Note: Superannuation changes extending the Low Income Super Contribution (contributions tax refund) beyond June 2017 are now law. The relevant laws passed both houses of parliament on 23 November 2016 (and received royal assent on 29 November 2016). The LISC will be renamed the Low Income Superannuation Tax Offset, and the new law commences 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 from July 2017, the LISC has been renamed the Low Income Superannuation Tax Offset (LISTO).
From 1 July 2017, the LISC will be renamed LISTO and continue indefinitely.
What is the LISC, soon to be renamed LISTO?
Under legislation effective for financial years from 1 July 2012 through to 30 June 2017, 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 calls this refund of super tax, the Low Income Super Contribution (LISC), although from July 2017, it will be called the Low Income Superannuation Tax Offset (LISTO).
You may recall that 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 applies to non-SG concessional contributions. I explain how the LISC works later in the article.
In the past, SuperGuide has flagged that Australians paying a lower rate of income tax than the 15% contributions tax deducted from super contributions, and the 15% earnings tax deducted from super fund earnings, received no tax incentives to save for retirement. 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 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.
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 (2016/2017 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 you should know.
For information on the other July 2017 changes (which were announced in the 2016 Federal Budget, and legislated in November 2016), see SuperGuide article Super changes (July 2017): Planning ahead for the 2017/2018 year.