Classic Texts in Australian and International Taxation Law

Background and Present Legislation

21.10. Figures released by the Australian Bureau of Statistics indicate that, as at February 1974, of the civilian work force approximately 1.65 million, or 28.7 per cent, were covered by a superannuation or pension-type scheme. The total number of such schemes in operation is not known but is very large, as are the variety and scope of the benefits provided.

21.11. It is important to recognise that most schemes have been established voluntarily by employers to provide for the needs of their employees who retire or the needs of the dependants of those who die while in employment. Any reform of the law directed to the curtailment of abuses in this area should not be such as to discourage employers from continuing to provide for these needs.

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21.12. The Committee is also mindful of the effect of inflation on superannuation schemes, particularly of the benefit promise type. If wages and salaries continue to rise at current rates, considerable strain will be felt by many funds in meeting objectives and that strain will be reflected in the contributions required to be made by, or on behalf of, employees.

Taxation of Lump-sum Payments on Retirement

21.13. Section 26 (d) of the Income Tax Assessment Act includes in the assessable income of a taxpayer:

‘(d) five per centum of the capital amount of any allowance, gratuity or compensation where that amount is paid in a lump sum in consequence of the retirement from, or the termination of, any office or employment, and whether so paid voluntarily, by agreement or by compulsion of law …’.

21.14. Section 26 (e) of the Act includes in the assessable income of a taxpayer:

‘(e) the value to the taxpayer of all allowances, gratuities, compensations, benefits, bonuses and premiums allowed, given or granted to him in respect of, or for or in relation directly or indirectly to, any employment of or services rendered by him, whether so allowed, given or granted in money, goods, land, meals, sustenance, the use of premises or quarters or otherwise:

Provided that this paragraph shall not apply to any allowance, gratuity or compensation which is included in the last preceding paragraph …’.

21.15. The effect of section 26 (d), when taken in conjunction with the proviso to section 26 (e), is twofold. Firstly, it includes in assessable income 5 per cent of lump sums that would otherwise be regarded as wholly capital receipts. Examples of such receipts are payments from the trustees of a superannuation fund and compensation for loss of office. Secondly, it includes in assessable income only 5 per cent of lump sums that would otherwise be regarded as assessable in full under either general law principles or under the specific provisions of the first part of section 26 (e). Examples of this latter type of receipt are retiring allowances paid directly by an employer to a retiring employee (including such items as accrued long-service leave and holiday pay) and payments made under a service contract that provides for payment of a lump sum at the satisfactory conclusion of the contract.

21.16. The principle inherent in section 26 (d) of assessing only 5 per cent of a lump sum received on retirement has been followed ever since income tax was first levied by the Australian Government in 1915. The choice of the figure of 5 per cent was plainly arbitrary and reflected in part the inequity of taxing such a sum wholly in the year of receipt when it may have arisen from employment stretching over many years.

21.17. There are no limitations on the amount of any receipt to which section 26 (d) is applicable, nor is there any restriction on the number of occasions on which it may be applied. Thus it is open to a taxpayer who is employed by one of a number of related companies to resign and move to another company within the group and collect a substantial retiring allowance from the first employer which will be assessable only as to 5 per cent. Instances of this happening have been brought to the attention of the Committee where the amounts involved, and the consequent cost to the Revenue, have been extremely large.

21.18. Some control over the application of section 26 (d) in the case of a private company is provided by section 109 of the Act:

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‘109. So much of a sum paid or credited by a private company to a person who is or has been a shareholder or director of the company or a relative of a shareholder or director, being, or purporting to be—

(a) …
(b) an allowance, gratuity or compensation in consequence of the retirement of that person from an office or employment held by him in that company, or upon the termination of any such office or employment,

as exceeds an amount which, in the opinion of the Commissioner, is reasonable, shall not be an allowable deduction and shall … be deemed to be a dividend paid by the company on the last day of the year of income of the company in which the sum is paid or credited.’

