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ACC3TAXS12018Week4SuperannuationETPandExemptIncomeLMS13-03-20182.pptxACC3TAX – 2018/1 Week 4 Superannuation ETPs Exempt Income
Livia Gonzaga
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Week 4 - Summary of Topics
Superannuation
Super Funds – General
Taxation of Super Benefits
Employment Termination Payments
ETPs
Redundancy
Long Service Leave and Annual Leave
Exempt Income
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Livia Gonzaga
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Superannuation
Part 1
Livia Gonzaga
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Superannuation - Overview
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Livia Gonzaga
| Superannuation – Basic Concepts |
| What is Superannuation? In Australia, it is a heavily regulated retirement savings scheme that shifts the responsibility for one’s retirement savings from the government to the individual. |
| Super Contributions vs Super Benefits: Superannuation contributions to a super fund are not assessable income. However, superannuation benefits paid out of a super fund may (in some circumstances) be assessable income for the recipient. |
| “Tax Free” Benefits vs Taxed Benefits: Recipients over 60 years of age may receive “tax free” benefits if the payments are made from a taxed fund. Note: From 1 July 2017 the tax free amount is restricted to income on assets which have capped to $1.6 million with excess assets taken out of system or resulting income taxed at 15%. Varying rates apply in other cases depending on the age of the recipient if less than 60 years and on the amount and source of the benefit. |
| Taxation of Superannuation: Payments from super funds are excluded from the Employment Termination Payment (ETP) regime. Payments from super funds are taxed following their own particular regime. |
Audio 1
Superannuation is a heavily regulated retirement savings scheme which aims to shift the responsibility for one’s retirement from the Government to the individual, thus reducing this burden at the state level. The whole superannuation scheme develops in 3 phases:
The first two phases are the “Investment” and “Accumulation” phases, which happen at the same time. These two phases correspond to employers and employees making super contributions into a superannuation fund, where the money will be invested and managed by the super fund in order to provide benefits for the retirement of their members.
The third phase is the “Benefits” phase, corresponding to the time when a member starts receiving their benefits, either as a result of their retirement or as a result of an early employment termination, or as a result of terminal illness. (in the next slide you will find a visual representation of these phases).
Audio 2
It is important to distinguish between super contributions and super benefits. Super contributions are regular deposits made by employers and individuals into the super fund. Super contributions are NOT assessable income for the individual, but if the fund is a taxed fund, they will form part of its assessable income. Superannuation benefits are the payments made by the fund to its members after retirement, early termination of employment, terminal illness or death. The benefits may constitute assessable income for the recipients depending on certain circumstances (such as age), or, if the recipient is older than 60, it may be non-assessable non-exempt, meaning it is not included in the assessable income.
Audio 3
It is generally advertised that superannuation benefits received by members who are at least 60 years old is tax free. However, this assertive is not entirely correct, because all money invested in a superannuation fund will be subject to taxation at a certain point, unless the fund is an untaxed fund (which is the kind of super funds available to public employees). Where people invest their money in taxed complying funds (which are the majority of the funds), the amounts will be subject to taxation at a concessional rate of 15% during the accumulations phase, that is, before the benefits are paid to the members. So even if the person only starts receiving their benefits after 60 years old, unless that person is a member of a non-taxed fund, that money would have already been taxed while it was deposited in the super fund, albeit at a reduced rate. Differently, if an individual is accessing super benefits before 60, there will be varying rates and requirements depending on each person’s circumstances. Finally, in case of non-taxed funds there is no taxation at the accumulations phase, but the money is taxed at the benefits phase, meaning that benefits paid to members will be subject to tax.
Audio 4
Let’s now look at a practical example (adapted from Foundations of Taxation Law 10th ed, 2018, p. 710-711) that will show you why it is so important to understand the taxation of superannuation. Let’s suppose that 5 years from now you have become a high income earner. You earn $180,000 per year and you have just been promoted with a pay rise of $5,000, which will push you into the top MTR. Your employer offers you two options:
Receive everything in cash,
Salary-sacrifice those $5,000 revert them into your superannuation fund.
Which one would you choose???
The smartest option here would be the second one, as it may allow you to substantially reduce the amount of tax you will pay and at the same time, will allow you to boost your retirement savings. On the downside, the money you put on Super will be locked in the fund, meaning you will not be able to access it until you are 60 years old or until you reach any of the other conditions for release. Still, it may be a smart tax/financial planning strategy, because not only you are saving tax but you are also providing for your future.
