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Re: Untaxed Superannuation Funds

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Newbie

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1. The ATO website suggests the untaxed plan cap for the forthcoming fiscal year will be published in Feb. Can you advise what this cap will be for 2020.

2. Am I correct that the untaxed plan cap operates for members of untaxed funds is effectively the same as how the transfer balance cap of $1.6m applies to taxed funds? Another way of putting this - the $1.6m transfer balance cap does not apply to members of untaxed funds because they have a lower cap (the untaxed plan cap) for which their excess contributions will assessed for tax treatment.

3. If the answer to question 2 is yes (re the operating effects of the caps) - what is the policy behind untaxed plans having a cap lower than that for untaxed funds? Members of untaxed funds are more likely to have larger balances at retirement age due to the compounding effects of not paying tax over periods of time? Given this shouldnt the untaxed plan cap be greater than, not below the $1.6m balance cap? 

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Devotee

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Hi BrendonBeh

 

1. I assume the untaxed plan cap amount website content is updated as soon as possible once we know what the rate for 2020-21 will be.

 

2. No, the untaxed plan cap isn't trying to be an equivalent policy to the Transfer Balance Cap. The transfer balance cap is about limiting the concessional treatment for super income streams - placing a limit on the ability of individuals to move money into the retirement phase and therefore be eligible for the 0% tax rate applying to earnings on assets underlying the income stream account. For defined benefit members (whether these are fully funded, partially funded, or unfunded defined benefit schemes), there are additional tax outcomes that take effect where the DB pension they're receiving exceeds $100,000 per year. These additional tax outcomes are intended to broadly mimic the Transfer Balance Cap outcomes that apply to members of accumulation funds.

 

The untaxed plan cap was in place long before the Transfer Balance Cap came along. It applies to the untaxed element taken as a lump sum, paid from a defined benefit account. So it's a lump sum tax as opposed to an income stream tax.

 

3. They're different policies. And depending on the specific DB scheme, the untaxed element could be nil, or all of the DB interest, or somewhere in between. So someone could have a DB lump sum of $2.5m paid, but the untaxed element is $1.5m, and therefore the additional tax doesn't apply as the untaxed element doesn't exceed the untaxed plan cap.

 

And no, there are no compounding effects for untaxed amounts in DB funds. They're untaxed because the money hasn't actually been paid anywhere, hasn't been invested anywhere on behalf of members. It's an amount that the employer (usually a State government or the Commonwealth government) is obliged to pay when a member becomes entitled to receive a benefit payment. The amount is then paid from government revenues.

 

As a general statement, it's not possible to design super policies that have the same impact on DB members as they do on Accumulation fund members. The DB rules are too diverse, there are too many variables in play, in DB schemes it's not clear what someone will receive until they actually leave the scheme - it's actuarial tables and maths to try to estimate what the annual accrual is in a DB scheme. But when introducing new super policies attempts are made to have broadly equivalent outcomes for members of both types of schemes.

 

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Best answer

Devotee

Replies 5

Hi BrendonBeh

 

1. I assume the untaxed plan cap amount website content is updated as soon as possible once we know what the rate for 2020-21 will be.

 

2. No, the untaxed plan cap isn't trying to be an equivalent policy to the Transfer Balance Cap. The transfer balance cap is about limiting the concessional treatment for super income streams - placing a limit on the ability of individuals to move money into the retirement phase and therefore be eligible for the 0% tax rate applying to earnings on assets underlying the income stream account. For defined benefit members (whether these are fully funded, partially funded, or unfunded defined benefit schemes), there are additional tax outcomes that take effect where the DB pension they're receiving exceeds $100,000 per year. These additional tax outcomes are intended to broadly mimic the Transfer Balance Cap outcomes that apply to members of accumulation funds.

 

The untaxed plan cap was in place long before the Transfer Balance Cap came along. It applies to the untaxed element taken as a lump sum, paid from a defined benefit account. So it's a lump sum tax as opposed to an income stream tax.

 

3. They're different policies. And depending on the specific DB scheme, the untaxed element could be nil, or all of the DB interest, or somewhere in between. So someone could have a DB lump sum of $2.5m paid, but the untaxed element is $1.5m, and therefore the additional tax doesn't apply as the untaxed element doesn't exceed the untaxed plan cap.

 

And no, there are no compounding effects for untaxed amounts in DB funds. They're untaxed because the money hasn't actually been paid anywhere, hasn't been invested anywhere on behalf of members. It's an amount that the employer (usually a State government or the Commonwealth government) is obliged to pay when a member becomes entitled to receive a benefit payment. The amount is then paid from government revenues.

 

As a general statement, it's not possible to design super policies that have the same impact on DB members as they do on Accumulation fund members. The DB rules are too diverse, there are too many variables in play, in DB schemes it's not clear what someone will receive until they actually leave the scheme - it's actuarial tables and maths to try to estimate what the annual accrual is in a DB scheme. But when introducing new super policies attempts are made to have broadly equivalent outcomes for members of both types of schemes.

