House of Representatives

Tax Laws Amendment (Simplified Superannuation) Bill 2006

Superannuation (Excess Concessional Contributions Tax) Bill 2006

Superannuation (Excess Concessional Contributions Tax) Act 2007

Superannuation (Excess Non-concessional Contributions Tax) Bill 2006

Superannuation (Excess Non-concessional Contributions Tax) Act 2007

Superannuation (Excess Untaxed Roll-over Amounts Tax) Bill 2006

Superannuation (Excess Untaxed Roll-over Amounts Tax) Act 2007

Superannuation (Departing Australia Superannuation Payments Tax) Bill 2006

Superannuation (Departing Australia Superannuation Payments Tax) Act 2007

Superannuation (Self Managed Superannuation Funds) Supervisory Levy Amendment Bill 2006

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello MP)

Chapter 2 - Taxation of benefit payments

Outline of chapter

2.1 Schedule 1 to this Bill establishes a new, simplified regime for the taxation of superannuation benefits. It also removes significant complexity from the taxation arrangements that apply to the payment of superannuation benefits from 1 July 2007. Under this simplified regime:

·
the payment of superannuation benefits, whether in the form of a superannuation lump sum or a superannuation income stream, to persons aged 60 and over is tax free where those benefits have been subject to tax in the fund;
·
where a superannuation benefit contains an amount that has not been subject to tax in the fund, it will continue to be subject to tax. However, where the benefit is paid to persons aged 60 and over, a lower rate of tax applies than currently. This is relevant generally to those people (eg, public servants), who are members of a superannuation fund established by the Australian Government or a state government;
·
simplified taxation arrangements apply to the payment of superannuation benefits to persons below age 60, primarily based on the existing taxation arrangements set out in the Income Tax Assessment Act 1936 (ITAA 1936);
·
reasonable benefit limits (RBLs) are abolished; and
·
some existing provisions which are retained in the simplified regime are rewritten in a simplified and modernised form to improve the readability of the law.

2.2 A higher rate of tax on transfers over $1 million from untaxed to taxed schemes is introduced separately in the Superannuation (Excess Untaxed Roll-over Amounts Tax) Bill 2006 to ensure that each Bill deals with a separate object of taxation. In addition, the Superannuation (Departing Australia Superannuation Payments Tax) Bill 2006 replaces the Income Tax (Superannuation Payments Withholding Tax) Act 2002 to reflect the new components of superannuation benefits while retaining the same rates of taxation.

2.3 All legislative amendments are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise indicated.

Context of amendments

2.4 The taxation of superannuation is currently complex, with different arrangements applying to the taxation of contributions, earnings and benefits.

2.5 The report of the Taskforce on Reducing Regulatory Burdens on Business, Rethinking Regulation recommended that high priority be given to comprehensive simplification of the tax rules for superannuation benefits.

2.6 The taxation of superannuation benefits is determined by reference to the following factors:

·
the age of the member;
·
the form of the superannuation benefit, that is, whether it is a superannuation lump sum or superannuation income stream benefit; and
·
the taxation arrangements that apply to each component that comprise the superannuation benefit.

2.7 A superannuation benefit may comprise up to eight different components. Each component is subject to different taxation arrangements.

2.8 Superannuation benefits are subject to RBLs that limit the amount of superannuation benefits a person may receive on a concessionally taxed basis. Amounts in excess of the RBL are subject to a higher rate of tax.

2.9 The complexity of these arrangements affects the ability of individuals to make decisions relating to their retirement and adds to the administration costs for superannuation funds.

Summary of new law

2.10 Schedule 1 establishes a new regime for the taxation of superannuation benefits in the ITAA 1997.

2.11 Schedule 1 simplifies the taxation of superannuation benefits by removing the tax payable upon a superannuation benefit where it is paid to a person aged 60 and above and the benefit has already been subject to tax on contributions and earnings. The taxation arrangements that apply to the payment of a superannuation benefit to persons below age 60 are also streamlined.

Taxation of a superannuation benefit

2.12 A superannuation benefit may comprise the following:

·
a tax free component;
·
a taxable component which includes:
·
an element taxed in the fund; and / or
·
an element untaxed in the fund.

2.13 The tax free component of a superannuation benefit is generally made up of contributions from a person's post-tax income and by amounts which represent the portion of a superannuation benefit that accrued before 1 July 1983.

2.14 The tax free component is, uniformly, not assessable income and not exempt income. That is, it is paid tax free.

2.15 The taxable component of a superannuation benefit is the total value of the superannuation benefit less the tax free component. The taxable component is usually made up of tax deductible contributions made to the superannuation fund by the person and / or by the employer on the person's behalf, as well as earnings on all contributions. For most people the taxable component is entirely made up of an element taxed in the fund, that is, a part that has been subject to tax at the time that contributions were made and upon earnings.

2.16 In comparison, an element untaxed in the fund usually arises in public sector superannuation plans where tax has not been paid on contributions or earnings, or from unfunded schemes.

2.17 Different taxation arrangements apply to the element taxed in the fund and the element untaxed in the fund. These arrangements are summarised in Tables 2.1 and 2.2. The tax rates specified in the tables are maximum rates of tax. The Medicare levy is also payable upon any superannuation benefit where a tax rate greater than zero per cent applies.

Table 2.1: Superannuation member benefit - element taxed in the fund (a)
Age Superannuation lump sum Superannuation income stream
Aged 60 and above Tax free (not assessable, not exempt income). Tax free (not assessable, not exempt income).
Preservation age to age 59 Zero per cent tax up to low rate cap of $140,000 (indexed).
Any amount above low rate cap is subject to 15 per cent tax.
Marginal tax rates and 15 per cent tax offset.
Below preservation age Taxable component is subject to 20 per cent tax. Marginal tax rates (no tax offset) (b).

(a)
Tax free component is always tax free.
(b)
A disability superannuation income stream also receives a 15 per cent offset.

Table 2.2: Superannuation member benefit - element untaxed in the fund (a)
Age Superannuation lump sum Superannuation income stream
Aged 60 and above 15 per cent up to the untaxed cap amount of $1 million (indexed) per superannuation plan.
The top marginal rate applies to amounts above this cap.
Marginal tax rates and 10 per cent tax offset.
Preservation age to age 59 15 per cent up to the low rate cap amount of $140,000 (indexed).
30 per cent on those amounts up to the untaxed plan cap of $1 million (indexed).
The top marginal tax rate applies to any amount above the untaxed plan cap.
Marginal tax rates (no tax offset).
Below preservation age 30 per cent up to untaxed plan cap of $1 million (indexed).
The top marginal rate applies to amounts above this cap.
Marginal tax rates (no tax offset).
(a) Tax free component is always tax free.

Disability benefit

2.18 Where a person receives a disability superannuation income stream before reaching his or her preservation age, he or she is entitled to claim a 15 per cent tax offset in respect of the element taxed in the fund.

Superannuation death benefit

2.19 Where a person dies, his or her superannuation benefit may be paid to another person (or to the trustee of a deceased estate). This person may be a dependant or a non-dependant of the deceased person for tax purposes. For tax purposes, a dependant may include any spouse or former spouse of the deceased, his or her children under the age of 18 and any other person who was dependant upon the deceased.