Now let’s look at the numbers:
If the $5,000 is paid to you as salary (as in option 1), you will have to pay tax of $2,350 ($5,000 × 47% - being 45% top MTR + 2% ML) on the extra income, leaving you with only $2,650 after tax. If you decide to invest it, you will be taxed again on 47% on the interest.
However, if you choose to ‘salary sacrifice’ your pay rise (as in option 2) by making a personal contribution to your complying superannuation fund, the fund will be required to pay tax of only 15% on the contribution, being $750, thus leaving you with $4,250 after tax, which means that you are better off by $1,600 (ie $4,250 − $2,650). This surplus reflects the difference between your personal income tax rate (47%) and your superannuation fund’s tax rate (15%) on the $5,000.
While $1,600 may not seem like huge savings when taken in isolation, over many years, the ‘compounding effect’ of a lower tax rate provides a substantial benefit. And finally, when you turn 60, you can get it back as a tax free benefit.
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Superannuation - Overview
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Livia Gonzaga
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Tax Treatment of Superannuation
3 Phases
1.Contributions
2. Investment (Super Fund)
3. Benefits
Generally payable to members on retirement by way of lump sum or income stream or combination of both
By members, employers and other persons to a superannuation fund
Trustee invests contributions and earnings on behalf of members as above
Superannuation Funds
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Livia Gonzaga
| Characteristics and Compliance Obligations (summary) |
| What is a Super Fund? A Superannuation Fund is special a type of Trust Fund with particular regulations and specific taxation rules. Superannuation Funds are regulated by the following acts: Superannuation Industry Supervision Act 1993 (SISA), Superannuation Industry Supervision Regulations 1994 (SISR), and ITAA97 Div 295 |
| “Complying Super Funds”: Complying Super Funds are resident funds which comply with the regulatory provisions under the SISA; meet the sole purpose test (s 62 SISA) of only providing super benefits to its members; do not provide any personal benefit to members; do not carry on business (a super fund must invest funds only) and cannot mortgage assets or borrow money. Only complying super funds are eligible to tax concessions, especially the concessional income tax rate of 15%. |
| Compliance obligations (brief outline): Superannuation funds must lodge an annual “Fund Income Tax and Regulatory Return” by 31 October (s 35D of SISA), after receipt of audit report. They must also pay annual supervisory levy and lodge an annual Member Contributions Statement by 31 October (s 390-5, Schedule 1 TAA53) |
| Income tax rates: Complying fund – 15%; Non-complying fund – 45% |
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Superannuation Funds
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Livia Gonzaga
| Characteristics and Compliance Obligations (summary) |
| Fund’s assets: Superannuation funds usually hold capital assets, such as real estate property or shares. CGT on assets: Capital gains on sale of CGT-assets are taxable – amount payable depends on period held.(see w 5). Discount Capital Gains (ITAA97 s 115-100): a discount of 1/3 of the gain is applicable on the disposal of discount capital assets (assets held for more than 12 months). Therefore, 2/3rd of the gains will be taxed at 15% upon disposal Non-Discount Capital Gains: entire gain liable to tax on disposal of non-discount CGT-assets (assets held less than 12 months) at rate of 15% Franking credits: Eligible to claim dividend franking credits offset. Excess dividend franking credits are refunded back to superannuation fund – s 67-25 (see w 10). |
| Super Funds’ Assessable Income includes: Taxable contributions from members (s 295-160 ITAA 97), e.g.: employer contribution for employee. A contribution made by contributor for which they get a deduction (s 295-190), e.g.: a self-employed person who makes a superannuation contribution. Investment income (e.g. interest, dividends (franked & unfranked), rent) Capital gains on disposal of CGT-assets (e.g. shares) |
| Allowable deductions for Super Funds: Actuarial costs; tax agent fees & legal costs; accounting & audit fees, certain other compliance costs (TR 93/17); insurance costs, investment advice; Death and Disability Premiums (s 295-465 ITAA97), but excludes the payment of benefits to members (s 295-495 ITAA97). |
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Types of Super Funds
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Livia Gonzaga
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Super Funds
Personal Superannuation Funds
Corporate Funds
Established for the self-employed
Public Offer Superannuation Funds
Industry Superannuation Funds
Also known as Retail Funds. E.g. Retail Banks
Self-managed Superannuation Funds (SMSF)
Managed by the ATO. Less than 5 members
Originally established by trade unions, now available to all. E.g. Unisuper, Hesta
Employer-sponsored Superannuation Funds
Superannuation Guarantee Scheme
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Livia Gonzaga
| Characteristics and Compliance |
| Who is eligible for super contributions: Super contributions must be paid to all full-time, part-time or casual employees who are 18yo+ and earning more than $450 in a calendar month (including those at work or on paid leave, such as paid sick leave, long service leave, annual leave and in some cases, those who are receiving workers compensation; excluding those on unpaid leave). These employees are eligible for the Superannuation Guarantee Scheme, meaning their employer should be contributing superannuation on their behalf. |
| Who is not eligible for super contributions: Those paid less than $450 per month before tax. Those who are under 18 years old and work 30 hours per week or less. |
| “Employers Contributions”: Employers may claim a deduction for the contributions made on behalf of their employees under the Superannuation Guarantee Scheme (Subdiv 190-B ITAA97). The 2017/18 Superannuation Guarantee Scheme rate is 9.5% (although employers may choose to contribute at a higher rate). When employers fail to provide minimum support for quarter, required to pay “Superannuation Guarantee Charge (SGC)”, which is non-deductible. |
Audio
The Superannuation Guarantee Scheme was Introduced in 1992 and it was designed to ensure that employees are guaranteed a minimum level of employer super support.
