Superannuation

Superannuation should not necessarily be viewed as a year-end planning matter, but rather as a long-term retirement savings approach. However, it is worth reflecting on the various concessions and deductions available under the superannuation system, which may impact on the tax position of a taxpayer. Note also the Government has recently made major announcements concerning super reform. (See Superannuation reforms)

Excess contributions tax

Superannuation contributions are classified as either "concessional" or "non-concessional". Contributions above the annual contributions caps are subject to excess contributions tax, which is levied on the individual. The individual may withdraw from their superannuation fund an amount to meet the excess contributions tax liability. The caps and excess contributions tax rates (disregarding the Government’s recent announcements concerning super reform) are outlined below:

The freezing of the concessional contributions cap at $25,000 (regardless of age) for 2012–2013 and 2013–2014 means that more individuals are now at risk of inadvertently breaching their annual contributions cap.

Some of the factors taxpayers should consider include:

• triggering of the bring-forward provisions of the non-concessional contributions cap;

• changes in personal circumstances, including pay rises, that may alter the amount of concessional contributions made;

• that from 1 July 2013, the superannuation guarantee rate will gradually increase from 9%, starting with 9.25% for 2013–2014, until it reaches 12% from 1 July 2019;

• the amount of employer-paid costs such as administration fees, insurance premiums, etc, which may count towards the concessional contributions cap;

• having multiple jobs or contributing to more than one superannuation fund; and

• the age of the taxpayer.

• NOTE: that the bring-forward provisions do not apply to individuals over 65 years of age.

• NOTE: The Government has proposed to increase the concessional contributions cap to $35,000 for seniors. (See Superannuation reforms)

Timing

The ATO has further emphasised that the timing of when a superannuation fund actually receives a contribution is crucial in determining which year the contribution falls into for cap purposes. Note that the Commissioner’s practice is to deem a contribution as having been made "when the funds are credited to the superannuation provider’s account" (paragraph 13 of Taxation Ruling TR 2010/1).

Individuals should consider keeping track of contributions and avoid making last minute contributions, which could end up being allocated to the next financial year. For example, a contribution paid in late June but received by the fund in early July could cause problems if the individual is not aware of this. In this circumstance, the contribution would count towards the next financial year, and the cap for that financial year could be breached if another subsequent June contribution is made but on time.

Contributions could be made via a cheque in the mail, by electronic funds transfer, or via a clearing house. Individuals should allow for possible delays and ensure the fund will receive the funds on time. Note that this year, 30 June 2013 is a Sunday and funds transferred via electronic funds transfer may not be credited to the fund until the next business day, Monday 1 July 2013. In addition, if an employer is making a contribution on behalf of an individual, individuals should make sure the employer makes the contributions on time so that they are received by the fund by the end of the financial year.

Review salary-sacrifice arrangements with employer(s) and identify the timing of super payments relating to wages accrued for the June quarter (or June month). Note that the Administrative Appeals Tribunal has consistently held that the “timing difference” between when an employee accrues a super entitlement and when the employer is required to pay the contribution for superannuation guarantee purposes (ie within 28 days after the end of the relevant quarter) is not a “special circumstance” to enliven the Commissioner’s discretion to disregard or reallocate amounts (see below).

Commissioner's discretion

A taxpayer who has contributed above their concessional or non-concessional contributions cap can apply to the Commissioner to disregard or reallocate excess contributions for a financial year: s 292-465. An application must be made on the approved form within 60 days of receiving an excess contributions tax assessment (or a longer period allowed by the Commissioner). Note that eligible individuals who breach the concessional contributions cap by up to $10,000 will be given a once-only option for the excess contributions to be refunded without penalty. However, the refund option will not apply to excess non-concessional contributions above the $150,000 annual limit.

The Commissioner may only exercise his discretion to make a determination if “special circumstances” exist and the making of a determination would be consistent with the object of the legislation: s 292-465(3). “Special circumstances” are not defined in the legislation but would generally only exist in situations that are “unusual, uncommon or exceptional”, or if the strict application of the law would give rise to an “unjust, unreasonable or inappropriate result”.

It should be noted that the discretion is not easy to obtain. Guidance on when the Commissioner may exercise the discretion is contained in Practice Statement Law Administration PS LA 2008/1.

A determination under s 292-465 is not reviewable under the Administrative Decisions (Judicial Review) Act 1977. Instead, a taxpayer who is dissatisfied with a determination may object against the relevant assessment: s 292-465(9).