2.20 Different taxation arrangements apply to the payment of a superannuation death benefit to a person that is a dependant of the deceased person for tax purposes in comparison to a person that is not a dependant of the deceased for tax purposes. The taxation arrangements also differ depending on whether the amount is paid as a lump sum or an income stream and, in the case of an income stream, the age of the deceased person and the recipient.

2.21 From 1 July 2007, a person who is not a dependant of the deceased will not be able to receive a superannuation income stream under amendments to be made to the Superannuation Industry Supervision Regulations 1994 . Non-dependants for whom a death benefit superannuation income stream commenced prior to 1 July 2007 will be taxed in the same manner as dependants.

2.22 Tables 2.3 and 2.4 summarise the taxation arrangements that apply to the payment of a superannuation death benefit from 1 July 2007. The tax rates specified in the tables are maximum rates of tax. The Medicare levy is also payable upon any superannuation benefit where a tax rate greater than zero per cent applies.

Table 2.3: Superannuation death benefits paid to a dependant (a)
Age of deceased Superannuation death benefit Age of recipient Taxation
Any age Lump sum Any age Tax free (not assessable, not exempt income).
Aged 60 and above Income stream Any age Taxable component - element taxed in the fund is tax free (not assessable, not exempt income).
Taxable component - element untaxed in the fund is subject to marginal tax rates and the person is entitled to a 10 per cent tax offset upon this amount.
Below age 60 Income stream Above age 60 Taxable component - element taxed in the fund is tax free (not assessable, not exempt income).
Taxable component - element untaxed in the fund is subject to marginal tax rates and the person is entitled to a 10 per cent tax offset upon this amount.
" " Below age 60 Taxable component - element taxed in the fund is subject to marginal tax rates and the person is entitled to a 15 per cent tax offset upon this amount.
Taxable component - element untaxed in the fund is subject to marginal tax rates.
(a) Tax free component is always tax free.

Table 2.4: Superannuation death benefits paid to a non-dependant (a)
Age of deceased Superannuation death benefit Age of recipient Taxation
Any age Lump sum Any age Taxable component - element taxed in the fund is subject to 15 per cent tax.
Taxable component - element untaxed in the fund is subject to 30 per cent tax.
Any age Income stream Any age Not applicable.
Income streams that had commenced prior to 1 July 2007 will be taxed as if received by a dependant.
(a) Tax free component is always tax free.

Supporting Bills

2.23 A higher rate of tax on transfers over $1 million from untaxed to taxed schemes is introduced separately by the Superannuation (Excess Untaxed Roll-over Amounts Tax) Bill 2006 to ensure each Bill deals with a separate object of taxation. The Superannuation (Departing Australia Superannuation Payments Tax) Bill 2006 replaces the Income Tax (Superannuation Payments Withholding Tax) Act 2002 to reflect the new components of superannuation benefits while retaining the same rates of taxation.

2.24 The taxation of certain other amounts at the top marginal tax rate will be achieved by consequential amendments that will be made to the Income Tax Rates Act 1986 .

Comparison of key features of new law and current law

New law Current law
Taxation of benefit payments
Superannuation benefits which have been subject to tax on contributions and earnings are tax free for all people aged 60 and over from 1 July 2007. Superannuation lump sum benefits paid from a taxed source comprise up to eight different components that are each subject to different taxation arrangements.
Five per cent of the pre-July 1983 component is subject to marginal tax rates.
Five per cent of the concessional component is subject to marginal tax rates.
All undeducted contributions, post-June 1994 invalidity payments and capital gains tax exempt components are tax free.
The non-qualifying component is subject to marginal tax rates.
The excessive component is subject to 38 per cent tax.
Superannuation income stream benefits paid from a taxed source are included in assessable income with a 15 per cent tax offset applying after age 55.
Element untaxed in the fund
Where a person aged 60 and over receives a superannuation income stream that contains an element untaxed in the fund (ie, no contributions or earnings tax has been paid on this element), he or she is entitled to a 10 per cent tax offset upon this amount.
Where a person aged 60 and over receives a superannuation lump sum that contains an element untaxed in the fund, a 15 per cent tax is imposed on the element untaxed in the fund up to the untaxed plan cap of $1 million (indexed) and the top marginal tax rate applies to amounts above this cap.
Where a person aged 55 and over receives a superannuation income stream that contains an element untaxed in the fund, this amount is included as part of the person's assessable income and subject to marginal tax rates.
Where a person aged 55 and over receives a superannuation lump sum that contains a post-June 1983 untaxed element, this amount is subject to 15 per cent tax up to a low rate threshold ($135,590 in 2006-07). Amounts above this amount are subject to 30 per cent tax and amounts above the RBL are subject to the top marginal tax rate.
Reasonable benefit limits
RBLs are abolished. The RBL system determines the maximum amount of superannuation benefits that a person may receive during his or her lifetime on a concessionally taxed basis.
Where a superannuation lump sum or superannuation income stream exceeds the lump sum RBL or pension RBL, excess amounts are taxed at a higher rate.
Superannuation death benefits
A lump sum death benefit paid to a dependant is tax free.
A lump sum death benefit paid to a non-dependant is taxed at 15 per cent (element taxed in the fund) or 30 per cent (element untaxed in the fund).
A superannuation income stream death benefit is tax free (element taxed in the fund) or taxed at marginal rates less a 10 per cent tax offset (element untaxed in the fund) if either the deceased or recipient is over the age of 60.
All other superannuation income stream death benefits are taxed at marginal rates and receive a 15 per cent offset (element taxed in the fund) or no offset (element untaxed in the fund).
A lump sum death benefit paid to a dependant is tax free up to the deceased's pension RBL.
A lump sum death benefit paid to a non-dependant is taxed at 15 per cent (element taxed in the fund) or 30 per cent (element untaxed in the fund) up to the deceased's pension RBL.
A superannuation income stream death benefit is taxed at marginal rates and receives the same rebate as the original pension (if any).

Detailed explanation of new law

Overall structure

2.25 The structure of this Division is based on the following outline, and addresses 'superannuation member benefits' (including 'superannuation lump sums' and 'superannuation income streams') from 'complying superannuation plans', 'superannuation death benefits', 'superannuation benefits' paid from 'non-complying superannuation plans', 'roll-overs' and key concepts that are used throughout this Bill.

Division 301 Superannuation member benefits paid from a complying plan
Subdivision 301-B Member benefits: general rules
Subdivision 301-C Member benefits: elements untaxed in the fund
Subdivision 301-D Departing Australia superannuation payments
Subdivision 301-E Superannuation lump sum member payments less than $200
Division 302 Superannuation death benefits paid from a complying plan
Subdivision 302-B Death benefits to dependants
Subdivision 302-C Death benefits to non-dependants
Subdivision 302-D Definitions relating to dependants
Division 303 Superannuation benefits paid in special circumstances
Division 304 Superannuation benefits in breach of statutory requirements
Division 305 Superannuation benefits from non-complying superannuation plans
Subdivision 305-A Superannuation benefits paid from resident non-complying superannuation plans
Subdivision 305-B Superannuation benefits paid from foreign superannuation funds
Division 306 Roll-overs
Division 307 Key concepts
Subdivision 307-A Superannuation benefits generally
Subdivision 307-B Superannuation lump sums and income streams
Subdivision 307-C Components of superannuation benefit
Subdivision 307-D Superannuation interests
Subdivision 307-E Elements taxed and untaxed in the fund of the taxable component of a superannuation benefit
Subdivision 307-F Low rate cap and untaxed plan cap
Subdivision 307-G Other concepts

Superannuation member benefits paid from complying plans

2.26 Division 301 sets out the taxation arrangements that apply to superannuation 'member benefits' paid from a complying superannuation plan. Member benefits are broadly all superannuation benefits other than benefits paid after the death of the member.

