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Concessional contributions

Defined benefit schemes

Section: 4.8

4.8 Defined benefit schemes

In a defined benefit fund, a member's final superannuation benefit is not dependent solely on contributions and earnings. The benefits may depend on other factors, such as a member's years of service or final average salary (on retirement or termination of employment). Prior to 1 July 2017, generally no concessional contributions counted towards an unfunded defined benefit scheme, e.g., a scheme for government employees, because in such a scheme a member's benefits are not financed until just before they become payable to the member.

Different rules apply for calculating contributions depending on whether they are made to:
  • a funded defined benefit fund
  • an unfunded defined benefit fund
  • a hybrid super fund

Defined benefit interest

A defined benefit interest exists where all or part of the superannuation benefits payable to a member are defined by reference to the member's salary, a specified amount or other specified conversion factors. A superannuation interest is not a defined benefit interest if the only benefits payable in reference to a salary are death or disability benefits.

Concessional contributions from 1 July 2017

From 1 July 2017, the concessional contributions of a member who has one or more defined benefit interests is the sum of:
  • contributions and amounts that relate to their accumulation interests, if these amounts would be included in their concessional contributions
  • notional taxed contributions for the financial year in respect of each defined benefit interest, and
  • the amount by which their defined benefit contributions for the financial year exceed those notional taxed contributions.

Prior to 1 July 2017, the concessional contributions amount for a defined benefit interest was basically a member's notional taxed contributions.

Notional taxed contributions

Notional taxed contributions are the notional amounts of contributions (excluding after-tax member contributions) that relate to a member defined benefit interest. Notional taxed contributions are counted towards a member's concessional contribution cap and are added to the other concessional contributions made to a member's accumulation account in a financial year to determine whether the member's concessional contributions cap has been exceeded.

The extent of the benefit, however, varies between different sub-groups of defined benefit division members, because of the way the government designed the notional taxed contributions formula.

Notional taxed contributions formula:
1.2 x (new entrant x superannuation salary at start of financial year x days in category/ 365 - any after-tax contributions)
New entrant = These rates are determined by the date the member joined the fund and groupings of the selected member contribution rates
Super salary at start of financial year = Annual salary as of 1 July of the financial year
Days in national tax contribution category = How many days in the financial year was an accruing defined member of the benefit category
Any after-tax contributions = The amount of after-tax member contributions paid by or on behalf of the member in respect of their defined benefit component in the financial year

Special rules (grandfathering) of notional taxed contributions

For some members, it will be difficult to adjust their notional taxed contributions if the member belongs to a defined benefit scheme.

The member could be liable for excess contributions tax even though they are unable to reduce their notional taxed contributions. Therefore, special rules (grandfathering) may apply if a member joined a defined benefit fund on 5 September 2006 (the day the original contribution caps were first announced) or 12 May 2009 (the reduction in the concessional contributions caps).

If a member's notional taxed contribution in a financial year exceeds their concessional contributions cap and they qualify for the grandfathering provisions, their fund will treat their notional taxed contributions as being equal to their concessional contributions cap.

The fund is responsible for determining if a member is eligible for the grandfathering provision.

These grandfathering provisions do not apply to other employer contributions made to their defined benefit fund or other funds.

Eligibility for grandfathering

To be eligible for grandfathering:

  • for the 2007/08 and 2008/09 financial years - been a member of an eligible defined benefit on 5 September 2006 (the day the original contributions caps were first announced)
  • for the 2009/10 financial year onwards - been a member of an eligible defined benefit fund on 12 My 2009 (the reduction in the concessional contribution caps)
  • not had a substantial change to the rules that apply to their benefit since that date
  • not had a non-arm's length change to their super salary of more than 50% in a year or 75% in three years since that date
  • notional taxed contributions in a financial year in excess of the concessional contributions cap
  • met other conditions specified in the regulations.

The grandfathering arrangement may not apply if their fund makes changes to its benefit rules. However, certain minor changes may still allow the grandfathering arrangement to continue.

If a transfer from a defined benefit fund to another defined fund, and continue to meet the requirements, they may still be entitled to the grandfathering arrangements in the new fund (for instance, where the funds provide equivalent rights to members).

The grandfathering provisions do not apply to a super interest in a constitutionally protected fund.

Unfunded defined benefit fund

In an unfunded defined benefit fund, the benefits are not financed until just before they become payable to the member. The benefits are generally paid by their employer.

Unfunded defined benefit funds mostly cover government employees- for instance, the Commonwealth Superannuation Scheme (CSS), Public Superannuation Scheme(PSS) and the Defence Force Retirement and Death Benefits Scheme (DFRB). Many unfunded super funds also have funded components (these are known as partially unfunded).

Concessional contributions (CCs)

Concessional contributions count towards a member's concessional contributions cap. These contributions on their own cannot result in exceeding their concessional contributions cap for a financial year.

Counting unfunded defined benefit fund contributions towards a member's concessional contributions cap means that their ability to make further concessional contributions to other funds is limited. There may be tax consequences for other concessional contributions.

Non-concessional contributions (NCCs)

Non-concessional contributions made to an unfunded defined benefit fund are counted towards a member's non-concessional contributions cap.

Some unfunded defined benefit funds require a member to contribute a percentage of their salary to their super. These contributions are made from after-tax income, so they are non-concessional contributions.

Liz is a public superannuation scheme member.

She makes after-tax (NCC) contributions of $14,000 to the PSS in the 2022/23 financial year. She makes further after-tax contributions of $298,000 to another super fund.

Liz can 'bring forward' two years of contributions, giving her a non-concessional cap of (3 x the prevailing NCC cap) $110,000 x 3 = $330,000_for the 2022/23 financial year.

Her non-concessional contributions total $312,000 as it includes both the:

  • $14,000 contributed to the public superannuation scheme
  • $298,000 made to the other super fund.

Therefore, Liz exceeded her non-concessional contributions cap by $2,000 and has to pay excess non-concessional contributions tax on this amount. Liz's available cap for the next two years is now $0.

Source: adapted from ATO

This technical resource is intended for the use of financial advisers only. It is current as at the date of publication but may be subject to change. This publication has been prepared without taking into account a potential investor's objectives, financial situation, needs or objectives. Before making a recommendation based on this material, you should consider its appropriateness based on the client's objectives, financial situation and needs. Rainmaker Group is not a registered tax agent under the Tax Agent Services Act 2009. Your client should refer to a registered tax agent before relying on information published herein that may impact their tax obligations, liabilities or entitlements.

Last modified: Wednesday, June 28, 2023