• NOTE: Some commentators have raised concerns as to how the proposed once-only option to refund excess concessional contributions up to $10,000 would interact with the freezing of the concessional contributions cap, arguing that the changes may only exacerbate the number of taxpayers who inadvertently breach the $25,000 cap. Therefore, it is important to review salary-sacrificing arrangements, transition to retirement pensions and deductible personal superannuation contributions, which are only tax-effective where an individual is within their concessional contributions cap.

• NOTE: The Government has proposed to allow individuals to withdraw any excess concessional contributions made from 1 July 2013 from their super funds. (See Superannuation reforms)

Superannuation splitting

A member of an accumulation fund (or whose benefits include an accumulation interest in a defined benefit fund) is able to split with their spouse superannuation contributions made from 1 January 2006. The spouse contributions splitting regime also covers employer contributions to untaxed superannuation schemes and exempt public sector superannuation schemes.

While the relevance of spouse contribution splitting has been reduced following the abolition of reasonable benefit limits and end benefits tax for those aged 60 and over, splitting contributions between spouses can still be a useful strategy to effectively transfer concessional contributions to the older spouse who will reach age 60 (and tax-free benefit status) first. In addition, contributions splitting may be relevant to access two low rate cap thresholds for superannuation benefits taken before age 60. However, it is not possible to split “untaxed splittable contributions” (eg non-concessional contributions) made after 5 April 2007.

Importantly, it is not mandatory for a superannuation fund to offer a contributions-splitting service for its members. However, a trustee that accepts a valid application must roll over, transfer or allot the amount of benefits in favour of the receiving spouse within 90 days after receiving the application.

Tax treatment

A member’s contribution that is split and paid to another fund is considered a “contributions-splitting superannuation benefit” and treated as a rollover superannuation benefit for the receiving spouse. As such, the contributions-splitting amount rolled over or transferred for the benefit of the member’s spouse is not subject to 15% contributions tax in the hands of the fund.

If a contributions-splitting superannuation benefit is transferred to an account within the same fund and paid to a taxpayer because their spouse is a member of the superannuation fund, the receiving spouse is deemed by s 307-5(6) to be the member of the fund for tax treatment of the superannuation benefit.

At the benefit payment stage, a contributions-splitting superannuation benefit is deemed to consist entirely of a taxable component of a superannuation benefit: s 307-140.

A person entitled to a tax deduction for a personal superannuation contribution under Subdiv 290-C of ITAA 1997 who wants to split personal contributions and claim a deduction must provide a notice under s 290-170 of ITAA 1997 to their superannuation fund before requesting the fund to split the contributions. Once a contribution has been split, a self-employed person is not able to make a new s 290-170 election to claim a deduction or amend an existing election in respect of the split amount: s 290-170(2)(d); reg 290-170.01 of the Income Tax Assessment Regulations. (See Valid notice to claim deduction on page 11.)

Spouse contributions tax offset

A tax offset of up to $540 is available under s 290-230 of ITAA 1997 for a resident taxpayer in respect of eligible contributions made by the taxpayer to a complying superannuation fund or an RSA for the purpose of providing superannuation benefits for the taxpayer’s low-income or non-working resident spouse (including a de facto spouse).

A taxpayer is entitled to the spouse contributions tax offset only if:

• the contribution is made on behalf of a person who was the taxpayer’s spouse when the contribution was made;

• both the taxpayer and the spouse were Australian residents and were not living separately and apart on a permanent basis when the contribution was made;

• the total of the spouse’s assessable income, reportable fringe benefits and reportable employer superannuation contributions is less than $13,800;

• the taxpayer cannot and has not deducted an amount for the spouse contribution as an employer contribution under s 290-60 of ITAA 1997; and

• if the contribution is made to a superannuation fund, it is a complying superannuation fund for the income year in which the contribution is made.

If the spouse in respect of whom the contribution is made is aged 65 years or over, the contribution cannot be accepted by the fund unless the spouse satisfies the requisite work test. Likewise, a regulated superannuation fund is not able to accept contributions on behalf of a spouse aged 70 to 74 years.

Spouse’s income test and limit on amount of tax offset

The assessable income, reportable fringe benefits and reportable employer superannuation contributions of the spouse must be less than $10,801 in total to obtain the maximum tax offset of $540, and less than $13,800 to obtain a partial tax offset.

