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Retirement savings

Date

2.2 Tax expenditures (continued)

C. Retirement savings

Under the superannuation benchmark:

  • contributions are taxed in the hands of the fund member as personal income;
  • earnings, including realised capital gains, taxed as personal income in the hands of the member (like any other investment income); and
  • benefits from superannuation are untaxed.
C1 Capital gains tax small business retirement exemption
Social security and welfare ($m)
2009‑10 2010‑11 2011‑12 2012‑13 2013‑14 2014‑15 2015‑16 2016‑17
360 350 370 360 370 370 380 400
Tax expenditure type: Exemption 2012 TES code: C1
Estimate Reliability: Low    
Commencement date: 1997 Expiry date:
Legislative reference: Subdivision 152-D of the Income Tax Assessment Act 1997

Capital gains arising from the sale of active small business assets are exempt from capital gains tax, up to a lifetime limit of $500,000, where the proceeds of the sale are used for retirement. An eligible small business is one where the net value of assets that the taxpayer and connected entities own is no more than $6 million, or where the aggregated annual turnover is less than $2 million.

C2 Capped taxation rates for lump sum payments for unused recreation and long service leave
Social security and welfare ($m)
2009‑10 2010‑11 2011‑12 2012‑13 2013‑14 2014‑15 2015‑16 2016‑17
105 105 140 160 145 130 115 115
Tax expenditure type: Concessional rate 2012 TES code: C2
Estimate Reliability: Medium    
Commencement date: Introduced before 1985 Expiry date:  
Legislative reference: Subdivisions 83-A and 83-B of the Income Tax Assessment Act 1997

A maximum tax rate of 30 per cent plus the Medicare levy applies to lump sum payments in lieu of unused long service or annual leave which accrued before 18 August 1993, or which are made in circumstances of bona fide redundancy, invalidity or under an early retirement scheme. All other lump sum payments in respect of unused annual or long service leave which accrued after 18 August 1993 are taxed at individual marginal rates.

C3 Concessional taxation of non-superannuation termination benefits
Social security and welfare ($m)
2009‑10 2010‑11 2011‑12 2012‑13 2013‑14 2014‑15 2015‑16 2016‑17
1,450 1,300 1,850 2,500 2,450 1,800 1,750 1,750
Tax expenditure type: Concessional rate 2012 TES code: C3
Estimate Reliability: Medium — Low    
Commencement date: Introduced before 1985 Expiry date:  
Legislative reference: Division 82 of the Income Tax Assessment Act 1997 Division 82 of the Income Tax (Transitional Provisions) Act 1997 Subdivision 83-C of the Income Tax Assessment Act 1997

Non-superannuation termination payments are generally paid by employers to terminating employees. Before 1 July 2007 these amounts were taxed in the same way as superannuation lump sums from untaxed funds with the exception of bona fide redundancy payments and approved early retirement scheme payments which were tax free up to certain limits. This tax expenditure excludes the treatment of payments in lieu of leave.

Since 1 July 2007, non-superannuation termination payments, known as employment termination payments (ETPs), have been taxed differently to lump sums paid from untaxed funds. The pre-July 1983 segment of the payment and the invalidity segments are tax free. The residual is taxed at up to 15 per cent for amounts up to an ETP cap of $180,000 in 2013‑14 (indexed) for recipients aged at or above preservation age and at up to 30 per cent for people who are under preservation age. Amounts in excess of $180,000 (indexed) are taxed at the top marginal tax rate. The Medicare levy is payable in addition to these rates. Concessional tax treatment also applies for transitional arrangements in place as at 9 May 2006 and early retirement scheme payments.

From 1 July 2012, only that part of an ETP that takes a person’s total annual taxable income (including the ETP) to $180,000 receives the ETP tax offset. Any ETP amounts above this whole of income cap are taxed at marginal rates. The whole of income cap operates in conjunction with the existing ETP cap ($180,000 in 2013‑14, indexed) which ensures that the ETP tax offset only applies to ETP amounts up to the cap.

Genuine redundancy and early retirement scheme payments made to people under 65 years of age are tax free up to a limit, which is based on the person’s years of service with the employer. Amounts in excess of this limit are taxed as an ETP.

