Section 8 – Summary of the Key Tax Issues
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The Australian taxation system is complex and different investors have different circumstances. The information in this section is general in nature and based on tax law that applies from 1 July 2010. We recommend that you speak with your financial or tax adviser for further information about how tax may apply with respect to your personal circumstances.
Furthermore, it is important to note that the Government has proposed to make certain changes to the superannuation and superannuation tax laws in the 2010-11 Federal Budget. To the extent legislated, this will affect certain matters covered in this PDS. In addition, note that there are a number of Government reviews being undertaken, or recently completed (such as the Henry Review into Australia’s Future Tax System and the Super System Review), the final recommendations of which, to the extent accepted by the Government, may have implications for the taxation and related comments made in this PDS.
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Contact the Australian Taxation Office on 13 10 20 or visit www.ato.gov.au/ super to find out the current taxes and limits applicable to superannuation and pensions.
Tax on Concessional Contributions
A tax of 15% applies to the TIC Plan for all employer contributions (including superannuation guarantee, Award and salary sacrifice contributions) and any personal concessional contributions that you may make, such as those from the self employed and any ‘untaxed’ component of a rollover benefit transferred to the TIC Plan.
If the Trustee does not hold your Tax File Number (TFN) the above contributions may attract additional tax of 31.5% (including Medicare Levy) on the entire contribution.
Caps on Contributions
Superannuation law limits the amount of superannuation that can be contributed in any financial year and taxed at a concessional rate. The caps for the 2010/11 financial year are set out below. The caps are indexed each year. Contact the Australian Taxation Office on 13 10 20 or visit www.ato.gov.au/super for further information.
If you exceed your concessional contributions cap, the excess amount may attract additional tax charged at the top marginal rate. Payment of this tax can be made from your personal money or by nominating an account in your superannuation fund upon presentation of an ATO Release Authority to the Trustee. Any excess concessional contributions also count towards your non-concessional contributions cap.
If you exceed your non-concessional contributions cap the excess amount will attract tax charged at the top marginal rate. Payment of this tax must be paid from your superannuation fund upon presentation of an ATO Release Authority to the Trustee.
Note: The Trustee reserves the right to take whatever steps it considers necessary or appropriate to manage ISARF’s tax liability where it does not hold a member’s Tax File Number, including rejecting concessional contributions or deducting higher tax as concessional contributions are received.
Tax on Income
One of the advantages that superannuation has over other long-term investments is the lower tax paid on investment earnings. The maximum rate of tax paid by superannuation funds on investment earnings is 15%. The amount may be less due to tax credits, tax deductible expenses and other adjustments. This compares with the top personal marginal rate of tax. There is no tax on investment earnings payable on assets segregated to pay pensions.
Tax on Super Benefits
Superannuation benefits paid to those aged 60 or over are generally paid tax free. Benefits paid to those under age 60 will consist of an exempt (tax-free) component and a taxable component. The exempt component consists of the contributions segment and crystallised segment. The contributions segment includes non-concessional contributions made on or after 1 July 2007.
The crystallised segment includes the value of the following components at 30 June 2007 that are rolled over into the TIC Plan:
- the pre-July 1983 component;
- the CGT exempt component;
- the post-June 1994 invalidity component;
- the concessional component; and
- undeducted contributions prior to 1 July 2007.
The taxable component is the balance of a benefit after deducting the exempt component. It comprises amounts such as concessional contributions and the post-June 1983 component.
Part-payments will include both exempt and taxable components, allocated in the same proportions as those of the total benefit. You cannot nominate the amount to draw down for each ofthese components.
Tax may be payable on the taxable component depending on your age.
Higher tax applies if the Trustee does not hold your TFN.
If your lump-sum benefit is less than $200, your payment will be tax-free provided the following conditions are met:
Tax on Death Benefits
Lump sum death benefits are tax-free if paid to a beneficiary who is a death benefits dependant (as defined by tax legislation). A lump sum death benefit paid to a non-dependant is taxed as follows: the tax-free component is tax-free, whilst the taxable component is taxed at 16.5%, inclusive of Medicare Levy. Where the benefit includes an insured component, a portion of the benefit may be an element untaxed (relating to the future service period of the insurance amount). The untaxed element of the death benefit is taxable at the maximum rate of 31.5%, inclusive of Medicare Levy. Tax may be higher if the Trustee does not hold your TFN.
Where a death benefit is received by the legal personal representative of a deceased estate, tax will be paid by the trustee of the estate. The tax payable will be determined according to who is intended to benefit from the estate.
A death benefits dependant for taxation purposes is a spouse* or former spouse, a child under 18 and any other person who was dependent on or in an interdependent relationship (summarised on page 56) with the deceased member. It does not include an adult child aged 18 or more (unless financially dependent or interdependent).
Note that this definition of dependant differs from the definition of dependant to whom a superannuation death benefit can be paid. (For further information refer to ‘what happens to your benefits when you die’ in Section 9).