2.27 The tax arrangements differ in accordance with the age of the person that receives the superannuation benefit and whether the superannuation benefit is a superannuation lump sum or a superannuation income stream. It is also relevant to consider whether the 'taxable component' of the superannuation benefit includes an 'element taxed in the fund' and / or an 'element untaxed in the fund'. The Division also sets out taxation arrangements that apply to 'departing Australia superannuation payments' and certain superannuation lump sum member benefit payments that are less than $200. [ Schedule 1, item 1, section 301 - 5 ]

2.28 Superannuation death benefits are taxed under separate arrangements and are dealt with in paragraphs 2.68 to 2.80 of this chapter.

Member benefits: general rules

2.29 Subdivision 301-B sets out the tax treatment of the most common superannuation benefits, that is, benefits which do not include an element untaxed in the fund.

2.30 A superannuation benefit paid to a person aged 60 and over as a superannuation lump sum or superannuation income stream benefit is not assessable income and is not exempt income. 'Non-assessable non-exempt income' is defined under section 6-23 of the ITAA 1997 and it means that the person does not have to pay income tax on it - in simple terms it is tax free. [ Schedule 1, item 1, section 301 - 10 ]

2.31 If the superannuation benefit includes an element untaxed in the fund, this Subdivision must be read with Subdivision 301-C. Elements untaxed in the fund generally only apply to members of public sector superannuation plans. Member benefits : person below age 60 and above preservation age

2.32 The 'tax free component' of a superannuation member benefit paid to a person who has reached his or her preservation age and is below age 60 is not assessable income and is not exempt income. The superannuation benefit may be a superannuation lump sum or superannuation income stream benefit. A person's preservation age depends on his or her birth date and is determined in accordance with Regulation 6.01 of the Superannuation Industry (Supervision) Regulations 1994 . [ Schedule 1, item 1, section 301 - 15 ]

2.33 The taxable component of a superannuation lump sum benefit paid to a person who has reached his or her preservation age and is below age 60 is assessable income. The element taxed in the fund and the element untaxed in the fund combine to form the taxable component; however, each element is subject to different income tax treatment. [ Schedule 1, item 1, section 302 - 20 ]

2.34 Different income tax rates are payable on the element taxed in the fund of a superannuation lump sum. Up to a certain threshold, known as the 'low rate cap' amount, an offset applies which ensures that the tax rate on the element taxed in the fund does not exceed zero per cent. Any amount greater than the low rate cap amount is subject to income tax at a maximum rate of 15 per cent. [ Schedule 1, item 1, section 301 - 20 ]

2.35 Different taxation arrangements, outlined under paragraphs 2.46 to 2.55, apply where the taxable component of a superannuation benefit contains an element untaxed in the fund.

2.36 Both the element taxed in the fund and the element untaxed in the fund (if any) can utilise the low rate cap amount. The low rate cap amount is calculated in accordance with section 307-345 and is $140,000 for 2007-08 and indexed thereafter.

Example 2.1 Michelle received two superannuation lump sum benefits from two different superannuation plans at age 58. The first superannuation lump sum benefit amount was $150,000. The tax free component was $40,000, the taxable component included an element taxed in the fund of $60,000 and an element untaxed in the fund of $50,000. Her second superannuation lump sum was for $600,000; the tax free component was $250,000 and the taxable component (which was completely comprised of an element taxed in the fund) was $350,000.The low rate cap amount applies first to elements taxed in the superannuation fund received in an income year. Michelle therefore did not pay tax on $140,000 of the element taxed in the fund of the two superannuation lump sum benefits.Michelle paid a maximum 30 per cent tax (plus the Medicare levy) on the element untaxed in the fund of $50,000 and a maximum 15 per cent tax (plus the Medicare levy) on the remaining element taxed in the fund.

2.37 The taxable component of a superannuation income stream benefit paid to a person who has reached his or her preservation age and is below age 60 is assessable income. He or she is entitled to a tax offset equal to 15 per cent of the taxable component of the superannuation income stream benefit. Different taxation arrangements apply to an element untaxed in the fund that forms part of the taxable component under Subdivision 301-C. [ Schedule 1, item 1, section 301 - 25 ]

Member benefits - recipient under preservation age

2.38 The tax free component of a superannuation member benefit, whether a superannuation lump sum or superannuation income stream benefit, is not assessable income and not exempt income where it is paid to a person below his or her preservation age. [ Schedule 1, item 1, section 301 - 30 ]

2.39 The taxable component of a superannuation lump sum paid to a person below his or her preservation age is assessable income. The person is entitled to a tax offset so that the income tax payable on the element taxed in the fund of the lump sum is not greater than 20 per cent. The taxable component may include an element untaxed in the fund and the taxation of this element is addressed under Subdivision 301-B. [ Schedule 1, item 1, section 302 - 35 ]

2.40 The taxable component of a superannuation income stream is assessable income where it is paid to a person who is below his or her preservation age. [ Schedule 1, item 1, subsection 302 - 40(1 )]

Disability superannuation benefits

2.41 A person receives a disability superannuation benefit if he or she has suffered physical or mental ill-health and two legally qualified medical practitioners certify that the person is unlikely to be gainfully employed again in a position for which he or she is reasonably qualified, due to his or her education, experience or training. [ Schedule 10, item 19 ]

2.42 A person is gainfully employed where he or she is employed or self-employed for gain in a business, trade, profession, vocation, calling, occupation or employment. This definition extends access to disability superannuation benefits to the self-employed. [ Schedule 10, item 36 ]

2.43 Where a person receives a disability superannuation benefit, he or she is entitled to a 15 per cent tax offset on the taxable component if it is paid as a superannuation income stream. If the person receives the disability superannuation benefit as a lump sum, the tax free component of the benefit is increased to broadly reflect the period where they would have expected to have been gainfully employed. [ Schedule 1, item 1, subsection 301 - 40(2 ) and section 307 - 145 ]

Application of the tax offset

2.44 Sections 301-20, 301-35, 301-95, 301-105 and 301-115 set out different tax offsets that apply to the taxable component of a superannuation lump sum benefit in accordance with the age of the member and the elements of the component. These tax offsets reduce the amount of tax payable on the benefit. In practice, these sections specify the maximum income tax rates applicable to the element(s) that form part, or all, of the taxable component. Where a person would be subject to a lower rate of tax than the maximum rate specified by the offset in the relevant section, the lower rate applies.

2.45 Sections 301-25, 301-40 and 301-100 set out different tax offsets that apply to the taxable component of a superannuation income stream benefit in accordance with the age of the member. These tax offsets reduce the amount of tax payable on the benefit.

