Top marginal tax rate on early access to superannuation?

Nest egg, superannuaiton, SMSF, retirement
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Top marginal tax rate on illegal early access to superannuation benefitsCurrently people who illegally access their superannuation balance early pay tax on the amount at their marginal tax rates, plus the medicare levy.

However it was a recommendation of the Cooper Review  that this be tightened to further discourage illegal early access of super, with such amounts to be taxed at the top marginal tax rate:

“Recommendation 8.25

The Government should amend existing tax laws so that:

  1. (a)  amounts illegally early released be taxed at the superannuation non‐complying tax rate; and
  2. (b)  an additional penalty, based on a sliding scale of penalties that takes into account the individual circumstances, should apply.”

The Cooper Review panel came to this conclusion because the amount of tax payable on illegally early-accessed superannuation funds depends on the income of the individual, not the act of breaching the preservation rules and cashing restrictions. Such a person would still have the benefit of the remaining funds accessed early, though there are other penalties available, and so the panel thought that:

“Tax rates and penalties need to be amended to ensure there is both a greater deterrence factor and to ensure that those committing illegal early release do not enjoy the same treatment as those who legally get early release of their superannuation”.

Then, in August 2012, the Treasury conducted a consultation on draft legislation to penalise early access scheme promoters and impose a higher tax rate for people receiving illegally early accessed superannuation benefits. This found support from the AIST, IPA and SPAA, with AIST also wanting the additional penalty as recommended by the Cooper Review, and the IPA wanting the ATO to be given the discretion to remit the tax where people may have been misled into an early access scheme.

These suggestions weren’t taken up, and the Income Tax Rates Amendment (Unlawful Payments from Regulated Superannuation Funds) Bill 2012 was introduced to the Parliament in November 2012 by the previous Labor Government. This bill would have changed the tax rate applying to illegal early access super to 45% – the top marginal tax rate at the time, as the then Minister for Financial Services and Superannuation Bill Shorten said about the bill:

“This measure delivers on the government’s announcement that it would impose the superannuation non-complying fund rate of 45 per cent on those amounts that are released early from superannuation by illegal means. This, combined with stronger sanctions, will provide an effective deterrent to the illegal early release of superannuation.”

This bill was part of a number of measures implementing recommendations from the Cooper Review – including rectification directions, education directions and administrative penalties under the Superannuation Legislation Amendment (Reducing Illegal Early Release and Other Measures) Bill 2012. However both these bills lapsed at dissolution of the last parliament.

In December 2013 then assistant treasurer Arthur Sinodinos added the measure to the list of Do Not Proceed superannuation changes :

Stronger Super — unlawful payments from regulated superannuation funds — income tax rates amendment. Taxes super benefits received illegally at 45 per cent plus Medicare levy.This measure was funded from the levy imposed on self-managed superannuation funds. The decision not to proceed with this measure will be taken into account when the amount of the levy is next considered.”

So, when the rectification/education directions, admin penalties and penalties for illegal early access super were reintroduced, and passed, as part of the Tax and Superannuation Laws Amendment (2014 Measures No. 1) Bill 2014 the tax rate changes for illegal early accessed super were not included. This despite a recommendation from the panel reviewing the superannuation system, a consultation process – in which the measure was supported by industry, and legislation already drafted.


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