Income tax changes in Austria
A change in the tax treatment of occupational pension plans, which are financed by internal book reserves, takes effect from 1 January this year.
Individually designed occupational benefit plans for executives and salaried employees are an important tool of compensation in Austria. These benefit plans are still mainly financed by internal book reserves.
The company is required to keep reserves in the balance sheet even after an employee has retired. In some cases, the period of retirement may be longer than the period of active employment, particularly if a spouse’s pension is included.
For the retired employee, future pension payments depend on the financial strength of the company and the pension may be lost if the company goes into liquidation. This gives both company and employee a strong incentive to take the retirement benefits in the form of a lump sum.
Individual pension plans are taxed on an ‘EET’ basis. The contributions and interest allocated to the book reserves are tax free, but pension payments after retirement are subject to income tax.
The tax rate depends on the way in which the benefit is paid. If the employee chooses to take a pension, the company must pay the pension net of income tax. If the employee chooses to take a lump sum on or before retirement, a different tax treatment applies.
Until 31 December 2000, there was a significant advantage to taking a lump sum. If the plan had been running for at least seven years and the employee did not own more than 25% of the company, the tax on the lump sum was calculated separately from other income and was reduced by 50%. The tax rate ranged from 3% for a lump sum of €5,000, to 8% for €10,000, and almost 21% for €100,000. The maximum tax rate was 25%.
Starting on 1 January 2002 this favourable tax treatment will longer apply to lump sums above €8,720. I n this case, the lump sum will be taxed as part of other income.
This means that if an employee’s annual income exceeds €70,000, the lump sum will be taxed at 50%!
The employee will therefore have to decide whether to take a lower net lump sum or regular pension payments, which will be taxed by 31, 41 or 50%, depending on the level of income.
A provisional tax regulation applies for 2001, under which 25% of the lump sum is tax free, but the balance is taxed as part of other income.
Thomas Keplinger is an actuary with Arithmetica / Austria, an executive member of the International Benefits Network