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Better super

Summary of the 2007 tax changes

New legislation that affects all members of the Defence Force Retirement and Death Benefits Scheme (DFRDB) applied from 1 July 2007.

The main changes include:

 Amounts you can contribute without paying additional tax

You can make two types of contributions. These are undeducted and deductible contributions.

Changes in relation to undeducted contributions

The tax changes set a cap on the amount of undeducted contributions you can make without incurring additional tax.

The undeducted contributions cap across all your superannuation funds is:

  • $150 000 per year, or
  • $450 000 over three years for members under 65. For example,

$300 000 in year 1, $100 000 in year 2 and $50 000 in year 3.

Your after-tax contributions up to the cap are paid in tax-free.

Undeducted contributions made above the cap will be taxed at the top marginal tax rate (plus Medicare levy).

If you are making a large contribution into superannuation or approaching your undeducted contributions cap, you will need to take into account that it is compulsory for you to continue to make member contributions at the rate of 5.5%.

If you contribute over the cap the Australian Taxation Office (ATO) will advise you of your options.

Undeducted Contributions

The following contributions are classed as ‘undeducted contributions’ for taxation purposes.

  1. Member contributions
    As a DFRDB scheme member, you must contribute 5.5% of your superannuation salary each fortnight unless you have reached 40 years of service.
  2. Additional personal contributions
    Although you cannot make additional personal contributions into DFRDB, you are eligible to make additional personal contributions into the Military Superannuation and Benefits Scheme (MilitarySuper) or another eligible superannuation fund. An additional personal contribution is a type of ancillary contribution.
  3. Co-contributions
    Government co-contributions are undeducted contributions but will not be included in the undeducted contributions cap.

Changes in relation to deductible contributions

The tax changes also set a cap on the amount of deductible contributions you can make without incurring additional tax.

The deductible contributions cap across all your superannuation funds is:

  • $50 000 per year, or
  • a transitional limit of $100 000 per year for five years (financial year 2007/08 to 2011/12) for members over age 50 on or after 1 July 2007.

Contributions above this cap will be taxed at the top marginal tax rate (plus Medicare levy), and will also count towards the undeducted contributions cap.

If you contribute over the cap the ATO will advise you of your options.

Deductible Contributions

Salary sacrifice contributions are classed as ‘deductible contributions’ for taxation purposes.

Salary sacrifice contributions

If you are Contributing Member of the DFRDB scheme you can make salary sacrifice contributions into MilitarySuper. They are taxed at 15% when entering the fund, unless you have made deductible contributions above the cap or you have not provided your Tax File Number (TFN). A salary sacrifice contribution is a type of ancillary contribution.

If MilitarySuper does not have your TFN all deductible contributions will be taxed at the top marginal tax rate at the end of each financial year.

Transfer Amounts

Amounts transferred into MilitarySuper from other superannuation funds will not count towards the undeducted or deductible contributions caps.

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 The Tax you Pay When You Claim Your Benefit

Under 55

From 1 July 2007, if you are aged under 55 at the time you claim your benefit from the DFRDB scheme (an untaxed source), you will be taxed as follows:

Untaxed Source

  • If you are entitled to retirement pay, it will be taxed at your marginal tax rate. Once you turn 60, a 10% tax offset will apply.
  • If you take any part of your benefit as a lump sum, the taxable component will be taxed at 30% up to a threshold of $1 million, and at the top marginal tax rate above this amount.

From 1 July 2 007, if you are aged under 55 at the time you claim an ancillary benefit from MilitarySuper, you will be taxed as follows:

Taxed Source

  • If you take any part of your benefit as a lump sum, you will pay no tax on the tax-free component. The taxable component will be taxed at 20%.

55 - 59

From 1 July 2007, if you are aged between 55 and 59 at the time you claim your benefit from the DFRDB scheme (an untaxed source), you will be taxed as follows:

Untaxed Source

  • If you are entitled to retirement pay, it will be taxed at your marginal tax rate. Once you turn 60, a 10% tax offset will apply.
  • If you take any part of your benefit as a lump sum, the taxable component will be taxed at 15% up to a threshold of $140 000, then 30% between this amount and $1 million, and at the top marginal tax rate above this amount.

From 1 July 2 007, if you are aged between 55 and 59 at the time you claim an ancillary benefit from MilitarySuper, you will be taxed as follows:

Taxed Source

  • If you take any part of your benefit as a lump sum, you will pay no tax on the tax-free component. The taxable component will be tax-free up to a threshold of $140 000 and taxed at 15% above this amount.

Over 60

From 1 July 2007, if you are aged 60 and over at the time you claim your benefit from the DFRDB scheme (an untaxed source), you will be taxed as follows:

Untaxed Source

  • If you are entitled to retirement pay, it will be taxed at your marginal tax rate. However, you will now receive a 10% tax offset.
  • If you take any part of your benefit as a lump sum, it will be taxed at 15% up to $1 million and at the top marginal tax rate above this amount.

From 1 July 2007, if you are aged 60 or over at the time you claim an ancillary benefit from MilitarySuper, you will be taxed as follows:

Taxed Source

  • If you take any part of your benefit as a lump sum, it will be tax-free.
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 The Introduction of Proportioning of Partial Benefit Payments

Under the tax changes if you access part of your benefit, the payment will include both tax-free and taxable components in the same proportions that exist in your total benefit.

This change has no effect on the DFRDB scheme and the current rules for applying your tax-free amount to your benefit (either commutations or retirement pay) remain unchanged.

However, if you are a DFRDB member who has an ancillary benefit with MilitarySuper you may be affected.
If you access part of your ancillary benefit, the payment will include both tax-free and taxable components in the same proportions that exist in your total ancillary benefit.

Other considerations

Tax File Numbers (TFN)

From 1 July 2007, if you have not provided your TFN:

  • we will not be able to accept your undeducted contributions (member and additional personal).
  • your employer may choose not to pay productivity contributions, and
  • you will be taxed at the top marginal tax rate at the end of the financial year on any deductible contributions (salary sacrifice) that are made.

Reasonable Benefit Limits (RBLs)

RBLs will be abolished from 1 July 2007.

Withdrawal of benefits

Contributing Members of the DFRDB scheme are eligible to make ancillary contributions into MilitarySuper. The tax rules that force a member to claim their benefit at age 65 have been removed with the changes. However, MilitarySuper scheme rules do not permit benefits to remain preserved in the fund after reaching 65 years of age.