Defined Benefit plans - how contributions work

Provided by Mercer.

What is a Defined Benefit (DB) plan?

Generally there are two types of superannuation funds in Australia. Most working Australians have accumulation-style super accounts, which are called 'defined contribution' funds, however some Australians have ‘defined benefits’ super funds.

When contributing to a defined benefit fund, your employer generally does not contribute specifically for you, but contributes to the fund in general. This is known as a notional taxed contribution.

What are notional-contributions?

The final benefit paid to a member of a DB plan is defined before they retire. Generally, a retirement benefit is based on a formula, specific to the fund, which usually takes into account the member's salary at or near retirement, their age and period of employment or membership.

The employer must make sufficient contributions to the super fund to ensure that each member's retirement benefit can be met. An actuary determines the amount of contributions that the employer needs to make to the fund.

Understanding the type of super fund you have can help you manage the super contributions caps.

Concessional contributions caps and what it means for notional contributions

A cap of $30,000 applies to concessional contributions for those aged 48 and under on 30 June 2015. A cap of $35,000 applies for those aged 49 and over at 30 June 2015.

Concessional contributions are generally contributions made by your employer, salary sacrifice contributions and personal contributions for which a tax deduction is claimed. They generally attract a 15% concessional contributions tax.

Where the cap is exceeded the excess amount is added to your assessable income for the year. This may increase your personal tax liability. You may elect to withdraw up to 85% of the excess contributions to help pay this tax liability. Any excess contribution that is not withdrawn will also count as a non-concessional contribution for that tax year.

While the concessional contributions cap is the same for accumulation and defined benefit members, the amount that counts towards this cap is calculated differently.

For an accumulation fund, it's the actual contributions made for the member (plus certain amounts allocated from reserves or surplus if applicable) that count towards the cap.

For defined benefit funds, it’s not possible to directly identify the amount of contributions for individual member. Instead, a "Notional Taxed Contribution" is calculated by the super fund on its members' behalf. This amount is an estimate of the amount of contributions that would probably have been required each year to account for the eventual benefits that might be received. This calculation is used to measure against their relevant concessional contributions cap. Any additional employer or salary sacrifice contributions to an accumulation fund will also count towards the concessional contributions cap.

How you can monitor your concessional contributions

You'll need to take into account the following contributions when monitoring your concessional contributions:

  • Your notional taxed contributions
  • Any additional employer super contributions which provide accumulation benefits
  • Any additional salary sacrifice contributions you make to provide accumulation benefits and,
  • Any concessional contributions you receive in other super funds.

Your super fund's Helpline should be the first source of information regarding notional taxed contribution calculations.

Given the complexity of the regulations and the serious implications if you exceed the concessional contributions cap, defined benefit members should manage and plan their overall super contributions and retirement wealth with care.

Non-concessional contributions

Caps also apply to non-concessional contributions, which are contributions you make from after-tax income.
You'll find details of the non-concessional contributions caps here.

Excess non-concessional contributions made from 1 July 2013 can be withdrawn without penalty, along with any 'associated earnings'. Associated earnings are calculated using an assumed earnings rate equal to the 90 day bank bill rate plus 7%. These earnings will be taxed at your marginal rate, less a 15% tax offset for tax already paid on the earnings within the fund.


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