It requires employers to contribute prescribed levels of superannuation support for the benefit of their employees. This contribution, which is called “employers contribution” is tax deductible for employers under Div 290 ITAA97.
The Superannuation Guarantee Scheme rate for 2017/18 is 9.5% and will remain at 9.5% until 30/06/2021. Then it will progressively increase, ultimately reaching 12% by 1 July 2025.
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Superannuation Related Deductions
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Livia Gonzaga
| Who can claim an income tax deduction in relation to super contributions? |
| Employers: employer contributions to complying superannuation funds (Subdiv 290-B ITAA97) are deductible for the employer. |
| Self-employed people: contributions made by self-employed persons are deductible to that person (Subdiv 290-C). For the 2017/18 year, the concessional cap of $25,000 applies for individuals of all ages. |
| Employees: Since 1 July 2017, an employee is able to claim a deduction for personal superannuation contributions up to the amount of the annual concessional contributions cap of $25,000 (2017/18). Employer contributions are included within this cap. Low income employees may be entitled to government co-contributions to complying superannuation funds. Interest on borrowings (financing costs on loan) to pay for personal superannuation contributions (s 26-80 ITAA97) are non-deductible for the individual making the personal super contributions. Example: Anna is employed by ABC Ltd, who paid a total of $10,000 in super contributions on her behalf. In the same year she made additional personal super contributions in a total of $20,000. Anna will be able to claim a deduction of $15,000 which corresponds to the total amount of her personal contributions up to the annual cap of $25,000. ABC will be able to claim a deduction of $10,000. |
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Superannuation Related Deductions
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| Excess Concessional Contributions |
| Since FY 2013/14, excess concessional contributions are “included as taxable income, taxed at marginal tax rate plus an excess concessional contributions charge”. |
| “The excess concessional contributions (ECC) charge is applied to the additional income tax liability arising as a result of having excess concessional contributions included in your income tax return. The intent of the ECC charge is to acknowledge that the tax is collected later than normal income tax. The charge is payable for the year a person makes excess concessional contributions and applies from the 2013–14 income year onwards.” (ATO https://www.ato.gov.au/Rates/Key-superannuation-rates-and-thresholds/?page=3#Excess_concessional_contribution_charge) |
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Superannuation Benefits
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Livia Gonzaga
| Access to Superannuation Benefits |
| Conditions for release of superannuation benefits (Div 307): Recipient’s age Whether the benefit is paid in a lump sum or income stream Whether the benefit is paid from a taxed fund or an untaxed fund. Death Terminal illness |
| Reporting obligations: All benefits must be reported to the ATO, including: Employment Termination Payments (ETPs); Super lump sum benefits and super income stream benefits |
| Two-types of super benefits paid from a complying fund: Death benefits: payable on the death of a taxpayer to: The deceased’s spouse, former spouse or de facto. Deceased’s child aged less than 18 years Any other person with whom the deceased had an “interdependency relationship” with just prior to death or Any other person who was financially dependent on the deceased just prior to death Death lump sum benefits are not assessable income (s 302-60) Superannuation member benefits (life benefits – see table s 307-5 ITAA97) |
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Audio
When a person retires and wishes to access their superannuation benefits, they must fulfil certain conditions for release, and depending on the circumstances, there may or may not be additional taxation. In general the conditions are related to the taxpayer’s age, whether their benefits are being paid from a taxed or untaxed fund and whether the fund was complying or not.