21.19. However, the Commissioner cannot make use of this section if the person receiving the retiring allowance is not within the class of persons prescribed in the section or if the company concerned is a public company.

21.20. Section 26 (d) was examined in the early 1950s by the Spooner Committee which recommended that the operation of the section be limited by restricting the concessional basis of taxation to so much of the retiring allowance as might be regarded as reasonable, having regard to remuneration and length of service. In effect the formula for assessment of retiring allowances and payments from superannuation funds proposed by that Committee was that the amount taxable on the concessional basis be limited to the equivalent of one year's salary for every eight years of service and should not, in any case, be allowed to exceed $30,000. The Spooner Committee further recommended that any payments received by an employee as consideration for entering into a restrictive covenant should be assessable in full, but, somewhat anomalously, recommended that any amounts received by an employee as compensation or damages for the termination of his employment should continue to be assessable only as to 5 per cent and without any limit on the amount received.

21.21. The Government decided to adopt the Spooner Committee's recommendations in principle and proceeded to implement a less generous version of the proposal. The Government's intention was that the amount subject to the 5 per cent basis of taxation be limited to one year's salary for every twenty years of service, with an upper limit of $20,000.

21.22. A Bill that would have given effect to this intention was introduced into the House of Representatives in 1952, but aroused much opposition. The principal ground of objection was that reputable private superannuation schemes had been operating for many years on the assumption that senior executives would be paid lump-sum amounts on retirement which would be substantially in excess of the amounts provided in the formula. If the excess were to be taxed in full, the application of the progressive graduated rate of tax to very large amounts received in a single year of income could result in most of the lump sum being lost in tax. It was contended that this would defeat the legitimate expectations of taxpayers who had been contributing to superannuation funds over a long period on the assumption that they would receive a lump sum on retirement, 95 per cent of which would be tax free.

21.23. As a result of these objections, the clause relating to retirement allowances was deleted from the Bill.

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21.24. The Ligertwood Committee, though aware of the previous Committee's recommendations on the matter, did not mention section 26 (d) in its 1961 report—probably because of what had transpired previously.

Deductibility of Retiring Allowances Paid by Employers

21.25. Amounts paid directly by an employer to a terminating employee, or to the dependants of a deceased employee, are at present an allowable deduction to the employer under either section 51 (1) of the Act, which provides that:

‘51 (1) All losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income, shall be allowable deductions except to the extent to which they are losses or outgoings of capital, or of a capital, private or domestic nature, or are incurred in relation to the gaining or production of exempt income’,

or under section 78 (1) (c), which provides that:

‘78 (1) The following shall … be allowable deductions:

(a) …
(b) …
(c) Sums which are not otherwise allowable deductions and are paid by the taxpayer during the year of income as pensions, gratuities or retiring allowances to persons who are or have been employees or dependants of employees, to the extent to which, in the opinion of the Commissioner, those sums are paid in good faith in consideration of the past services of the employees in any business operations which were carried on by the taxpayer for the purpose of gaining or producing assessable income.’

21.26. Certain lump sums paid to terminating employees have always been considered to be allowable deductions under section 51 (1). These include accrued holiday and long-service leave pay and certain payments made under service contracts. To the extent that other payments were regarded as being deductible it had been the practice of the Commissioner—in line with what was thought to be the intention of the legislature evinced from the words in section 78 (1) (c)—to apply similar standards of reasonableness in determining the amount of the deduction as those now applied in determining the maximum benefit that may be provided by a tax-exempt superannuation fund under section 23F (2) (h) of the Act.

21.27. However, it has lately become clear that the Commissioner is unable to resist claims that section 51 (1) authorises the full deduction of retiring allowances paid by public companies where it can be established that the payments are made for one or more of the following reasons:

(a) as a matter of commercial expediency in order to establish harmonious relationships between the management and staff;
(b) as a means of ensuring greater efficiency; or
(c) as a means of inducing executives to press themselves to the limit by giving them the prospect of being treated generously on their retirement.

