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Glossary of Superannuation Terms

Allocated pension/Allocated annuity

These are the most popular types of income streams due to their flexibility. They do not meet the pension and annuity standards because of the flexible payment amounts and terms. There is no specified term for an allocated pension or allocated annuity but maximum payment restrictions do limit the minimum term available. The key features of these benefits include:

  • payment must be made at least annually
  • payment amount for the financial year depends on the account balance and age of the recipient on 1 July each year. Regulations set the minimum and maximum range of pension payments for each year. Although there is some flexibility in the payment amount, there is no protection against the money running out during the person’s lifetime.
  • can be commuted at any time
  • on death, the balance may be paid as a lump sum to a designated beneficiary, used to buy a further pension for a surviving spouse or may continue as a reversionary pension.

Age Based Limits (Contribution Caps)

In each year there is a limit on the amount of contributions you can claim as a deduction. This limit is based on your age on the day the last contribution was made during the income year.

Annuity

An annuity is a series of payments purchased with a lump sum, usually from a life insurance company or registered organisation. For reasonable benefit limits, an annuity only includes those purchased wholly or partly with ETPs which have been rolled over.

Approved deposit fund (ADF)

A fund which can accept rolled over eligible termination payments in order to preserve the benefit, or to defer the tax liability on these payments.

Assessable amount

For ETPs, this is the amount of the ETP cash payment a taxpayer needs to include in their income tax return.

Australian Prudential Regulation Authority (APRA)

One of the Federal Government agencies which regulates superannuation funds, and other bodies in the financial sector, ensuring they operate within the requirements of retirement income legislation.

Accumulation Fund (often referred to as a “defined contribution fund”)

A superannuation fund in respect of which the amount of contributions received by the fund are defined, as opposed to defining the benefit which a member or members may receive. No promise is made by either the contributors to the fund or the fund itself to provide a particular level of benefit for a member upon retirement.

AWOTE

Average Weekly Ordinary Time Earnings. The average wage of employees in Australia published by the ABS

Bank reconciliation

A means of checking that your financial records agree with those held by your financial institution. A bank reconciliation also establishes the correct balance in your bank account after adjusting for transactions such as deposits not yet banked and cheques not yet presented.

Beneficiary

A person entitled to or in receipt of a benefit. This is normally an employee, a superannuation fund member, a related dependant, or any financial dependants.

Benefit

Amounts paid to you by a super fund. These include:

  • Lump Sum Payments (eligible termination payments)
  • Income Streams (pensions and annuities)
  • A combination of the above

Bona fide redundancy

Bona fide redundancy has the following characteristics:

  • the employee must have been dismissed from a job, not have left voluntarily; and
  • the employee must have been made redundant (their work has ceased or workplace has been relocated); and
  • the dismissal must have been made before the employee had to retire

Capital amount

The capital amount is the capital value of the benefit reduced by any excessive amount. This amount is used to calculate the qualifying portion of the benefit.

Capital gains tax

A tax on the profit obtained when selling an asset (most homes and motor vehicles are exempt from this).

Capital value

The capital value is the equivalent lump sum value of a pension at commencement date. There are different formulae for calculating the capital value of each type of pension or annuity.
Example 1: Allocated pensions

The capital value is based on the amount used to purchase the pension and is calculated as follows:

Capital value = Purchase price – (UC + CC + IC)

Where

UC = undeducted contributions

CC = concessional component

IC = invalidity component

In this case the capital value is also the RBL amount of the pension.
Example 2: Rebateable superannuation pension (lifetime)

The capital value is based on the following formula:

Capital value = Year 1 payments x PVF – UC + RCV

Where

PVF = pension valuation factor

UC = undeducted contributions

RCV = residual capital value
For other types of pensions and how to calculate the capital value, refer to the formulae located in sections 140ZO and 140ZP of ITAA 1936, or the following ATO fact sheets:

  • RBL – valuation of pensions payable for life, or
  • RBL – valuation of pensions not payable for life, or
  • RBL – how much counts

Cash accounting

If you issue (or receive) an invoice but do not account for the sale (or purchase) until the cash is received (or paid), you are using a cash basis of accounting. You can use the cash basis if your annual turnover is $1 million or less. ‘Account on a cash basis’ is a defined term in GST law.

 

CGT exempt component

A benefit may have this component if the member has sold business assets and was entitled to a capital gains tax (CGT) exemption.

 

Commutation

This is the process of converting a pension or annuity into a lump sum payment. This payment can be paid to the beneficiary or rolled over to another product within the same superannuation fund, or to another superannuation fund.
For more information of how to deal with a commutation in Simple Fund, click here.

 

Complying pension or annuity

A pension or annuity that meets the pension and annuity standards as specified in the SIS regulations. Generally a pension payable from the investment of a capital sum in respect of which, income payments are to be made at least annually. There is the possibility of a reversionary beneficiary and income is fixed for life.

