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 didn't 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 capital gains tax (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 is unsuitable 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 can't exercise the CRP in these circumstances because 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 is unsuitable 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. The standard 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 of the Bill to the Tax Laws Amendment (2009 Budget Measures No. 2) Act 2009, paragraphs 4.27 and 4.28 of the Explanatory Memorandum of the Bill to the Tax Laws Amendment (2009 Measures No. 1) Act 2009 and paragraph 4.34 of the Explanatory Memorandum of the Bill to the Treasury Laws Amendment (Protecting Your Superannuation Package) Act 2019.
CRP suitability
This is unsuitable 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/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 (ITAA 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 couldn't make a determination as the individual didn't 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) allows for an application to be made to meet expenses that are consistent with one of the grounds under subregulation 6.19A(1) of the SISR. However, this is a qualified discretion and can't 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 is unsuitable 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, amongst 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 (TAA). 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 zero 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 couldn't be utilised.
CRP suitability
This is unsuitable as it is inconsistent with the intended purpose or object of the relevant provision.