For example, people over 60 who receive their benefits in a lump sum from a complying taxed fund will not pay any additional tax.
People who are at preservation age, meaning they are aged between 57-59 (min preservation age in 2017/18 is 57) in the year they wish to start receiving their benefits, may be subject to additional taxation, however the rates are generally reduced. On the other hand, someone who is under 57 may have their benefits taxed at marginal tax rates in certain cases.
It is also important to remember that where a member is receiving benefits from an untaxed fund (as it is the case of public employees), the benefits will always be subject to taxation because those amounts had not been previously taxed during the accumulations phase. This means that a public employee who’s 65 and starts receiving super benefits paid out of an untaxed fund will be taxed on those benefits, although again, at a reduced rate.
Components of a Superannuation Benefit (Div 307 ITAA97)
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Livia Gonzaga
Audio
This slide is extremely important because it allows you to visualise all the elements which form each component of a superannuation benefit. You must always have in mind that in order to correctly calculate the taxation of a superannuation benefit, you will only apply any rates after you calculate the taxable component.
In other words, this means that all superannuation benefits will always have a tax-free component (which may even be zero in some cases). Once you calculate the tax-free component, you will obtain the taxable component by subtracting the tax-free component from the total benefit. You must also know that the tax free amount is NANE, meaning that it won’t be included in the assessable income, therefore it won’t be subject to taxation even though it is not an exempt amount. In view of this, you should carefully read and understand the elements of a superannuation benefit before proceeding to the calculation of the tax payable, which is described on the following slides and will depend on the age of the recipient, on whether the payment is in a lump sum or income stream, and the type of fund which is making the payment.
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Components of a Super Benefit
(s 307-120)
Tax free component (S 307-210)
Contribution Segment
Comprises all contributions from 1 July 2007 that have not been included in the assessable income of the fund, i.e. non concessional contributions (s 307-220)
Crystallised Segment
(s 307-210)
Defined in s 307-225 and assumes an ETP is paid just before 1 July 2007, and includes
Concessional component e.g. redundancy
post June 94 invalidity
Undeducted contributions prior Jul/07
CGT exempt component
pre July 83 component
Taxable Component (s 307-215)
Is the total value of the superannuation interest less the tax free component (s 307-215)
Taxation of Benefits 2017/18
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| Benefits paid from an element taxed in the fund (from a taxed fund) 2017/18 | ||
| Age | Lump Sum | Income Stream |
| 60+ | Tax free (NANE – s 301-10) | Tax free (NANE – s 301-10) |
| At pres. age | 0% up to $200,000 (s 307-345) > $200,000 maximum 15%+ML (s 301-20) | MTR + ML, but with tax offset of 15% of taxable component (s 301-25) |
| Below Pres. age | MTR, up to maximum 20%+ML (s 301-35) | MTR + ML (no offset). If disability super benefit, MTR + ML with offset of 15% of taxable component (s 301-40) |
| Benefits paid from an element untaxed in fund (from an untaxed fund) 2017/18 | ||
| Age | Lump Sum | Income Stream |
| 60+ | Max 15% + ML up to $1.445M $1.445M – Top Marginal Rate 45% + ML (s 301-95) | MTR + ML, with offset of 10% of the element untaxed in the fund (s 301-100) |
| At pres. age | < $200,000 - maximum 15% + ML Between $200,000 and $1.445M – up to maximum of 30% + ML > $1.445M, Top Marginal Rate 45% + ML (s 301-105) | Marginal Rates (no offset) + ML (s 301-110) |
| Below Pres. age | 30% up to $1.445M + ML Top Marginal Rate 45% + ML over this cap (s 301-115) | Marginal Rates (no offset) + ML (s 301-120) |
Livia Gonzaga
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Audio
This is another extremely important slide, because the tables herein summarize a large number of complicated legal provisions which may be difficult to understand when read for the first time. We strongly advise that you fully understand this table before reading the legislation, however it is very important that you do read the sections which are mentioned here. Remember, all rates and caps mentioned in these tables only apply to the taxable component of a superannuation benefit, never to the entire benefit itself.
Taxation of Benefits
NOTE: Lump sum payments from an element taxed in the fund to a member with a terminal illness are tax free.