Anti-Detriment Payments - Death Benefits Only
A lump sum benefit payable on the death of a member that is paid to a death benefits dependant of the deceased is typically not subject to tax. In some circumstances, the amount of the death benefit may be increased by an anti-detriment payment. Anti-detriment payments are designed to “compensate” certain dependants (a spouse, former spouse or child) who receive a death benefit for tax that has been paid previously on contributions made in respect of the deceased. Trustees of superannuation funds may (but are not required to) make anti-detriment payments.
The Trustee has adopted a policy of allowing “anti-detriment payments” where a death benefit is paid from the TIC Plan to a spouse, a former spouse or a child of the deceased, subject to the availability of a tax deduction to the TIC Plan and provided certain conditions are satisfied.
The amount of the “anti-detriment payment” is calculated by reference to the amount of contribution tax paid in respect of the deceased using a formula prescribed in tax legislation.
Where this information is not available, in some circumstances the anti-detriment payment can be calculated using a formula that estimates the amount of the tax that has been paid.
The Trustee may be able to make anti-detriment payments because, under tax legislation, in certain circumstances a tax deduction can be claimed. If the Trustee determines that, at the time the payment is being processed, the Trustee may be unable to claim some or all of the available deduction, the Trustee may decide that no anti-detriment payment will be made or that only part of the payment will be made. The Trustee may also determine at any time to discontinue anti-detriment payments or amend the criteria for the availability of anti-detriment payments. Members will be notified of any changes to the Trustee’s approach to anti-detriment payments.
Tax on Terminal Illness Benefits
Lump sum benefit payments paid to a member who is suffering a ‘terminal medical condition’ will be tax-free. Terminal medical condition is defined under ‘Preservation’ in Section 3.
Tax on Salary Continuance Benefits
Salary continuance insurance benefits are paid as taxable income and, like salary and wages, attract Pay-As-you- Go tax at your marginal tax rate. The tax is deducted by the Trustee and remitted to the Australian Taxation Office before the benefit is paid. Higher tax applies if the Trustee does not hold your TFN.
Tax on Departing Australia Superannuation Payments
If you enter Australia on an eligible temporary visa you are entitled to receive your superannuation benefit once you leave Australia permanently. This type of payment is known as a Departing Australia Superannuation Payment (DASP). From 1 April 2009, the following rates apply for DASP payments:
• Tax-free component – Nil
• Taxable component – 35% for the taxed element and 45% for any untaxed element.
Spouse Rebate
If you make spouse contributions on behalf of your non-working or low income spouse, who is earning less than $13,800 p.a., you may be able to claim an 18% tax offset on superannuation contributions up to $3,000 that you make directly to your spouse’s account. The maximum rebate is $540.
Contact the Australian Taxation Office on 13 10 20 or visit www.ato.gov. au/super to find out the current limits relating to the Spouse Rebate.
Tax on Pensions
The Australian taxation system is complex and different investors have different circumstances. The information in this section is general in nature and based on current tax law and the tax law applicable from 1 July 2010, which may change. We recommend that you speak with your financial adviser for further information about how tax may apply with respect to your personal circumstances
Tax on Investment Earnings
There is no tax payable on investment earnings within your pension account*.
Tax on Your Pension Payments
Pension payments to members aged 60 and over are generally tax-free. You will not need to include these payments in your tax return.
Pension payments generally consist of a taxable component and a tax-free component. The taxable amount forms part of your assessable income and is taxed at your marginal rate (plus Medicare levy). However, you may be able to claim a 15% tax offset, depending on your age.
Note: If you have more than one pension in TIC Pensions, each pension is treated as a separate superannuation interest with its own taxable and tax-free components.
Tax on Lump Sum Withdrawals Account-Based Pensions Only
If you make a lump sum withdrawal it will be taxed as a lump sum superannuation benefit.
Lump sum payments will consist of two components: exempt and taxable. Lump sum benefit payments paid to members aged 60 or over will generally be taxfree. Tax will be payable on the taxable component received by a member aged less than 60.
For a summary of how components of your superannuation benefits are taxed when withdrawn as a lump sum refer to ‘tax on super benefits’ earlier in this Section.
Tax on Death Benefits
The tax treatment of death benefits depends on whether they are paid as a reversionary pension or as a lump sum, and the recipient of the benefits.
LUMP SUM
Superannuation death benefits paid to death benefits dependants are tax-free. Refer to Summary of the Key Tax Issues on page 49 for details of taxation of lump sum death benefits.
PENSION
If you die whilst in receipt of a pension and your pension continues to be paid to your reversionary beneficiary as permitted by superannuation legislation, the continuing pension will be taxed as per the table below:
Your pension may continue to be paid to your nominated reversionary pensioner (i.e. your spouse or your dependent child) if your child is
- Under age 18; or
- Age 18 but under age 25 and financially dependent on you; or
- Permanently disabled.
Pension payments to a child will be required to be paid as a lump sum by the time the child reaches age 25 unless the child is permanently disabled. This amount will be tax free and will not be required to be included in their annual tax return.
Tax treatment of death benefits may be complex and we recommend that you speak with your financial and tax advisers for tax information specific to your personal circumstances.
Social Security
The receipt of pension payments may have social security implications depending on your personal circumstances.
For more information about this speak to a professional adviser or seek information from the Financial Information Service provided by Centrelink, or the Veteran’s Affairs Financial Information Service.