This tax expenditure excludes the taxation treatment of payments in lieu of leave (see the tax expenditures C2 Capped taxation rates for lump sum payments for unused recreation and long service leave and C14 Taxation of five per cent of unused long service leave accumulated by 15 August 1978).

2014‑15

C4 Superannuation — capital gains tax discount for funds
Social security and welfare ($m)
2009‑10 2010‑11 2011‑12 2012‑13 2013‑14 2015‑16 2016‑17
80 100 90 100 210 470 1,020 1,380
Tax expenditure type: Reduction in taxable value 2012 TES code: C4
Estimate Reliability: Low    
Commencement date: 1999 Expiry date:  
Legislative reference: Paragraph 115-10(b) and subparagraph 115-100(b)(i) of the Income Tax Assessment Act 1997

Capital gains made by complying superannuation funds are taxed concessionally. Two-thirds of any nominal capital gain made from a capital gains tax event occurring on or after 21 September 1999 is included in the assessable income of a fund, provided the fund has held the asset for at least 12 months. The effect of this item is in addition to the effect of lower tax rates for superannuation investments reported in the tax expenditure Superannuation — concessional taxation of superannuation entity earnings (C6). The amounts reported reflect the additional tax that would be raised at fund rates on the same investments if total nominal capital gains were taxed instead of discounted gains or gains with frozen indexation where this applies.

C5 Superannuation — concessional taxation of employer contributions
Social security and welfare ($m)
2009‑10 2010‑11 2011‑12 2012‑13 2013‑14 2014‑15 2015‑16 2016‑17
12,700 12,600 14,300 14,600 16,000 17,800 19,150 20,700
Tax expenditure type: Exemption, Reduction in taxable value 2012 TES code: C5
Estimate Reliability: Medium    
Commencement date: Introduced before 1985 Expiry date:  
Legislative reference: Divisions 290, 292 and 295 of the Income Tax Assessment Act 1997

Currently, employer contributions, after certain costs of the superannuation entity are deducted, are generally included in the assessable income of a superannuation entity and are taxed at a concessional rate of 15 per cent.

Concessional contributions subject to the 15 per cent tax rate are limited by the concessional contribution cap. Currently the general cap is $25,000 per annum (indexed and rounded down to the nearest $5,000). From 1 July 2013 a transitional higher cap of $35,000 applies to individuals aged 60 and over. This cap will be extended to individuals aged 50 and over from 1 July 2014. The transitional arrangements in which persons aged 50 and over were subject to a $50,000 per annum cap ended on 1 July 2012. Prior to 1 July 2009, individuals could receive concessional taxation treatment on up to $50,000 ($100,000 for persons 50 and over) of concessional contributions. The general concessional contributions cap is expected to rise with indexation to $30,000 in 2014‑15.

From 1 July 2012, individuals with income greater than $300,000 have the tax concession on their contributions, including notional employer contributions, reduced from 30 per cent to 15 per cent (excluding the Medicare levy).

The amounts of employer contributions in superannuation are influenced by the superannuation guarantee rate. The Government intends to maintain the superannuation guarantee rate at 9.25 per cent until 1 July 2016 before gradually increasing to 12 per cent.

In any particular year, the application of the benchmark treatment rather than the concessional tax rates to these contributions would increase tax revenue by the amounts indicated.

C6 Superannuation — concessional taxation of superannuation entity earnings
Social security and welfare ($m)
2009‑10 2010‑11 2011‑12 2012‑13 2013‑14 2014‑15 2015‑16 2016‑17
10,650 15,050 13,000 13,400 16,100 18,450 21,700 24,100
Tax expenditure type: Exemption, Concessional rate 2012 TES code: C6
Estimate Reliability: Low    
Commencement date: Introduced before 1985 Expiry date:  
Legislative reference: Division 295 of the Income Tax Assessment Act 1997

The earnings of complying superannuation entities, after certain costs are deducted, are taxed at a concessional rate. The tax rate on earnings is 15 per cent (for the accumulation phase) or nil where the earnings are derived from assets which are used to meet current pension liabilities (drawdown phase). Complying superannuation entities are entitled to refunds of excess imputation credits attached to dividends payable to them.

