Taxation of benefit payments
Note: the taxation of benefits paid from an untaxed source is dealt with on page 20.
- Superannuation benefits paid from a taxed source either as a lump sum or pension will be tax free when paid to people aged 60 and over.
- Superannuation benefits paid before age 60 will be taxed in a similar manner as they are now.
- RBLs for superannuation will be abolished.
- The current concessional tax treatment of invalidity payments will be extended to the self-employed.
Rules for benefits paid to individuals aged 60 and over (page 12) 1
From 1 July 2007, all lump sum benefits paid from a taxed source to an individual aged 60 or over will be tax free. There will be no RBL.
All pension payments from a taxed source will be tax free when paid to individuals aged 60 or over. This will also apply to pensions which commenced before 1 July 2007. There will be no RBL.
Individuals will not need to include lump sum superannuation benefits and superannuation pensions from a taxed fund made after 30 June 2007 in their tax returns.
Superannuation funds will not need to report benefit payments made after 30 June 2007 to the ATO for RBL purposes.
Rules for benefits paid to individuals aged under 60 years (page 13)
Lump sums will have two components — an exempt component and a taxable component (there are different rules for payments from an untaxed source).
- The exempt component will be tax free. The exempt component will comprise: the pre-July 1983 component, the CGT exempt component, the post-June 1994 invalidity component, the concessional component and undeducted contributions.
- The taxed component (the current post-June 1983 component and the non-qualifying component) will be tax free up to the low-rate threshold and taxed at a maximum rate of 15 per cent above the threshold. For those aged under 55, this component will be taxed at a maximum rate of 20 per cent. This is the same treatment as currently applies to the post-June 1983 component.
- The low rate threshold will be set at $140,000 on 1 July 2007 and indexed to Average Weekly Ordinary Times Earnings (AWOTE) in $5,000 amounts.
Calculating the pre-July 1983 component
Funds will be required to calculate a pre-July 1983 amount. This will be calculated on the value of the benefits as at 30 June 2007, using the existing legislative formulae, with the lesser amount to be crystallised. Superannuation funds will have until 30 June 2008 to calculate this amount. Once calculated, this amount will become a fixed component that will not change in the future and will form part of the new exempt component.
There will be no crystallisation of the pre-July 83 component of employer ETPs. The pre-July 83 component will continue to be calculated by the employer upon termination of employment.
Pension payments for individuals aged under 60 will continue to be taxed under current arrangements, although consistent with the simplification of taxation of lump sum payments, tax will be lower in some cases.
Pensions commenced on or after 1 July 2007, which would currently qualify for a pre-July 1983 component will have this included in the exempt component of the pension. The current arrangements for calculating the deductible amount of a pension will remain for pensions that commenced prior to 1 July 2007.
The full superannuation pension rebate of 15 per cent will apply to all pensions paid from a taxed fund if the individual is aged 55 to 59 years.
Once the pension recipient turns 60, their pension will be tax free.
Individuals aged under 60 will still be required to report details of lump sums and pensions in their tax return.
Benefit payments made after 30 June 2007 will no longer be reported to the ATO by superannuation funds for RBL purposes.
Proportional drawdown of benefits
From 1 July 2007, when any part payment of a superannuation benefit is made, the benefits will be considered to include both exempt and taxable components with the relevant portions of each reflecting the proportions such components make up of the total benefit. This will apply to both lump sums and pensions. This will support the plan’s objectives to encourage higher participation in the workforce. Existing pensioners will retain the current ‘deductible amount’ on their pension until they reach age 60 when benefits become tax free in any case.
Death benefits (page 15)
The current superannuation system provides favourable tax treatment to death benefits paid to a dependant. The plan continues with this treatment of death benefits. Lump sum death benefit payments will be tax free if paid to a dependant. The definition of dependant will remain as currently defined in the Income Tax Assessment Act 1936 (paragraph (b) in subsection 27A(1)). The taxable component of a lump sum paid to a non-dependant will be taxed at 15 per cent (as is currently the case for the post-June 1983 taxed element).
The taxation of a death benefit paid as a reversionary pension will depend on the age of the primary and reversionary beneficiary. If the primary beneficiary was aged 60 or over at the time of death, then payments to the reversionary beneficiary will be tax exempt. If the primary beneficiary was under age 60 at the time of death, the pension will continue to be taxed at the reversionary beneficiary’s marginal tax rate (less any deductible amount and pension rebate) unless, or until, the reversionary beneficiary is aged 60 or over, in which case it will be tax exempt.
Death benefits will be able to be paid as a pension to a dependant if the member dies before commencing a pension. These pensions will be taxed in the same way as a reversionary pension.
Death benefits will be able to be paid as a pension to a dependant child, although when the child turns 25 the balance in the fund will have to be paid as a lump sum (tax free) unless the child was permanently disabled.
A pension will not be able to revert or be paid to a non-dependant on death; rather, death benefit payments to non-dependants will have to be made as a lump sum.
Temporary residents (page 16)
People who enter Australia on an ‘eligible temporary resident visa’ and who later permanently leave Australia can claim any superannuation they have accumulated. The payment is subject to withholding tax.
Reflecting the new simplified ETP components, the rates for benefits from a taxed source will be:
- exempt component — 0 per cent; and
- taxable component — 30 per cent.
In practice, this is no change to the current system. If the payment is from an untaxed source, it will continue to be taxed at 40 per cent.
Many submissions sought clarification of the treatment of invalidity benefits under the plan. It is not intended to change the current treatment of these benefits.
Benefits which are paid on the permanent disablement of the member will be eligible for a ‘post-June 94 invalidity component’ on the part of the benefit taken as a lump sum or a 15 per cent pension offset if taken as a pension. Once the person is aged 60 or above these benefits will be tax free.
The Government will extend eligibility for a ‘post-June 94 invalidity component’ to the self-employed from 1 July 2007.
Benefits which are paid on the temporary disablement of the member (such as salary continuance benefits) are regarded as ‘replacement of income’ benefits rather than ‘retirement income’ benefits. Therefore, these benefits will continue to be treated as income of the member regardless of their age. Funds will continue to provide relevant information to the member to include these benefits in their tax returns.
1 Headings and page numbers are references to those in the detailed outline A Plan to Simplify and Streamline Superannuation.Source: simplersuper.treasury.gov.au