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Taxation of super benefits

Taxation of capped defined benefit income streams

Section: 7.14

Many defined benefit income streams are also capped defined benefit income streams, but capped defined benefit income streams also include other income streams such as term allocated pensions commenced prior to 1 July 2017.

Certain incomes stream payments from capped defined benefit income streams, exceeding the 'defined benefit income cap' are subject to additional taxation from 1 July 2017.

Defined benefit income cap

A client's defined benefit income cap for a financial year is:

general transfer balance cap

16

the defined benefit income cap for 2018/19 is $100,000.

Defined benefit income cap amounts

The following income stream payments from capped defined benefit income streams count towards the defined benefit income cap, and are known as 'defined benefit income cap amounts':

  • payments to those age 60 or over, or
  • payments paid to clients under age 60 from a death benefit income stream where the deceased member was age 60 or over at the time of death.

Modified tax on defined benefit income cap amounts

Where a client receives defined benefit income cap amounts above their defined benefit income cap, the excess amount is subject to additional taxation.

There will be no modification to the income tax treatment of any other payments from a capped defined benefit income stream.

Where defined benefit income cap amounts consist of both taxed source and untaxed source benefits, these payments are assessed against the defined benefit income cap in the following order:

  1. Tax-free component and taxable component (taxed element)
  2. Taxable component (untaxed element).

The modified tax treatment is outlined in the table below.

Defined benefit income cap amounts Component Standard tax concession Modified tax treatment
Defined benefit income paid to a member:
  • age 60 or over, or
  • under age 60 from a death benefit income stream where the deceased member was age 60 or over at the time of death
Tax-free Not assessable and not exempt (NANE) If (tax-free + taxed element) is:
  • within defined benefit income cap: NANE
  • over defined benefit income cap: 50% x (tax free + taxed element) in excess of cap is included in assessable income.
Taxable (taxed element) Not assessable and not exempt (NANE)
Taxable (untaxed element) MTR less tax offset equal to 10% of the untaxed element If total of (tax-free + taxed element + untaxed element) is:
  • within defined benefit income cap: untaxed element taxed at MTR less 10% tax offset (any tax - free and taxed element: NANE)
  • over defined benefit income cap: taxable (untaxed element) taxed at MTR. 10% tax offset not applicable to amount exceeding cap. Effectively, if the payment is 100% untaxed element, the whole payment is assessable and the 10% offset is limited to a maximum of $10,000

Note: As the tax free component is included when working out the modified tax treatment from 1 July 2017, it can be subject to taxation where the tax free + taxable (taxed elements) exceed the $100,000 defined benefit income cap.

Example - taxation of capped defined benefit income

Josh is age 63 and receives a capped defined benefit income stream of $170,000pa in 2018/19, made up of the following components:

  • $20,000 tax-free
  • $100,000 taxable (taxed element)
  • $50,000 taxable (untaxed element)

All of these amounts count towards the defined benefit income cap as they are paid from a capped defined benefit income stream, and Josh is aged 60 or over.

Step 1: consider tax-free and taxable (taxed element)

  • 50% x (tax free + taxed element) in excess of defined benefit income cap is included in assessable income
  • 50% x (($20,000 + $100,000) - $100,000) = $10,000
  • Therefore, $10,000 is included in John's assessable income and $110,000 remains not assessable and not exempt income

Step 2: consider untaxed element

  • The untaxed element in excess of the defined benefit income cap, is not eligible for the 10% tax offset
  • As the defined benefit income cap is already fully utilised by the tax free and taxable (taxed element), the entire untaxed element of $50,000 exceeds the defined benefit income cap
  • Therefore, the $50,000 untaxed element is included in assessable income, and no tax offset applies.

Part year reduction of defined benefit income cap

A client's defined benefit income cap will be pro-rated where:

  • the capped defined benefit income stream commences part way through the year, or
  • the client becomes entitled to concessionally taxed payments from a defined benefit income stream part way through a year, i.e. they turn age 60 part way through a year.
Example

Sanjay is age 65. He commences a capped defined benefit income stream on 24 November 2018.

Sanjay's defined benefit income cap for 2018/19 is:

$1.6 million / 16 x (219 days / 365 days) = $60,000

Last modified: Wednesday, May 1, 2019