Refund of Contributions Tax

Draft legislation to implement the Government’s proposal to refund contributions tax for low income super members has now been introduced.  The draft legislation is Tax Laws Amendment (Stronger, Fairer, Simpler and Other Measures) Bill 2011 and was introduced on 2 November 2011.

It is proposed that for low income super members (generally super members with a tax income of $37,000 or less) the Government will make a superannuation contribution of up to $500 on their behalf to a superannuation fund or a retirement saving account.  The contribution will be made in a manner similar to the current Government Co-Contribution.

The refund of contributions tax will apply from the 2012/13 financial year.

To be eligible, the super member must in respect of the relevant financial year satisfy a number of requirements.

The first requirement is that the super member is an Australian resident.

The second requirement is that the super member must have lodged their tax return for the relevant financial year.  However, there is an exception to this requirement, which is considered later.

The third requirement is that the super member must have at least 10% of their total income for the relevant financial year arising from employment or business.

The fourth requirement is that the super member must have a tax income of $37,000 or less for the relevant financial year.  Tax income (called “adjusted taxable income” in the draft legislation) is taxable income plus adjusted fringe benefits, target foreign income, total net investment loss, tax-free pension or benefit, reportable superannuation contributions less any deductible child maintenance expenditure.

The last requirement is that one or more concessional contributions must have been paid by or in respect of the super member during the relevant financial year.

The amount of the refund is 15% of the total of concessional contributions made by or in respect of the super member for the relevant year.  The amount of the refund is capped at $500 and no refund of less than $20 will be paid.

Generally, the refund of contributions tax will be made in a manner similar to the current Government Co-Contribution payments.

Like the increase in the compulsory contribution rate and the increase in the age limit from 70 to 75, this proposal is dependent upon the enactment of the Government’s Minerals Resource Rent Tax legislation before 1 July 2013.  If this legislation is not enacted by 1 July 2013, the refund of contributions tax will not apply.

Comments
A number of comments can be made about the draft legislation.  First, the income ceiling has no taper: an excess of $1 over the limit of $37,000 will result in no refund of contributions tax.

Second, if the super member is not required to lodge a tax return due to having a taxable income less than the tax free threshold, then a refund of contributions tax will still be made (assuming the other requirements are satisfied).  In this case, the ATO will determine the eligibility to the refund and will also determine the amount of the refund.  The tax free threshold for 2012/13 will be $18,200.

Third, the refund of contributions tax can be paid to a superannuation fund, retirement saving account, to the super member (for example where the super member has retired and taken their super as a lump sum) or to the legal personal representative of the member (where the member has died before the refund can be made).

While, for ease of explanation, the term “refund of contributions tax” has been used, strictly it is a not a refund of contributions tax.  The ATO will make a contribution for the super member calculated as 15% of the total of the concessional contributions made by or in respect of the super member (capped at $500).  It is irrelevant that the actual rate of tax applied to the concessional contributions is less than 15% (say due to deductions in the super fund or carry forward of prior year losses).