Defined Benefit plans - how contributions work


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 are in the defined benefits fund.

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 in advance of their retirement. 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 1st July 2014. A cap of $35,000 applies for those aged 49 and over at 1 July 2014.

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. In addition, this excess amount 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 is 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 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 on the Australian Taxation Office (ATO) website.

The government has proposed that excess non-concessional contributions made from 1 July 2013 will be able to be withdrawn, without penalty, along with any 'associated earnings'.

More information

If you have any questions about defined benefits or notional contributions, please contact us.

This information has been prepared by Mercer Outsourcing (Australia) Pty Ltd (MOAPL) ABN 83 068 908 912, Australian Financial Services Licence #411980. Any advice contained in this document is of a general nature only, and does not take into account the personal needs and circumstances of any particular individual. Prior to acting on any information contained in this document, you need to take into account your own financial circumstances, consider the Product Disclosure Statement for any product you are considering, and seek professional advice from a licensed, or appropriately authorised, financial adviser if you are unsure of what action to take. "MERCER" is a registered trademark of Mercer (Australia) Pty Ltd ABN 32 005 315 917. Copyright 2012 Mercer LLC. All rights reserved.

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