Once the company has established that the payment was made for one or more of these reasons—and in practice it is not difficult to establish this—then the quantum of the lump-sum payment is for the company itself to determine and it must be allowed a deduction for the full amount. Instances of amounts of up to $250,000 being paid by

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public companies to retiring executives and deducted under section 51 (1) have been brought to the notice of the Committee. In some of these cases the executives have also received very large amounts from the companies’ superannuation funds and also under service contracts. The amounts received by the executives are reported to have been assessable only as to 5 per cent in their hands.

21.28. It is to be noted that the foregoing applies not only to employees of public companies, but also to arm's length employees of private companies. However, section 109 of the Act imposes an effective limit on the deduction that can be claimed for a retiring allowance paid to a person who is or has been a shareholder or director of a private company or a relative of a shareholder or director. In addition, section 65 gives the Commissioner power to disallow a deduction for a retiring allowance paid by a non-corporate employer to a relative to the extent that the retiring allowance is excessive.

21.29. Even if the deduction is claimed under section 78 (1) (c), the Commissioner may be unable to challenge the amount of the payment. If the payment is made by a public company and approval for the payment has been granted by the shareholders in general meeting, then the Commissioner would be hard-pressed to superimpose his opinion as to the reason for, or the amount of, the payment.

Deductibility of Contributions to Superannuation Funds

21.30. Contributions by an individual to a superannuation fund for the benefit of himself or his spouse or child are a concessional deduction under section 82H of the Act. Such contributions when aggregated with life insurance premiums and payments to friendly societies are subject to a maximum deduction of $1,200.

21.31. Concessional treatment of personal contributions to superannuation funds can be traced back to the first time income tax was levied by the Australian Government in 1915. From that year until 1935 superannuation contributions were a concessional deduction subject initially to a maximum of $100, but from 1922 a maximum of $200 applied. From 1936 to 1941 superannuation contributions and life insurance premiums were amalgamated with an overall maximum deduction of $200. From 1942 to 1951 concessional rebates of tax were substituted for concessional deductions against income and the maximum amount on which a rebate was allowed remained at $200, raised in 1950 to $300. Concessional deductions were reintroduced in 1951 and the maximum deduction increased to $400. This maximum was increased to $600 in 1957, $800 in 1960 and to the present level of $1,200 in 1968.

21.32. In 1973 section 82H was amended to restrict the availability of the deduction for personal superannuation contributions to cases where the contribution was made to a fund that had been approved by the Commissioner for the purpose of total or partial exemption from tax of the income of the fund. This was done in order to prevent abuses of section 82H whereby funds that were superannuation funds in name only were being set up by individual taxpayers who would make contributions to the fund, claim a deduction and then terminate the fund and withdraw their contributions.

21.33. Deductibility of contributions by employers to superannuation funds for the benefit of their employees is governed by the provisions of sections 82AAA-82AAR of the Act. These sections, some of which are exceedingly complex, were inserted in 1964 and 1965 largely as a result of the Report of the Ligertwood Committee. That Committee detailed abuses which had developed as a result of the then section 66

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(governing deductibility of contributions by employers) and section 79 (governing deductibility of contributions by persons other than employers).

21.34. In summary, the provisions of sections 82AAA-82AAR provide for the deductibility of amounts set aside or paid as or to a fund by an employer for the purpose of making provision for superannuation benefits for an eligible employee or his dependants (section 82AAC). It is to be noted that the deduction is available regardless of whether or not the fund concerned is one that complies with the requirements necessary for partial or total exemption from tax of the fund's income.