 

Complying superannuation funds

A superannuation fund that has elected to be regulated under the Superannuation Industry (Supervision) Act 1993.

 

Concessional component

A benefit will have a concessional component if it was made before 1 July 1994 and it includes an invalidity payment, bona fide redundancy or approved early retirement scheme payment. It will also apply to a payment made after that date that arose from a roll over to a superannuation fund and the entitlement to those components can be attributed to the period prior to 1 July 1994. This component is not counted for RBL purposes.

 

Concessional Contributions

Contributions to your super fund that are made before tax is taken out of your wage. These include superannuation guarantee contributions made by employers, salary sacrifice contributions and contributions made by the self-employed for which they can claim a tax deduction. These contributions are taxed at a lower “concessional” rate of 15% which is often referred to as ‘contributions tax’. These may also be known as ‘taxable’ or ‘deducted’ contributions

 

Concessional Contributions Cap

From 1 July 2007 there will be a limit on concessional contributions of $50,000 (indexed) a year. For people 50 or over, there will be a transitional limit of $100,000, (not indexed) but only until 30 June 2012. Contributions in excess of the limit will be subject to the excess concessional contributions tax.

 

Contributions tax

The 15% tax payable on some amounts paid into a superannuation fund and the earnings and investments held in the fund. Your super fund reduces your superannuation account by your share of this tax.

 

Conditions of release

These are restrictions placed on superannuation funds for how and when preserved benefits can be paid. A condition of release must be met before a benefit is paid. The following conditions of release have ‘nil’ cashing restrictions.

  • retirement
  • reaching age 65
  • reaching preservation age and permanently retired
  • death
  • permanent Incapacity
  • termination of employment and the benefit is less than $200

Benefits can only be paid if the rules of the superannuation fund allow it. For further conditions and their restrictions refer to Superannuation Industry (Superannuation) Regulation 6.01 & Schedule 1.

 

Contributions splitting application

An application by a splitting applicant to their fund’s trustee/RSA provider, to roll over, transfer or allot an amount of benefits, for the benefit of their spouse. The total amount to be split in a financial year cannot be more than 100% of the untaxed splittable contributions and 85% of the taxed splittable contributions made by, for, or on behalf of the applicant in the relevant financial year. The application may include an eligibility statement by the receiving spouse.

 

Death benefit

A payment made on the death of an employee or superannuation fund member. A death benefit may be paid to a beneficiary as a lump sum (death benefit ETP) or as an income stream (pension or annuity).

 

Death benefit ETP

A lump sum payment made to a beneficiary because of the death of an employee or superannuation fund member that is made within 6 months of death or 3 months of probate being granted.

 

Deductible amount

That portion of a pension (or annuity) which is either tax free, or not assessable for income tax purposes. See also Undeducted Purchase Price.

 

Deferred annuity

An annuity where the payments are delayed by a specified period or to the date of occurrence of a specified event, for example, the taxpayers 65th birthday. It does not have to become an income stream. It can be cashed or withdrawn on or before the date the taxpayer reaches 65 years of age. In subsection 27A (1) of ITAA 1936, a deferred annuity is defined as an annuity other than an immediate annuity. Refer to ‘immediate annuity’.

 

Defined benefit fund

Benefits which a member will ultimately receive are defined in advance of the retirement date of a member. Often the benefit is expressed as a proportion of the member’s retirement salary or year’s of service. An employer sponsor may carry the liability of meeting any shortfall in terms of the defined benefit which the fund is not able to provide to the member at retirement.

 

Defined benefit pension

An income stream where payments are based upon a defined amount and/or reference to the member’s salary.

 

Defined contribution fund

See Accumulation fund.

 

Dependant

A dependant for a death benefit ETP is:

  • a surviving spouse or de facto spouse
  • an ex-spouse
  • a child of the deceased who is under 18
  • any person who is financially dependent on the deceased person at the time of death, or at the time of the payment of the death benefit ETP
  • any person with whom the deceased has an interdependency relationship.

Financially dependent on the deceased means the deceased employee contributed necessary financial support to maintain the dependant. Children over 18 must be financially dependent on the deceased employee to qualify as dependants. An interdependency relationship is generally a close personal relationship between two people who live together, where one or both provides for the financial, domestic and personal support of the other.

 

Disability superannuation pension

A pension payable to a person where two legally qualified medical practitioners have certified that due to the disability the person is unlikely to ever be employed in a capacity for which they are reasonably qualified.

 

Eligible service period

Generally, this is the period from the day membership of the fund or employment commenced through to the day membership of the fund or employment ceased.

