Low Income Earners Government Contribution

In June 2011 the Government released a consultation paper on the proposed operation and design of the 2010 Federal Budget proposal for a low income earners Government contribution.

Under this measure, the Government will provide a superannuation payment of up to $500 annually for eligible low income earners.

The amount payable under this measure will be calculated by applying a 15 per cent rate to the concessional superannuation contributions made by or for eligible individuals on adjusted taxable incomes (ATI) of up to $37,000 (not indexed), with an annual maximum amount payable of $500 (not indexed).

This measure will offset the super contributions tax thereby creating equity for low income individuals making pre-tax contributions to super and will take effect from the 2012/2013 financial year.

Eligibility: The following eligibility requirements have been proposed:

• No age test will apply.
• The measure will apply to all individuals except temporary residents. Temporary residents who are New Zealand citizens will be eligible for the payment.
• An individual must make or receive concessional superannuation contributions and have lodged an income tax return for the relevant income year.
• An individual must have less than or equal to $37,000 adjusted taxable income (ATI) for the income year.

Excluded amounts: The following concessional superannuation contributions will not qualify for the payment:

• taxable components of directed termination payments;
• non contribution amounts allocated by superannuation providers, including allocations from reserves;
• contributions made into an account where no tax file number has been quoted.

Treatment of the payment: The Government contribution will:

• not be subject to tax in the hands of the superannuation fund;
• be treated as a tax free component when ultimately paid as part of a benefit from the superannuation provider;
• not count towards either the concessional cap or the non-concessional cap;
• be preserved;
• not count towards any social security income tests; and
• not need to be included in the individual's income tax return.

The administration arrangements will largely mirror the arrangements in place for the existing Government co-contribution.

Possible issues and opportunities: It is not clear how those who don't lodge tax returns will receive the benefit of the new co-contribution. This is likely to become important given the Government's proposal to raise the tax free threshold to $18,000 in future income years.

It will also be interesting to see whether the $37,000 threshold is indexed in line with any changes to the relevant marginal tax rate threshold.

It also brings into play the use of the family superannuation fund to benefit children to increase the assets and benefits of children if structured correctly.