CRP not suitable for superannuation law
The Commissioner of Taxation has limited powers to modify the operation of tax law in circumstances where entities will benefit, or at least be no worse off, as a result of the modification. This power is known as the Commissioner's remedial power (CRP).
The following information describes situations where the Commissioner was unable to use the CRP to modify the operation of the superannuation law.
Definition of ‘ineligible annuity’ and deferred life annuities
Issue description
The definition of ‘ineligible annuity’ provides a carve-out from the definition of qualifying security for the purposes of the taxation of financial arrangements (TOFA) rules. This carve-out currently refers to ‘an annuity issued by a life assurance company to, or for, the benefit of a natural person (other than in the capacity of the trustee of a trust estate)’.
The carve-out applies to a deferred annuity purchased directly by an individual from a life company, but not to an annuity purchased by a superannuation fund to underwrite its liabilities to its members.
As a result, annuities issued by life companies to complying superannuation funds to meet their liabilities for the provision of deferred superannuation income streams may be subject to double taxation during the accumulation (pre-retirement) phase.
The Commissioner did not need to consider whether to exercise his power because this issue was addressed by a minor technical amendment.
CRP suitability
The issue was resolved via legislative amendment in Item 30 of Part 6 of Schedule 8 to the Treasury Laws Amendment (2018 Measures No. 4) Act 2019.
Transitional capital gains tax relief for unsegregated super funds
Issue description
There are transitional rules that are intended to preserve the tax-exempt status of capital gains accrued by super funds, but not realised, before 1 July 2017.
These transitional rules are difficult to apply to unsegregated funds because of the need to undertake analysis of all CGT assets at a share parcel level to determine which are eligible for the relief and which are not and then apportion amounts on a parcel-by-parcel basis.
The suggested modification using the CRP would have amounted to a new regime for providing cost base resets. This treatment would be inconsistent with the purpose of the provision.
CRP suitability
This issue is unsuitable for an exercise of the CRP as it is inconsistent with the intended purpose or object of the relevant provision.
Excess non-concessional contributions rules and associated earnings formula
Issue description
There is a formula for calculating associated earnings for the purposes of the excess non-concessional contributions (ENCC) rules.
The Commissioner was asked to use the CRP to permit the use of a different formula because the income calculated under the statutory formula is ‘far higher than the actual income earned on the excess non-concessional contributions’.
However, the Commissioner cannot exercise the CRP in these circumstances. It is clear from paragraph 1.44 of the Explanatory Memorandum to the Tax and Superannuation Laws Amendment (2014 Measures No. 7) Bill 2014 that the associated earnings formula may result in associated earnings being ‘lower or higher than the actual earnings from the investments made with excess non-concessional contributions by the superannuation provider’. This was an intended policy outcome of the measure.
The law is operating as intended.
CRP suitability
This issue is unsuitable for an exercise of the CRP as it is inconsistent with the intended purpose or object of the relevant provision.
Lost and unclaimed super reporting
Issue description
Super funds are required to assess member accounts each year on 31 December and 30 June (the ‘unclaimed money day’) to determine whether the accounts are lost, unclaimed or inactive low-balance super accounts. These accounts are then required to be reported and paid to the ATO before the following 30 April and 31 October (the ‘scheduled statement day’). Where accounts were assessed as lost, unclaimed or inactive low-balance on unclaimed money day, but ceased to be lost, unclaimed or inactive low-balance on the scheduled statement day, the legislation still required the funds to report details of these accounts to the ATO.
Super funds had been able to report this information using the unclaimed money statement; however, this has been superseded by the SuperStream standard, which is unable to accommodate the reporting of information without an associated payment.
The proposed modification was to remove the requirement to report this information to the ATO.
The modification was deemed unsuitable for the CRP as it was inconsistent with the intended purpose or object of the relevant provisions. This information is required to be provided to the Commissioner as per the policy intent evident in paragraph 3.33 of the Explanatory Memorandum to the Tax Laws Amendment (2009 Budget Measures No. 2) Bill 2009, paragraphs 4.27 and 4.28 of the Explanatory Memorandum of the Tax Laws Amendment (2009 Measures No. 1) Bill 2009 and paragraph 4.34 of the Explanatory Memorandum of the Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018.
CRP suitability
This issue is unsuitable for an exercise of the CRP as it is inconsistent with the intended purpose or object of the relevant provision.
The issue was nonetheless resolved via legislative amendment in Items 54, 59 and 60 of Part 1 of Schedule 3 of the Treasury Laws Amendment (2019 Measures No. 3) Act 2020.
Debit value for certain capped defined benefit income streams
Issue description
Effective from 1 July 2017, a ‘transfer balance cap’ was introduced that limits the amount an individual can have in retirement phase that supports a superannuation income stream and is subject to exempt current pension income rules. The general transfer balance cap is currently $1.6 million.
Special rules apply to certain superannuation income streams referred to as capped defined benefit income streams (CDBIS). The amount of the transfer balance debit when a CDBIS is commuted in full is the debit value, just before the superannuation lump sum is paid, of the superannuation interest that supports the CDBIS.
