Defined Benefit Superannuation (DBS) plays a crucial role in the financial lives of many Australian Police Officers and retirees. However, navigating the taxation complexities can be challenging, not only where the superannuation entitlements are large, but in fact for very simple scenarios as well. In this article, we’ll explore common pitfalls and provide essential guidance, particularly in relation to those former Officers who have received a lump sum payment in arrears (LSPIA) for underpaid Superannuation.
Pre-Filling Information Challenges
Non-Taxable Amount Default
Many taxpayers simply rely on the ATO’s pre-filling information to prepare their returns and assume that the information is correct and complete. For those with DBS, the ATO information often defaults to include non-taxable amounts for DBS income streams. Many taxpayers are unaware of this and unaware of the need to manually change this in their returns, leading to an overstatement of income and consequently an overpayment of tax.
Manual Calculation of Tax Offset
The Australian Superannuation Income Stream tax offset is another item which requires manual calculation and inclusion in the tax return. Our experience suggests that many self-lodgers and even some accountants overlook this step and do not know the ins and outs of this offset and the annual limit that applies. For the 2023/24 income year, someone entitled to an offset equal to the limit of $11,875, who has not included this, will have overpaid tax by the same amount.
Back Payment of Superannuation
Lump Sum Payments in Arrears
Over the last few income years, the Australian Federal Police has made a number of lump sum payments to retired Officers who did not have certain allowances included in calculating their superannuation entitlements. In many cases, these payments have been hundreds of thousands of dollars. These irregular payments impact tax reporting as they are received and declared in the one income year, which pushes most recipients into a higher tax bracket in the majority of these scenarios. A Lump Sum in Arrears Tax Offset is available to right this wrong (in conjunction with the Australian Superannuation Income Stream Tax Offset). There are also concessions available that may reduce additional tax arising from the Medicare Levy and the Medicare Levy Surcharge applying to these taxpayers that are pushed into these higher tax brackets simply due to receiving these once off lump sum payments.
However, sole reliance on ATO pre-filling information will lead to taxation positions far above what they should be. We are also aware that even where items have been included at the correct labels, the ATO’s systems are not able to correctly calculate the available offsets. This has resulted in many returns being processed without including the relevant offsets, leaving Officers tens of thousands of dollars out of pocket.
Getting the Right Return
Nexis Accountants has been working with our retired AFP clients and the ATO to ensure their returns are completed correctly and flagged with the ATO for manual processing to ensure that all eligible offsets are included in the return.
In the event you have already lodged your return, Nexis can assist in amending and/or objecting to the assessment already issued by the ATO.
If you have any questions call our specialist DBS taxation accountants and we can ensure you are getting the refund that you are entitled to.
