement or preserved State agreement under the Workplace Relations Act 1996, or a similar agreement made under a State law. Employee For an employer to deduct a contribution for an employee, the employee must be: an employee within the expanded definition of employee in section 12 of the Superannuation Guarantee (Administration) Act 1992, or engaged in producing the assessable income of the employer, or an Australian resident who is engaged in the employer s business. Employers are able to claim a deduction for contributions made on behalf of SG employees who are not engaged in producing the assessable income of the business, nor engaged in the business for the employer but are SG employees for the purpose of the SGAA (eg some directors may fall into this category). However, individuals who are not SG employees will still need to be engaged in producing the assessable income of the business or engaged in the business before a deduction can be claimed. Limits on deductions for personal services income An employer cannot deduct a contribution made to a super fund or an RSA for an associate s work if the contribution relates to gaining or producing the employer s personal services income (PSI). An associate includes a spouse, business partner or relative of the employer. However, an employer is permitted to deduct a contribution for work performed by the associate which does not relate to gaining or producing the employer s PSI. In this case, the deduction would be limited to SG contributions. See ATO TR 2003/10 for further information on tax deductions that relate to personal services income. 21
3.6. Offset for spouse super contributions Conditions A taxpayer is eligible to claim a tax offset for eligible spouse contributions if the following conditions are satisfied: The recipient spouse s assessable income + plus reportable fringe benefits (RFB) + reportable employer superannuation contributions (RESC) for the income year must be less than $13,800. The couple live together in a bona fide domestic relationship (ie includes a de facto spouse but excludes married couples who have separated) or in a relationship that is registered under a law of a State or Territory. The contribution must be made to a complying super fund, provide super benefits for the spouse or provide death benefits for the spouse s dependants. The contributor must not claim the contribution as a tax deduction. The gainful employment status of the contributor is not relevant. Eligible spouse contributions may not be made for a recipient spouse who is age 70 or over. If the recipient spouse is: under age 65, then his/her gainful employment status is not relevant aged at least 65 but under 70, then the contribution must be made at a time that the recipient spouse meets the work test (see section 2.4). Spouse contributions are preserved. Both the contributor and the spouse must be Australian residents for tax purposes when the contribution is made. Amount of offset The maximum tax offset is $540. The amount of the offset is calculated as 18% of the lesser of: W W $3,000 [(recipient spouse s assessable income + RFB + RESCs) $10,800], and the amount of the spouse contribution actually made. 3.7. Children and tax deductions for super A child may claim a tax deduction for contributions they make to their super if the child meets the criteria set out in sections 3.2 and 3.3. Parents cannot claim tax deductions for contributions made to the child s super fund on behalf of the child. The only exception to this is where the parent is also the child s employer. 3.8. Government co-contribution for super contributions The super co-contribution is an Australian Government initiative introduced on 1 July 2003 to assist eligible low to middle income earners in saving for their retirement. The maximum Government co-contribution is $1 for every $1 of eligible personal super contributions made in a financial year and is subject to an income test. The maximum co-contribution of $1,000 is reduced by 3.333 cents for every $1 that the taxpayer s total income exceeds $31,920 in 2010/11 until it reaches or exceeds $61,920. 22
The matching rate of 100% and the maximum co-contribution that is payable on an individual s eligible personal non-concessional contribution of $1,000 will be permanently retained. The indexation rate that applies to the income threshold above which the maximum superannuation co-contribution begins to phase down will be frozen at 2009/10 levels for 2010/11 and 2011/12. Until 1 July 2007, self-employed persons were unable to claim a Government co-contribution. Now, the self-employed may be able to claim a Government co-contribution if they meet the eligibility criteria. The Government co-contribution does not count toward either the concessional or the non concessional cap. Eligibility A person may be eligible to receive a co-contribution if all of the following criteria are met: The person makes one or more eligible personal super contributions (a personal non concessional contribution) during the income year. 10% or more of the person s total income 1 for the income year is attributable to the following: employment, where the person is an employee for SG purposes, and/or self-employment, where the person is carrying on a business. Total income 1 = assessable income + reportable fringe benefits + reportable employer super contributions. An income tax return for the person for the income year is lodged. The person is less than 71 years old at the end of the income year. The person does not hold a temporary visa under the Migration Act 1958 at any time in the income year or, if they do, is a New Zealand citizen or the holder of a visa to be prescribed in the Regulations. The person s total income 2 for the income year is less than $61,920. Total income 2 = assessable income + reportable fringe benefits + reportable employer super contributions any amounts for which the person is entitled to a deduction as a result of carrying on a business. Note: You may need to check each fund s trust deed to confirm that the fund can receive the Government co-contributions. Assessable income: Assessable income is income before deductions. Deductions for personal super contributions will reduce taxable income, but will not reduce assessable income. Salary sacrifice will reduce assessable income; however, salary sacrifice super contributions are effectively added back through the inclusion of reportable employer super contributions in the income definitions (refer below). Reportable employer super contributions From 1 July 2009, both total income 1 and total income 2 will include a client s reportable employer super contributions in determining eligibility for and the amount of a co contribution. 23