A problem arose with determining the debit value for the debit of a life expectancy pension or annuity or market linked pension or annuity where it was fully commuted. As the CDBIS has been fully commuted, the taxpayer no longer had a right to receive superannuation income stream benefits and therefore there couldn't be a ‘next’ superannuation income stream benefit, resulting in a nil debit value.
When the individual started a new market linked pension, the individual would have 2 transfer balance credits on their account without a transfer balance debit referable to the commutation. For some CDBIS, the special value may result in a higher transfer balance credit amount than would be the case if the general valuation rules applicable to non-CDBIS applied.
It was intended that the law provide a transfer balance debit with respect to the commutation and that the individual would then have a new transfer balance credit when the new market linked pension or annuity started.
The issue was due to be considered by the CRP Panel, but a legislative solution was pursued instead.
CRP suitability
The issue was resolved via legislative amendment in items 327 and 328 of Part 4 of Schedule 3 to the Treasury Laws Amendment (2019 Measures No. 3) Act 2020.
Items 327 and 328 amend subsections 294-145(1) and (6) of the Income Tax Assessment Act 1997 to ensure the transfer balance debit is the debit value of the superannuation interest that supported the superannuation income stream just before the commutation takes place.
Extra discretion for early release of superannuation
Issue description
An individual applied for a determination for early release of superannuation on compassionate grounds to provide medical treatment for a dependant. The Commissioner could not make a determination as the individual did not provide medical certification from a specialist that the treatment was necessary and not readily available through the public health system, which is a requirement under subregulation 6.19A(3) of the Superannuation Industry (Supervision) Regulations 1994 (SISR).
Use of the CRP was proposed to modify the operation of regulation 6.19A to allow a common sense discretion in assessing compassionate release of superannuation cases.
The policy is clear that the intended purpose of subregulation 6.19A(3) is that a person must have 2 medical certificates, one of which must be from a medical specialist. The medical certification must state that the treatment is not readily available in the public health system.
Further, paragraph 6.19A(1)(f) of the SISR allows for an application to be made to meet expenses that are consistent with one of the grounds under subregulation 6.19A(1). However, this is a qualified discretion and cannot be applied to bypass the evidentiary requirements contained in paragraphs 6.19A(1)(a) to (e) where the application is to pay for an expense that falls into one of those paragraphs.
As the proposal would be inconsistent with the intended purpose or object of the regulation, the CRP could not be utilised.
CRP suitability
This issue is unsuitable for an exercise of the CRP as it is inconsistent with the intended purpose or object of the relevant provision.
Associated earnings formula
Issue description
An individual will have excess non-concessional contributions if they receive an excess non-concessional contributions (ENCC) determination. The ENCC determination must state, among other things, the amount of the associated earnings on the excess non-concessional contributions calculated using the formula in section 97-30 of Schedule 1 to the Taxation Administration Act 1953. In that formula, the default proxy rate is calculated by reference to the general interest charge rate, though the Treasurer may determine an alternative rate, including a zero rate, by legislative instrument.
The applicant asked the Commissioner to exercise the CRP to have the associated earnings amount in their ENCC determination reduced to nil to account for their self-managed superannuation fund performing significantly worse than the default proxy rate used in their ENCC determination.
The Explanatory Memorandum to the Tax and Superannuation Laws Amendment (2014 Measures No. 7) Bill 2014 highlights that the associated earnings amount may be lower or higher than the actual earnings made by a superannuation fund, which is the intended outcome under the policy. Accordingly, the law is operating as intended and the CRP could not be utilised.
CRP suitability
This issue is unsuitable for an exercise of the CRP as it is inconsistent with the intended purpose or object of the relevant provision.
Transfer of losses
Issue description
Division 310 of the Income Tax Assessment Act 1997 (ITAA 1997) sets out special rules for merging superannuation funds addressing the transfer of losses between the funds, the treatment of CGT events related to the merger, and the treatment of assets related to the merger. Division 310 protects fund members from being disadvantaged by the merger of superannuation funds by ensuring that certain losses retain their income tax value in situations where they would otherwise be lost. Division 310 provides CGT relief via a loss transfer, or an asset roll-over, or a combination of both, provided a series of conditions are met.
Section 310-45 of the ITAA 1997 provides conditions for complying superannuation funds to access the CGT asset roll-over relief. Subsection 310-45(2) requires that CGT events happen in relation to all of the transferring superannuation fund’s CGT assets, such that it ceases to own all the assets under the arrangement. This means that the transferring superannuation fund must transfer all assets to the receiving superannuation fund in order to access roll-over relief. Subsection 310-45(5) provides limited exceptions to the condition in subsection 310-45(2) where assets may be retained in the first superannuation fund in certain circumstances.
Use of the CRP was requested to include a new exception in 310-45(5) of the ITAA 1997 where unforeseen circumstances outside the transferring superannuation fund’s control prevent the full transfer of fund assets.
