Accounting Law - Assignment Example

?Part A a. The important facts at hand to consider are: Jonathan’s age is 57 years old; his superannuation fund balance is $700,000; that amount is made of the following components: $140,000 voluntary after-tax contribution of Jonathan and $560,000 employer contributions and fund earnings. The Superannuation Industry (Supervision) Regulations 1994 – Schedule 1 provides for the conditions of release of the superannuation funds under Part I, sections 101 to 114 thereof, namely: retirement; death; terminal medical condition; permanent incapacity; former temporary resident under certain conditions; payment to the Commissioner of Taxation under the Superannuation (Unclaimed Money and Lost Members) Act 1999; termination of employment on or after July 1, 1997 where the member’s fund does not amount to more than $200; severe financial hardship; attainment of age 65; compassionate grounds; termination of employment with an employer who contributed to the funds for the member; temporary incapacity; attainment of preservation age; a found lost member with fund balance amounting to less than $200; certain conditions under the Income Tax Assessment Act 1997; under s 292-B of the Income Tax (Transitional Provisions) Act 1997, and; so provided as release conditions under §62(1) (b) (v) of the 1994 Act. In the problem at hand, Jonathan’s primary condition for release of his superannuation fund balance is retirement, which is further defined as a state when the person under gainful employment of another is set to terminate that employment and will never again seek employment either on a full or part time basis. 1 In addition, that employee contemplating retirement must have reached the age of 60 or if below 60, must have reached his or her preservation age, according to s. 7 of the same Act. The problem does not state, however, if Jonathan has reached his preservation age, a condition assumed if a person is born under the following dates: before 1 July 1960 to 30 June 1961, if 55 years of age; between 1 July 1960 to 30 June 1961, if 56 years of age; between 1 July 1960 to 30 June 1962, if 57 years of age; between 1 July 1962 to 30 June 1963, if 58 years of age; between 1 July 1963 to 30 June 1964, if 59 years of age, or; after 30 June 1964, if 60 years of age.2 Fig. 1 Superannuation Interest Tax3 Thus, for Jonathan to be able to able to access his superannuation fund balance, he must have been born between 1 July 1960 to 30 June 1962, since he is now 57 years of age, otherwise he will not be able to access the same on the ground of retirement. Assuming he was born between that period, Jonathan can lawfully access his fund and the tax due on the benefit from the superannuation fund depends on the following factors: age; whether as lump sum or income stream, and; the taxed or untaxed elements present in the fund.4 Figure 1 above illustrates how taxes of superannuation benefits are determined. A superannuation benefit, according to the diagram, may have components, which according to s. 307.120 of the Income Tax Assessment Act 1997 (ITAA 97 hereafter), may be a taxable or tax-free component. Superannuation income streams paid on or after 1 July 2007 have tax free components that are usually the “crystallised segment and the contributions” while the taxable component is the amount of the income stream benefit minus its tax free component. A superannuation income stream as a “regular series of payments: made directly from accumulated superannuation contributions or purchased with a lump sum” (Guide to Social Security Law 2011) while the ITAA Regulations define it as: “an annuity for the purposes of the SIS Act in accordance with the subregulation 1.05 (1) of the SIS Regulations; or a pension for the purposes of the SIS Act in accordance with subregulation 1.06 (1) of the SIS Regulations; or a pension for the purposes of the RSA Act in accordance with regulation 1.07 of the RSA Regulations.” In addition, it is also “an annuity or pension within the meaning of the SIS Act; and commenced after 1 September 2011.”5 According to s. 307.125 of the ITAA 97 (2) “The superannuation benefit is taken to be paid in a way such that each of those components of the benefit bears the same proportion to the amount of the benefit that the corresponding component of the superannuation interest bears to the value of the superannuation interest.” The same provision gives as an example where the value of the superannuation interest was $1000 before payment of which $200 was tax free and $800 taxable. In paying the lump sum to the recipient, the same proportion as the interest must be followed in taxing it. Thus, $20 is tax free and only the $80 is taxable. Table 1 Tax Treatment of Superannuation Income Streams6 In the present problem, Jonathan’s superannuation fund consists only of an element taxed in the fund as it is regulated and taxed. Since he is retiring after 1 July 2011, the tax-free component of his income stream will constitute the crystallised segment (which consists of concessional component, post-June 1994 invalidity component, undeducted contributions, CGT exempt components and pre-July 1983 component, if they are applicable) and the contributions segment or contributions after-tax.. However, since the problem does not mention any of these crystallised segment, it must be assumed that only Jonathan’s voluntary contributions constitute the tax-free component. On the other hand, the taxable component should be determined by subtracting the tax-free component from the entire fund balance. Thus, $700,000 - $140,000 = $560,000 [the taxable component] The tax on the income stream must be calculated at the time of the