The taxpayer’s own assessable or taxable income, and whether they qualify for a deduction or tax offset for any superannuation contributions made for their own benefit, is irrelevant to determining entitlement to the rebate. Similarly, whether the spouse has any other superannuation is also irrelevant.

There is no limit on the amount of the actual contributions that can be made on behalf of the spouse, merely a $3,000 limit on the contributions for which a tax offset can be obtained. If less than $3,000 is contributed, the tax offset is 18% of the actual amount of the contributions. If the sum of assessable income, reportable fringe benefits and reportable employer superannuation contributions (if any) of the spouse is greater than $10,800, the $3,000 maximum contributions subject to the tax offset is reduced by $1 for each dollar of assessable income, reportable fringe benefits and reportable employer superannuation contributions in excess of $10,800, and an 18% tax offset applies on actual contributions up to this maximum.

Transition to retirement pensions

Broadly, a transition to retirement pension (TRP) allows a taxpayer who has reached preservation age to access their superannuation benefits by commencing a non-commutable pension or annuity without having to retire from the workforce. At the same time, an individual can salary sacrifice employment income back into retirement savings. However, the pension cannot be cashed or commuted to a lump sum while the taxpayer is still working, unless a condition of release with a “nil” cashing restriction has been satisfied (eg attaining age 65 or permanently retiring from the workforce). All superannuation funds including self managed superannuation funds are able to offer such a product to their members, provided the fund’s deed allows it.

A TRP has a maximum annual payment limit of 10%. Both the minimum and maximum annual payment amounts are calculated according to the “account balance” under Sch 7 of the Superannuation Industry (Supervision) Regulations 1994 (SIS Regs). Further, the minimum annual payment amount is determined by the age of the taxpayer at the start of each financial year.

Therefore, it is necessary to decide how much superannuation capital needs to be set aside to guarantee a TRP within the minimum/maximum annual payment limits. Due consideration must also be given to the make-up of the capital, which consists of taxable components and/or non-taxable components, because the composition will impact upon the tax treatment of a pension received by a taxpayer aged under 60 years.

• NOTE: that it will not be possible to receive a pension (including a TRP) from a MySuper product from 1 July 2013. As such, a MySuper member will need to switch to a separate choice product before commencing a TRP.

Tax treatment

A TRP paid from a taxed source to an individual aged 60 or over is totally tax-free, ie non-assessable non-exempt (NANE) income. As such, it is not counted in working out the tax payable on any other assessable income of the individual.

Conversely, if an individual is under age 60, the “taxable component” of a TRP paid from a taxable source is included in the individual’s assessable income. Where the individual is above their preservation age (but below age 60) a 15% tax offset in respect of the tax component of the pension is available.

The tax-free component of a TRP paid from a taxed source is tax-free, regardless of an individual’s age.

Salary sacrifice and TRP

One advantage of a TRP is that instead of employment income being taxed at an individual’s marginal rate, the salary-sacrifice superannuation contributions are only taxed at the rate of 15% on entry into the superannuation fund. This, generally, results in less overall tax being paid on the pension income (as compared to employment income). However, it is important to note that the amount available for salary sacrificing is effectively restricted by the annual concessional contributions cap, which is determined by reference to the individual’s age.

Another advantage is the income tax exemption available to superannuation funds in respect of income derived from assets that are segregated to support a fund’s current pension liabilities.

• NOTE: Taxpayers aged 50 or over should review their TRPs and salary-sacrificing arrangements to take into account the reduction in the concessional cap from $50,000 to $25,000 for 2012–2013 and 2013–2014. However, note that the Government has proposed to increase the concessional contributions cap to $35,000 for seniors. (See Superannuation reforms)

• NOTE: Any salary-sacrificing arrangement must strictly comply with Taxation Ruling TR 2001/10.

Government co-contribution

Eligible low-income earners (including self-employed persons) may qualify for a government superannuation co-contribution payment. From 1 July 2012, the Government has proposed to reduce the matching rate from 100% to 50% with a maximum co-contribution of $500 (down from $1,000) for individuals with total incomes up to $31,920 in 2012–2013 (phasing down for incomes up to $46,920). Note that the Government has also proposed that indexation of the co-contribution income thresholds, which was frozen for 2010–2011 and 2011–2012, will also be frozen for 2012–2013 (see Tax and Superannuation Laws Amendment (2013 Measures No. 2) Bill 2013 – still before the House of Representatives at the time of writing.)