This tax expenditure reflects the extra tax in a particular year that would be collected if superannuation earnings were taxed at the personal tax rates of members rather than fund rates.

C7 Superannuation — concessional taxation of unfunded superannuation
Social security and welfare ($m)
2009‑10 2010‑11 2011‑12 2012‑13 2013‑14 2014‑15 2015‑16 2016‑17
360 410 450 460 490 500 520 540
Tax expenditure type: Exemption, Offset, Concessional rate 2012 TES code: C7
Estimate Reliability: Medium    
Commencement date: Introduced before 1985 Expiry date:  
Legislative reference: Part 3-30 and Subdivision 320-D of the Income Tax Assessment Act 1997
Part 3-30 of the Income Tax (Transitional Provisions) Act 1997

In the case of unfunded superannuation, no employer contribution is made until the actual benefit is provided on the member’s retirement. The appropriate benchmark treatment for these amounts is therefore taxation at personal rates on receipt by the member.

Unfunded superannuation lump sums are taxed in the same way as funded superannuation lump sums from untaxed funds (see the tax expenditure Superannuation — tax on funded lump sums (C12)).

Similarly, unfunded superannuation income streams are taxed in the same way as funded superannuation income streams from untaxed funds (see the tax expenditure Superannuation — tax on funded superannuation income streams (C13)).

The taxation of a death benefit paid to a dependant as a reversionary pension depends on the age of the primary and reversionary beneficiary. If either was aged 60 or over at the time of death, then the taxable component of payments to the reversionary beneficiary will be taxed at marginal rates with a 10 per cent tax offset. If both were under age 60 at the time of death, the taxable component of the pension will be taxed at the reversionary beneficiary’s marginal rate. However, once the reversionary beneficiary reaches age 60, the taxable component of the pension will become eligible for the 10 per cent tax offset.

C8 Superannuation — deduction and concessional taxation of certain personal contributions
Social security and welfare ($m)
2009‑10 2010‑11 2011‑12 2012‑13 2013‑14 2014‑15 2015‑16 2016‑17
1,500 870 960 1,000 670 770 900 950
Tax expenditure type: Exemption, Reduction in taxable value 2012 TES code: C8
Estimate Reliability: Medium — High    
Commencement date: Introduced before 1985 Expiry date:  
Legislative reference: Divisions 290, 292 and 295 of the Income Tax Assessment Act 1997

Currently, certain persons are entitled to a full deduction for all personal contributions they make to a superannuation fund, provided that the deduction is not greater than the amount that reduces the individual’s taxable income to nil. For the purposes of this deduction, the persons entitled are those who have less than 10 per cent of their income earned as an employee. This includes many unincorporated and substantially self-employed persons and persons not in paid employment. These personal contributions are concessional deductible contributions and are subject to the concessional 15 per cent tax rate.

Caps apply to the amount of concessional contributions. Currently the general cap is $25,000 per annum (indexed and rounded down to the nearest $5,000). A temporary cap of $35,000 applies to individuals aged 60 and over from 1 July 2013 and to individuals aged 50 and over from 1 July 2014. Transitional arrangements where persons aged 50 and over were subject to $50,000 per annum cap ended on 1 July 2012. The general concessional contributions cap is expected to rise with indexation to $30,000 in 2014‑15.

Prior to 1 July 2009, individuals could make up to $50,000 ($100,000 for persons over 50) of concessional deductible contributions subject to the 15 per cent tax rate. The 2009 changes to the levels subject to 15 per cent tax are reflected in the tax expenditure estimates with a one year delay.

Also, from 1 July 2012, individuals with income greater than $300,000 have the tax concession on their contributions reduced from 30 per cent to 15 per cent (excluding the Medicare levy).

C9 Superannuation — measures for low-income earners
Social security and welfare ($m)
2009‑10 2010‑11 2011‑12 2012‑13 2013‑14 2014‑15 2015‑16 2016‑17
230 300 170 140 130 180 55 35
Tax expenditure type: Exemption, Reduction in taxable value 2012 TES code: C10 and C9
Estimate Reliability: Medium    
Commencement date: Introduced before 1985 Expiry date:  
Legislative reference: Superannuation (Government Co-Contribution for Low Income Earners) Act 2003

The existing superannuation co-contribution, which applies to eligible non-concessional superannuation contributions, and the low income superannuation contribution, which applies to eligible concessional superannuation contributions, are expense measures. As such, these payments are not included in the TES. The amounts indicated represent the impact of these payments not being taxed.