commencement of the income stream, according to s. 307.125 (30(a). To get the tax to be imposed on the individual income stream to be paid to Jonathan, the proportional rule must be employed under s. 307.125(2). Thus, Tax free component = $140,000 = 20% [tax free component] Value of the interest $700,000 Since 20% of the Jonathan’s income stream is tax-free, then the remaining 80% is taxable income. Therefore, of the $10,000 owing to him as his first annual payment, 20% of it is tax-free and the remaining 80% or $800,000 is subject to marginal tax rate with 15% tax offset as shown under Table 1. b. In six years time, Jonathan will be 63 years old, which implies that all elements that are taxed in the fund will no longer be subject to any tax. Since, all components of Jonathan’s superannuation fund are taxed in the fund; he will no longer be taxed and will receive the full amount of $10,000 per annum after turning 60 years old. c. A superannuation lump sum is defined under ITAA 1997 as a superannuation benefit that is not a superannuation income stream benefit. In calculating the tax on the superannuation lump sum, the same principle as that used in the income stream is used. The lump sum tax, however, is calculated before the lump sum amount is to be given to the recipient, according to s. 137.125(3) (b) of the ITAA1997. d. The proportioning rule under s. 137.125 (2) of the same is still applicable if Jonathan takes out the entire superannuation balance as a lump sum instead of the annual superannuation pension. Thus, as established in the preceding numbers, the following constitute the taxable and tax-free portions of Jonathan’s superannuation fund: 20% of the amount or $140,000 is the tax free component, and; 80% or the $560,000 of the amount is the taxable component. The taxable component, like in the case of the superannuation income stream, is calculated by subtracting the amount of the tax-free income from the total superannuation fund. Since Jonathan’s superannuation fund is taxed at fund and he is presumed to have reached his preservation age, the 80% or $560,000 will be subjected to an amount up to the low rate cap amount, as shown in Table 1, third column under “Member benefit-taxable component-taxed element” for those who have reached their preservation age up to 59 years old. As of 2010-2011, the low rate cap amount is $160,000,7 which means that up to that amount, the tax imposed is nil or 0%, and beyond that amount the tax imposed is not more than 15%, in accordance with s. 301.20 (4). In practical terms, of the $560,000 of the superannuation fund subject to tax, the first $160,000 is imposed a 0% tax and the remaining balance of $400,000 may be imposed a maximum rate of 15% including Medicare levy. Thus, $400,000 x .15 = $60,000 The maximum amount of tax that Jonathan will have to pay on the amount beyond $160,000 (or $400,000) is $60,000. e. The superannuation benefit of a deceased person may only be paid to superannuation law dependants defined as the “spouse of the person, any child of the person, and any person with whom the person has an interdependency relationship” 8 An interdependency relationship is one where two persons have a close personal relationship, live together, one or both provides the other with financial support, and one or both provides the other with domestic support and personal care.9 The taxation law also defines a death benefits dependant called as tax dependant. Under the SISA 1993, a superannuation death benefit may be paid to a trustee of the deceased’s estate, which may in turn distribute it to death benefits dependants, which are defined as a person’s spouse or former spouse, his child less than 18 years of age, or any other person with whom he had an interdependency relationship just before he died or any other person who was his dependant before he died. 10 The ITAA 1997 also defines interdependency relationship in the same way that the SISA does.11 Thus, a dependant under SISA can receive a superannuation benefit directly or through the estate, but a dependant who is not a SISA dependant can receive only through the estate or the trustee. Table 1 also shows the schedule of rates in the event a member dies and the superannuation benefit is distributed to dependants and non-dependants in both taxable and non-taxable elements. It shows the discrepancy of the taxes paid between dependants and non-dependants. On the other hand, Fig. 2 shows a diagram of the simpler Super Tax System or the flow of death benefits to the recipient when he is alive or following his death. Fig. 2 The Simpler Super Tax System12 In the problem at hand, Jonathan dies two years after retirement,, which implies that he dies at the age of 59. Under the death benefits of the superannuation, however, the age of the member at the time of the death does not matter as death is one of the conditions of the release of the superannuation benefits under s. 110 to 114 of Part I, SISR. As to Julie, who is a de facto spouse of Jonathan for four years, she is considered a dependant both under the SISA and the ITAA 1997, because she and Jonathan had an interdependency relationship assuming that they met all the requirements under the laws. Since she is a SISA dependant, she can receive the superannuation benefits directly and even indirectly through the trustee of the Jonathan’s estate. Table 1 shows that a dependant is available to receive the death benefits of the superannuation fund without any of its components taxed or any other tax imposed on it. All of the lump sum of a superannuation benefit received as a death benefit is therefore tax free if given to a dependant under s. 302.160 of the ITAA 1997 and it does not