 

Employer Contributions

See Concessional Contributions

 

Employment termination payment (ETP)

A lump sum benefit made by:

  • a superannuation fund to a person because they, or another person, were a member of a superannuation fund, approved deposit fund (ADF) or a depositor with a retirement savings account (RSA) or
  • an employer to an employee, as a result of the termination of employment or
  • a Superannuation fund or an employer after the death of the person who was a fund member or an employee.

ETPs can generally be rolled over into a superannuation fund, ADF or RSA if the recipient elects to do so. An ETP also includes a lump sum paid when a pension or annuity is converted to cash or the residual capital value is paid at the end of a pension or annuity term.

 

Excess concessional contributions

Before-tax contributions to your super fund which go over a yearly cap. This is $50,000 a year (indexed) for most people. If you’re over 50 between 1 July 2007 and 30 June 2012, the cap is $100,000.

 

Excess non-concessional contributions

After-tax contributions to your super fund which go over a cap of $150,000 a year. Excess concessional contributions (see above) are also counted towards this limit.

 

Excess concessional contributions tax

A tax of 31.5% on your contributions over the cap. You are personally liable for this tax, and you can ask your super fund to release money to pay it.

 

Excess non-concessional contributions tax

A tax of 46.5% on your contributions over the cap. You are personally liable for this tax, and you must ask your super fund to release an amount of money equal to the tax

 

Excessive amount / Excess benefit

The part of the RBL amount of a pension or annuity that exceeds the recipient’s RBL. If a rebatable pension or annuity is in excess of the taxpayer’s RBL, they are not entitled to the full rebatable proportion of 1.0000 when calculating their 15% pension tax offset in their income tax return. The tax offset a taxpayer is able to claim is calculated using their rebatable proportion which appears on an excessive determination notice.
If the pension or annuity is within the taxpayers RBL, the rebatable proportion of the pension or annuity will be 1.0000 and the full rebate is available. If the benefit is found to exceed the taxpayers RBL, the Tax Office will send to the taxpayer an excessive RBL determination notice showing what proportion of the pension or annuity is rebatable (a rebatable proportion which will be less than 1.0000 if the pension or annuity is in excess of the taxpayers RBL).

 

Excessive component (superannuation fund)

The part of an eligible termination payment (ETP) which exceeds the recipient’s RBL. An excessive determination notice is issued to advise the taxpayer that their benefit has an excessive component. This component and the other adjusted components on that notice must be used to complete the taxpayer’s income tax return instead of the information contained in their ETP summary. The taxation of the excessive component of an ETP varies depending on the date of payment.

ETP paid before 1 July 2002 – excessive component is taxed at 47% plus medicare levy.

ETP paid after 30 June 2002 and before 01 July 2007– The post June 83 taxed portion of the excessive component is taxed at 38% plus medicare levy and the balance of the excessive component is taxed at 47% plus medicare levy

 

Excessive RBL determination notice

A notice issued by the Commissioner to advise the taxpayer that a benefit exceeds their reasonable benefit limit. An excessive determination can be an interim or final determination. This notice provides the following information:

  • for an eligible termination payment (ETP) – the excessive component and the adjusted components of the ETP
  • for a rebatable pension or annuity – the rebatable proportion
  • the basis on which the determination was made.

If the pension or annuity is within the taxpayers RBL, the rebatable proportion of the pension or annuity will be 1.0000 and the full rebate is available. If the benefit is found to exceed the taxpayers RBL, the Tax Office will send to the taxpayer an excessive RBL determination notice showing what proportion of the pension or annuity is rebatable (a rebatable proportion, which will be less than 1.0000 if the pension or annuity is in excess of the taxpayers RBL).
If a rebatable pension or annuity exceeds the taxpayers RBL, the taxpayer is not entitled to utilise the full rebatable proportion of 1.0000 when calculating the 15% pension tax offset in their income tax return. Essentially, the taxpayer will receive a 15% tax offset, however it is applied to a reduced rebatable proportion (less than 1.0000) of their rebatable pension or annuity.
The amount they are able to claim is calculated using their rebatable proportion that appears on an excessive determination notice. Refer ‘RBL final determination notice’
For an excessive ETP, the information contained in this determination notice must be used by the taxpayer to complete their income tax return, instead of the information contained in the ETP payment summary. Refer to ‘excessive component’ for further information of the tax treatment of excessive ETPs.

Franking credit

Franking credits are income tax credits that a company can pass on to its shareholders. They occur when a company pays dividends out of after tax profits. A franking credit arises when the super fund receives a franked dividend or distribution. Simple Fund requires the franked and unfranked amounts to be recorded when posting dividends to the ledger, and the applicable franking credit is automatically calculated.

 

Fringe benefits

Benefits received by employees from their employer in place of salary or wages such as the use of a car for private purposes.

 

Future Income Tax Benefit

See also Provision for Deferred Income Tax.
If a super fund makes a tax loss in the current year, then it is likely that the tax loss can be applied against gains in future financial years. This would mean that the accounts could reflect a FITB instead of PDIT.