Member benefits: element untaxed in the fund

2.46 Where the taxable component of a superannuation benefit is wholly or partly made up of an element untaxed in the fund, the tax free component, and that part of the taxable component comprising an element taxed in the fund, if any, are treated on the same basis as outlined above. The taxation arrangements that apply to the tax free component and the element taxed in the fund are not affected by the taxation arrangements that apply specifically to the element untaxed in the fund. [ Schedule 1, item 1, section 301 - 90 ]

Member benefits (element untaxed in the fund) - recipient aged 60 or above

2.47 Where a person aged 60 or over receives a superannuation lump sum benefit that contains an element untaxed in the fund, that amount is assessable income. [ Schedule 1, item 1, subsection 301 - 95(1 )]

2.48 The person is entitled to a tax offset to ensure that the tax rate that he or she is liable to pay on the element untaxed in the fund, up to the untaxed plan cap amount, is not greater than 15 per cent. Where the element untaxed in the fund is greater than this amount, the top marginal tax rate is applied in accordance with consequential amendments that will be made to the Income Tax Rates Act 1986 . The person is entitled to a separate untaxed plan cap for each plan they receive superannuation lump sum benefits from. [ Schedule 1, item 1, subsections 301 - 95(2 ) and ( 3 )]

Example 2.2 Jenny is a public servant and receives a superannuation lump sum of $500,000 at age 60. Her superannuation lump sum includes an element untaxed in the fund of $300,000, an element taxed in the fund of $100,000 and a tax free component of $100,000.Jenny receives the element taxed in the fund and the tax free component tax free. The element untaxed in the fund is taxed at her marginal tax rates up to a maximum rate of 15 per cent (plus the Medicare levy).

2.49 Where a person aged 60 or above receives a superannuation income stream benefit, the element untaxed in the fund is assessable income and subject to marginal tax rates. The person is also entitled to a 10 per cent tax offset on this amount. [ Schedule 1, item 1, section 301 - 100 ]

Example 2.3 Vern receives a superannuation income stream of $56,000 which commenced prior to 1 July 2007. The superannuation income stream has a deductible (tax free) amount of $6,000 (for contributions made from his post-tax income) and the remainder is an element untaxed in the fund.Vern will continue to receive the deductible amount of $6,000 as the tax free component. He will also continue to be assessed on the remaining $50,000 at marginal rates, but will receive a tax offset of 10 per cent of $50,000 (ie, $5,000). The amount of tax Vern pays will therefore be reduced by up to $5,000.

Member benefits (element untaxed in the fund) - recipient aged over preservation age and below 60

2.50 Where a person who is below age 60 and has reached his or her preservation age receives a superannuation lump sum benefit, the element untaxed in the fund is assessable income and is subject to different rates of tax:

·
up to the low rate cap amount (if any) - a maximum of 15 per cent;
·
up to the 'untaxed plan cap' amount for each 'superannuation plan' (excluding any low rate cap amount) - a maximum of 30 per cent; and
·
above the untaxed plan cap amount - the top marginal tax rate set out in the Income Tax Rates Act 1986 .

[ Schedule 1, item 1, section 301 - 105 ]

Example 2.4 Jack is 58 years of age when he receives a superannuation lump sum of $180,000 which is completely comprised of an element untaxed in the fund. Jack has not previously received a superannuation lump sum.The amount up to Jack's low rate cap of $140,000 is taxed at his marginal tax rates up to a maximum rate of 15 per cent (plus the Medicare levy). The remaining $40,000 is taxed at Jack's marginal tax rates up to a maximum rate of 30 per cent (plus the Medicare levy).

2.51 Where a person who has reached his or her preservation age but is below age 60 commences receiving a superannuation income stream benefit, the element untaxed in the fund is assessable income and marginal tax rates apply. [ Schedule 1, item 1, section 301 - 110 ]

Member benefits (element untaxed in the fund) - recipient aged under preservation age

2.52 Where a superannuation lump sum benefit is paid to a person below his or her preservation age that includes an element untaxed in the fund, this amount forms part of his or her assessable income. [ Schedule 1, item 1, subsection 301 - 115(1 )]

2.53 The person is entitled to a tax offset on the element untaxed in the fund up to the untaxed plan cap amount for the superannuation plan to ensure that the maximum rate of tax that can apply is 30 per cent. The top marginal tax rate applies to any amount greater than the untaxed plan cap amount, in accordance with the Income Tax Rates Act 1986 . [ Schedule 1, item 1, subsections 301 - 115(2 ) and ( 3 )]

2.54 Where a person receives more than one superannuation lump sum benefit that includes an element untaxed in the fund from two different superannuation plans, he or she is entitled to a separate untaxed plan cap in respect of each superannuation plan. [ Schedule 1, item 1, subsection 301 - 115(3 )]

2.55 Where a person who is below his or her preservation age receives a superannuation income stream benefit that includes an element untaxed in the fund, this forms part of his or her assessable income and is taxed at marginal tax rates. [ Schedule 1, item 1, section 301 - 120 ]

Departing Australia superannuation payments

2.56 A departing Australia superannuation payment must be paid as a superannuation lump sum benefit to a person that has departed Australia. This payment must comply with one of the following:

·
regulations under the Superannuation Industry (Supervision) Act 1993 or the Retirement Savings Account Act 1997 ;
·
section 67A of the Small Superannuation Accounts Act 1995 ; or
·
the rules of the fund that apply to the operation of an exempt public sector superannuation scheme provided that these rules are substantially similar to the regulations set out above.

[ Schedule 1, item 1, section 301 - 170 ]

2.57 Where a person receives a departing Australia superannuation payment, the benefit is not assessable and is not exempt income and, therefore, the person is not liable to pay income tax. This restates existing provisions set out in section 27GA of the ITAA 1936. [ Schedule 1, item 1, subsection 301 - 175(1 )]

2.58 The benefit is however subject to a final withholding tax in accordance with the Superannuation (Departing Australia Superannuation Payments Tax) Act 2006 . [ Schedule 1, item 1, subsection 301 - 175(2 )]

2.59 The Superannuation (Departing Australia Superannuation Payments Tax) Bill 2006 replaces the Income Tax (Superannuation Payments Withholding Tax) Act 2002 to reflect the new components of superannuation benefits while retaining the same rates of taxation. The rates are nil for the tax free component, 30 per cent for the element taxed in the fund and 40 per cent for the element untaxed in the fund. [ Superannuation ( Departing Australia Superannuation Payments Tax ) Bill 2006 ]

Superannuation lump sum member benefits less than $200

2.60 Where a person receives a member benefit that is less than $200 in value and the requirements specified in the regulations are met, he or she receives this benefit tax free provided that it is paid as a superannuation lump sum and it is the person's entire benefit in the plan. Regulations are able to specify that this will apply to certain types of payments, for example, those relating to otherwise lost members. [ Schedule 1, item 1, section 301 - 225 ]

Low rate cap and untaxed plan cap amounts

Low rate cap

2.61 The low rate cap reflects the low rate threshold for eligible termination payments (ETPs) calculated under former section 159SA of the ITAA 1936. It is being retained to maintain the existing tax treatment of superannuation payments between preservation age and age 60.

2.62 The low rate cap for the 2007-08 income year is $140,000. This cap is indexed annually in accordance with section 960-285. [ Schedule 1, item 1, section 307 - 345 ]

2.63 As it reflects current arrangements, the low rate cap is reduced by any amount previously applied to the low rate threshold. In these cases, the first cap amount for the 2007-08 income year is calculated by adding together:

·
the person's closing balance for the 2006-07 income year that is calculated in accordance with former subsection 159SF(2) of the ITAA 1936; and
·
$4,410, that is, the difference between $140,000 and the upper limit for the 2006-07 income year calculated in accordance with section 159SG of the ITAA 1936.

