Contributions caps and taxation of contributions
Concessional contributions modifications for constitutionally protected and defined benefit interests
There are some modifications to the contributions cap rules that apply to constitutionally protected funds and defined benefit interests.
Constitutionally protected funds (CPFs)
CPFs are untaxed super funds that do not pay income tax on contributions or earnings they receive. CPFs are operated by some state governments in Australia for their employees. Under the Australian constitution, state governments cannot be taxed, so different arrangements apply to concessional contributions. Funds created for members of the judiciary are also often CPFs.
Prior to 1 July 2017 contributions that would have normally been included in an individual's concessional contributions cap if made to a taxed fund, did not count towards an individual's concessional contributions cap if they were made to a CPF.
From 1 July 2017, contributions that are made, or allocated to, a constitutionally protected fund (CPF) on or after 1 July 2017 are counted toward an individual's concessional contributions cap. However, these contributions and amounts, on their own, cannot result in excess concessional contributions.
|Example (modified from Example 1 in LCG 2016/11)
Jamie has an interest in a CPF that is not a defined benefit interest. During the 2017-18 financial year, Jamie's employer contributes $30,000 to the CPF for Jamie. This contribution exceeds Jamie's $25,000 concessional contribution cap, but because the contribution has been made to a CPF, Jamie's total concessional contributions are taken to be $25,000 for 2017-18. That is, he is not subject to excess concessional contributions tax.
In contrast, if Jamie also salary sacrificed $20,000 to another superannuation fund which is not a CPF in 2017-18, Jamie's total concessional contributions would be $50,000. As the amount of concessional contributions in relation to Jamie's interest in CPFs ($30,000) cannot create an excess and is greater than Jamie's concessional contributions cap, the amount of those concessional contributions is taken to be equal to his concessional contributions cap. Therefore, Jamie has excess concessional contributions of $20,000 for the 2017-18 financial year.
Defined benefit interests - concessional contributions
A member's superannuation fund is a 'defined benefit interest' to the extent the member's entitlements are defined by reference to one or more of the following:
- the individual's salary at a particular date or averaged over a period
- another individual's salary at a particular date or averaged over a period
- a specified amount
- specified conversion factors.
Some superannuation plans may pay death or disability benefits that are referenced to the member's salary. However, a superannuation interest is not a defined benefit interest if the only benefits payable in reference to a salary (or other matters outlined above) are death or disability benefits.
If a person has superannuation that is, or includes, a defined benefit interest, the amount of that person's concessional contributions for a financial year, commencing on or after 1 July 2017, is the sum of:
Allocated surplus amounts
Concessional contributions include an amount allocated by a superannuation provider to a member's account from a reserve or surplus in relation to the plan for a member in a financial year, other than:
- amounts allocated to all members (or all members of a specific class to which the reserve relates) on a fair and reasonable basis given the members' proportionate interest in the fund, and those allocations for the financial year represent less than 5% of each member's interest in the fund, or
- an amount allocated from a reserve in order to allow a fund to pay a superannuation pension liability, or
- on the commutation of an income stream, where the amount is allocated to the member receiving the income stream and is used to commence another income stream in the name of the member as soon as practicable3, or
- on the commutation of an income stream due to the death of a member and the amount is allocated as soon as practicable in order to allow a death benefit to be paid as either an income stream or a lump sum.
Notional taxed contribution
Notional taxed contributions are determined by the funded part of a superannuation interest. A defined benefit interest is funded to the extent that it is sourced from contributions made into the fund or earnings from those contributions. The amount of notional taxed contributions is an estimate of the amount of concessional contributions that would be required to be paid to the fund in respect of the member in that year to fund the member's expected final benefits. The amount of notional taxed contributions may be calculated in different ways depending on:
- the person who has the superannuation defined benefit
- the superannuation plan in which the superannuation exists, or
- the superannuation provider in relation to the superannuation plan.
Notional taxed contributions for funds with five or more defined benefit members
Notional contributions are determined by an actuary to be notional taxed contributions, according to one of two methods.
The first method applies to accruing members of a defined benefit category if the fund benefit is not wholly sourced from an accumulation of contributions made in respect of the member.
Notional taxed contributions = 1.2 x (new entrant rate x S x D ÷ 365) - M where:
New entrant rate is the new entrant rate for the benefit category worked out by an actuary and can be advised by the fund.
S is the member's annual superannuation salary relevant to the benefit category on the first day of the financial year on which the member had a defined benefit interest in the scheme.
D is the number of days during the financial year that the member was an accruing defined member of the benefit category.
M is the amount of member contributions paid by or on behalf of the member in respect of the member's defined benefit interest in the fund during that part of the financial year that the member was an accruing member of the benefit category, and which are not assessable income of the fund.
The second method applies in special circumstances and relies on the advice of an eligible actuary. Such special circumstances arise where:
- a discretion is exercised to pay a benefit upon voluntary exit or redundancy that is not bona fide and the benefit exceeds the benefit assumed in calculating the new entrant rate
- a member's accrued retirement benefit increases during a financial year as a result of a change of benefit category
- the governing rules of the defined benefit fund are amended in a way that may result in an increase in a member's benefit and the amendment is made for a reason other than to satisfy a legislative requirement
- a member's superannuation salary is increased in a non-arm's length way with the primary purpose being to achieve an increase in superannuation benefit.