This could occur where the fund has

  1. Tax losses, or
  2. Capital losses

AASB1020 defines future income tax benefit as the estimated amount of future saving in income tax likely to arise as a result of:

  1. the reversal of timing differences; and
  2. the recoupment of carried forward tax losses (which for the purposes of this standard are dealt with separately from other timing differences)

Example A: The super fund has a current year capital loss of $3000.

The current year change in PDIT/FITB would be 15% of this Timing Differences: Hence the PDIT/FITB change would be 3000 x 15% = $450. Therefore the balance in the 870 PDIT account would decrease by $450. Simple Fund will post a FITB of $450 DEBIT to the 870 PDIT/FITB account.
Example B: The super fund has a current year tax loss of $1000. Accounting fees of $1000 were paid and the fund had no income.

The current year change in PDIT/FITB would be 15% of this timing difference: Tax loss $1000. Current year change in PDIT/FITB $150 (1000 x 15%) Therefore the balance in the 870 PDIT account would decrease by $150.Simple Fund will post a FITB of $150 DEBIT to the 870 PDIT/FITB account.

 

Gainful employment

Generally, a person who is in paid employment or is employed for earnings, including business income, for at least 520 hours in one year. Reference should be made to the actual legislation.

 

Gross tax

The tax on taxable income before tax offsets are taken into account.

 

Highest Average Salary

Used in determining a person’s Reasonable Benefit Limit. Prior to a determination as to a Reasonable Benefit Limit, a Highest Average Salary must be ascertained. Use of Highest Average Salary as a determinant of Reasonable Benefit Limits ceased on 1 July 1994 (save for Transitional Reasonable Benefit Limits), with the introduction of lump sum and pension RBL’s of fixed, indexed amounts.

 

Imputation credit

See Franking credit.

 

Input tax credit

You are entitled to an input tax credit for the GST included in the price you pay for an acquisition or the GST paid on an importation if it is for use in your business, but not to the extent that you use the acquisition or importation to make input taxed supplies. You will need to have a tax invoice to claim an input tax credit (except for purchases with a GST-exclusive value of $50 or less).

 

Input taxed supplies

You don’t charge GST on input taxed supplies, but neither are you entitled to input tax credits for the GST included in the price you paid for the things you acquired to make the supplies.

 

Instalment

A part or portion of an amount of tax due which is paid at regular intervals.

 

Instalment activity statement (IAS)

A form similar to the BAS but without GST and some other taxes. Businesses that are not registered for GST, and individuals who are required to pay PAYG instalments or PAYG withholding (such as self-funded retirees), use this form to pay PAYG. These are prepared in Simple Fund from the Financial Reports screen.

 

Invalidity payment

The amount of an invalidity payment is linked to the employee’s future service period that is lost through early retirement due to their permanent disability. The rules for invalidity payments vary depending on when the payment was made.

If the payment was prior to 1 July 1994 then:

The payment must be in consequence of termination of employment of the taxpayer, and occurred because of;

  • the taxpayer’s physical or mental incapacity to engage in that employment and
  • the termination of employment is before the last retirement date. Refer to ‘last retirement date”
  • If the payment occurred on or after 1 July 1994 then:
  • The payment must be in consequence of termination of employment and occurred because;
  • two legally qualified medical practitioners certify that the employee’s disability is likely to prevent the employee from ever being employed in a capacity for which they are reasonably qualified because of their education, training or experience; and
  • the termination of employment is before the last retirement date. Refer to ‘last retirement date”

 

Life expectancy/15 year pension/annuity

These pensions/annuities meet the pension and annuity standards. They are payable for a term equal to life expectancy if less than 15 years, or a term between 15 years and life expectancy. For example, if a beneficiary’s life expectancy is 12 years at the pension commencement date then the pension is paid for 12 years, but if the life expectancy is 22 years the pension can be paid for 15 years or any term up to 22 years.

 

Lifetime pension/annuity

These are often referred to as superannuation pensions. A lifetime pension/annuity may meet the pension and annuity standards. The key features of when a benefit meets the pension and annuity standards are:

  • they are payable for the life of the member, or for the reversionary beneficiary’s life on the death of the member
  • payments must be made at least annually, they are a fixed amount and generally only varied by indexation.
  • they cannot be commuted except for limited circumstances (refer to the definition ‘non-commutable’)

 

Lump sum

A benefit taken as a single payment, for example, an eligible termination payment (ETP). This can be contrasted with a pension or annuity which is a series of payments and are in the nature of income rather than capital.

 

Lump Sum payment summary

The superannuation fund must provide this form to the recipient (member) within 14 days of making the employment termination payment (ETP). This form shows the ETP component details and tax withheld from an ETP. An individual must use these details or those contained in an Excessive ETP determination notice when completing their income tax return.

