In 1993 an incumbent Prime Minister was facing an 'unwinnable' election, so he promised cuts in the income tax rate to match those being offered by the opposition. To the surprise of the general population (and more than a few prominent political commentators), he won the election, which left him with the problem of funding as many of those tax cuts as possible.

One of the solutions was to get superannuation funds to pay 15% tax on their previously exempt income. This was portrayed, as merely asking the funds to pay part of the tax their members would pay when they started receiving their pensions (or took their lump sums as eligible retiring allowances).

Because the pensions now received by members of superannuation funds had effectively been reduced by this tax, it was decided that any tax those members then paid on those pensions or lump sums should receive a 15% rebate.

(This is similar to the way the dividend imputation system works. The company uses money to pay tax which otherwise would have found its way into the dividends received by the shareholders. So a rebate is allowed against the tax those shareholders pay on the dividend income to represent the company tax their company paid which otherwise would have been their dividend income)

And which is either

In other words, you do not get the rebate unless you are over 55 or in receipt of a death or disability pension

Moreover, the rebate is quarantined to that part of the pension, which does not exceed the Reasonable Benefit Limit for the taxpayer.

The superannuation provisions of the income tax law provide some generous tax shelters. There are some provisions, which ensure that they are not overly generous. The most notable of these is Reasonable Benefit Limit, which seeks to place a limit on the amount of tax shelter that can be gained by making superannuation contributions. (Refer CCH Master Tax Guide para 11-350)

For the 1998 income year, the reasonable benefit limit for pension is $909,435 and the reasonable benefit limit for a lump sum is $454,718.

To work out the reasonable benefit level of a pension the following formula is applied.

To keep things simple, let's assume there is no undeducted purchase price or residual capital value.

Let's say the first payment was $100.

The annualised value of that pension would be 100 * 52 weeks in a year = $5200

So we would then look up the pension valuation factor in Superannuation Industry Supervision Regulations - Schedule 1B. If you are a little overwhelmed by all this, think of the figures in this table, as estimates of life expectancy. We will assume that

If you look in the table below you will see that the pension valuation factor is 14 for such a pensioner. So in our example we would multiply $5200 by 14 to get a reasonable benefit limit $72,800. This is well below the maximum for the 1998 income year of $909,435.

Indexation rate of at least 7% but less than 8%

Age next birthday of recipient on commencement day of pension

Refer CCH Master Tax Guide paragraph 11-400 for further details.

The 15% Rebate allowed against income from

Let's consider the first of those - the rebatable superannuation pension.

A rebatable superannuation pension is one for which

This is an annuity