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LISTO: Super tax refund for lower-income earners

December 19, 2017 by Trish Power 9 Comments

Contents

  • What is the Low Income Superannuation Tax offset?
  • How the super tax refund works
  • What are concessional contributions for the purposes of LISTO?
  • History: Why and when was LISC, and LISTO introduced?

Note: Superannuation changes extending the Low Income Super Contribution (contributions tax refund) beyond June 2017 are now law. The LISC is renamed the Low Income Superannuation Tax Offset, and the new law commenced 2 July 2017, and applies from the 2017/2018 year onwards.

In a welcome backflip, as part of its May 2016 Federal Budget, the Coalition government announced it would extend the Low Income Super Contribution (LISC) beyond its legislated expiry date of June 2017. This extension is now law, and since July 2017, the LISC has been renamed the Low Income Superannuation Tax Offset (LISTO).

The Low Income Superannuation Contribution (LISC) is now renamed Low Income Superannuation Tax Offset (LISTO), and continues indefinitely.

What is the Low Income Superannuation Tax offset?

If you earn less than $37,000 a year, and your employer (or you) makes concessional (before-tax) super contributions on your behalf, then you can expect a refund of the 15% contributions tax that was deducted from your super account. The refund is paid directly to your superannuation account by the federal government. The federal government previousy (from 1 July 2012 until 30 June 2017) called this refund of super tax, the Low Income Super Contribution (LISC), but now since July 2017, it is called the Low Income Superannuation Tax Offset (LISTO).

Background: Way back in May 2010, the former ALP government (in its response to the Henry Tax Review), announced that from 1 July 2012, individuals earning up to $37,000 will be no worse off tax-wise by receiving Superannuation Guarantee (SG) contributions. The promise was that any tax deducted from SG contributions, made on behalf of individuals earning less than $37,000, will be returned to the super accounts of the affected individuals. The LISC scheme also applied to non-SG concessional contributions. For more information on the history of this welcome super tax refund, see the end of this article.

In the past, SuperGuide has flagged that Australians paying a lower rate of income tax than

How the super tax refund works

The deal is: the federal government contributes up to $500 to an individual’s superannuation account, where the individual’s adjusted taxable income is less than $37,000. Note that the income test is based on ‘adjusted taxable income’.

The exact amount of LISC (soon-to-be called LISTO) is calculated by working out how much contributions tax is payable on the actual Superannuation Guarantee contributions, or other types of concessional contributions (such as your own before-tax contributions), and then refunding this amount as a payment to the individual’s super account.

For example, if an individual earns $30,000 as an employee in ordinary time earnings, the employer must pay the equivalent of 9.5% of the $30,000, that is, $2,850 annually, as quarterly SG contributions. Contributions tax of $427 (rounded) is payable on the SG contributions, and the federal government would refund this tax in the following financial year. Note that for the 2017/2018, 2016/2017, 2015/2016 and 2014/2015 financial years, the SG rate is 9.5%, but for the 2012/2013 year the rate was 9.0% and for the 2013/2014 year, the rate was 9.25%.

According to the former ALP federal government, “The LISC will benefit over three times as many low-income earners as the current co-contribution, and is better targeted in boosting retirement savings. This is because low-income earners can only access the co-contribution if they make additional superannuation contributions from their income or savings, whereas all low-income earners who receive compulsory SG contributions will automatically benefit from the new initiative.”

For information on the separate co-contribution scheme see SuperGuide article, Cashing in on the co-contribution rules (2017/2018 year).

Background: Not ‘all low-income earners’ benefit from the LISC. In November 2011, the former ALP federal Government made changes as part of its strategy to keep the budget in surplus. I wrote about these changes way back in November 2011 but for completeness, those changes are:

  • Individuals who receive less than 10 per cent of their income through employment or business are not eligible, which means this will exclude many thousands of low-income earning Australians (more than 50,000 and probably more, on my calculations).
  • Originally, individuals only received a payment if their LISC entitlement was at least $20, to reduce administration costs, although based on a 2013/2014 Federal Budget measure, and according to the ATO, the minimum LISC entitlement is now $10. If a person is entitled to less than $10 in a LISC, then the LISC entitlement will be rounded up to $10. From 1 July 2017, the LISTO entitlement minimum will also be $10.

