Low income superannuation contribution
In recent years, the effectiveness of superannuation as a savings vehicle for low income earners has been questioned. For those who earn up to $37,000, the marginal tax rate has been 19 per cent (plus Medicare levy). Taxable contributions to superannuation are also taxed at up to 15 per cent, so there was no real tax incentive for people on lower incomes to contribute more to their super.
The Henry Review, an analysis of Australia’s future tax system published in 2009, noted that:
“ the current taxation of superannuation favours high-income earners compared to low and middle-income earners. Concessions should be distributed more equitably by including employer superannuation contributions in an individual’s income and taxing them at marginal rates.”
While the Government has not implemented this recommendation, a new benefit has been introduced for low income earners.
The low income superannuation contribution (LISC) came into effect on 1 July 2012 and effectively refunds the 15 per cent tax paid on contributions such as SG and salary sacrifice contributions for individuals with an adjusted taxable income up to $35,087 (from 1 July 2014). While the maximum refund is $500 per year, when the tax payable is less than $10, the ATO will round up the benefit to $10.
Kate earns a salary of $25,000. Over the course of a year, her employer would contribute $2,375 in SG payments ($25,000 x 9.5%). As a result of the new legislation, Kate would be entitled to an LISC payment of $356 ($2,312.50 x 15%), effectively a refund of the tax payable on the SG contribution.
An individual’s ‘adjusted taxable income’ includes their taxable income as well as a host of other benefits such as fringe benefit amounts, salary sacrifice amounts and tax-free social security pensions.
As contributions tax is paid by the super fund to the ATO, the refund is generally paid by the ATO to the individual’s super fund.
To be eligible to receive the LISC, an individual must also satisfy an income test. As the requirement is for 10 per cent or more of their total income to be derived from business or employment, certain categories of people are excluded from qualifying for the LISC.
The LISC is a new incentive and is in addition to the Government’s superannuation co-contribution. Depending on their situation, some low income earning individuals may be able to receive both benefits in the next financial year while others may only receive one or the other.