21.35. By section 82AAE the amount of the deduction available in respect of each employee is limited in any year to the greater of $400 or 5 per cent of the employee's remuneration in that year. However, this limitation is of little practical significance since the Commissioner is given power to allow the deduction of a greater amount if he considers that there are special circumstances justifying such greater deduction. The Commissioner exercises this power in such a way that, since 1970, the amount which will be allowed as a deduction is the amount (or rate of contribution) which, when aggregated with the contributions, if any, being made by the employee, will produce an end-benefit that is ‘reasonable’ for the purposes of section 23F (2) (h) (see later). These amounts will often be extremely large, particularly where the maximum permissible benefit is being funded over a relatively short period for an executive close to retirement. Deductions in excess of the employee's annual salary are not unusual in these circumstances.

21.36. Self-employed persons are disadvantaged by comparison with employees since they are restricted to claiming a deduction for personal superannuation contributions under section 82H which imposes a limit of $1,200 on deductions for superannuation contributions and life insurance premiums. Employees may receive the benefit both of the section 82H deduction and of contributions made on their behalf to a superannuation fund by their employer. The Ligertwood Committee recommended that self-employed persons be allowed an additional deduction, over and above the section 82H deduction, of $400 per annum for contributions to superannuation funds set up to cater specifically for the self-employed. However, this recommendation has never been implemented.

Taxation of Income of Superannuation Funds

21.37. There are a number of provisions in the Act governing the total or partial exemption from tax of the income of superannuation funds.

21.38. Section 23 (jaa) exempts from tax the income of a superannuation fund established by:

‘(i) an Act, a State Act or an Ordinance of a Territory of the Commonwealth; or

(ii) a municipal corporation, other local governing body or public authority constituted by or under an Act, a State Act, or an Ordinance of a Territory of the Commonwealth’.

No conditions are prescribed for the exemption of the income of such a fund.

21.39. Section 23 (ja), which was inserted in the Act in 1952, exempts from tax the income of a superannuation fund established for the benefit of self-employed persons where:

(a) the number of members of the fund is not less than twenty; and
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(b) ‘the terms and conditions applicable to the fund … have been approved by the Commissioner, having regard to the classes of persons who are eligible for membership, the reasonableness of the benefits provided for, the amount of the fund in relation to those benefits and such other matters as the Commissioner thinks fit’.

The Commissioner has set out guidelines for the approval of funds under section 23 (ja) and these include a restriction on the maximum permissible benefit to $100,000 and a limitation on the maximum contribution which a member may make in any one year, ranging from $1,200 where the member is under forty years of age up to $2,800 where the member is over fifty-five. In addition, such a fund must comply with the provisions of section 121C in regard to the maintenance of a minimum proportion of its assets in public sector securities in order to qualify for exemption. At least 30 per cent of the increase in the assets of the fund since 1 March 1961 (at cost price) must be invested in public sector securities, with at least 20 per cent being invested in Australian Government securities—the so-called ‘30/20 ratio’.

21.40. Section 23 (jb) exempts the interest and dividend income derived in Australia by a foreign superannuation fund. No conditions are prescribed for this exemption.

21.41. Section 23F governs the exemption of the income of ‘conventional’ private sector superannuation funds set up by employers for the benefit of their employees. This section was inserted in the Act in 1964 and amended in 1965 and was largely the result of recommendations contained in the Report of the Ligertwood Committee. That Committee had found that the earlier provision—section 23 (j) (the predecessor of which dates back to 1915)—which simply exempted the income of such funds, was being seriously abused. In particular such funds were being used as recipients for private company dividends that would otherwise have borne tax in the hands of shareholders (who were of course members of the superannuation fund as well). The present section 23F closely parallels sections 82AAA-82AAR in many respects, including the complexity of its provisions.