[ Schedule 1, item 25, section 307 - 345 of the Income Tax ( Transitional Provisions ) Act 1997 ]

2.64 The low rate cap is a lifetime limit. The low rate cap is therefore reduced by any amount for which a person has received a tax offset under subsection 301-20(4) or 301-105(4) which applies a tax offset to those payments or amounts that are counted towards the low rate cap amount. [ Schedule 1, item 1, subsection 307 - 345(2 )]

Untaxed plan cap amount

2.65 The untaxed plan cap amount ensures that the concessionality of benefits that have not been subject to contributions or earnings tax in a superannuation fund is targeted appropriately. The untaxed plan cap amount is necessary as the caps that operate so as to limit the amount of superannuation contributions that a person can make (or an employer can make upon his or her behalf) do not apply to those employer contributions that are included as part of an element untaxed in the fund.

2.66 The untaxed plan cap amount for the 2007-08 income year is $1 million. This cap is indexed annually in accordance with section 960-285. [ Schedule 1, item 1, section 307 - 350 ]

2.67 The untaxed plan cap amount is a per plan limit, that is, a separate untaxed plan cap applies to each superannuation plan from which a person receives superannuation lump sum member benefits. The untaxed plan cap amount for each superannuation plan is reduced by the total amount of each element untaxed in the fund of a superannuation lump sum that a person has received, including roll-overs. [ Schedule 1, item 1, subsection 307 - 350(2 )]

Superannuation death benefits

Superannuation death benefits paid from complying plans

2.68 Division 302 sets out the taxation arrangements that apply to the payment of 'superannuation death benefits'. These arrangements depend on whether the person that receives the superannuation death benefit is a dependant of the deceased or not and whether the amount is paid as a 'lump sum superannuation death benefit' or a 'superannuation income stream death benefit'. The current definition of a dependant for tax purposes, which includes individuals in an interdependency relationship, is being maintained. In the case of a superannuation income stream death benefit, it is also relevant to consider the age of the deceased person and the recipient. [ Schedule 1, item 1, sections 302 - 5, 302 - 195 and 302 - 200 ]

2.69 From 1 July 2007, a person who is not a dependant of the deceased will not be able to receive a superannuation income stream under amendments to be made to the Superannuation Industry Supervision Regulations 1994 . Non-dependants for whom a death benefit superannuation income stream commenced prior to 1 July 2007 will be taxed in the same manner as dependants.

Superannuation death benefits paid to a trustee of a deceased estate

2.70 A superannuation death benefit may be received by a person acting as a trustee of a deceased estate. The taxation arrangements that apply to this superannuation death benefit are determined in accordance with the taxation arrangements that would otherwise apply to the person or persons otherwise intended to benefit from the estate [ Schedule 1, item 1, section 302 - 10 ].

·
This means that where a dependant of the deceased is expected to receive part or all of a superannuation death benefit, it will be subject to tax as if it were paid to a dependant of the deceased. However, it is also clear that the dependant is not presently entitled to this superannuation death benefit at this time and it therefore does not form part of his or her assessable income [ Schedule 1, item 1, subsection 302 - 10(2 )].
·
Where a person that is not a dependant is expected to receive part or all of a superannuation death benefit, it will be subject to tax as if it were paid to a non-dependant of the deceased to that extent. However, it is also clear that the non-dependant is not presently entitled to this superannuation death benefit at this time and it therefore does not form part of his or her assessable income [ Schedule 1, item 1, subsection 302 - 10(3 )].

2.71 This is to ensure that the superannuation death benefit is not subject to double taxation.

Death benefits to a dependant

2.72 Where a person receives a superannuation lump sum death benefit and that person was a dependant of the deceased, it is not assessable income and is not exempt income. This means the person is not liable to pay tax on this amount. [ Schedule 1, item 1, section 302 - 60 ]

Superannuation income stream

2.73 A person may receive a superannuation income stream upon the death of a person upon whom he or she was dependent. This income is tax free income where the dependant is aged 60 or above or the deceased was aged 60 or above at the time when he or she died. [ Schedule 1, item 1, section 302 - 65 ]

2.74 Where a dependant of the deceased is under age 60 at the time he or she receives the benefit and the deceased died before he or she turned age 60:

·
the tax free component of a superannuation income stream is tax free income [ Schedule 1, item 1, section 302 - 70 ];
·
the element taxed in the fund is assessable income and the dependant is entitled to a tax offset equal to 15 per cent of the element taxed in the fund [ Schedule 1, item 1, section 302 - 75 ]; and
·
when the recipient turns 60 the superannuation income stream becomes tax free.

2.75 Where a child of the deceased under age 25 receives a death benefit superannuation income stream, he or she will be required to commute this benefit upon turning age 25 in accordance with payment standards prescribed under subsection 31(1) of the Superannuation Industry Supervision Act 1993 . This commutation is treated as non-assessable and non-exempt income. [ Schedule 1, item 1, section 303 - 5 ]

An element untaxed in the fund

2.76 Where the taxable component of a superannuation income stream benefit includes an element untaxed in the fund, the tax free component is still tax free. Further, the person that receives the benefit is entitled to either the 15 per cent tax offset under section 302-75 or the tax free arrangements set out under section 302-65 in respect of the element taxed in the fund. The element untaxed in the fund is treated differently in accordance with section 302-80 or 302-85 depending upon the age of the deceased and the dependant. [ Schedule 1, item 1, section 302 - 80 ]

2.77 Where a superannuation income stream is paid to a dependant of the deceased who is age 60 or over when he or she receives the benefit or the deceased was age 60 or over at the time of his or her death, the dependant is entitled to a tax offset equal to 10 per cent of the element untaxed in the fund. [ Schedule 1, item 1, section 302 - 85 ]

2.78 In the event that a superannuation income stream is paid to a dependant under age 60 and the deceased died before he or she turned age 60, the element untaxed in the fund is part of the dependant's assessable income. When the dependant turns 60 they will receive a 10 per cent tax offset. [ Schedule 1, item 1, section 302 - 90 ]

Death benefits to a non-dependant

2.79 A non-dependant of the deceased may receive a superannuation lump sum. The tax free component of this lump sum is not assessable and is not exempt income and therefore the person is not liable to pay tax on this amount. [ Schedule 1, item 1, section 302 - 140 ]

2.80 Different taxation arrangements apply to the element taxed in the fund and the element untaxed in the fund that makes up the taxable component. An offset is available to ensure the tax rate on the element taxed in the fund is not greater than 15 per cent. The person is also entitled to a tax offset to ensure that the tax payable on the element untaxed in the fund does not exceed 30 per cent. [ Schedule 1, item 1, section 302 - 145 ]

Superannuation benefits if there is a breach of statutory requirements

2.81 The taxation arrangements set out in relation to superannuation benefits paid from a complying superannuation fund do not apply where a superannuation fund has not adhered to requirements set out in section 62 of the Superannuation Industry Supervision Act 1993 . [ Schedule 1, item 1, section 304 - 5 ]

2.82 Further, these arrangements do not apply where a person receives an amount or benefit that does not meet the payment standards prescribed under subsection 31(1) or 32(1) of the Superannuation Industry Supervision Act 1993 relating to the operation of regulated superannuation funds and regulated approved deposit funds respectively. This means that where a person receives a superannuation benefit that does not meet these requirements, it must be included as part of his or her assessable income and is therefore subject to marginal tax rates. [ Schedule 1, item 1, subsections 304 - 10(1 ) and ( 2 )]