This modification was determined to be unsuitable for the exercise of the CRP as the modification would be inconsistent with the intended purpose of the provision. The Explanatory Memorandum to the Tax Laws Amendment (2009 Measures No. 6) Bill 2009 introduced Division 310 of the ITAA 1997 specifies that ‘all’ assets must be transferred, and it appears the current exceptions under subsection 310-45(2) of the ITAA 1997 are intended to be exhaustive noting Parliament has already accounted for situations that may be outside the control of transferring entities. To expand these exemptions to cover new situations outside the superannuation fund’s control would be contrary to the intended purpose or object of the provision.
The modification is also considered unreasonable having regard to policy intent, the compliance cost impact, and broader implementation considerations.
CRP suitability
This issue is unsuitable for an exercise of the CRP as:
- it is inconsistent with the intended purpose or object of the relevant provision
- the proposed modification is unreasonable.
Division 293 tax and inclusion of lump sum payments in arrears
Issue description
Division 293 of the Income Tax Assessment Act 1997 (ITAA 1997) operates to reduce the concessional tax treatment of certain concessional superannuation contributions for ‘high income individuals’ for a financial year. An individual’s income for a financial year is added to certain superannuation contributions and compared to the high-income threshold of $250,000. An additional tax of 15% is payable by the individual on the smaller of either of the following amounts:
- the excess amount over $250,000
- the amount of the super contributions.
Lump sum payments in arrears (LSPIA), as taxable income, are captured under Division 293 of the ITAA 1997. LSPIAs are assessed for income tax and Division 293 purposes in the year they are paid to the taxpayer. However, as a LSPIA can accrue across several years of income, a taxpayer may be subject to Division 293 tax in circumstances where tax would otherwise not be payable if the payments had been paid to them on-time.
Use of the CRP was proposed to modify the law to exclude LSPIAs from Division 293 of the ITAA 1997, as it was perceived to be inconsistent with how it is treated by other parts of the taxation law, such as the:
- LSPIA offset found in Subdivision AB of Division 17 of the Income Tax Assessment Act 1936
- Medicare Levy Lump Sum Exemption under section 9A of the Medicare Levy Act 1986.
The modification was determined to be unsuitable for the exercise of the CRP as it is inconsistent with the purpose of the provision. When compared to other parts of the taxation law that provide explicit concessional treatments for LSPIA (such as the LSPIA tax offset and the Medicare levy lump sum payment exemption), the extrinsic materials to Division 293 of the ITAA 1997, including the Second Reading Speech and paragraph 4.24 of the Explanatory Memorandum to the Tax and Superannuation Laws Amendment (Increased Concessional Contributions Cap and Other Measures) Bill 2013 provide explicit guidance on lump sum payments that may be excluded from the calculation of Division 293 tax, which do not include LSPIAs. To modify Division 293 in the requested manner would, therefore, be contrary to the intent or object of the provision.
The modification is also considered unreasonable having regard to:
- policy intent
- the compliance cost impact, and
- broader implementation considerations.
CRP suitability
This issue is unsuitable for an exercise of the CRP as:
- it is inconsistent with the intended purpose or object of the relevant provision
- the proposed modification is unreasonable.
Superannuation guarantee charge earnings base calculations
Issue description
The superannuation guarantee charge (SGC) regime plays a critical role in Australia’s retirement income system by incentivising employers to meet their superannuation obligations. An employer becomes liable to pay the SGC when they fail to make the minimum required superannuation guarantee (SG) contributions for an employee by the prescribed due date. SG contributions are calculated using the ordinary time earnings of the employee for the quarter, which does not include overtime earnt. In contrast, the SGC is calculated on the ‘total salary or wages’ of an employee for the quarter, which does include overtime. Therefore, liability to the SGC is triggered where the employer’s contributions fall short of the required percentage of an employee’s ordinary time earnings.
Use of the CRP was proposed to align the earnings base used in calculating the individual SG shortfall with the earnings base used in SG contributions calculations. The proposed modification would modify the SGC rules to ensure that employers will not be liable to pay SGC on the overtime earnt by their employees.
The modification was determined to be unsuitable for the CRP because the proposed change is inconsistent with the intended operation of the SGC rules in subsection 19(1) of the Superannuation Guarantee (Administration) Act 1992. It appears that Parliament chose not to align the calculation of the SGC and SG contributions for the reasons outlined below:
- The differing earning bases act as an incentive for payment of on-time SG contributions to employee’s super funds (or alternately, as a deterrent to late payment of minimum SG contributions).
- The differing earning bases are a feature that strengthens compliance and reinforces the integrity of the superannuation system.
Any proposal to exclude overtime from the SGC base would weaken this integrity function and be inconsistent with the broader policy intent.
The proposed modification is also beyond the remit of the CRP, as a change in policy would require significant changes to the current legislative framework.
CRP suitability
This issue is unsuitable for an exercise of the CRP as:
- it is inconsistent with the intended purpose or object of the relevant provision
- the proposed modification is unreasonable.