 

I'm an ATO employee voluntarily providing my time here

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Newbie

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Hi Seb, thanks so much for your reply, and I appreciate your time as an ATO employee responding. Although it wasnt clear from my question, the untaxed fund I am a member of is actually a defined contribution (DC) scheme, not a DB scheme. And my understanding of the effect of the untaxed plan cap legislation applying in this case is that once I exit my untaxed accumulation fund, regardless of whether I take my benefit as a lump sum or commute it into a income stream in pension mode. As soon as I exit the untaxed accumulation scheme I must pay tax at the highest marginal rate plus medicare levy for any amount over the untaxed plan cap (as I understand occurs with taxed accumulation funds for balances exceeding $1.6M) . I'm not an expert, and I may be missing something obvious, but to my mind the untaxed plan cap works to the same effect an the transfer balance cap in this case. Is this correct? Thanks again for your assistance.   

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Devotee

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Hi again

 

Oh, ok. An untaxed defined contribution scheme. One of the constitutionally protected funds. I haven't looked at these that closely before.

 

I assume your understanding of the tax treatment is correct - ie that the tax is payable up-front, even if you choose to start up an income stream from the fund.

 

The difference between how this works and how the Transfer Balance Cap works is that in your situation the tax is payable at the top marginal rate on the excess. Whereas for the Transfer Balance Cap, an earnings amount is calculated on the excess, and the earnings amount is taxed at 15%. The excess and the earnings must then be moved back out of the pension phase.

 

Let's say your untaxed amount is $100,000 above the untaxed plan cap. You'll pay tax at 45%, so $45,000 on this $100,000.

 

Compare this to an excess transfer balance amount of $100,000. For calculation purposes let's say this is made up of $90,000 that exceeded the $1.6m cap, plus $10,000 of earnings calculated on this excess amount. The $100,000 will need to be commuted - ie moved back out of the pension phase. Tax is then payable on the $10,000 earnings amount at 15%, so $1,500 tax. Basically, the excess amount shouldn't have been in pension phase, the earnings on the excess shouldn't have received the 0% concessional rate that applies to pension phase accounts and should have instead been taxed at 15%. So the outcome is trying to replicate the outcome that would have occurred if the excess hadn't happened.

 

So, very different outcome between the two. They're not trying to be equivalent policies, apart from trying to limit the overall concessional tax treatment that an individual can receive from the superannuation environment.

 

I'm an ATO employee voluntarily providing my time here

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Newbie

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Thankyou again Seb. Is there anyone at the ATO who can confirm that the untaxed plan cap rules definitely apply to tax payable up-front from both lump sum payments and the commencement of income streams from constitutionally protected (untaxed) funds? I'm interested to know and understand the policy reasoning for the seemingly harsh treatment of excess balances above cap limits for these untaxed funds which ultimately aim to give bigger growth and balances over time through delayed payment of tax on contributions and earnings, whilst applying a cap threshold below that applying to ordinary transfer balances.   

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Newbie

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I might also add that one interesting anomoly here is that members of untaxed funds do not have a choice in electing to pay their 15% tax owing on contributions and earnings prior to being subject to application of the untaxed plan cap. If they had this ability then the taxation of excess balances pursuant to the untaxed plan capwould be a lot fairer. For instance - before exiting a fund today a member with an untaxed balance of $1.7M could pay the $255K tax owing to reduce their balance below the cap limit. Instead as it stands today , as I understand the rules - the same member would effectively be liable to pay tax of $310,500K.  Is there a policy reason why this is the case?

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Master

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The explanatory memorandum (EM) relating to the introduction of the cap includes the below paragraph, giving the reasoning behind introducing of the cap.


"Untaxed plan cap amount
2.65 The untaxed plan cap amount ensures that the concessionality of benefits that have not been subject to contributions or earnings tax in a superannuation fund is targeted appropriately.  The untaxed plan cap amount is necessary as the caps that operate so as to limit the amount of superannuation contributions that a person can make (or an employer can make upon his or her behalf) do not apply to those employer contributions that are included as part of an element untaxed in the fund."


The original cap of $1 million is roughly half way between the previous reasonable benefit limit amounts relating to lump sums and pensions.


The EM also lists different tax treatments for income streams and lumps sums from an untaxed fund (see table after paragraph 2.24).

Non-concessional contributions to an untaxed fund and amounts attributed to pre-July 1983 service are excluded from the cap.

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Master

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The cap for the 2020-21 year is likely to be $1,565,000.  This amount was calculated using the AWOTE figure published last week and it not official.

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Newbie

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Thanks Glenn much appreciated. I'll use that as a rough guide and await the published figure in due course.

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ATO Certified

Community Support

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Hi @BrendonBeh

 

Thanks for your posts.

 

As to what the policy reasons might be, that is one that you will need to direct to Treasury or your local Member of Parliament. Our role is to administer legislation that has been passed by Parliament and received Royal Assent to become law.

 

As @SebReiter has correctly said, these are both quite different rules. While both may put limits on the concessional treatment of super, one rule has been around for over a decade while the other has only been in place for the last couple of years or so.

 

Being a constitutionally protected fund (CPF) member, if you would like us to take a closer look at your circumstances, you can send an advice request email to SuperAdvice@ato.gov.au or letter to:

 

Australian Taxation Office

PO Box 3100

Penrith NSW 2740

 

Hope this helps.

 

Thanks,

 

ChrisR