The low income superannuation contribution is available for superannuation contributions made in 2012‑13. This contribution is designed to pay an amount equivalent to the tax paid on superannuation concessional contributions up to a maximum of $500 each year. This contribution is available to individuals who have adjusted taxable incomes up to $37,000 (not indexed).

The superannuation co-contribution boosts superannuation savings of individuals by matching a proportion of eligible superannuation contributions made by or for lower to middle income earners. The maximum co-contribution is $500 from 1 July 2012.

An 18 per cent offset is also available for post-tax contributions to the superannuation account of a spouse whether married or de facto (where the total of assessable income and reportable fringe benefits for the spouse is less than $13,800). A maximum offset of $540 applies for a contribution of $3,000 where the spouse’s income is less than $10,800. The offset is phased out for higher incomes and is no longer payable where the spouse’s income exceeds $13,800.

C10 Superannuation — tax on excess concessional contributions
Social security and welfare ($m)
2009‑10 2010‑11 2011‑12 2012‑13 2013‑14 2014‑15 2015‑16 2016‑17
-3 -25 -36 * * * * *
Tax expenditure type: Increased rate 2012 TES code: C11
Estimate Reliability: Medium * Category 2-
Commencement date: Introduced before 1985 Expiry date:  
Legislative reference: Divisions 290, 292 and 295 of the Income Tax Assessment Act 1997 Superannuation (Excess Concessional Contributions Tax) Act 2007

Currently, employer contributions and personal contributions for which deductions are claimed, after certain costs of the superannuation entity are deducted, are generally included in the assessable income of a superannuation entity and are taxed at a concessional rate of 15 per cent; the tax expenditure from this is shown at C5.

Caps apply to the amount of concessional contributions which receive this concessional taxation treatment. Concessional contributions are limited by the concessional contributions caps. Currently the general cap is $25,000 per annum (indexed and rounded down to the nearest $5,000). Contributions above this limit on or before 30 June 2013 are effectively taxed at the top marginal tax rate plus Medicare levy by applying an additional tax of 31.5 per cent to the 15 per cent deducted by the superannuation provider on the excess concessional contributions. The tax is payable by the individual. A negative tax expenditure occurs where a person contributes to superannuation an amount above the relevant cap and their marginal tax rate is below the effective excess concessional contributions tax rate.

The general concessional contributions cap is expected to rise with indexation to $30,000 in 2014‑15.

From 1 July 2013, individuals aged 60 and over will be able to receive concessional taxation treatment on contributions of up to $35,000 per annum. The higher cap will apply to individuals aged 50 and over from 1 July 2014. The higher cap is not indexed and will cease when the general cap is indexed to $35,000.

For the 2011‑12 and the 2012‑13 income years, an individual will have an option to have excess concessional contributions of $10,000 or less refunded to them from their superannuation provider. The excess concessional contributions will be included in the assessable income of the individual for the year the contribution was made and taxed at the individual’s marginal income tax rate rather than incurring excess contributions tax. The refund offer will be available for the first time an individual has been assessed for excess concessional contributions since 1 July 2011. Circumstances before 1 July 2011 will not affect eligibility.

On or after 1 July 2013, contributions above the concessional contribution cap are taxed at the individual’s own marginal tax rate plus the Medicare levy by including these contributions in the individual’s income tax assessment and allowing an offset for the 15 per cent tax payable by the superannuation provider on these contributions.

These contributions will also attract an interest charge for the period beginning at the start of the financial year in which the excess was made and ending at the time of the income tax assessment that includes the excess contributions.

The individual will be liable for the payment of the tax and interest charge through the income tax assessment. The individual will also have the ability to withdraw excess concessional contributions from superannuation. Any withdrawn amount will not count towards the individual’s non-concessional contribution cap.

