House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello MP)

Chapter 3 - Taxation of superannuation entities

Outline of chapter

3.1 Schedule 1 to this Bill incorporates the provisions of Part IX of the Income Tax Assessment Act 1936 (ITAA 1936) that deal with the taxation of superannuation entities into the Income Tax Assessment Act 1997 (ITAA 1997). The rewritten provisions in Division 295 of the ITAA 1997 do not change the law as it currently operates under Part IX of the ITAA 1936.

3.2 Schedule 1 also includes some new rules in relation to the taxation of superannuation entities which are a part of the Simplified Superannuation reforms.

3.3 This Schedule amends the ITAA 1936 to ensure that when an individual makes a tax file number (TFN) declaration in relation to a payer (their employer) the individual is also authorising their employer to provide their TFN to their superannuation fund.

3.4 This Schedule also amends the ITAA 1997 and the Income Tax Rates Act 1986 to assess 'no-TFN contributions income', impose income tax on no-TFN contributions income, provide a particular rate of tax on that income and provide a way to refund no-TFN contributions tax when a TFN is later quoted within the required time period.

3.5 This Schedule amends the Superannuation Industry (Supervision) Act 1993 to allow the Commissioner of Taxation (Commissioner) to regulate an employer's legal responsibilities to quote TFNs to superannuation entities.

Context of amendments

3.6 One of the main objectives of the Simplified Superannuation reforms is to reduce complexity in Australia's superannuation system, which has arisen as a result of changes that have occurred over the last two decades.

3.7 Given the extent of the legislative changes to the taxation of superannuation required as a result of the Simplified Superannuation reforms it is appropriate that Part IX be rewritten and brought together with all other taxation of superannuation provisions in the ITAA 1997.

Summary of new law

3.8 Changes to the wording or the style used in the rewritten provisions in Division 295 do not change the law as it currently operates under Part IX of the ITAA 1936.

3.9 The provisions relating to the non-disclosure of TFNs will encourage individuals making superannuation contributions to provide their TFNs to their superannuation entities. This is required to administer the excess contributions caps as it is necessary for a member's TFN to be attached to their account. Under the current law if the individual has not provided their TFN no additional tax is levied on contributions or earnings. Accordingly many superannuation accounts and retirement savings accounts (RSAs) do not have a TFN attached. Without the new provisions relating to TFNs there is scope for abuse of the superannuation contributions cap and for people to gain unlimited access to superannuation concessions.

3.10 New provisions impose a tax on a new category of income based on superannuation contributions (where a TFN is not attached to the receiving member's account) and provide a way to have tax paid refunded to the superannuation fund or RSA provider when a TFN is later quoted within the required time period.

3.11 New provisions in the Income Tax Rates Act 1986 provide a particular rate of tax for the tax on no-TFN contributions income which is imposed on the superannuation fund or RSA provider.

3.12 New provisions also amend the law relating to TFN declarations so that when an individual makes a TFN declaration to their employer they are also authorising their employer to provide the TFN to their superannuation fund.

3.13 New provisions also move the regulation of an employer's responsibilities to quote an individual's TFN to their superannuation fund or RSA provider from the Australian Prudential Regulation Authority (APRA) to the Australian Taxation Office (ATO).

Comparison of key features of new law and current law

Detailed explanation of new law

Provisions rewritten and transferred from Part IX of the ITAA 1936 to Division 295 of the ITAA 1997

3.14 The rewritten provisions of Division 295 do not change the law as it currently operates under Part IX of the ITAA 1936. A finding table at the end of this chapter matches an old provision and the relevant new provision, and vice versa .

3.15 In the rewrite, each of the income and deduction rules relating to an entity's superannuation activities are stated only once.

3.16 The existing law addresses each entity type specifically (eg, complying superannuation funds, non-complying superannuation funds) and states all the rules for that entity. This results in repetition as most rules apply to more than one entity. It also interferes with the logical arrangement of the provisions. The rewrite logically follows the steps in determining taxable income, that is, income included, income excluded, allowable deductions and deductions not allowed. The entities to which the rule applies are listed beside it.

3.17 The benefits of this approach are seen most clearly in the rewrite of the provisions that include certain contributions in assessable income. The existing law lists the assessable contributions for each entity. This approach obscures the fact that source of a contribution and its tax treatment in the hands of the contributor are important in determining its assessability. A person can make contributions on behalf of someone else (eg, an employer can make one in respect of their employee) or for the person's own benefit. For the most part, they are assessable if deductible in the hands of the contributor. The rewrite groups assessable contributions according to their source.

Subdivision 295-A: Provisions of general operation

3.18 Subdivision 295-A lists the superannuation entities to which the Division applies, gives an overview of how the Division assists in working out tax payable for these entities and sets out some general rules used in applying the Division.

3.19 The Division applies to:

•

superannuation funds;

•

approved deposit funds;

•

pooled superannuation trusts; and

•

companies (other than life insurance companies) that provide a superannuation product known as an RSA.