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| Preservation Age | |
| For a person born | Preservation Age |
| Before 1 July 1960 | 55 |
| 1.7.60 – 30.6.61 | 56 |
| 1.7.61 – 30.6.62 | 57 |
| 1.7.62 – 30.6.63 | 58 |
| 1.7.63 – 30.6.64 | 59 |
| After 30 June 1964 | 60 |
Livia Gonzaga
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Examples – Taxation of Super Benefits
Example 1:
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Livia Gonzaga
| 1) Joe Brown, aged 62, receives a $275,000 lump sum payout from his complying superannuation fund at the end of the current income year. His contributions segment (undeducted contributions from 1 July 2007) is $20,000 and his crystallised segment is $25,000. |
| Taxable component = total interest – (contrib. segment + crystal. component) Taxable component = $275,000 - ($20,000 + $25,000) = $230,000. However, as he is over 60 years of age this is tax free (s 301-10). |
| 2) Assuming the same conditions as in example 1, what if Joe was 58 years of age? |
| In this case the taxable component ($230,000) is reduced by the tax free amount of $200,000. The remaining would be taxed at 15% plus Medicare. $230,000 - $200,000 = $30,000 $30,000 x 17% = $5,100 |
| 3) Assuming the same conditions as in example 1, what if Joe was 48? |
| Then the whole amount is taxed at 20% plus Medicare due to his age being less than the preservation age. $230,000 x 22% = $50,600 |
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Steps to Calculate Taxation on Super Benefits
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1
Add up contribution and crystallised segments (may require previous calculations) to obtain tax free component.
2
Subtract the tax free component from the total amount to obtain the taxable component.
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Check recipients preservation age.
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Calculate taxation according to table (and remember to mention appropriate sections!).
Summary of recent changes to Super Rules
The following changes came into force on 1 July 2017 (for FY 2017/18):
Low Income super contribution scheme was abolished, Low Income Super Tax Offset was created for FY17/18 onwards (same eligibility criteria though, it was basically a name change)
Annual cap on concessional contributions was reduced to $25,000
Employees are now able to claim a deduction for personal super contributions up to the $25,000 cap
Individuals aged between 65 and 74 who remain working may claim a deduction for personal super contributions to eligible super funds up to the concessional contributions cap
Spouse Contributions Offset will apply where the spouse earns up to $40,000 (increased from the cut-off limit of $13,800)
Exemption for income from assets supporting transition to retirement income streams will be removed
Preservation age to increase to 57 as of FY 17/18
Livia Gonzaga
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Employment Termination Payments (ETP)
Part 2
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ETPs – General
Examples of payments included in an ETP:
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Livia Gonzaga
| ETPs – Overview |
| What are ETPs? An ETP is received by person in consequence of termination of employment (S 82-130) within 12 months of termination (S 82-5). Examples: amounts for unused rostered days off amounts in lieu of notice a gratuity or ‘golden handshake’ an employee’s invalidity payment (for permanent disability, other than compensation for personal injury) certain payments after the death of an employee. |
| Amounts that CANNOT be ETPs: Unused annual leave or unused long service leave the tax-free part of a genuine redundancy payment or an early retirement scheme payment (see slides about genuine redundancy). Superannuation benefits Pensions Personal injury compensations |
| Types of ETP: ETP – Life benefits (S 82-A) ETP – Death benefits (S 82-B) |
Audio
Employment termination payments are payments received in consequence of termination of the employee’s employment. They’re also commonly referred to as “golden handshakes” (s 82-130 ITAA97).
We can think of ETPs as a bigger category which encompasses other termination payments, such as genuine redundancy payments and unused annual leave or unused long service leave. However each of these payments has their own rules, requirements and methods of calculation. In particular, ETPs and genuine redundancy payments will both have a tax free limit, just as it happens with superannuation payments. For these types of payments you must always remember that you never apply any rates on the entire amount, you must always calculate the tax free limit and apply the rates only on the taxable component.
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Taxation of ETP - Life Benefits
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ETP components
Tax free component
(tax free s 82-10(1))
Invalidity component
(s 82-150)
Taxable component
(assessable, but a tax offset is available)
Taxable component is the ETP reduced by the tax free component after this has been calculated (s 82-145)
Pre July 83 component
(s 82-140)
ETP – Taxation of Life Benefits
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Tax free component of an ETP (NANE s 82-10(1)) = Invalidity Segment + Pre July 83 Component.