matter that a period of time has passed after retirement and before the lump sum is given.13 f. The pre 1 July 1983 component can be determined using the following formulae: number of pre 1 July 1983 days (total amt) Total No. of Service Days Thus applying the formula in Jonathan’s case, 900 days ($600,000) = 900 ($600,000) 900 ys + 8100 days 9000 1 ($600,000) = $60,000 tax free component 10 Therefore, the total tax free component of his superannuation fund is $60, 000 representing the amount in his fund contributed prior to 1 July 1983 and the taxable component is the product of the total amount, which is $600,000, and the tax free component, which is $60,000 or $540,000. The $60,000 is tax free because it constitutes one of the crystallised components under s. ITAA 1997 s. 307.225. Part B An Employer termination payment (ETP hereafter) is a lump sum payment made to a person after his employment with his employer has ended, either because such person has retired, resigned or has died. Such payment must be made within 12 months of such occurrence, otherwise it will not be considered an ETP and will thereafter, be taxed as ordinary income subject to marginal tax rates, unlike an ETP which is taxed at a lower rate than the standard marginal rates.14 It is not the same as superannuation benefit received by an employee upon compliance of certain condition under the SISA law. An ETP can be a product of an agreement between employer and employee, or be purely voluntary on the part of the employer or be compelled by law. It can even be paid to a dependant in case it is triggered by the death of the employee. It can be paid more than once, but in all cases the payments must all be made within the 12 month period to avail of the lower tax of the ETP. Payments that are considered as ETP include the following: payments made in lieu of notice; redundancy payments above the tax-free amount; “golden handshake” payment; unused sick leave payment; unused rostered days off payment; compensation in case of wrongful dismissal or loss of job; payments after an employee dies.15 The rule of thumb is that to be considered an ETP, the payment must have the element of “consequence of the termination of the employee” as was determined by Taxation Ruling TR 2003/13. There must be, therefore a connection between termination and payment although the former need not be the primary reason for it and that the greater the length of time between them, the less likely that the payment is considered an ETP. In the case of Advanced Prosthetic Centre Pty. Ltd v Appliance & Limb Centre (Int) Pty Ltd, 16 the Court considered the payment made by the employer to the employee, which forms part of the settlement between them in a case filed by the latter against the former for wrongful dismissal, not an ETP because the lump sum paid to the employee corresponded to the various claims that did not touch the termination itself. Under certain circumstances, however, a settlement in disputes between employer and employee for termination is considered ETP.17 In Le Grand v FC of T,18 the settlement for a breach of contract by the employer was considered an ETP and so was the settlement in the case of Dibb v FC of T 19 between an employer and employee for a termination dispute. ETPs are taxed as shown in Table 2 below. Transitional ETPs are applicable to payments made between 1 July 2007 and 30 June 2012 to employees who have acquired a right to it as of 9 May 2006 under a contract, a law or a workplace agreement. They are taxed concessionally up to a certain limit, $160,000 as of 2010-2011, if given to an employee who has reached the preservation age or over and with specific rates in excess of the cap.20 (COT 2010:3). Table 2 ETP Tax Rates21 Articles/Books Guide to Social Security Law Australian Government Retrieved 26 August 2011. http://www.fahcsia.gov.au/guides_acts/ssg/SSG_KEYX/L.html Lump Sum Superannuation Benefits (2011) http://www.eluvia.com.au/content/apps/assetlibrary/MjA0MzQ2NDI50/access-taxation- of-lump-sum-super-benefits-amp-jan-2011-.pdf Superannuation Death Benefits (2010) Tapln, Retrieved 26 August 2011, http://www.ampcapital.com.au/research-centre/tapin/2010-April-13_TapIn.pdf?DIRECT. Abbott, Grant, Self Managed Superannuation Funds Strategy (2008) CCH Australia Limited ATO, Key Superannuation Rates and Thresholds (2011) Australian Tax Office, Retrieved 25August 2011 http://www.ato.gov.au/super/content.aspx?menuid=0&doc=/content/60489.htm&page=1 0&H10 ATO, Tax Table for Employment Termination Payments (2010) Australian Tax Office, http://www.ato.gov.au/content/downloads/BUS00241727N709800510.pdf. CCH, Australian Master Human Resources Guide 2010 (2010) Eight Ed. CCH Australia Limited COT, Tax Table for Employment Termination Payments (2010) Commissioner of Taxation. http://www.ato.gov.au/content/downloads/BUS00241727N709800510.pdf Devos, Nethercott Richardson, ‘Master Tax Examples’ (2010) Australia: CCH Australia Limited Leow, James and Shirley Murphy and Giles Hooper, Australian Master Superannuation Guide (2010) CCH Australia Limited Biti, Louise and Graeme Colley, Jennifer Brookhouse, ‘Australian Master Financial Planning Guide 2010/11’ 13th Ed. (2010) CCH Australia Limited Case Law Advanced Prosthetic Centre Pty. Ltd v Appliance & Limb Centre (Int) Pty Ltd [2002] NSWSC 515/. Dibb v FC of T [2004] ATC 4555. Le Grand v FC of T [2002] ATC 4907. Legislation Income Tax Assessment Act 1997 (ITAA 1997) Income Tax Assessment Regulations 1997 Income Tax (Transitional Provisions) Act 1997 Superannuation Industry (Supervision) Act 1993 Superannuation (Unclaimed Money and Lost Members) Act 1999 Superannuation Industry (Supervision) Regulations 1994 Read More