21.42. The main requirements for approval of a superannuation fund under section 23F and the exemption from tax of its income under section 121C are:

(a) The fund must be established and maintained solely for the provision of superannuation benefits for employees in the event of their retirement or in other circumstances of a kind approved by the Commissioner, or the provision of benefits for the dependants of employees in the event of death.
(b) The employer(s) must contribute to the fund and, broadly speaking, only employees and employers may contribute.
(c) Benefits forgone by an employee who leaves the service of the employer before retirement must be either applied towards providing benefits for the members (or their dependants) or dealt with in some other manner approved by the Commissioner.
(d) The benefits to be provided by the fund for an employee or his dependants must not be excessive having regard to his remuneration and length of service, to benefits which he or his dependants have received or may receive from another fund to which section 23F applies, and to such other matters as the Commissioner considers relevant. This is commonly referred to as the

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‘reasonable benefits’ test. The criteria that have been adopted for determining reasonable benefits are discussed below.
(e) The amount of the fund must not be substantially in excess of the amount required to provide the benefits, having regard to the future contributions that will be made to the fund and its earning rate.
(f) Rights of members to benefits must be fully secured and members must be notified of the existence of a right to receive benefits.
(g) That part of the income of the fund comprising private company dividends will not be exempt, and will be currently liable to tax at a rate of 50 per cent, unless the Commissioner is satisfied that it would be reasonable to exempt such dividend. Broadly speaking, the dividend must have the character of an arm's length transaction to qualify for exemption.
(h) The fund must also satisfy the 30/20 ratio, outlined in paragraph 21.39, in relation to its investments.

21.43. The concept of ‘reasonable benefits’ is quite central to the operation of section 23F and, as pointed out in paragraph 21.35, the Commissioner now, as a matter of practice, applies the standards of reasonableness determined for the purposes of section 23F in stipulating the maximum deduction allowed for contributions to a fund by an employer under section 82AAE, and also, where this is possible, to retiring allowances paid by an employer and claimed as a deduction under section 78 (1) (c). The standards of reasonableness have been increased at various times since they were first introduced in 1965 and the present position, in very general terms, is that a benefit will be considered ‘reasonable’ in the following circumstances:

(a) In the case of a lump sum, if it does not exceed the lesser of $100,000 or seven times the average annual remuneration of the employee in the three years preceding retirement. In cases where seven times the average annual remuneration at retirement exceeds $100,000, the Commissioner is normally prepared to approve a higher figure—up to approximately $300,000 in the case of very highly-paid executives—but the multiple of average annual remuneration that will be approved will decline progressively from seven as the amount increases. Thus a benefit of $250,000 may be approved in a particular case but this may represent only three or four times the average annual remuneration of the executive over the three years preceding his retirement.
(b) In the case of a fund providing pension benefits on retirement, the pension must not exceed 70 per cent of the employee's average remuneration over the three years preceding his retirement. No dollar limit is set on the pension, providing the same method of calculating pension entitlement is applicable to substantially all the members of the fund.
(c) In the case of a fund providing benefits in part pension, part lump-sum form, a combination of methods (a) and (b) is used.

The above criteria apply, without any further limitations, to employees of private companies. In the case of non-arm's length employees of private companies (directors, shareholders and their relatives), the same tests apply with the two following exceptions:

(a) Where section 109 of the Act has been applied to reduce the amount of the employee's remuneration which may be claimed as a deduction, the

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remuneration so reduced will be used as the basis for calculating the maximum benefit permitted.
(b) Where the employee concerned will have had less than twenty years’ service with the company at retirement, the maximum benefit permitted will be the benefit calculated as above but reduced by the ratio that the service which will be completed at retirement bears to twenty years.