2.83 A person must also include as part of his or her assessable income any benefit received from a retirement savings account (RSA) that is in breach of the Retirement Savings Accounts Act 1997 , regulations made under the Act or payment standards prescribed under subsection 38(2) of the Retirement Savings Accounts Act 1997 relating to the operating standards applying to an RSA. [ Schedule 1, item 1, subsection 304 - 10(3 )]

2.84 The Commissioner of Taxation (Commissioner) retains discretion to provide that an amount may be excluded from a person's assessable income and treated as a superannuation benefit where the Commissioner is satisfied that it would be unreasonable not to do so. The Commissioner may have regard to the nature of the superannuation fund, where relevant, and any other matter that he or she may consider to be relevant. [ Schedule 1, item 1, subsection 304 - 10(4 )]

2.85 Where a payment is made from a superannuation plan regarding a release authority in relation to excess contributions tax, the amount specified in the release authority is not assessable and not exempt income. Anything above this amount must be included as part of the person's assessable income in the year it is released and is subject to income tax at the person's marginal tax rates. [ Schedule 1, item 1, section 304 - 15 ]

Superannuation benefits paid from non-complying superannuation plans

2.86 The existing tax treatment of superannuation benefits paid from non-complying superannuation plans will be maintained, however the terminology applying to these benefits will be simplified. In summary:

·
Superannuation benefits paid from 'non-complying Australian superannuation funds' are exempt income as these superannuation funds do not receive tax concessions. These funds were formerly known as eligible resident non-complying superannuation funds [ Schedule 1, item 1, Subdivision 305 - A ].
·
Superannuation lump sum benefits paid from 'foreign superannuation funds' continue to be taxed on the earnings while the person was an Australian resident. These funds were formerly known as eligible non-resident non-complying superannuation funds [ Schedule 1, item 1, Subdivision 305 - B ].
·
Superannuation income streams paid from foreign superannuation funds continue to be taxed at marginal rates under existing provisions set out in the ITAA 1936.

Roll-overs

2.87 Generally a 'roll-over superannuation benefit' is a lump sum superannuation member benefit that can be paid from, and to, a complying superannuation plan. It may also be paid to an entity to purchase a superannuation annuity. A person is taken to have received a roll-over superannuation benefit when a payment is made for his or her benefit or where he or she has made a direction or request that a payment be made. [ Schedule 1, item 1, sections 306 - 10 and 307 - 15 ]

2.88 Regulations may specify those superannuation benefits that are not roll-over superannuation benefits. [ Schedule 1, item 1, paragraph 306 - 10(b )]

2.89 A roll-over superannuation benefit is not assessable income and not exempt income at the time that it is made. In most cases a roll-over superannuation benefit is not taxed at the time that the roll-over occurs. [ Schedule 1, item 1, section 306 - 5 ]

2.90 A person may have more than one superannuation plan with a superannuation provider. It is therefore possible that a superannuation benefit may be rolled over from one superannuation plan to another superannuation plan held by the same superannuation provider. A superannuation plan may also contain more than one superannuation interest. Therefore a superannuation interest in a superannuation plan can be paid into another superannuation interest in the same plan and qualifies as a roll-over. [ Schedule 1, item 1, subsection 307 - 5(8 )]

2.91 A person may have a benefit that is a roll-over superannuation benefit that consists wholly or partly of an amount paid from an element untaxed in the fund (an untaxed roll-over amount). If the untaxed roll-over amount exceeds the person's untaxed plan cap amount for a superannuation plan tax is payable on the amount of the excess. [ Schedule 1, item 1, section 306 - 15 ]

2.92 The tax on the 'excess untaxed roll-over amount' is introduced under the Superannuation (Excess Untaxed Roll-over Amounts Tax) Bill 2006. [ Schedule 1, item 1, section 306 - 15 ]

2.93 A higher rate of tax on transfers over $1 million from untaxed plans is introduced separately in the Superannuation (Excess Untaxed Roll-over Amounts Tax) Bill 2006. The rate of tax is the top marginal tax rate plus the Medicare levy. This tax will be levied on the person on whose behalf the roll-over was made and withheld by the originating superannuation fund. [ Superannuation ( Excess Untaxed Roll - over Amounts Tax ) Bill 2006 ]

2.94 The Commissioner or a state or territory authority (as defined by the Superannuation (Unclaimed Money and Lost Members) Act 1999 ) may receive a superannuation benefit on behalf of a person where they cannot be found. The person is not subject to income tax on this amount as it is not assessable income and it is not exempt income. [ Schedule 1, item 1, section 306 - 20 ]

Key concepts

Types of superannuation benefits

What is a superannuation benefit?

2.95 Superannuation benefits are typically paid from superannuation funds, RSAs, approved deposit funds or superannuation annuities. A 'superannuation annuity' will be defined in regulations to cover superannuation income streams purchased from life insurance companies and other similar providers. [ Schedule 1, item 1, section 307 - 5 ]

2.96 Government agencies also make a range of payments which are superannuation benefits. These include payments by the Australian Taxation Office (ATO) as a result of the administration of the superannuation co-contribution and superannuation guarantee (SG), and payments from unclaimed money registers. [ Schedule 1, item 1, section 307 - 5 ]

2.97 In order to maintain the current tax treatment, the following payments are not superannuation benefits:

·
Payments under an income stream because a person is temporarily unable to perform his or her normal duties as an employee. These are considered to be replacement of regular income, and are therefore taxable at marginal rates.
·
Payments received from a commutation of a superannuation income stream and wholly applied to pay a superannuation contributions surcharge liability are tax free.

[ Schedule 1, item 1, section 307 - 10 ]

Types of superannuation benefits

2.98 As outlined above the tax treatment of a superannuation benefit differs depending on the form in which it is paid and to whom it is paid.

2.99 A superannuation benefit can be paid as either a lump sum or as an income stream. A 'superannuation income stream' will be defined in regulations. [ Schedule 1, item 1, sections 307 - 65 and 307 - 70 ]

2.100 A superannuation benefit can be paid as either a member superannuation benefit or a death superannuation benefit. [ Schedule 1, item 1, section 307 - 5 ]

2.101 A superannuation benefit is a superannuation member benefit if it is paid to the member, including if:

·
the member requests that it be paid to another person or to an entity;
·
it is paid as a 'contributions splitting benefit'; or
·
it is paid to the member as a result of a 'family law superannuation payment'. Such payments will not be a superannuation benefit to the spouse originally entitled to the superannuation but rather will be a superannuation benefit for the receiving spouse.

[ Schedule 1, item 1, subsections 307 - 5(5 ) to ( 7 )]

2.102 A superannuation benefit is a superannuation death benefit if it is paid to you as a result of the death of another person. [ Schedule 1, item 1, section 309 - 5 ]

2.103 If a superannuation income stream was originally payable to the deceased, a commutation of this income stream will be a member benefit if paid after six months has passed since the person died, or three months after the will or letters of administration that relate to the person's estate has been granted probate, which ever is the later in time. This reflects existing arrangements. [ Schedule 1, item 1, subsection 307 - 5(3 )]

Components of a superannuation benefit

2.104 A superannuation benefit comprises two components: the tax free component and the taxable component. [ Schedule 1, item 1, section 307 - 120 ]

The tax free component

2.105 The tax free component of a superannuation interest is the total value of the following segments:

·
the 'contributions segment'; and
·
the 'crystallised segment,'

[ Schedule 1, item 1, section 307 - 210 ]

What is the contributions segment?

