Priority Protection
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{{label}}17 April 2018
At AIA we know the importance of having access to technical experts to help you provide exceptional service and grow your business. AIA's Technical Education Centre of Excellence (TECE) is here to do just that. For today's tip learn more about the Eligible Service Date (ESD), and how it determines the tax payable calculation for your clients who make a claim on a policy they hold within their superannuation fund.
What is the Eligible Service Date (ESD)?
The ATO defines ESD (also known as service period start date) on their website as:
1. the first day of the first period of employment that the lump sum relates to if the member was employed when some or all of the lump sum accrued
2. the earlier of the following if the member was not employed when some or all of the lump sum accrued;
What does this mean?
The ESD is the earliest date that can be attributed to the superannuation benefit, whether by first date of fund membership, first date of employment relating to a contribution, or by rollover from a fund with an earlier ESD.
Here is an example of how the ESD is recorded from fund to fund.
Andrew is 17 years old and has started work on 01/02/2005 with his first employer, First Choice Employment Pty Ltd and is eligible to receive superannuation contributions. Andrew does not make a choice regarding here his superannuation should be paid because he does not have an existing superannuation account and has not applied to become a member of a particular fund. First Choice Employment Pty Ltd makes a payment to their nominated default fund ABC Super Fund. Due to quarterly payment obligations for employers, this payment is made to ABC Super Fund on 28/04/2006.
On 25/07/2010, Andrew starts work with a new employer, General Consulting Services Pty Ltd, however he forgets to nominate a super fund. General Consulting Services Pty Ltd makes payment to their default super fund, Super for Life on 28/10/2010
On 01/07/2015, Andrew applies for a Public Offer superannuation account with Self-Employed Super and commences working as sole-trader. He makes regular, tax deductible payments to this fund, however he does not organise to roll over any funds held with ABC Super Fund or Super for Life.
On 15/02/2016 Andrew decided to start a Self-Managed super fund – Andrews Family Self-Managed Fund. He establishes the account by rolling over the funds from Self-Employed Super and he also remembers his first super account with ABC Super Fund. On 01/03/2016, he receives the rollovers into his SMSF from both Self-Employed and ABC Super Fund.
On 22/10/2017 Andrew remembers to roll-in funds from Super for Life. He receives the funds on 02/11/2017. The ESD that was held with Super for Life is 25/07/2010 and the ESD currently recorded for his SMSF is 01/02/2005.
Why is this relevant?
The service period start date is used in calculating tax on lump sum superannuation benefits payable on death or total and permanent disablement (TPD) and is an important consideration for clients with insurance cover held inside superannuation. The service period in the fund holding the insurance can impact the amount of tax payable on any insured benefits paid from the fund.
What is the impact on insured benefits?
When a superannuation benefit for:
Then the service period is used to calculate the tax components of the benefit.
The taxable component of the death benefit will be split into elements taxed and untaxed in proportion to the insured persons ‘actual’ and ‘future service’. The element taxed represents the insured persons ‘actual service’ period, which is calculated from the service period start date (ESD) of their superannuation interest to their date of either TPD or death. The ‘element untaxed’ represents the deceased’s ‘future service’ period, which is calculated from their date either TPD or death until what their expected retirement date would be (generally age 65).
Summary
If the eligible start date on the rollover is earlier than that recorded on the receiving fund, the ESD will be updated; if the ESD is later than that recorded on the receiving fund, there will be no change to the ESD.