C11 Superannuation — tax on excess non-concessional contributions
Social security and welfare ($m)
2009‑10 2010‑11 2011‑12 2012‑13 2013‑14 2014‑15 2015‑16 2016‑17
-39 -43 -33 -45 * * * *
Tax expenditure type: Exemption, Reduction in taxable value 2012 TES code: C12
Estimate Reliability: Medium * Category 2-
Commencement date: 10 May 2006 Expiry date:  
Legislative reference: Division 292 of the Income Tax (Transitional Provisions) Act 1997
Division 292 of the Income Tax Assessment Act 1997 Superannuation (Excess Non-Concessional Contributions Tax) Act 2007

Non-concessional contributions include those made from an individual’s after tax income (generally undeducted contributions) and excess concessional contributions (that is, employer and personal deducted contributions which have exceeded the annual concessional contribution thresholds). The benchmark treatment of these contributions is that they are taxed like any other income in the hands of the individual (that is, the contributions are taxed at the individual’s marginal tax rate).

Since 10 May 2006, non-concessional contributions have been subject to a cap, with contributions in excess of the cap taxed at the top marginal tax rate, payable by the individual. The taxation of these excess contributions represents a deviation from the benchmark.

An annual cap of $150,000 applies to non-concessional contributions, although people under age 65 are able to bring forward up to two years’ worth of non-concessional contributions. Exemptions to the cap include proceeds from the disposal of assets that qualify for some small business CGT concessions, up to a lifetime limit of $1.255 million in 2012‑13, and proceeds arising from structured settlements or orders for personal injuries.

The non-concessional contributions cap is currently set at six times the concessional contributions cap. The non-concessional cap is expected to rise to $180,000 in 2014‑15 with the expected increase in the general concessional cap to $30,000 in 2014‑15.

Contributions above the non-concessional caps are subject to the excess contributions tax levied at 46.5 per cent. The tax is payable by the individual. This results in a negative tax expenditure.

C12 Superannuation — tax on funded lump sums
Social security and welfare ($m)
2009‑10 2010‑11 2011‑12 2012‑13 2013‑14 2014‑15 2015‑16 2016‑17
-190 -220 -260 -230 -250 -260 -280 -290
Tax expenditure type: Increased rate 2012 TES code: C13
Estimate Reliability: Medium    
Commencement date: Introduced before 1985 Expiry date:  
Legislative reference: Divisions 301, 302 and 307 and Part 3-30 of the Income Tax Assessment Act 1997
Part 3-30 of the Income Tax (Transitional Provisions) Act 1997

Superannuation lump sums paid from a taxed fund to persons aged 60 or over are tax free. A taxed fund is one in which tax has been paid during the accumulation phase.

The taxable component of a lump sum paid from a taxed fund to a person under age 60 is taxed. For a person aged 55 to 59 the tax rate on this component is zero per cent up to the low rate cap amount ($175,000 in 2012‑13) and 15 per cent thereafter. For a person below age 55 a maximum tax rate of 20 per cent applies.

Untaxed funds are those where superannuation benefits are not taxed during the accumulation phase. The taxable component of lump sums paid from untaxed funds to persons aged 60 or over is taxed at a maximum rate of 15 per cent up to an amount of $1.255 million (in 2012‑13) and at the top marginal rate thereafter. For persons aged 55 to 59, the tax rate ranges from 15 per cent up to the top marginal rate, while for persons under age 55 the tax rate is typically 30 per cent.

Special arrangements apply to lump sums paid to certain temporary residents who have departed Australia. The taxable component of these payments is taxed at 35 per cent where paid from a taxed source and at 45 per cent where paid from an untaxed source.

Lump sums paid to death benefit dependants (and non-dependants of service and police personnel killed in the line of duty) and to persons suffering from a terminal medical condition are tax free.

Death benefit payments to non-dependants must be made as a lump sum. These payments are taxed at a maximum rate of 15 per cent where paid from a taxed source, and at a maximum rate of 30 per cent where paid from an untaxed source.

The amounts reported are the tax raised on these lump sums.

