Taxation Ruling

IT 2026

Superannuation: pension fund ready reckoner : early termination benefits

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FOI status:

May be releasedFOI number: I 1104423

RULING

Attached is a ready reckoner which has been prepared for use in the calculation of contributions to section 23F superannuation pension funds which may be allowed as income tax deductions. The ready reckoner has been produced as an aid to funds for which, because they do not have the same incidence of retirement, withdrawal or mortality factors which exist in the larger employer/arm's length employee funds, it is a practicable proposition to calculate contributions on an individual basis.

2. Consistent with the lump sum ready reckoner, salaries are projected at 8% per annum compound and interest rates vary from 9% to 15%. Rates of contribution are specified until ten years from retirement. As a general rule, where an employee is admitted to a fund within ten years of normal retirement age, the allowable contribution will be determined in the circumstances of each case.

3. The ready reckoner is based on the assumption that the post-retirement earning rate of the pension fund will be the same as the pre-retirement earning rate. Where a fund is providing for post-retirement cost of living adjustments it will be acceptable, where all the assets of the fund are invested in appropriate arm's length securities and the 30/20 ratio is satisfied, for the post-retirement earning rate to be reduced by a maximum of 5% to reflect the provision of post-retirement cost of living adjustments. Income tax deductions will not be allowed for contributions to a fund to provide post-retirement cost of living adjustments where there is an amount lent back to the employer and the amount lent back exceeds 10% of the assets of the fund at any time during the year of income.

4. There are some superannuation funds in existence which provide for the payment of a flat pension, i.e. without cost of living or other indexation adjustments, by means of an annuity purchased from an insurance company. In calculating the amount necessary to purchase the required annuity a post-retirement earning rate is taken into account which is considerably less than the long term earning rate of 9% per annum specified in the guidelines already issued. Income tax deductions for contributions to funds of this type will be restricted to the amount ascertained by applying the calculations in the attached ready reckoner.

5. The calculations in the ready reckoner are based on the 1975-77 Australian Life Tables which indicate a life expectancy for a male aged 65 of 13.13 years and for a female aged 60 of 21.04 years. The Ready Reckoner provides for reversionary pensions equal to two-thirds of the member's pension. For this purpose it has been assumed that males are three years older than their spouses and that a reversionary pension will be payable to a male for 4.72 years and to a female for 10.29 years.

6. Formulae to enable the calculation of either lump sum or pension fund contributions are attached. Also attached is a schedule of reduction factors to be applied where a member has previously received a benefit from another section 23F fund.

Early Termination Benefits

7. Where a member of a superannuation fund withdraws from the fund as a result of the termination of his employment prior to normal retirement age, it is necessary to ensure that the benefits payable from the fund to the member on the early termination of his or her employment are not excessive.

8. It will be readily appreciated that it is not wholly practicable to make a general rule in this area which will apply to all funds. The reason for this is, of course, that many funds do not provide the maximum retirement benefits permitted by the Commissioner and, furthermore, experience indicates that funds make differing reductions according to the length of service at date of termination. It is necessary, therefore, to have regard to the rules applying to the particular fund.

9. As a general proposition, however, where a fund provides the maximum benefit permitted by the Commissioner and the member's employment terminates within 10 years of the normal retirement date, i.e. 65 years for males and 60 years for females, the benefit which may be paid from the fund should not exceed the amount which represents the reasonable benefit based on final average salary at the date of termination reduced by 2.5% for each year by which actual retirement date precedes the normal retirement date. In practice this will apply in respect of all terminations of employment on and after 55 years of age for males and 50 years of age for females and whether the superannuation fund be a lump sum or pension fund. Should a member of a pension fund elect to take his benefit in the form of a lump sum the normal requirements for commutation in excess of 25% of entitlement will apply. It is stressed that advance funding for early termination benefits will not be permissible.

10. In the event of termination of employment prior to the age of 55 years in the case of males and 50 years of age in the case of females, the amount paid from the fund should not exceed the amount which should have been in the fund at that date assuming contributions had been made on an acceptable basis. The formulae to calculate the amount both for lump sum and pension funds are reflected in the attached schedule.

11. In calculating early termination benefits for associated employees it will be permissible to take into account prospective service to normal retirement to determine whether a proportionate reduction for service less than 20 years should be made.

COMMISSIONER OF TAXATION
22 MARCH 1983

APPENDIX

(Amended 28/3/83)

A

Contributions Formula

1)

Lump Sum

a)

E = ((1 + I) / (1 + G)) - 1


b)

A = ((S * M) / ((1 + E)^N))


c)

K = A - B - [ [ W * ((1 + I)^(- N))] * (1 + G)]


d)

V=(k*(E/((1+E)*(1-((1+E)^N)))))


e)

C = (V / (1 + G))


f)

P = (C / S) * 100


2)

Pension Non-reversionary as above, except that

b)

A = ((S * F) * (([1 - ((1 + R)^(-T))] / R) / ((1 + E)^(N)))))


3)

Pension Reversionary

b)

A = (S * F) * ((([1 - ((1 + R)^(-T))] / R) + ((2 / 3) * ([1 - ((1 + R)^(-D))] / R)) * ((1 + R)^(-T))) / ((1 + E)^(N)))


B

Balance in Fund - Withdrawal

1)

Lump Sum

(S * M) * [(1 + E)^(J) - 1)] / ([(1 + E)^(Q) - 1)] * [1 + I])


2)

Pension non reversionary

(S * F) * (((1 - (1 + R)^(-T)) / (R)) * [(1 + E)^(J) - 1]) / ([(1 + E)^(Q) - 1] * [1 + I])


3)

Pension Reversionary

(S * F) * ([(([1 - (1 + R)^(-T)] / R) +(2 / 3) * ([1 - (1 + R)^(-D)] / R)) * [1 + R]^(-T)] / (1 + E)^(Q) -(1 * (1 + I))) * ((1 + E)^(J) - 1)


C

Early Retirement - 2.5% Reduction

1)

Lump Sum

(Z * M) * [1 - [.025 * (Q - J)]]


2)

Pension

(Z * F) * ([1 - (1 + R)^(- T)] / R) * [1 - (.025 * [Q - J])]


Where

B

= Balance presently in fund

C

= $ Contribution, based on final average salary

D

= Spouses life expectancy at expiration of member's life expectancy, assuming female spouse is 3 years younger than male

F

= Current Pension Factor

G

= Salary Growth Rate

I

= Fund Earning Rate

J

= Years of actual service

M

= Current Multiplier

N

= Number of years of fund membership

P

= % Contribution, based on final average salary

Q

= Years of prospective service

R

= Post-retirement earning rate of fund

S

= Current Salary

T

= Life expectancy at normal retirement age

V

= $ Contribution, Based on final salary

W

= Amount received from another fund

Z

= Final average salary at date of retirement

References

ATO references:
NO J172/21/1 Pt16

Date of effect:
01.07.82

Date original memo issued:
17.03.83

Related Rulings/Determinations:

IT 294

Subject References:
SUPERANNUATION
DEDUCTIONS FOR CONTRIBUTIONS TO EXEMPT 23F FUNDS
CONTRIBUTIONS TO EXEMPT 23F FUNDS, DEDUCTIONS FOR
EARLY TERMINATION BENEFITS

Legislative References:
23F
82AAA
82AAB
82AAC
82AAD
82AAE
82AAF
82AAG
82AAH
82AAI
82AAJ
82AAK
82AAL
82AAM
82AAN
82AAP
82AAQ
82AAR