For the purposes of determining the amount of co-contribution payable, a person’s total income for an income year is reduced by amounts for which the person is entitled to a deduction as a result of carrying on a business. These deductions do not include work-related employee deductions or deductions that are available to eligible individuals (including the self-employed) for their personal superannuation contributions. However, for the purposes of determining eligibility for the co-contribution and whether an individual satisfies the 10% test, total income is not reduced by the deductions that result from carrying on a business.

From 1 July 2012, the Government also provides a low income superannuation contribution of up to $500 for concessional contributions made by individuals on adjusted taxable incomes of up to $37,000.

Pensions – minimum annual payment amounts

Account-based pensions and annuities must meet the minimum payment rules set down in Sch 7 of the SIS Regs. The payment rules specify minimum annual limits only. The Government has extended the current drawdown relief for 2012–2013. However, the minimum annual drawdown factors are expected to return to normal from 2013–2014.

Reportable employer superannuation contributions

It should be noted that since 1 July 2009, reportable employer superannuation contributions have been counted towards the maximum employee earnings limit for deducting personal contributions, the co-contribution income test, the low income superannuation contribution, and other income tests for various tax concessions and government assistance programs.

A reportable employer superannuation contribution is an amount contributed to a superannuation fund by an employer (or an associate of an employer) for the benefit of an employee (eg under a remuneration package), but only to the extent that the individual has or had, or might reasonably be expected to have or have had, the capacity to influence the size of the amount and/or the way the contribution is made (so that the employee’s assessable income is reduced).

However, a contribution made by an employer that meets the employer’s requirements under the superannuation guarantee scheme is not a reportable employer superannuation contribution, nor is a contribution made under an arm’s length industrial agreement that the employee has no capacity to influence. In addition, a contribution is not a reportable employer superannuation contribution if the amount is included in the employee’s assessable income (ie a contribution made from “post-tax” income).

A person’s reportable superannuation contributions are the sum of their “reportable employer superannuation contributions” and any deductible personal contributions for a financial year. Reportable superannuation contributions form part of a person’s adjusted taxable income for various purposes including: the Medicare levy surcharge (but not the Medicare levy); the pensioner tax offset and senior Australians tax offset; the spouse superannuation tax offset; and the dependant tax offsets.

Superannuation reforms

On 5 April 2013, the Government announced the following major superannuation reforms (presumably to end mounting speculation ahead of the 2013 Budget):

• tax-free pension earnings capped at $100,000 – the tax exemption for earnings on superannuation fund assets supporting income streams will be capped at $100,000 per annum per person from 1 July 2014. A tax rate of 15% will apply for fund earnings above $100,000 (to be indexed in $10,000 increments). Special arrangements will apply for capital gains on CGT assets purchased before 1 July 2014;

• taxation of withdrawals unchanged – the tax-free status of withdrawals from super for those aged 60 years and over will remain unchanged;

• concessional contributions cap – a $35,000 concessional cap (not indexed) will apply for people aged 60 years and over from 1 July 2013 (or 1 July 2014 for people aged 50 to 59 years) instead of the general concessional cap of $25,000. The Government has also scrapped plans to limit the higher cap to balances below $500,000;

• refund of excess concessional contributions – all individuals will be able to withdraw from their superannuation fund any excess concessional contributions made from 1 July 2013. The withdrawn excess contributions will instead be taxed at the individual's marginal tax rate (plus an interest charge);

• deeming rules for account-based pensions – the rules will be amended to ensure that superannuation account-based pension payments are assessed from 1 January 2015 for the purposes of the social security pension income test, under the same rules that apply for other financial investments. Products held by pensioners before 1 January 2015 will be grandfathered indefinitely and continue to be assessed under the existing rules;

• deferred lifetime annuities – from 1 July 2014, these will be granted the same concessional tax treatment that superannuation assets supporting income streams receive;

• lost superannuation transfers to ATO – the account balance threshold above which inactive accounts must be transferred to the ATO will be increased from $2,000 to $2,500 from 31 December 2015 (and to $3,000 from 31 December 2016); and

• Council of Superannuation Custodians – this will be established to ensure that any future superannuation changes are consistent with an agreed Charter of Superannuation Adequacy and Sustainability.

Of course, it is important to note that the above announcements are just proposals at this stage, some of which will require public consultation. More superannuation changes could be announced in the Budget, although the Treasurer has said that there would be "no further announcements in the Budget". (Source: Treasurer's interview with Kieran Gilbert, Sky News, 5 April 2013.)