If there is no mention to such segments, the whole ETP payment is taxable in accordance with the caps and thresholds below. If there is a tax free component, then the rates and thresholds below apply to the taxable component only.
| Taxation of ETPs (Summary) | |
| Age | Taxation 2016/17 |
| Over pres. age | Taxable component up to $200,000, taxed at no more than 15% + ML (s 82-10(2)) and s 82-160) Taxable component above $200,000, taxed at 45% + ML |
| Under pres. age | Taxable component up to $200,000. taxed at no more than 30% + ML (s 82-10(3)(4)) Taxable component above $200,000, taxed at 45% + ML |
Livia Gonzaga
Audio 1
The tax free component of an ETP may include two elements: the invalidity component and the Pre-July/83 component. The invalidity component will exist when the individual’s employment was terminated due to ill health. The Pre-July/83 component will exist when the person started working before July/1983. The next two slides show you how to calculate each of them.
If a person receives an ETP but they haven’t started working before July 83 and their dismissal was not related to ill health, then the tax free amount will be zero, therefore the taxable component will be equal to the entire amount of the ETP, so in this case, the rates would apply on the entire ETP amount.
Audio 2
Once you have studied and understood the rules for taxation of superannuation payments and those for taxation of ETPs, it may be useful to compare both so you will remember them more easily. Assuming you have already excluded the tax-free amount, if you check the table that summarizes the taxation of superannuation lump sum payments paid by a complying taxed fund, you will see that if the recipient is preservation age, the first $200,000 (which correspond to the cap amount for 2017/2018) will be tax free, because the applicable rate is 0%, and only amounts in excess of that cap will be taxed at 15% + ML. Now, when you compare that with an ETP paid in a lump sum to a recipient at preservation age, you will see that in the case of an ETP the first $200,000 will be taxed at 15% + ML, and the excess of the cap will be taxed at the top marginal rate.
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ETP – Tax Free Element
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| Invalidity Segment (s 82-150(2) ITAA97) - Conditions and Example |
| Conditions: An ETP includes an invalidity segment (part of the tax free element) if: The payment was made to a person who stopped being gainfully employed because they suffered from ill-health (whether physical or mental), The gainful employment stopped before the person’s last retirement day, and Two qualified medical practitioners have certified that, because of the ill-health, it is unlikely that the person can ever be gainfully employed in capacity for which he/she is reasonably qualified - s 82-150(1). |
| Formula to calculate invalidity segment (s 82-150(2)) Amount of ETP x Days to retirement /(Employment days + Days to retirement) Days to Retirement is the number of days from the day on which the person’s employment was terminated to the last day before retirement, and Employment Days is the number of days of employment to which the payment relates |
| Example: Ann, 58, is retiring due to cardiac problems. She received $300,000 as an ETP, and worked for 27 years. Days to retirement = 2,555 (65*-58) x 365 *Based on expected retirement at age 65 Employment days = 9,855 (27 x 365) Invalidity Segment = ETP x Days to Retirement/(Employment Days + Days to Retirement) $300,000 x 2,555/(9,855 + 2,555) = $300,000 x 2,555/12,410 = $61,765 tax free The excess of ($300,000 - $61,765) = $238,235 is taxed as an ETP, i.e. the first $200,000 is taxed at 17% and the remaining is taxed at 45% + ML. $200,000 x 17% = $34,000 $38,235 x 47% = $17,970 Total $51,970 |
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ETP – Tax Free Element
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| Pre-July/83 Component (s 82-155 ITAA97) - Conditions and Example |
| The Pre-July/83 Component (part of the tax free component of an ETP - s 82-155) is based on total employment days relating to pre July 83 relative to total employment. |
| Formula to calculate Pre-July/83 Component (No. employment days before July 83/total employment days) x amount of ETP Note: may need to include leap year extra days in total employment days. |
| Example: Bob retired age 60 on 30 June 2018. He worked for 38 years and received $300,000 as an ETP. Therefore the pre July 83 component is: Pre-July-83 days: 2018 – 38 = 1980 Therefore, he worked for 3 years before July-83, totalling 1,095 days. Total employment days: 38yrs x 365 = 13,870 total employment days Pre-July-83 component: 1,095 days/13,870 days x $300,000 = $23,684 pre-July 83 component $300,000 - $23,684 = $276,316 The balance of $276,316 is taxed as an ETP. Because he has reached preservation age, the amount up to $200,000 is taxed at 15%+ML ($34,000) and the remaining amount $76,316 would be taxed at 45%+ML = $35,869, totalling $69,869. If he had not reached preservation age, the amount within the cap (up to $200,000) would be taxed at 30%+ML and thereafter at 45%+ML. |
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ETP – Death Benefit (s 82-130(3))
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| Death Benefits - Conditions and Examples |