2.106 The contributions segment generally includes all contributions made from 1 July 2007 that have not been included in the assessable income of the superannuation provider. Typically these would be the person's non-concessional contributions. [ Schedule 1, item 1, subsection 307 - 220(1 )]

2.107 Roll-over superannuation benefits (other than roll-overs from an untaxed to a taxed superannuation scheme) are not included in the assessable income of the receiving superannuation provider. The taxable component of a roll-over is therefore specifically excluded from the definition of the contributions segment. However, amounts that have been subject to excess untaxed roll-over tax are included in the contributions segment as tax has been withheld on these amounts at the top marginal tax rate (plus the Medicare levy). [ Schedule 1, item 1, subsections 307 - 220(2 ) and ( 3 )]

2.108 The definition of the contributions segment also excludes a number of contributions which would otherwise have been included in a superannuation provider's assessable income, but are excluded due to the operation of other aspects of the superannuation system, such as the application of pre-1 July 1988 funding credits. [ Schedule 1, item 1, subsection 307 - 220(2 )]

What is the crystallised segment?

2.109 The crystallised segment includes existing components of an interest that are being consolidated into the tax free component: undeducted contributions, the pre-July 1983 component, the capital gains tax (CGT) exempt component, the concessional component and the post-June 1994 invalidity component. The segment is calculated by assuming that an ETP representing the full value of the superannuation interest is paid just before 1 July 2007. [ Schedule 1, item 1, section 307 - 225 ]

2.110 The pre-July 1983 component relates to superannuation benefits accrued or accumulated before 1 July 1983. The crystallisation of the pre-July 1983 component is discussed in further detail in paragraphs 2.140 to 2.145. [ Schedule 1, item 1, section 307 - 225 ]

2.111 A CGT exempt component and a post-June 1994 invalidity component would only exist if such a component had been rolled into a superannuation interest prior to 1 July 2007. The value of these components is set, or crystallised, on 30 June 2007 based on the amount of the interest attributable to that component on that date. [ Schedule 1, item 1, section 307 - 225 ]

2.112 Similarly, a concessional component would only exist in a superannuation interest if a redundancy, early retirement or invalidity payment that was made before 1 July 1994 was rolled over into superannuation. The value of the concessional component is set, or crystallised, on 30 June 2007 based on the amount of the interest attributable to that component on that date. [ Schedule 1, item 1, section 307 - 225 ]

Taxable component

2.113 The taxable component of the superannuation interest is calculated by subtracting the tax free component from the total value of the superannuation interest. The taxable component of a superannuation benefit paid from a superannuation interest consists of two elements:

·
the element taxed in the fund; and / or
·
the element untaxed in the fund.

[ Schedule 1, item 1, section 307 - 215 ]

2.114 Consistent with the existing arrangements, the taxable component of a superannuation benefit consists of an element taxed in the fund except in a limited number of circumstances. While these provisions have been rewritten, changes only in wording or style are not intended to change the meaning of these provisions. [ Schedule 1, item 1, section 307 - 275 ]

2.115 The taxable component of superannuation benefits paid from untaxed superannuation schemes contain an element untaxed in the fund to the extent that no contributions and earnings tax has been paid. These schemes are generally run by the Australian Government and the state and territory governments, generally only apply to public servants, and fall into two broad categories:

·
constitutionally protected funds which are specifically exempted from tax on all contributions and earnings [ Schedule 1, item 1, section 307 - 280 ]; and
·
superannuation funds which pay tax on contributions and earnings but are partially unfunded [ Schedule 1, item 1, section 307 - 295 ].

2.116 Some superannuation funds finance their benefits by making large one-off contributions. The trustee of the fund, with the consent of the contributor, can then elect for these contributions not to be taxable. Some funds also allow their members to elect whether the taxable component of their benefit is paid as an element taxed in the fund or an element untaxed in the fund. These arrangements will continue but will not be available for plans established after 5 September 2006. [ Schedule 1, item 1, section 307 - 285 ]

2.117 If a superannuation provider has claimed a tax deduction in respect of an insurance premium, the element untaxed in the fund of a lump sum superannuation death benefit is increased to broadly reflect the insurance component of the superannuation death benefit. The deductibility of insurance premiums broadly results in no contributions or earnings tax having been paid on this component of the superannuation death benefit. [ Schedule 1, item 1, section 307 - 290 ]

2.118 The taxable component of small superannuation account payments and SG payments only contain an element untaxed in the fund as these payments are made directly from the ATO and have therefore not been subject to tax in a superannuation fund. [ Schedule 1, item 1, subsection 307 - 275(3 )]

Service periods

2.119 Service periods are used to calculate the pre-July 1983 amounts and adjust the tax free component of lump sum disability superannuation benefit payments and the element untaxed in the fund of superannuation death benefit payments. The definition of a 'service period' reflects the existing arrangements. [ Schedule 1, item 1, section 307 - 400 ]

Proportioning rule

2.120 When part of a 'superannuation interest' is paid out, the benefit will include both tax free and taxable components with the relevant portions of each reflecting the proportions such components make up of the total value of the superannuation interest. [ Schedule 1, item 1, section 307 - 125 ]

2.121 The proportioning rule applies to both superannuation lump sums paid after 1 July 2007 (including roll-overs) and superannuation income streams which commence after 1 July 2007. [ Schedule 1, item 1, section 307 - 125 ]

Step 1 - proportions of the underlying superannuation interest

2.122 The first step in applying the proportioning rule is to determine the proportion of the tax free component and the taxable component of the superannuation interest from which the superannuation benefit is being paid. [ Schedule 1, item 1, subsection 307 - 125(3 )]

2.123 The tax free and taxable components of a superannuation lump sum are determined based on the value of the superannuation interest at the time just before the lump sum is paid. [ Schedule 1, item 1, subsection 307 - 125(3 )]

2.124 The tax free and taxable components of a superannuation income stream are calculated based on the value of the superannuation interest at the time that the superannuation income stream is created. [ Schedule 1, item 1, subsection 307 - 125(3 )]

What is the value of a superannuation interest?

2.125 The value of a superannuation interest is the total amount of all superannuation lump sums that could be paid to the person at that time. [ Schedule 1, item 1, section 307 - 205 ]

2.126 This general definition may not be appropriate for a minority of superannuation plans with more complex arrangements. Methods for determining the value of superannuation interests in these plans will be specified in the regulations. [ Schedule 1, item 1, section 307 - 205 ]

Step 2 - proportions of the superannuation benefit

2.127 These proportions must then be applied to the superannuation benefit. [ Schedule 1, item 1, subsection 307 - 125(2 )]

Example 2.5 Peter is age 56 and has a superannuation interest with a value of $400,000. The interest includes a tax free component of $100,000 and a taxable component of $300,000. Peter uses all of his superannuation interest to purchase an income stream on 1 August 2007.The tax free percentage of Peter's superannuation interest when the superannuation income stream commenced would be:

tax free component/value of the interest = $100,000/$400,000 = 25%

The taxable percentage of Peter's superannuation interest would therefore be 75 per cent.Peter receives a superannuation income stream benefit of $2,000 on 1 September 2007. The tax free component of this superannuation benefit would be:

$2,000 * 25% = $500

The taxable component of this superannuation benefit would therefore be $1,500 ($2,000 - $500).