21.44. If a superannuation fund fails to qualify for exemption from tax under any of the foregoing provisions, it may nonetheless qualify for approval under section 79 which was inserted in the Act in 1965. Funds to which section 79 applies do not receive exemption from tax but instead are granted a deduction from assessable income of an amount equal to 5 per cent of the cost price of the assets of the fund. The balance of the income of the fund is liable to tax at a rate currently fixed at 50 per cent. However, by investing in assets such as shares that have a dividend yield of 5 per cent or less but high capital growth prospects, it is possible to avoid tax altogether and indeed this is the policy followed by most funds approved under this section. The main tests a fund must satisfy for approval under section 79 are:

(a) its membership must be restricted to persons following a gainful occupation either as employees or self-employed persons;
(b) it must impose restrictions on benefits and contributions which are broadly similar to those applicable to a fund approved under section 23 (ja); and
(c) no benefits may be paid out of the fund prior to a member's sixtieth birthday or his prior death or disablement.

It is to be noted that funds of this type do not have to comply with the 30/20 ratio nor must they have a minimum number of members, as is the case with a fund approved under section 23 (ja). Several large funds approved under section 79 have been set up by banks and similar institutions to cater for self-employed people or employees whose employers may not have a staff superannuation fund of their own.

21.45. A superannuation fund that fails to qualify for concessional treatment under any of the foregoing provisions will be taxed on its income under section 121DA. The rate of tax currently applicable in such cases is a flat 50 per cent.

21.46. Many superannuation funds are managed by life insurance companies and the assets of the funds comprise life policies of one type or another. Changes to the Act made in 1961 have the effect of exempting life insurance companies from tax on that part of their investment income attributable to policies issued for the purposes of tax-exempt superannuation funds. This exemption is subject to certain conditions, including compliance by the life insurance company with the 30/20 ratio in respect of all its assets. The exemption from tax on superannuation policies results in the life insurance company being able to issue these policies on more favourable terms than non-superannuation policies. One minor anomaly of these provisions is that where a policy is issued in respect of a fund approved under section 79 of the Act, the whole of the investment income attributable to that policy is exempt rather than simply the first 5 per cent of the cost price of the assets concerned. On the other hand, as the life insurance company has to comply with the 30/20 ratio in respect of such a policy, the two aspects probably balance out fairly evenly.

Taxation of Benefits Received from Superannuation Funds

21.47. A benefit received from a superannuation fund in a lump sum on the occasion of the taxpayer's termination of office or employment is assessable as to 5 per cent under section 26 (d). In the absence of this provision such a receipt would be

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regarded as a capital amount and would not be subject to tax at all. Benefits paid from a fund upon the death of a member do not come within the scope of section 26 (d) and are regarded as receipts of capital. The question of whether or not the fund is an approved one for the purpose of total or partial exemption from tax of the fund's income is not relevant in determining whether or not section 26 (d) applies to the benefit received by the member.

21.48. Pension benefits received from a superannuation fund are wholly assessable in the hands of the recipient, either on general law principles or under the specific provisions of section 26AA. This latter section includes in assessable income of a taxpayer:

‘the amount of any annuity, excluding, in the case of an annuity which has been purchased, that part of the amount of the annuity which represents the undeducted purchase price.’

The exclusion does not operate in the case of a pension or annuity provided by a superannuation fund, since either the annuity is not a purchased annuity or, if it is, there is no ‘undeducted purchase price’, unless, and to the extent that, the member had made personal contributions to the fund in excess of the limits allowed as a deduction under section 82H.

21.49. Use can however be made of section 26AA to give a substantial relief from tax on a superannuation pension. If the retiring employee receives a lump-sum benefit and then elects to use this lump sum (after meeting his tax liability on 5 per cent of the amount under section 26 (d)) to purchase an annuity from a life insurance company, section 26AA will operate to exempt from tax that part of the annuity payments representing the undeducted purchase price of the annuity. The amount to be exempted in each year is found by dividing the purchase price of the annuity by the life expectancy of the employee at the time of purchase according to the prescribed tables of expectation of life. In spite of the theoretical tax-saving advantages of such a transaction, it is seldom encountered in practice.