 

Lump Sum pre-payment statement

A form provided by the employer or superannuation fund to advise the employment termination payment (ETP) recipient of the eligible service period and components details. The recipient then advises the employer/superannuation fund whether they would like the employment termination payment paid as a lump sum or rolled over to a superannuation fund.

 

Lump sum RBL

The RBL applied when more than 50% of the qualifying portions of total benefits paid do not meet the pension and annuity standards. Benefits that do not meet the pension and annuity standards include:

  • ETPs
  • Allocated pensions and annuities
  • Non-commutable allocated pensions/annuities

The lump sum RBL amount is lower than the pension RBL amount and is indexed annually.

 

Marginal tax rate

The rate of tax applicable to the income range which the person’s taxable income is in.

 

Market linked income stream

A market linked pension or market linked annuity meets the pension and annuity standards. They became available on 20 September 2004. They are a flexible pension or annuity in terms of how investments are managed. The key features of these income streams are as follows:

  • term is based on life expectancy
  • payment must be paid at least annually
  • payment amount is based on the remaining term of the pension and the account balance on 1 July each year
  • they are subject to concessional social security treatment for determining eligibility for the age pension
  • they can only be commuted in limited circumstances (refer to ‘non-commutable’)

 

Member Contributions

Refer to Non-Concessional contributions

 

Member spouse

In relation to splitting a superannuation interest due to marriage breakdown, means the spouse who has the superannuation interest or account.

 

Non-commutable

In relation to a pension or annuity, this means it cannot be converted into a lump sum payment.

There are limited circumstances when a commutation is allowed, they include:

  • commutation within 6 months of commencement – this applies to the original pension or annuity only, or
  • in certain circumstances, to a reversionary beneficiary, or
  • to purchase another pension or annuity that meets the pension and annuity standards, or
  • to pay a superannuation contribution surcharge, and
  • to allow for a payment in regard to payment split due to marriage breakdown

 

Non-Concessional contributions

These contributions paid into a superannuation fund by the member (or by a person other than an employer of the member) where no deduction has been allowed for the contributions, for example after tax income such as your take home pay. These contributions must have been paid on or after 1 July 1983. These contributions are often referred to as ‘personal’, ‘member’ or’ undeducted’ contributions. This component is not counted for RBL purposes and no further tax is payable.

 

Non-concessional contributions cap

From 1 July 2007, non-concessional contributions made to super will be capped at $150,000, or $450,000 over a three-year period.

 

Notional taxed contributions

Since contributions into defined benefit funds are not always linked to individual members, a ‘notional’ amount will be calculated to determine if you have gone over the cap for that year.

 

Non-qualifying component

Very few benefits will have a non-qualifying component. It represents the earnings on any annuities that were purchased with non-superannuation or termination of employment money. These amounts do not qualify for RBL concessional tax rates and are taxed as ordinary income.

 

Non-vested Benefit

A benefit which is usually employer sponsored to which a member has no immediate entitlement until the attainment of normal retirement age, or another event. For instance, a contribution may be paid in advance by an employer in respect of a member of a defined benefit fund who is not eligible to receive that entitlement by way of benefit until a specific period of service has elapsed.

 

Partially Vested Benefit

Usually, a contribution from an employer which is not fully vested until such time as certain contingencies (such as a particular age) are achieved.

 

Pay as you go (PAYG)

A single, integrated system for reporting and withholding amounts and tax on business and investment income.

 

Pension

A series of regular payments made as an income stream, this may be provided by a superannuation fund or retirement savings account (RSA) For RBL purposes this excludes the government ‘age pension’.

 

Pension Age

65 for men and 63.5 for women, gradually rising to 65 for women by 2014.

 

Pension and annuity standards

These are the standards that a pension or annuity must meet in order to be counted towards the pension RBL. Among other things, the pension or annuity must:

  • be payable for life or life expectancy (if life expectancy is 15 years or greater, it must be payable for a term between 15 years and life expectancy)
  • be paid at least annually
  • only be commuted in limited circumstances,
  • have no residual capital value, and
  • not be used as security for a borrowing.

 

Pension RBL

The RBL applicable when at least 50% of the qualifying portions of the benefits received are pensions or annuities that meet the pension and annuity standards. These benefits include:

  • Lifetime pensions and annuities
  • Life expectancy/15 year pensions/annuities
  • Market linked income streams
  • Non-commutable pensions/annuities

The pension RBL is greater than the lump sum RBL to encourage retirees to take benefits that provide a lifetime income stream. The pension RBL is indexed annually.

 

Pension valuation factor (PVF)

Is used to convert a pension to an equivalent lump sum for calculating the capital value. It is based upon the age of the recipient at commencement of the pension, the level of reversion and the level of indexation. The pension valuation factors can be found in the Superannuation Industry (Supervision) Regulations (SISR) Schedule 1B.

