Preservation age: it’s not all about access

Strategies

Thursday 09 April 2015

This article was published in Money Management.

In 2015/16, we will start to see the impact of the phased increase in the superannuation preservation age for those born on or after 1 July 1960. The increase was introduced as part of the current preservation regime that was established in 1999. It not only impacts the ability to access preserved superannuation benefits, but also has implications for the taxation of superannuation benefit payments and employment termination payments, as well as spouse contribution splitting.

With practical effect from 1 July 2015, preservation age will progressively increase from age 55 to age 60 as shown in the table below.

If a client was born ... ... their preservation age is:
Before 1 July 1960 55 years
From 1 July 1960 to 30 June 1961 56 years
From 1 July 1961 to 30 June 1962 57 years
From 1 July 1962 to 30 June 1963 58 years
From 1 July 1963 to 30 June 1964 59 years
After 30 June 1964 60 years

Access to superannuation benefits

This change means for those born on or after 1 July 1960, the age from which preserved superannuation benefits can generally be accessed will gradually increase until it reaches age 60 on 1 July 2024. The phased increase impacts the ability to access benefits under certain conditions of release that are based on preservation age, such as retirement, commencing a transition to retirement (TTR) pension and access to full benefits under financial hardship provisions.

Retirement

Once an individual reaches their preservation age and retires, they are able to access their superannuation benefits without restriction.

Generally, an individual will be considered ‘retired’ under superannuation law if one of the following tests applies:

  1. If the individual has reached preservation age, retirement occurs if they have ceased an employment arrangement and the trustee of their superannuation fund is satisfied they never intend to be gainfully employed for 10 hours or more each week
  2. If the individual is aged 60 or more, retirement occurs if they have ceased an employment arrangement on or after reaching age 60.

The increase in preservation age means clients who turn 55 in the 2015/16 financial year (ie are born between 1 July 1960 and 30 June 1961) need to be at least age 56 to be retired under the first test. Those clients will be unable to access their benefits under the retirement condition of release in 2015/16.

Accessing a TTR pension from preservation age

Individuals who have reached preservation age, but have not yet retired or reached age 65, may be able to access their preserved superannuation benefits in the form of a TTR pension.

As for retirement, clients born between 1 July 1960 and 30 June 1961 will need to be at least age 56 to commence a TTR pension, not age 55 as has previously been the case. More broadly, the increase in preservation age will eventually remove the ability for those under age 60 to commence a TTR pension.

Severe financial hardship

The ‘aged-based’ test for the condition of release that allows early access to superannuation benefits for severe financial hardship will also be affected by the increase in preservation age. This test requires individuals looking to access their full superannuation benefits to have been receiving Commonwealth income support for a cumulative period of 39 weeks after reaching preservation age and to not be gainfully employed for 10 hours or more each week. Clients who reach age 55 in 2015/16 will need to wait until they are at least age 56 and 39 weeks to access their full benefits under this condition of release. This means access to their full benefits will not be permitted before 2016/17.

Access to amounts of between $1,000 and $10,000 per annum will still be allowed for clients under age 65 who have been continuously receiving Commonwealth income support for 26 weeks and are unable to meet reasonable and immediate family living expenses.

Taxation of superannuation benefits

The tax treatment of lump sum and income stream benefits paid from a taxed superannuation fund depends on the tax components of the benefit and the age of the individual at the time of payment.

The increase in preservation age will not affect a client’s ability to withdraw superannuation benefits where they have qualified for access before reaching preservation age, eg those who hold unrestricted non-preserved benefits because they have met a condition of release such as permanent incapacity. However, it will be relevant for the tax treatment of benefits (other than disability superannuation benefit income streams) paid prior to preservation age. Clients in this situation who turn 55 in 2015/16 may wish to defer drawing on benefits until after their 56th birthday to access the tax concessions available from preservation age.

For lump sum benefits paid to those aged between preservation age and age 59, a low rate cap ($185,000 in 2014/15, increasing to $195,000 in 2015/16) applies to ensure no tax is payable on the taxable component benefits that are within the cap. While it may be rare for clients who turn 55 in 2015/16 to have already qualified for access to benefits, those who have will need to wait until age 56 to access the low rate cap for lump sum withdrawals from superannuation.