| A Death Benefit is received by another person after taxpayer’s death whilst taxpayer employed. Tax free component: taxed as above (i.e. invalidity segment and Pre-July/83 segment) Taxable component: Paid to a dependant: up to $200,000, NANE. Any excess is taxed at 45% + ML (s 82-65) Paid to non-dependant: benefit is included in the recipient’s assessable income and a tax offset applies so that the amount up to the cap ($200,000 for 2017/18) is taxed at a maximum rate of 30% + ML. Amounts exceeding the cap are taxed at 45% + ML. |
| Examples: 1) Death Benefit ETP paid to a dependant: Angela, a full time student, receives $210,000 from her mother’s employer as an ETP paid due to the death of her mother. The amount was paid within the 2017/18 year. As Angela is a dependant she is not taxed on the first $200,000. The balance ($10,000) is taxed at 45%+ML. 2) Death Benefit ETP paid to a non-dependant: Same example above, but assuming Angela was not a dependant of her mother. Payment to a non dependant: rate of no more than 30% + ML up to $200,000. Balance ($10,000) taxed at 45% + ML. |
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Where an ETP is paid as a death benefit, it means that the employee has died while employed and someone else (most of the times a dependent of the employee) will receive that payment on behalf of the employee. However, for death benefits the taxation is different. Where a death benefit is paid to a dependent of the employee, the first $200,000 are tax free because they are NANE to the beneficiary, and the excess of that cap is taxed at the top marginal rate plus ML. If the death benefit is paid to a non-dependent, the amounts of up to $200,000 (that is, the amounts within the annual cap) will be included at the recipient’s assessable income and will be taxed at no more than 30% + ML. Any amounts which exceed $200,000 will then be taxed at top marginal rate + ML.
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Genuine Redundancy - Subdiv 83-C
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| Genuine Redundancy Payments – Conditions and Example |
| Conditions: A genuine redundancy payment (including early retirement scheme) is made to an employee who is dismissed from employment because employee’s position is genuinely redundant (s 83-175(1)), under the following conditions: The employee is dismissed before the earlier of the following: Before aged 65, or If employment would have finished on a particular age, or upon completion of a particular service, before that date. Must be a Bona fide redundancy, and there must not be an arrangement for re-employment at time of dismissal |
| Taxation of genuine redundancy payments: The tax free amount of a genuine redundancy payment is NANE. The balance that exceeds the tax free amount is taxed as an ETP. Formula to calculate tax free amount: Tax free amount = Base amount + service amount The service amount is multiplied by each year of FULL service. FY 2017/18: Base Amount = $10,155 Service Amount = $5,078 |
| Example: Tom receives $200,000 after 20 years service as a genuine redundancy payment on 30.06.2018. Therefore tax free amount = $10,155 + (20 x $5,078) = $111,715. Balance of $88,285 (taxable amount) is taxed as an ETP (see previous slides). As this amount is within the ETP cap of $200,000, he will pay tax at 15%+ML, being $15,008. |
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A genuine redundancy payment, which is commonly made in early retirement schemes, is an amount paid to an employee whose position has become genuinely redundant. The payment must be made in good faith (‘bona fide’ is the Latin expression for good faith), and there must be no arrangement to re-employ that person with the employer or any party related to the employer. As it is with Superannuation and ETPs, genuine redundancy payments will also have a tax free amount which will be NANE for the recipient, and only the excess of the tax free amount will be taxed as an ETP.
In calculating the tax free limit of a genuine redundancy payment according to the formula in this slide, you will always consider the number of full years in service. This means that if an employee has worked for 10 years and 8 months before being made redundant, the number of full years to be used in the formula will be 10. You should also keep in mind that the base amount and the service amount are indexed annually, therefore you must always check what the correct values are for the current year.
Now, what is the practical difference for tax purposes between an ETP and a genuine redundancy or an early retirement scheme payment? The main difference lies on how the tax free amount is calculated. Because of the different formulas, a genuine redundancy payments may end up with a much higher tax free amount, and as a consequence, much lower taxation, if any at all. ETPs generally don’t have such a high tax free amount, and in many cases the tax free amount ends up being zero, meaning that the tax burden on an ETP is comparatively much higher than that of a genuine redundancy payment.
However you need to know that it is not up to the employee to decide which type of payment they will receive if they are dismissed in circumstances that are not arm’s length. The type of payment to be received (if any) will depend on the objective circumstances of each case.