 

Permanent Difference

Permanent differences are income or expense items that are recorded for accounting purposes, but are non-taxable income, or non-deductible expenses. The super fund will never be required to pay tax or receive a deduction for these items.
AASB1020 defines permanent differences as differences between taxable income or tax loss and pre-tax accounting profit or loss arising from the existence of:

  1. particular expenses and particular items of revenue, which, under current income tax legislation, will never be included in the determination of taxable income or tax loss although they are brought to account in the profit and loss account; and
  2. a particular amounts which are allowable deductions or particular amounts which are allowable deductions or although these amounts will never be brought to account in the profit and loss account;

Examples of permanent differences in Simple Fund:

  • tax-free distributions
  • non-deductible expenses, such as late lodgement penalties
  • non-deductible pension expenses
  • the 1/3 discount on unrealised capital gains
  • unrealised capital gains on investments that are not subject to CGT, such as investments purchased pre 1984 or investments held by pension funds.

 

Permanent Incapacity

Also referred to as permanent disability. This is when an individual is deemed to be unlikely to be gainfully employed in a job they are currently qualified, due to ill-health. Also refer to the definitions:

 

Post-June 1983 component

The post-June 1983 component represents that part of the member’s eligible service period that occurred after 30 June 1983. Most benefits will have this component. The component is calculated using a formula. The component is made up of a taxed element or an untaxed element or both elements. The taxed and untaxed elements generally reflect whether the employer/superannuation fund is paying tax on contributions or not.

Taxed element – The taxed element occurs where the superannuation fund has paid tax on contributions. Untaxed element – A benefit that has an untaxed element will generally be paid from a superannuation fund that does not pay tax on contributions.

The tax treatment of this component depends on the age of the recipient, whether the amount is below their low rate threshold and whether it is a taxed or untaxed element. This component counts for RBL purposes but the percentage that counts varies depending on whether it is an untaxed or taxed element.

 

Post-June 1994 invalidity component

The part of an invalidity payment made on or after 1 July 1994. This component represents a payment for the time between the date employment stopped, due to injury or permanent disability and the date of normal retirement. This component is tax free and does not count for RBL purposes.

 

Pre-July 1983 component

A benefit may have a pre-July 1983 component if the recipient’s eligible service period started before 1 July 1983. It is calculated using a formula that determines the amount of the benefit that applies to the period of service before 1 July 1983. This component counts for RBL purposes except in the case of an employer ETP paid to a non-associate. 5% of this component is taxed at marginal tax rates.

 

Preservation age

The minimum age a member may be able access their preserved benefits. A benefit may be paid earlier if the member has met a condition of release. The preservation age varies depending on when the member was born.

Date of birth Preservation age

Before 1 July 1960 55

1 July 1960- 30 June 1961 56

1 July 1961- 30 June 1962 57

1 July 1962- 30 June 1963 58

1 July 1963- 30 June 1964 59

After 30 June 1964 60

 

Preserved benefits

Generally, preserved benefits must be retained in a superannuation fund until the member has met a condition of release under the SIS Act. Refer to the definition ‘conditions of release’. When this ‘condition of release’ occurs, usually retirement, the benefit is no longer preserved and becomes unrestricted.
Preserved benefits are most commonly paid when a member has reached their preservation age and retired. New legislation introduced on 1 July 2005 allows a member who has reached their preservation age to access their preserved benefits while they continue working. In Simple Fund this means members balances may be unrestricted simply because of the person’s age, but still in accumulation mode.

If a member has not reached their preservation age, but has permanently retired, a benefit can only be paid as a result of the member’s permanent disablement, severe financial hardship, because of compassionate reasons or on death of the member.

When a member has reached 65 years of age, there are no restrictions on preserved benefits being paid.

 

Provision for Deferred Income Tax (PDIT)

See also Future Income Tax Benefit.
Simple Fund will calculate the PDIT as part of the Create Entries process, where tax-effect accounting is selected in [[HF:Fund Details Add/Edit#Reporting|Fund Details | Reporting. A PDIT Reconciliation report can be printed from the Financial Reports screen.
AASB1020 defines provision for deferred income tax as the non-current liability for the estimated amount of income tax expected to be assessed in the future as a result of the reversal of timing differences.
PDIT is calculated as:15% of timing differences. Simple Fund breaks this calculation down on the PDIT Reconciliation into Revaluations and Other Timing Differences.
Example

The super fund has current year share revaluations of $3000, and a tax-deferred distribution of $500.

The current year change in PDIT would be 15% of these Timing Differences:

2/3 of revaluation
2000
Tax-deferred distribution
500
Current year change
2500
PDIT change (15% tax rate)
375

Therefore the balance in the 870 PDIT account would increase by $375.