Tax treatment of lump sum payments

Age at time of payment Tax-free component Taxable component (element taxed)
Under preservation age Non-assessable non-exempt income 20%*
Preservation age to 59 0% up to low rate cap 15%* on amounts above low rate cap
Age 60 or more Non-assessable non-exempt income

* Plus Medicare levy

For income stream benefits paid to clients aged between preservation age and age 59, a 15 per cent tax offset applies to the taxable component of their pension payments. In 2015/16, the offset will generally only be available for income streams paid to those who are aged 55 or more at 30 June 2015. Those who turn 55 in 2015/16 will not be eligible until age 56 unless they are receiving a disability superannuation benefit income stream.

Tax treatment of income streams

Age at time of payment Tax-free component Taxable component (element taxed)
Under preservation age Non-assessable
non-exempt income
Marginal tax rates*
Disability superannuation benefit income stream attract a 15% tax offset
Preservation age to 59 Marginal tax rates* less a 15% tax offset
Age 60 or more Non-assessable non-exempt income

* Plus Medicare levy

Employment termination payments

The increase in preservation age also impacts the taxation of employment termination payments (ETPs). Unlike superannuation benefits, the tax treatment of an ETP depends on the individual’s age at the end of the financial year the payment is received (not at the time payment is made) and the tax components of the payment.

Tax treatment of life benefit ETPs

Age at end of financial year Tax-free component Taxable component (element taxed)
Under preservation age Non-assessable
non-exempt income
30%* up to cap
47%* on amounts above cap
Over preservation age 15%* up to cap
47%* on amounts above cap

* Plus Medicare levy

The cap is based on whether or not the life benefit ETP is an excluded payment (ie it relates to genuine redundancy, an approved early retirement scheme, invalidity or certain types of compensation). If it is, an ETP cap of $185,000 in 2014/15 ($195,000 in 2015/16) applies. For all other payments (eg golden handshakes or gratuities), the cap is the lesser of:

  • the ETP cap, and
  • the $180,000 ‘whole of income’ cap less other taxable income.

As shown in the table above, the taxable component of an ETP received by an individual who is under preservation age at the end of the financial year is taxed at a higher rate than if they had reached their preservation age. This means ETPs paid to those who turn 55 in 2015/16 will be taxed more heavily than if the payment was received by someone who was 55 in 2014/15.

Case Study: redundancy

After working with the same employer for 10 years, Sally is advised her position within the company will be made redundant with effect from 30 June 2016. She is to receive a genuine redundancy payment of $125,000, of which $58,690 will be tax-free (based on 2015/16 rates of $9,780 plus $4,891 for every completed year of service) and the balance of $66,310 will be an ETP.

Sally was born on 7 July 1960, giving her a preservation age of 56. If she receives the payment on 30 June 2016 (ie when she is age 55) she will still be under her preservation age and the maximum tax payable on the ETP will be $21,219.20. However, if payment is delayed until 1 July 2016, Sally will have reached her preservation age by the last day of the 2016/17 financial year and the maximum tax payable is reduced to $11,272.70.

It is important to remember that the termination payment must generally be received no later than 12 months after employment is terminated to be considered an ETP, unless it is a genuine redundancy or early retirement scheme payment.

Spouse contribution splitting

Superannuation law allows certain contributions made by or on behalf of an individual to be split with their spouse. To be eligible to split contributions, the receiving spouse must be either under their preservation age or aged between preservation age and 64 (inclusive) and not retired (see retirement condition of release above) at the time of the split.

The increase in preservation age may be beneficial for some clients as it effectively extends the age below which contributions can be split to a retired or non-working spouse. If the spouse is working, contributions can continue to be split until the earlier of when the spouse reaches their preservation age and retires or reaches age 65.

Contributions split to a spouse born on or after 1 July 1960 will typically not be accessible until the spouse reaches age 56 (or later depending on when the spouse is born) and retires or satisfies another condition of release.

Conclusion

The gradual increase in the superannuation preservation age starting from 1 July this year impacts more than just the age from which superannuation benefits can be generally be accessed. Clients who turn 55 in 2015/16 will generally need to wait until 2016/17 when they reach 56 to not only access benefits but also to receive the more concessional tax treatment for superannuation benefit payments and employer termination payments. Those clients looking to split contributions with their spouses may also be impacted.

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