21.50. Where a retiring employee wishes to receive a lump-sum superannuation benefit it is possible, subject to the rules of the fund concerned, for him to avoid even the minor imposition of tax on 5 per cent of the benefit. If he elects to receive a pension and then, after one or two pension payments have been made, exercises a right to exchange the pension for a lump sum, the latter amount is not received ‘in consequence of retirement’ but in consequence of giving up a right to future income and, according to long-standing legal authorities, is a receipt of capital. This technique is now not uncommon, retiring employees from some funds that pay pensions being advised to make use of it.

21.51. Where a lump-sum benefit is received from a superannuation fund other than in consequence of termination of an office or employment, it will normally be a capital receipt and, being outside the scope of section 26 (d), will escape tax altogether. This will usually be the case with benefits received from funds approved under section 23 (ja) or section 79, since the time of receipt of the benefit will be different to the time at which the office or employment terminated and since many members of such funds are self-employed people to whom section 26 (d) will not be applicable. However, it has been held that this exemption from tax will extend to cases where lump-sum benefits are paid to persons whose employment has not been terminated. It has come to the Committee's attention that this position is being increasingly abused by people who set up funds that comply with section 23F and

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then amend the deed governing the fund to permit benefits to be paid out of the fund while members of the fund are still employed. The benefits so received are exempt from tax; and while the fund can be taxed at the rate of 50 per cent on income derived in that year, the amount involved is usually quite small and there is no power to reopen the assessments of previous years.

International Comparisons: A Brief Summary

21.52. All industrialised countries with which Australia can be compared have special tax regimes governing provision for retirement. In general and subject to a multitude of conditions, contributions to superannuation funds by employers, selfemployed persons, and, in most countries, employees are allowed as a deduction in computing assessable income. The income of superannuation funds is, again subject to a variety of conditions, exempt from tax. Thus far the present Australian position is comparable with that obtaining in other countries. However, in the treatment of benefits other than in the form of pensions flowing from superannuation funds or paid directly by an employer on retirement, the Australian tax treatment is markedly more favourable. Australia virtually stands alone in the generosity of its treatment of lump-sum retiring allowances paid to employees.

21.53. Information currently available to the Committee shows that legislation and practice in New Zealand, Canada, the United Kingdom and the United States are as follows.

21.54. The New Zealand Government, though still regarding lump-sum benefits received from superannuation funds as wholly exempt, has been forced to legislate to limit the excessive lump-sum retiring allowances paid directly to employees by their employers. Broadly speaking, the effect of section 88B of the New Zealand Land and Income Tax Act is that an employee with ten years or more service is taxable on a lump sum received in consequence of retirement as to 5 per cent to the extent it does not exceed one-third of his total remuneration for the last three years of service and in full to the extent it exceeds that amount.

21.55. In Canada there is no escape from tax on retiring allowance or superannuation benefit paid in a lump sum. However, the effect of the tax is alleviated by general income-averaging provisions and further relief can be obtained by the taxpayer, if he so desires, purchasing an income-averaging annuity contract.

21.56. In the United Kingdom, as in New Zealand, the Government was forced to act to tax large amounts paid on retirement or removal from office, especially on the occasion of take-over bids. Very broadly the provisions of the United Kingdom legislation tax the excess of the retiring allowance over £5,000 and relief is allowed for the long-service or superannuation component included in the payment. In respect of any amount chargeable to tax, relief is allowed by way of a reduction of tax which is based on the additional tax payable being spread over a period of six years. Further constraints are imposed in the United Kingdom by virtue of provisions governing the contributions to and income of superannuation funds which require that benefits must be paid predominantly in pension form if concessional treatment is to be obtained.

21.57. In the United States lump-sum payments from exempt superannuation funds are taxed as income but subject to generous forward-spreading provisions. These provisions have been significantly changed by the Pension Reform Act 1974 and form the basis for the proposals contained in paragraph 21.77 below. Other amounts received on retirement are taxable in full, subject however to the application of the

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general income-averaging provisions which are briefly described in Chapter 14 (paragraph 14.74).