 

Purchased pension

A pension purchased from a superannuation fund with the balance a member’s account or an ETP. For example, the purchased price of an allocated pension or market linked pension is the account balance on the commencement day of the pension. Most Simple Fund pensions are purchased pensions, being purchased from their accumulation balance.

 

Reasonable benefit limits (RBL)

RBL is the maximum amount of retirement and termination of employment benefits that a person can receive over their lifetime at concessional (reduced) tax rates. There is a Lump Sum limit (roughly $600k) and a Pension limit (roughly $1.2k) and these limits are indexed annually. When a member retires with an amount above the RBL, this is taxed as an ‘Excessive RBL’ at the highest marginal tax rate. Transitional RBL’s might apply where individual members have applied to the ATO previously, and can be recorded in the Members screen in Simple Fund.
RBLs will be removed from 1 July 2007.

The RBL Form is lodged when a person retires and begins a pension. This is prepared in Simple Fund from the Pensions/RBLs screen.

 

Rebatable Pension/Annuity

A superannuation pension or annuity where the recipient may be entitled to claim the pension tax offset. The superannuation fund can advise the recipient if their pension is rebatable. For a pension or annuity to be rebatable, the superannuation fund must be a taxed fund – the fund must have paid the 15% contribution tax on post-June 1983 contributions received and earnings.

 

Rebatable proportion (RP)

The proportion of rebatable pension or annuity income which is eligible for the pension tax offset each year.
If a rebatable pension or annuity is in excess of the taxpayer’s RBL, they are not entitled to the full rebatable proportion of 1.0000 when calculating their 15% pension tax offset in their income tax return. The tax offset a taxpayer is able to claim is calculated using their rebatable proportion which appears on an excessive determination notice.
If the pension or annuity is within the taxpayers RBL, the rebatable proportion of the pension or annuity will be 1.0000 and the full rebate is available. If the benefit is found to exceed the taxpayers RBL, the Tax Office will send to the taxpayer an excessive RBL determination notice showing what proportion of the pension or annuity is rebatable (a rebatable proportion which will be less than 1.0000 if the pension or annuity is in excess of the taxpayers RBL).
A non-rebatable proportion can be input in the Pensions/RBLs screen under Pension Data, ‘Excess Benefit’

 

Regulated Fund

A fund regulated by the Superannuation Industry (Supervision) Act 1993 in respect of which the Trustee has lodged a Notice of Election with the Insurance & Superannuation Commissioner to become so regulated.

 

Reportable fringe benefits (RFB)

From 1 April 1999, employers are required to keep records of the fringe benefits provided to each employee.

Where an employee receives fringe benefits with a total taxable value of more than $1000 in a fringe benefits tax year, employers must record the grossed-up taxable value of those benefits on the employee’s payment summary (group certificate). These are known as reportable fringe benefits. This amount is required for calculating the member’s Adjusted Taxable Income for surcharge tax reporting purposes.

 

Residual capital value

The capital amount remaining at the end of the term of a pension or annuity. The amount of the RCV is generally specified in the fund deed or contract when the benefit is commenced

 

Restricted non–preserved benefits

These are superannuation benefits which can be paid on termination of employment. Hence if the member leaves the employer, the balance becomes unrestricted. They can also be paid under the same conditions that preserved benefits are paid.

 

Retirement savings accounts (RSA)

An account that provides low cost and low risk savings strategy. It is offered by banks, building societies, credit unions, life insurance companies and prescribed financial institutions (RSA providers). An RSA provider is not a superannuation fund.

 

Reversionary beneficiary

The person nominated by the member to automatically receive an income stream (pension/annuity) on the member’s death, usually the spouse.

 

Reversionary pension/annuity

A pension or annuity which has reverted to a beneficiary, usually a spouse, on the death of the member. The reversionary pension UPP will change from the original pension as this will now be based on the age of the spouse.

 

Roll over / ETP rollover

A roll over is

  • the transfer of all or part of an employer ETP into a superannuation fund or
  • a transfer of a member’s capital value from one superannuation fund to another or to a new product within the same fund.

The Simple Fund ETP rollin screen records amounts rolled over into the super fund, and the ETP’s screen records amounts paid out of the super fund.

 

Salary Sacrifice Contributions

When you arrange for your employer to put a part of your before-tax salary into your superannuation account for you. These contributions count toward your concessional contributions cap.

 

Section 290 notice and Section 82AAT(1A) Notice

A notice in writing provided to a superannuation fund, stating the member’s intention to claim a deduction in respect of their personal superannuation contributions. These relate to self-employed persons. From 01/07/2007 the Section 82AAT(1A) notice was replaced by the Section 290 notice.