C13 Superannuation — tax on funded superannuation income streams
Social security and welfare ($m)
2009‑10 2010‑11 2011‑12 2012‑13 2013‑14 2014‑15 2015‑16 2016‑17
-250 -240 -250 -290 -300 -310 -330 -340
Tax expenditure type: Increased rate 2012 TES code: C14
Estimate Reliability: Medium    
Commencement date: Introduced before 1985 Expiry date:  
Legislative reference: Divisions 301 and 302 and Part 3-30 of the Income Tax Assessment Act 1997
Part 3-30 of the Income Tax (Transitional Provisions) Act 1997

Superannuation income stream payments from a taxed source are tax free for persons aged 60 or over. The taxable component of superannuation income stream payments to persons below age 60 is included in assessable income. A 15 per cent tax offset applies to the taxable component of superannuation income stream benefits paid to persons aged 55 to 59, and to disability benefits paid to persons of any age.

The taxable component of superannuation income stream payments from an untaxed source is included in the recipient’s assessable income. A 10 per cent tax offset applies to the taxable component of pension payments for persons aged 60 or over.

The taxation of a death benefit paid from a taxed source as a reversionary pension depends on the age of the primary and reversionary beneficiary. If either the primary or reversionary beneficiary was aged 60 or over at the time of death, then income stream payments to the reversionary beneficiary are tax free. If both were under age 60 at the time of death, the taxable component of the payments is taxed at the reversionary beneficiary’s marginal tax rate (less a 15 per cent tax offset). However, once the reversionary beneficiary reaches age 60, the payments are tax free.

For the taxation treatment of a death benefit paid from an untaxed source as a reversionary pension see the tax expenditure Superannuation — concessional taxation of unfunded superannuation (C7).

This item relates to the tax on funded pensions.

C14 Taxation of five per cent of unused long service leave accumulated by 15 August 1978
Social security and welfare ($m)
2009‑10 2010‑11 2011‑12 2012‑13 2013‑14 2014‑15 2015‑16 2016‑17
55 55 55 55 50 45 45 40
Tax expenditure type: Concessional rate 2012 TES code: C15
Estimate Reliability: Medium — High    
Commencement date: Introduced before 1985 Expiry date:  
Legislative reference: Subsection 83-80(1) of the Income Tax Assessment Act 1997

A reduced tax rate applies to lump sum payments for unused long service leave which accrued prior to 15 August 1978. Five per cent of such payments is included in the taxpayer’s assessable income and is subject to tax at marginal rates.

C15 Exemption of foreign termination payments
Other economic affairs — Other economic affairs, nec ($m)
2009‑10 2010‑11 2011‑12 2012‑13 2013‑14 2014‑15 2015‑16 2016‑17
* * * * * * * *
Tax expenditure type: Exemption 2012 TES code: C16
Estimate Reliability: Not Applicable * Category 1+
Commencement date: 1 July 2007 Expiry date:  
Legislative reference: Subdivision 83-D of the Income Tax Assessment Act 1997

Certain termination payments paid as a result of the termination of foreign employment are non-assessable and non-exempt income for tax purposes. To be non-assessable and non-exempt, the payment must have been paid to a taxpayer who was a foreign resident during the period to which the payment relates and must not be a superannuation benefit or a pension or annuity. Where the taxpayer was an Australian resident for some of the period to which the termination payment relates, the payment will be non-assessable and non-exempt if it was received in consequence of the termination of a period of employment or engagement for the purposes of section 23AF or section 23AG and the payment relates only to that period of employment or engagement and is not a superannuation benefit or a pension or annuity.

C16 Small business capital gains tax exemption for assets held more than 15 years
Other economic affairs — Other economic affairs, nec ($m)
2009‑10 2010‑11 2011‑12 2012‑13 2013‑14 2014‑15 2015‑16 2016‑17
90 95 125 140 140 140 145 150
Tax expenditure type: Exemption 2012 TES code: C17
Estimate Reliability: Medium — High    
Commencement date: 1999 Expiry date:  
Legislative reference: Subdivision 152-B of the Income Tax Assessment Act 1997

Capital gains arising from the disposal of active small business assets that have been held continuously for 15 years are exempt from capital gains tax. This exemption is available only if the taxpayer is permanently incapacitated or reaches the age of 55 and retires. An eligible small business is one where the net value of assets that the taxpayer and connected entities own is no more than $6 million, or where the aggregated annual turnover is less than $2 million.