Note: The Government also introduced a verification process to remove the requirement for low-income earners to lodge a tax return solely to receive the tax refund under the LISC. Instead, the Australian Taxation Office (ATO) will verify an individual’s income using available data (such as contributions reporting from super funds). According to Government estimates, this small change in administration ensures that an additional 100,000 individuals earning up to $37,000 will receive the LISC for the 5 years that the LISC is available (and presumably a similar number of individuals will benefit from July 2017, when the super tax refund is extended beyond 30 June 2017).

What are concessional contributions for the purposes of LISTO?

Concessional contributions are also described as before-tax super contributions. In the explanatory memorandum (Chapter 6) accompanying the new legislation, the legal definition, as contained in the Income Tax Assessment Act 1997 is referred to, and the EM lists the different type of concessional contributions:

“Example of concessional contributions that will be eligible [for LISTO] include:

  • Superannuation guarantee contributions;
  • Notional taxed contributions;
  • Allocations from reserves that are concessional contributions;
  • Contributions an employer makes under a salary sacrifice arrangement; and
  • Personal contributions which are allowed as an income tax deduction.”

In relation to notional taxed contributions and allocations from reserves, the LISTO “may be payable in relation to an amount that is not an actual contribution that has been included in a fund’s assessable income as a contribution”.

Note: The explanatory memorandum explains that the LISTO will only apply for an individual’s concessional contributions that are included in the assessable income of a super fund. The EM expressly states that payments to constitutionally protected funds are excluded from LISTO entitlements. The EM also states that “an individual’s concessional contributions in relation to their defined benefit contributions to an unfunded defined benefit scheme  or an unfunded component of a partially funded defined benefit scheme would also be excluded as these amounts are also not taxed as contributions”.

For more information on the LISC rules, see SuperGuide article Superannuation tax refund: 10 things to know about LISTO.

For information on the other July 2017 changes (which were announced in the 2016 Federal Budget, and legislated in November 2016), see SuperGuide article Latest superannuation changes: 2017/2018 guide.

History: Why and when was LISC, and LISTO introduced?

Before the LISC/LISTO was introduced, lower-income earners received no tax incentives to save for retirement. The 15% contributions tax deducted from super contributions, and the 15% earnings tax deducted from super fund earnings, regardless of the level of income of Australian workers.

In some cases, Australian workers who paid less than 15 cents in the dollar in income tax, ended up being penalised tax-wise by the superannuation system. For example, you may not pay any tax on your personal income due to the level of income that you earn, but if your employer paid Superannuation Guarantee contributions into your super fund, those contributions were hit with 15% contributions tax. And any earnings from investing that money within the super system was also hit with 15% tax.

At the time of the ALP announcement in 2010 (introducing the LISC from July 2012), the marginal tax rate for those earning less than $37,000 was zero or 15 per cent. Since then, the marginal tax rate for those earning between $18,201 and $37,000 has increased to 19% from 15%, but the principle of equity still remains.

Under the super and tax rules that applied until 30 June 2012, workers on lower incomes were being financially penalised by the superannuation system rather than receiving tax incentives. According to the former ALP federal government, the introduction of the super tax refund (LISC) from July 2012 would result in 3.6 million lower-income earners (the majority being women) receiving up to $500 each year from the Government, paid directly into super accounts. In short, these Australians would not pay contributions tax on their employer’s compulsory super contributions (but these Australians will still pay 15% tax on the investment earnings when these super contributions are invested by the super funds).

I believe this change was long overdue particularly for those who pay no tax on their personal income, but are currently paying 15% tax on any employer SG contributions.

Unfortunately, until 3 May 2016, the current Coalition government had not philosophically supported the LISC and was intending to end the 5-year LISC policy on 30 June 2017. Thankfully, the Coalition government reviewed its approach and the LISC/LISTO is now available indefinitely for eligible Australians. If the Coalition had not changed its policy, the consequence of repealing the LISC, which would have been effective from the 2017/2018 year, would have meant that 3.6 million Australians would have been penalised by paying more tax on their super contributions than many of these Australians pay on their personal income.

Background: In the past, the Coalition government (and Coalition opposition) has always opposed this measure. When the Coalition government came into power in September 2013, it was forced to extend the Low Income Super Contribution (tax refund on certain super contributions) until the 2016/2017 financial year. The time extension for this refund was part of a parliamentary deal which secured passage of the repeal of the Mineral Resource Rent Tax. Under the legislation, enacted in September 2014, the LISC was payable for the 2012/2013, 2013/2014, 2014/2015, 2015/2016 and 2016/2017 years only. The Liberals originally hoped it would only be payable for the 2012/2013 year.

