Must the fund issue a PAYG summary? Does the individual need to report the payments in their personal tax return? Are they still eligible for the untaxed element tax offset?
Fund PAYG Summary requirements
Where an MLP meets the definition of a Capped Defined Benefit Income Stream (CDBIS), the paying fund is required to issue a PAYG Summary.
An MLP will be a CDBIS if it commenced prior to 1 July 2017 and the recipient is:
- over age 60, or
- the beneficiary of a death benefit MLP where the deceased was over age 60.
A PAYG summary must be issued, even if the withholding amount is NIL. Why?
The introduction of the Transfer Balance Cap limited the amount that could be transferred to retirement phase, and individuals with more than the allowed amount were required to return the excess to accumulation.
However, MLPs and similar income streams, are prohibited from being returned to accumulation. To create a broadly similar limited tax concession for these types of pensions, a $100,000 pa defined benefit income cap was introduced. This cap is applied at the individual level.
As the trustee of a superannuation fund has no way of knowing what other CDBIS payments an individual may be receiving, they are required to issue a PAYG summary and the individual is then responsible for determining what to report in their personal tax return.
Individual return & CDBIS payments – to include or not?
Below age 60 for entire year
For individuals aged under 60 receiving their own pensions or in receipt of death benefit pensions where the deceased was under age 60 at the time of passing, there have been no reporting changes. Total taxable, untaxed and tax withheld figures for all pensions should be reported at Item 7.
Aged over 60 for entire year and pension held for whole year
Individuals aged over 60 for the entire year will generally only receive a PAYG summary for a pension if that pension:
- meets the definition of a CDBIS, or
- has an untaxed element.
Simply receiving a payment summary for a CDBIS does not mean an amount always needs to be included in the individual’s income tax return. An amount only needs to be included if:
- the sum of all of the individual’s CDBIS amounts (both tax free & taxed elements) exceeds $100,000. The amount to include is then 50% of the excess above $100,000 (label 7M), or
- the individual has an untaxed element (label 7Z).
Receiving own MLP & turned 60 during the year OR aged below 60 and in receipt of death benefit MLP where deceased was over age 60 at death
Individuals in this category may have a reduced defined benefit income cap to reflect that some of the payments they received were not concessionally taxed. This is discussed in detail in Law Companion Ruling 2016/10 and the 2018 Individual Tax Return Instructions (QC 54214).
Very simply, the $100,000 cap is prorated to only capture the period of tax concession. Similarly, the reportable amount will be half the amount that exceeds the reduced income cap received during the period of the tax concession. For example, if you turn 60 during the year, it only includes the payments received after reaching age 60.
What about the untaxed element tax offset? It’s not showing on the PAYG summary anymore – can it still be claimed?
Similar to the PAYG summary requirement, as the trustee of a superannuation fund has no way of knowing what other CDBIS payments an individual may be receiving, they cannot determine what offset eligibility an individual may have as it too is now affected by the defined benefit income cap. As a result, this figure is no longer provided on the PAYG summary for CDBISs.
Each individual may still be eligible for the offset but must self-assess their eligibility and complete the tax return appropriately at Item T2.
Where the sum of the taxed and tax-free components of the CDBIS payments exceeds $100,000, there is no offset available on the untaxed element.
Where the sum of the taxed and tax-free components of the CDBIS payments is below $100,000, an offset is available on the difference between that total and the individual’s defined benefit income cap (which may not be the full $100,000 for all pensioners).