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Unused Annual Leave and Unused Long Service Leave
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| Unused Annual Leave (AL) – Div 83-A |
| Included in assessable income (s 83-10). If paid as part of genuine redundancy, taxed at no more than 30% (s 83-15) + ML If in respect of pre 18 Aug 93 leave, taxed at not more than 30% + ML Otherwise, taxed as assessable income at marginal rate of taxpayer. |
| Unused Long Service Leave (LSL) – Div 83-B |
| If payment refers to period pre-16.08.78, only 5% of unused LSL is included in assessable income. If payment refers to period post-16.08.78 but pre- 18.08.93, 100% of unused LSL is included as assess income but taxed at max 30% + ML. If payment refers to period post-17.08.93 and is paid in the context of a genuine redundancy or invalidity package, 100% of unused LSL is included in assessable income but taxed at no more than 30% + ML. |
| Example: On 1 June 2018 Joe received $25,000 payment from his employer in respect of LSL paid in conjunction with a genuine redundancy payment, referring to 2000 to 2018. As the LSL was paid in conjunction with a genuine redundancy payment, the whole payment will be included in the assessable income but taxed at no more than 30% + ML (s 83-85). $25,000 x 32% = $8,000 |
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EXEMPT INCOME
Part 3
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Exempt Income
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| Exempt Income – Div 11 ITAA97 | |
| Some ordinary income, and some statutory income, is exempt from tax (s 6-1(2)) Exempt income is not assessable income (s 6-1(3)) Some ordinary income, and some statutory income, is neither assessable income nor exempt income (s 6-1(4)) | |
| Exempt Categories of Income (Divs 51 & 52) | Exempt Entities (Div 50) |
| These categories of income are exempt, no matter who receives them. | All income received by these entities, ordinary and statutory, will be exempt. |
| ITAA97 Div 51: a list of exempt categories (both ordinary and statutory) (s 51-1). Examples: Defence forces - s 51-5 Education and training - s 51-10 Certain welfare payments – s 51-30 ITAA97 Div 52: a list of certain pensions, benefits and allowances which are exempt. | ITAA97 Div 50: a list of exempt entities (entities whose ordinary income and statutory income is exempt). Examples: Charities s 50-5 Community service s 50-10 Government s 50-25 Health s 50-30 Sports culture film and recreation s 50-45 |
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You already know that for income to be exempt there must be a specific legal provision saying so. This means that you cannot say that income is exempt without stating the correct section. If you check Division 11, then Divisions 50, 51 and 52 you will find a comprehensive list of exempt entities and exempt categories of income.
There are 2 categories of exemptions, being: 1) exemptions applied to entities and 2) exemptions applied to particular types of income. Where an entity (such as charitable institutions) is exempt, all income derived by that entity will be exempt. Differently, where the type of income is exempt (for example, Defence Force Allowances), that particular type of income will be exempt no matter who receives it.
Although exempt income is not subject to taxation, it becomes relevant where a taxpayer has losses from previous years. This is because exempt income must be used to reduce any previous year’s losses which are carried forward. Here you should note that we’re talking about losses, not deductions. Losses will occur when the amount of deductions exceed the amount of assessable income for a particular year. If those losses are carried forward, that’s where exempt income must be taken into account.
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Exempt Income
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| If exempt income is not subject to any tax, why is it important? | |
| Because: Expenditures incurred in deriving exempt income are not tax deductible (s 8-1(2) ITAA97)). Exempt income must be taken into account in reducing prior year tax losses that can be deducted in the current year, and in reducing tax losses carried forward in later years. | |
| Example of Carry-forward Losses with Exempt Income | |
| An Australian resident taxpayer has a constant annual exempt income of $1,000. They also derive assessable income from their manufacturing business. The results of their trading activities for the three years ended 30.06.2018 were: | |
| 2015/16 Net Loss on trading-----------------------$3,300 Reduced by exempt income------------$1,000 Net loss (carried forward)---------------$2,300 2015/16 Taxable Income-------------------- Nil 2016/17 Net profit ------------------------------------$8,100 Carried forward loss ---------------------$2,300 Loss is reduced by exempt income ---$1,000 | $8,100 – 2,300 + $1,000 = $6,800 2017/18 Taxable Income -------------------$6,800 2017/18 Profit on trading -----------------------------$17,600 2017/18 Taxable Income-------------------$17,600 Note exempt income is not included in taxable income. |
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End of week 4
Thank you!
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On 30 June Income/(Loss)
2016 (3,300)
2017 8,100
2018 17,600
On 30 JuneIncome/(Loss)
2016(3,300)
20178,100
201817,600
