Howdy All,
The Government for all its mismanagement is at it again declaring that high income earners will again be subject to a surcharge rate of tax on superannuation contributions.
While I am all for an equitable tax structure, I am becoming increasingly annoyed by the actions of this Government. Rather than focusing on a class war, they should instead stop spending money on gimmicks which ultimately will amount to nothing more than increased waste.
Fortunately this will all be resolved by September of this year but in the interim we have to put up with idiotic ideas as the one which is being proposed for high income earners.
Listed below is an extract of what we understand will apply once the legislation is enacted.
In this alert, we explore the more complex aspects of the Government’s draft legislation to reduce the tax concessions that individuals with annual income above $300,000 receive on their concessional contributions.
The application of the new tax to defined benefit arrangements, departing temporary residents and to scenarios involving excess and potentially excess contributions are summarised below.
Review
An individual will have a liability for Division 293 tax for an income year if in a given financial year their income for surcharge purposes, less their reportable super contributions plus their low tax contributions, exceed $300,000.
It is worth recalling three definitions which are fundamental to understanding the calculation process:
- Low tax contributions include employer contributions to accumulation interests, personal contributions where a tax deduction is claimed, contributions to a defined benefit interest (valued by an actuary), salary packaged contributions to constitutionally protected funds and amounts allocated by the trustee (as prescribed in income tax regulations for the purposes of determining concessional contributions).
- Income for surcharge purposes (as defined in ITAA 97) includes taxable income, reportable super contributions, reportable fringe benefits and total net investment losses.
- Reportable super contributions are reportable employer super contributions (generally employer contributions other than award or SG) and personal contributions for which the individual claims a tax deduction.
Impact issues
Taxable income is a major component in the calculation of ‘income’ for surcharge purposes. Remember that lump sum payments are included in an individual’s taxable income, even though they may be subject to a prescribed rate of tax, rather than the individual’s marginal rate. Such payments include:
- the taxable component of lump-sum death benefits paid to non-dependants for tax purposes (for example, an adult child)
- employment termination payments
- payments of unused annual and long service leave
- a capital gain on the sale of property.
Receiving payments of this type may result in a breach of the $300,000 threshold and thus trigger Division 293 tax on the recipient’s low tax contributions for that year.
Treatment of excess and potentially excess concessional contributions
Excess concessional contributions can be refunded and potentially excess concessional contributions can be disregarded or allocated to another year using the Commissioner’s discretion. These variations impact the inclusion or exclusion of these contributions in the calculation of low tax contributions and the $300,000 threshold.
The following table, based on the table provided in the Explanatory Memorandum issued with the draft legislation, summarises the treatment of excess and potentially excess concessional contributions for the purposes of Division 293 tax.
Treatment of excess and potentially excess concessional contributions
|
Scenario |
Include in low tax contributions? |
Include in $300,000 threshold? |
|
Excess concessional contributions subject to excess concessional contribution tax. |
No. |
No. |
|
Excess concessional contributions that are disregarded (once-off refund of excess concessional contributions under $10,000) |
No. |
Yes. |
|
Concessional contributions which would be excessive but for the application of the Commissioner’s discretion to disregard them |
Yes. |
Yes. |
|
Concessional contributions which would be excessive in the year in which they are made, but for the application of the Commissioner’s discretion to allocate them to another year |
Yes. They are not low tax contributions in the year to which they are allocated. |
Yes. They are not included in the calculations of the $300,000 threshold in the year to which they are allocated. |
* This tax treatment may change as a result of the Government’s announcements on 5 April 2013 that it would reform the treatment of excess concessional contributions.
Defined benefit arrangements
Low tax contributions for people with defined benefit arrangements will consist of:
- low tax contributed amounts made to non-defined benefit interests
- less excess concessional contributions
- plus defined benefit contributions in respect of defined benefit interests (calculated using a method to be set out in regulations).
The defined benefit contributions calculated using the prescribed methodology will not necessarily be the same as ‘notional taxed contributions’ which are used for determining an individual’s concessional contributions for excess contributions tax purposes. Certain notional taxed contributions which are above the dollar amount of the relevant concessional contributions cap are deemed to be within the cap due to grandfathering arrangements. There will be no grandfathering of defined benefit contributions for the purposes of calculating a person’s low tax contributions.
Where Division 293 tax applies to low tax contributions attributable to a defined benefit arrangement, the ATO will make a deferred payment determination and a debt account will be maintained by the ATO until the first benefit is paid from that defined benefit interest, when payment of the accrued amount will be required. The ATO will issue a release authority to enable payment to be made from the superannuation fund.
Alternatively, the Division 293 tax may be paid by the individual from other sources, as it arises. The ATO will also issue a release authority at the time the Division 293 tax arises so that where the individual also has an interest in a non-defined benefit superannuation fund, they may use the release authority to make voluntary payments to reduce the tax.
The Explanatory Memorandum provides a series of examples of how to calculate low tax contributions where contributions to a defined benefit interest are involved.
Special rules – Contributions to constitutionally protected funds
Low tax contributions in respect of certain state higher level office holders (to be defined in regulations) are calculated in the same manner as described for contributions to accumulation style funds and defined benefit contributions, except that where those contributions (defined benefit or otherwise) are made to a constitutionally protected fund, only salary sacrificed amounts are counted as low tax contributions.
However, all low tax contributed amounts (whether resulting from salary sacrifice arrangements or not), including defined benefit contributions are included in the calculation to determine whether the $300,000 threshold is breached.
Special rules – Commonwealth justices and judges
Defined benefit contributions for a defined benefit interest in a superannuation fund established under the Judges’ Pensions Act 1968 are not included as low tax contributions and therefore not subject to Division 293 tax. These special rules only apply to justices and judges who have a defined benefit interest in a superannuation fund established under the Judges’ Pensions Act 1968.
You should note however, that a calculation of low tax contributions will still be made, based on these defined benefit contributions, and will be included in the calculation to determine whether the $300,000 threshold is breached. This will be relevant if other low tax contributions have been made to a superannuation fund in respect of these individuals.
Special rules – summary
|
Contributions |
Include in low tax contributions? |
Include in $300,000 threshold? |
|
Contributions to constitutionally protected funds for state higher level office holders |
No. |
Yes. |
|
Defined benefit contributions for a defined benefit interest in a superannuation fund established under the Judges’ Pensions Act 1968 |
No. |
Yes. |
Temporary residents departing Australia
Individuals who receive a departing Australia superannuation payments (DASP) will be entitled to a refund of Division 293 tax they have paid. This is because any concessional tax treatment of their superannuation contributions is removed by the final withholding tax which applies to DASPs.
Conclusion
The closing date for submissions on this draft legislation is Wednesday 8 May 2013, allowing only a week for the industry to review and comment.
As we have seen, the implementation of this measure requires some complex calculations to determine whether a liability for the new Division 293 tax will arise and taxpayers who would not generally be considered to be very high income earners may be caught by the new rules.
We will as a matter of course be reviewing all affected individuals and we will be in touch with possible solutions in due course.
Bidding you all a wonderful weekend ahead ….. Go Bombers
Luke Eres CFP SSA
The Three Wise men 