Transitional arrangements

2.128 Recipients of existing superannuation income streams as at 1 July 2007 will retain the current 'deductible amount' on their superannuation income stream unless a trigger event occurs (see paragraphs 2.131 to 2.133). The deductible amount of a superannuation income stream is currently tax free. [ Schedule 1, item 25, section 309 - 37 of the Income Tax ( Transitional Provisions ) Act 1997 ]

How are deductible amounts applied?

2.129 The amendments move the tax treatment of superannuation income stream benefits from an annual basis to a per payment basis. As a result, the annual deductible amount needs to be converted into a 'per benefit' figure to maintain the existing tax treatment. [ Schedule 1, item 25, subsection 309 - 37(2 ) of the Income Tax ( Transitional Provisions ) Act 1997 )]

2.130 This will be achieved by apportioning the annual deductible amount across each superannuation income stream according to the value of each superannuation income stream benefit received in the income year. The portion of the deductible amount applying to a particular superannuation income stream benefit will be the tax free component for that superannuation income stream benefit. [ Schedule 1, item 25, subsection 309 - 37(2 ) of the Income Tax ( Transitional Provisions ) Act 1997 ]

Example 2.6 Vernon is age 58 and is receiving a superannuation pension which commenced before 1 July 2007. Vernon receives monthly superannuation income stream benefits of $2,000 and his annual deductible amount is $6,000. The tax free component of the $2,000 superannuation income stream benefit is calculated as follows:Step 1: Calculate the proportion of the superannuation income stream benefit to the benefits from that superannuation income stream received in the year:

$2,000/$2,000 * 12 months = 8.33%

Step 2: Multiply the annual deductible amount by the percentage calculated in Step 1:

$6,000 * 8.33% = $500

The tax free component of the superannuation income stream benefit is $500. The taxable component of the superannuation income stream benefit is $1,500 ($2,000 - $500).

What are trigger events?

2.131 If the superannuation income stream does not contain an element untaxed in the fund, the proportional approach applies once the person turns age 60 or has died. The benefits become tax free in any case once the person turns age 60 or if a death benefit is paid to a dependant. As a result, this trigger event will only have a practical impact in calculating components of death benefits to non-dependants. [ Schedule 1, item 25, subsection 309 - 37(3 ) of the Income Tax ( Transitional Provisions ) Act 1997 ]

2.132 In all other cases, the proportional approach does not apply unless the superannuation income stream is commuted. [ Schedule 1, item 25, subsection 309 - 37(3 ) of the Income Tax ( Transitional Provisions ) Act 1997 ]

2.133 Once a trigger event has occurred, the tax free amount is the sum of the unused undeducted purchase price and a pre-July 1983 amount where relevant. Both of these amounts are calculated under existing legislative provisions. The crystallisation of the pre-July 1983 component is discussed in further detail in paragraphs 2.139 to 2.144. [ Schedule 1, item 25, subsection 309 - 37(4 ) of the Income Tax ( Transitional Provisions ) Act 1997 ]

Application of the proportioning rule to special cases

2.134 A proportioning rule applies to family law superannuation payments under the existing arrangements so as to ensure that the various components of the superannuation interest are divided fairly between each spouse. A specific proportioning rule is no longer required as family law superannuation payments are covered by the general proportioning rule.

2.135 The proportioning rule does not affect SG payments and contributions splitting superannuation benefits (under changes that will apply from 1 July 2007) as these payments only contain a taxable component. Similarly, superannuation co-contribution payments only contain a tax free component. [ Schedule 1, item 1, sections 307 - 130, 307 - 135 and 307 - 140 ]

2.136 Regulations may specify an alternative method for determining the tax free and taxable components of a superannuation benefit. Alternatively, the Commissioner may either:

·
make a determination, by legislative instrument, for one or more alternative methods to be used to determine those components of the benefit; or
·
consent in writing to the use of another method.

[ Schedule 1, item 1, subsections 307 - 125(4 ) and ( 5 )]

2.137 In addition, regulations may specify circumstances where superannuation interests could be combined or separated and rules that determine how to allocate the tax free component, the taxable component, the element taxed in the fund and the element untaxed in the fund between superannuation interests. [ Schedule 1, item 1, section 307 - 200 ]

2.138 These regulations may be required to modify the application of the proportioning rule in certain circumstances, such as:

·
where appropriate allowing existing arrangements which may not strictly comply with the proportioning rule to continue; and
·
addressing arrangements designed to evade the proportioning rule.

Crystallising the pre-July 1983 component

2.139 Five per cent of the pre-July 1983 component is currently included in a person's assessable income and taxed at marginal rates. The 'pre-July 1983 amount' forms part of the new tax free component, and is therefore tax free for lump sums paid after 1 July 2007 (including commutations of superannuation income streams).

2.140 The mechanism for including the pre-July 1983 amount in the tax free component varies depending on the status of the superannuation interest.

2.141 For most superannuation interests, a pre-July 1983 amount will be calculated as at 30 June 2007 using the existing legislative formula. This amount will become a fixed amount and form part of the tax free component. [ Schedule 1, item 1, section 307 - 225 ]

2.142 Superannuation providers will have until 30 June 2008 to calculate the crystallised pre-July 1983 segment. Superannuation providers that do not calculate this amount by this date for all affected superannuation interests, are subject to an administrative penalty of 5 penalty units. [ Schedule 1, item 23, section 288 - 105 of the TAA 1953 ]

2.143 As outlined above, the tax free component of superannuation income streams in existence as at 1 July 2007 will be calculated based on the current 'deductible amount' concept. A pre-July 1983 amount is therefore not calculated until a trigger event occurs to move the superannuation income stream into the new arrangements.

2.144 Separate arrangements apply to superannuation benefits that have not been subject to contributions or earnings tax within the fund. This reflects existing arrangements. The pre-July 1983 segment for an element untaxed in the fund is only calculated when a lump sum superannuation benefit is withdrawn from a superannuation plan or rolled over into a taxed superannuation scheme. [ Schedule 1, item 1, section 307 - 150 ]

Example 2.7 Bessie has a superannuation interest of $100,000 on 30 June 2007 and a service period of 30 years (six years of which reflect pre-July 1983 service). Bessie's superannuation interest comprises a tax free component of $15,000, an element taxed in the fund of $10,000 and an element untaxed in the fund of $75,000.The pre-July 1983 amount for Bessie's superannuation interest is calculated as at 30 June 2007 under the existing legislative formula, disregarding the value of the element untaxed in the fund:

($15,000 + $10,000) × 6/30 = $5,000

As a result, the crystallised segment of the tax free component of Bessie's superannuation interest is increased by $5,000 and the element taxed in the fund is decreased by $5,000.

Example 2.8 Bessie subsequently makes a non-concessional contribution of $20,000 on 1 July 2007 and receives a superannuation lump sum of her entire interest of $120,000. The lump sum initially comprises a tax free component of $40,000 ($20,000 from Example 2.7 plus the non-concessional contribution of $20,000), an element taxed in the fund of $5,000 and an element untaxed in the fund of $75,000.The pre-July 1983 amount for this lump sum is calculated by disregarding any element taxed in the fund, any crystallised segment of the tax free component and any part of the tax free component used in the earlier crystallisation. The calculation is as follows:

($20,000 + $75,000) × 6/30 = $19,000

As a result, the tax free component of Bessie's superannuation lump sum is increased by $19,000 and the element untaxed in the fund is decreased by $19,000.


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