The method above is used to determine the notional taxed contributions of members of a superannuation fund where:
- the fund has five or more defined benefit members
- the superannuation fund has five or more defined benefit members on 1 July 2007 and the number of defined benefit members becomes less than five after that date
- the trustee is an RSE licensee, the fund has been in existence for five or more years and had five or more members at any time before 1 July 2007 and the employer sponsor is dealing at arm's length with each defined benefit member
- the fund meets either criteria above and the defined benefit members are transferred after 1 July 2007 to another fund whose trustee is an RSE licensee and the employer-sponsor is dealing at arm's length with each defined benefit member
- the fund had no defined benefit members on 30 June 2007 but has at least 50 defined benefit members on or after 1 July 2007 and the employer sponsor is dealing at arm's length with each defined benefit member.
Notional taxed contributions for funds with fewer than five defined benefit members
Allocation of contributions must be made in proportion to the present and prospective liabilities of the fund to its members. The notional taxed contributions are the amount of assessable contributions which have been allocated to the member in the financial year. An amount allocated from a reserve may count towards the member's concessional cap unless the amount allocated is used solely for the purpose of allowing the fund to discharge all or part of its pension liabilities.
Notional taxed contributions for non-accruing members
Where the notional contributions are determined by an actuary and the member is a non-accruing member of the fund for the whole of the financial year, the amount of notional taxed contributions of the defined benefit interest of the member is nil.
A non-accruing member is a member of a defined benefit superannuation fund where the member meets either of the following requirements:
- the member's membership in the fund consists only in the member receiving pension payments under the scheme (subject to further conditions), or
- the member has a benefit entitlement in the defined benefit fund but no employer provided benefits have accrued to the member during the period and the rules of the fund provide that the benefit is not to increase in nominal terms (subject to some exceptions regarding indexing).
For the purposes of determining whether a member of a defined benefit superannuation fund is a non-accruing member, any employer contributions paid to the fund to meet partially, or wholly, unfunded benefit liabilities of the fund are not to be treated as employer contributions for the benefit of the member for the period.
Notional taxed contributions for public sector superannuation schemes
Notional taxed contributions will also be taken to be nil where the defined benefit interest is in a public sector superannuation fund and none of the interest is sourced to any extent from contributions made into a super fund or earnings on such contributions.
However, notional taxed contributions are not taken to be nil where the interest is an element taxed in the fund attributable to one or more rollover superannuation benefits.
Grandfathering of notional taxed contributions for existing defined benefit interests
Given the unique nature of defined benefit interests, and the difficulty for members to reduce their contributions or notional taxed contributions, certain arrangements are grandfathered so that these members are not unfairly taxed on what would otherwise be excess concessional contributions. Special arrangements apply to members with a defined benefit interest on 5 September 2006 and 12 May 2009.
If these members have notional taxed contributions for that interest that exceed the concessional contributions cap, the notional taxed contributions for that interest will be taken to be the concessional cap. This arrangement will cease to apply if the scheme amends its rules to increase the member's benefits. The grandfathered arrangement will continue to apply if the defined benefit interest has been transferred to one or more successor superannuation funds that retained equivalent rights for members.
To be eligible for grandfathering, the member must have:
- for the 2007-08 and 2008-09 financial years, been a member of an eligible defined benefit fund on 5 September 2006
- for the 2009-10 financial year onwards, been a member of an eligible defined benefit fund on 12 May 2009, and
- not had a change to improve their benefit, or a move to a new benefit category since that date, and
- not had a non-arm's length change to their salary of more than 50% in a year or 75% in three years since that date.
Defined benefit contributions less notional taxed contributions
For financial years commencing 1 July 2017 and later, an additional amount may be included in concessional contributions for members of unfunded or partially unfunded defined benefit schemes. This amount is the 'defined benefit contributions' for the interest less the notional taxed contributions for the interest.
Defined benefit contributions are calculated by the actuary, under Schedule 1AA ITAR 1997. The high level calculation is as follows:
(BC - NTC) x 0.85 + NTC
BC is the notional employer contribution (calculated under subclause 2 of Schedule 1AA, and on advice from an actuary) and NTC is the notional taxed contributions (calculated under Schedule 1A)
The grandfathering transitional rules for notional taxed contributions are ignored for the purpose of calculating defined benefit contributions.
Contributions and amounts that do not result in excess concessional contributions
For financial years commencing on or after 1 July 2017, the amounts listed below that count towards the concessional contributions cap do not, on their own, cause an individual to exceed their concessional contributions cap. Instead, the sum of those contributions is taken to be equal to the concessional contributions cap and cannot create an excess.
- Contributions to a CPF that would be counted as concessional contributions (including notional taxed contributions to CPFs and defined benefit contributions in excess of notional taxed contributions to CPFs)
- Notional taxed contributions where the grandfathering transitional rules apply. (These rules do not apply to CPFs)
- Defined benefit contributions - notional taxed contributions (to the extent this excess does not relate to an interest in a CPF).
Last modified: Tuesday, January 9, 2018