Case study 2 - Making the most of benefits payments

Choices made by employees when they leave the company can make a big difference to the amount of tax they pay on certain termination payments.

Currently, when employees access their superannuation savings (normally at retirement) the taxation that applies will depend on where the contributions originated from and how old the employee is. A system known as “components” categorises the money as it comes into an employee’s account and these components have different tax treatment when it comes time for the employee to access their super. For example, if an employee makes a personal contribution into their super from after-tax money, it is categorised in a different component then a contribution made by you as the employer for that employee. The government proposed in the Federal Budget 2006 to simplify this tax system: Australians aged over age 60 and who have already paid tax on their superannuation contributions and earnings will not pay tax on their superannuation benefits when taken as a lump sum or a pension. For employees under age 60 who are able to access their super, streamlined tax arrangements would apply. The current tax components that apply on a lump sum will be replaced by two components: an exempt component and a taxable component. The table below illustrates the current tax treatment and the proposed new tax treatment.

Component	Current tax treatment	New tax treatment
Pre-July 1983	5 per cent taxed at marginal rates	Exempt component
Concessional	5 per cent taxed at marginal rates
Undeducted contributions	Exempt
Post-June 1994 invalidity	Exempt
Capital gains tax exempt	Exempt
Non-qualifying	Marginal rates	Taxable component (see below)
Post-June 1983	Taxed as per table below	Taxable component (see below)
Excessive	38 per cent	Abolished

Taxable component

Taxpayers age	Current tax treatment (for post June 1983)	New tax treatment
Under 55	20 per cent	20 per cent
Age 55-59	Up to threshold ($129,751) — 0 per cent Over threshold — 15 per cent	Up to threshold ($129,751) — 0 per cent Over threshold — 15 per cent
Age 60 and over	Up to threshold ($129,751) — 0 per cent Over threshold — 15 per cent	Exempt

Tax on pension payments made to individuals under age 60 would be lower in some cases. A pension commenced on or after 1 July 2007 would have an undeducted purchase price which includes all the new exempt components illustrated in the table above. A full pension rebate of 15% would apply to all pensions paid from a taxed fund if the individual is aged 55 to 59 years. For pensions that commenced before 1 July 2007 for individuals that are still under age 60 at 1 July 2007 the deductible amount would continue to be applied based on the existing formula until they reach age 60 and all income from the pension is tax free.

The new tax treatment has been legislated as yet. If passed, it will be effective 1 July 2007.