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Reader Interactions

Comments

  1. Stephen says

    April 13, 2016 at 9:18 am

    It seems a bit of a fallacy to say that the LISC scheme also applies to non-SG concessional contributions, The application of the earnings test denies at least one source of non-SG concessional contributions from eligibility for the LISC; individuals who receive less than 10 per cent of their income through employment or business.

    Reply
  2. Monika says

    September 5, 2014 at 4:21 pm

    I earn all my income from my home which is rented out, as well as a small interest bearing bank account. I currently earn less than $18,000pa. So I don’t earn enough at present to pay income tax. What little super my employer contributed, was long ago eaten up by fees. So I don’t have any super. If I put any money into Super myself, my super earnings would be taxed at 15% and I would be worse off. I was not entitled to the super co-contribution as I wasn’t employed since the scheme was introduced…

    I think it is very unfair that only Superannuation income is tax free when you are over 60. If my rental income increases I will have to pay tax, regardless of the fact that I earn very little, simply because I looked after my own investments by putting my money into a home. This is my own form of Superannuation which is not recognised as such by the government. I am still pleased that I looked after my own funds, and bought a house. The government constantly changes the Super rules, and makes it difficult to access your own money. And funds charge a management fee but often lose a large part of your capital. Super is simply a government sanctioned tax rort for high income earners. Low income earners receive no benefits – and if you gave up work many years ago, like many housewives did, any money you invested won’t be through super anyway.

    Reply
  3. Hermes says

    July 9, 2011 at 10:53 pm

    Not sure if this policy will have much impact as I am not sure if there are many people earning under $37000 who actually make concessional contributions to super. I would imagine if you earned that much you’d need every cent just to cover basic expenses.

    Reply
    • Simon says

      July 24, 2012 at 4:06 pm

      Hermes, while I agree that individuals on that income are unlikely to make salary sacrifice contributions, those contributions made by your employer ARE concessional contributions, so the refund of contributions tax will make a big difference over someones 30-40 year working life.

      Reply
    • Roland says

      September 3, 2014 at 6:17 pm

      Hermes, with casualisation of the work force and severe under-unemployment, you will be surprised to learn that many people do appreciate the LISC. Actually, it is an equity issue as the low paid either don’t pay tax or they are on the lowest bracket meaning that 15% Super tax will be higher than their marginal rate!.

      Hopefully, the Abbott government will not be reelected at the next election and Labor will restore the LISC and the co-contribution.

      Reply
  4. Noelle Stuart says

    July 1, 2010 at 3:08 pm

    The Commonwealth Seniors Health Card for self-funded retirees of pension age has a maximum taxable income limit of $50 000 for singles and $80 000 for couples.These limits have applied since July 2001. This must surely be due for review after being pegged at these limits for 9 years without any indexation being applied during those years.

    Reply
    • Trish Power says

      July 2, 2010 at 2:03 pm

      Hi Noelle
      I agree with you 100% on this issue, although I suspect the introduction of tax-free super for over-60s (and excluding this super pension income from the CSHC income test – see article https://www.superguide.com.au/retirement-planning/good-news-super-pension-income-excluded-from-health-card-test , may have also influenced the Government’s decision. Even so, many current retirees missed out on the opportunities available via super, and should not be disadvantaged by the fact that their income is derived from non-super sources. I will write something on this issue in the near future.
      Regards
      Trish

      Reply
      • Daryl says

        September 3, 2014 at 1:48 pm

        If I am reading Trish’s latest newsletter correctly, this means those on low incomes will receive BACKDATED reimbursement of the Contributions Tax starting from 12/13 fin yr …. is this right?

        Reply
        • Trish Power says

          September 3, 2014 at 2:30 pm

          Hi Darryl
          Thanks for your comment. Yes, the LISC will be applicable from the 2012/2013 year until the 2016/2017 year.
          My understanding of the current legislation, is that the LISC was payable for later years as well as the 2012/2013 year, but that the Liberals had intended to repeal the ‘later years’ part with the draft legislation. The Liberals have now conceded four more years of LISC during negotiations with PUP, and it will no longer apply from July 2017, assuming the House of Reps confirms its first vote, and after royal assent.
          Regards
          Trish

          Reply

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