 

Self managed superannuation funds (SMSFs)

A self managed superannuation fund (SMSF) is a complying superannuation fund under the Superannuation Industry (Supervision) Act 1993 which has:

  • fewer than five members
  • each individual trustee of the fund is a fund member
  • each member of the fund is a trustee
  • no member of the fund is an employee of another member of a fund, unless those members are related, and
  • if the trustee of the fund is a body corporate each director of the body corporate is a member of the fund.

 

Superannuation benefit

The amount you are paid either as a superannuation income stream, lump sum or a combination.

 

Statement of release authority

A statement from a superannuation provider, which documents a benefit payment paid because the provider received a release authority.

 

Superannuation income stream

A regular series of payments from a superannuation fund.

 

Super Co-contribution

A payment made by the government into your super fund. The government pays $1.50 for every $1 you make in personal contributions for which you have not claimed a tax deduction, up to a maximum of $1,500. The payment reduces by 5 cents for every dollar you earn over $28,000 (current as at 30/05/2007).

 

Superannuation guarantee (SG)

A prescribed minimum level of superannuation required under the Superannuation Guarantee (Administration) Act 1992 that an employer must contribute for employees. Currently 9% of salary where the employee earns $450 or more in a one month period.

 

Superannuation Industry (Supervision) Act 1993 (SIS Act)

The legislation providing prudential standards for superannuation funds. The legislation is administered by three regulators, the ATO, Australian Securities Investment Commission (ASIC) and APRA. The ATO is responsible solely for the administration of SMSFs.

 

Superannuation surcharge

A surcharge (tax) of up to 15% is imposed on certain superannuation contributions, specified rollover amounts, and termination payments. Surcharge does not apply from 1 July 2005.

 

Taxable contributions

Refer to Concessional Contributions

 

Timing Difference

Timing differences are income or expense items that are recorded for accounting purposes, but are taxable income or deductible expenses in a different accounting period. The timing of the tax liability or deduction is in a different financial period. The super fund will pay tax or receive a deduction for these items in the future.
AASB1020 defines timing differences as differences between pre-tax accounting profit or loss and taxable income or tax loss for a given financial period which arise because the financial period in which some items of revenue and expense are included in the determination of the pre-tax accounting profit or loss does not coincide with the financial period in which they are included in the determination of taxable income or tax loss.
Each timing difference originates in one financial period and is reversed, or “turns around”, in one or more subsequent financial periods.
Examples of timing differences in Simple Fund:

  • tax-deferred distributions
  • 2/3 of unrealised capital gains, assuming discount method is applied

 

Tax File Number (TFN)

The unique identifying number issued to you by the Tax Office.

 

TFN withholding tax

Tax that is deducted at the source on certain investments or payments to residents where the recipient has not provided their tax file number. Record TFN withholding in the Simple Fund Transactions Add/Edit screen in the TFN Credits field. Do not post these amounts to the 850/005 Tax File Number Credits account.

 

Transitional reasonable benefit limit (TRBL)

The TRBL was developed for individuals who may have been disadvantaged by the introduction of flat dollar reasonable benefit limit on 1 July 1994. If applicable, this limit is greater than the flat dollar reasonable benefit limit. An individual must apply to the Tax Office for a TRBL. Each individual has a different TRBL based on their individual circumstances. This limit is indexed annually.

 

Transition To Retirement

Since 1 July 2005, people who have reached their preservation age can withdraw part of their superannuation benefits as an income stream while they are still working. This income stream can be no more than 10% of their superannuation account balance per year.

 

Undeducted Contributions

Refer to Non-Concessional contributions.

 

Undeducted Purchase Price

The amount contributed towards the purchase of a pension or annuity that was not eligible for a tax deduction, for example undeducted contributions. This is calculated by Simple Fund based on the members undeducted account balance, concessional contributions, invalidity payments and life expectancy, in the Pensions/RBLs screen.

 

Unrestricted non-preserved benefits

These are generally benefits which the member has previously met a condition of release and was entitled to be paid but has voluntarily decided to keep within the superannuation system. There are no restrictions for paying these superannuation benefits out to a member at any time on demand, irrespective of age, employment situation or financial position, providing the superannuation fund rules allow the payment.

 

Untaxed Contributions

An ‘untaxed contribution’ source, is typically a government fund for public servants. As amounts have not been accumulating in a fund, contributions and earnings taxes have not been paid. Tax is payable on the untaxed post-June 1983 component rolled into a SMSF and it must be paid by the SMSF receiving the roll-over.

 

Vested Benefits

Benefits which at all times during the member’s interest in the fund, remain vested in the member in the sense that the benefit cannot be removed from the member or members’ dependents if they become subsequently entitled to the benefits.

 

Work Test

A test that requires a person to have worked at least 40 hours within 30 consecutive days in a financial year. People who are aged between 65 and 74 must meet the work test to be allowed to make personal superannuation contributions.

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