[ Schedule 1, item 1, section 295 - 5 ]

3.20 Superannuation funds and approved deposit funds that comply with the Superannuation Industry (Supervision) Act 1993 receive concessional tax treatment. Pooled superannuation trusts and RSA providers are also taxed concessionally.

Liability to tax for a fund, an approved deposit fund or a pooled superannuation trust

3.21 The trustee of a fund, an approved deposit fund or pooled superannuation trust is liable to pay tax on the entity's taxable income. [ Schedule 1, item 1, subsections 295 - 5(2 ) and  ( 3 )]

3.22 A complying superannuation fund, non-complying superannuation fund or RSA provider is also liable to pay tax on no-TFN contributions income. [ Schedule 1, item 1, subsection 295 - 5(2 )]

3.23 The reference to trustee also includes the manager of an entity when there is no trustee. [ Schedule 10, item 10, new definition of ' trustee of a superannuation fund' in subsection 995 - 1(1 )]

3.24 Taxable income is worked out using the general income and deduction rules as modified by Division 295. Specific income and deduction rules dealing solely with superannuation activities also apply. [ Schedule 1, item 1, section 295 - 10 ]

3.25 The arm's length income of complying funds, complying approved deposit funds and pooled superannuation trusts is taxed at a concessional rate. The Commissioner can make an assessment in anticipation of a notice being issued by APRA, confirming that the fund or approved deposit fund complies with the Superannuation Industry (Supervision) Act 1993 or that the trust is a pooled superannuation trust. [ Schedule 1, item 1, section 295 - 25 ]

Liability to tax for an RSA provider

3.26 An RSA provider is a company and, like other companies, is liable to pay tax on its taxable income (section 4-1 of the ITAA 1997).

3.27 There are some specific income and deduction rules for RSAs, including how to isolate the part of the provider's taxable income attributable to providing RSAs. [ Schedule 1, item 1, section 295 - 10 ]

3.28 That part is taxed at the same concessional rate as that applying to complying funds. The remainder of the provider's taxable income is taxed at the general company rate.

Exempt entities

3.29 Public sector funds or schemes established under a state Act listed in the Income Tax Regulations 1936 are exempt. They are known as 'constitutionally protected funds'. [ Schedule 1, item 8, section 50 - 25 ]

3.30 Tax does not apply to the property of a state. This may be relevant to state funds or schemes not listed in the Income Tax Regulations 1936 . [ Schedule 1, item 1, section 295 - 15 ]

3.31 Another Commonwealth law can only exempt a superannuation entity if it does so expressly. [ Schedule 1, item 1, section 295 - 20 ]

3.32 The Commissioner may make an assessment for a fund or trust that is not complying or a pooled superannuation trust on the basis that it is likely that a notice will be given having the effect that it will become such an entity. [ Schedule 1, item 1, section 295 - 25 ]

Superannuation Industry (Supervision) Act 1993 notice revoked

3.33 Some of the specific income and deduction provisions depend on notices being issued by APRA under the Superannuation Industry (Supervision) Act 1993 or its regulations. APRA is responsible for ensuring the prudent management of funds, approved deposit funds and pooled superannuation trusts.

3.34 If a notice is revoked, or the decision to give it is subsequently set aside, it is taken never to have been given [ Schedule 1, item 1, section 295 - 30 ]. As a result, any assessment made on the basis of the notice can be amended (consequential amendments that will be made to subsection 170(10AA) of the ITAA Act 1936).

Acronyms used in tables

3.35 Many of the specific income and deduction rules are set out in tables. The entities to which the rule applies are listed in one column and the rule in the next. The entities are referred to by acronyms to simplify the tables. Section 295-35 explains the acronyms. [ Schedule 1, item 1, section 295 - 35 ]

Subdivision 295-B: Modifications of provisions of the ITAA 1997

3.36 Subdivision 295-B modifies the application of some other provisions of the ITAA 1997 about income and deductions.

Capital gains tax to be a primary code for calculating gains and losses

3.37 Only the capital gains tax (CGT) provisions (and not the general income provisions) apply if a CGT event happens involving a CGT asset owned by a complying fund, a complying approved deposit fund or a pooled superannuation trust. [ Schedule 1, item 1, subsections 295 - 85(1 ) and ( 2 )]

3.38 But this rule does not apply to:

•

a gain or loss attributable to currency exchange rate fluctuations;

•

the disposal of a security; or

•

some cases where the CGT provisions disregard the gain or loss.

[ Schedule 1, item 1, subsections 295 - 85(3 ) and ( 4 )]

CGT rules for pre-30 June 1988 assets

3.39 The CGT provisions also apply to assets which a trustee (or former trustee) of a complying fund, a complying approved deposit fund or a pooled superannuation trust owned when section 295-90 commenced. The assets are deemed to have been acquired on 30 June 1988. [ Schedule 1, item 1, section 295 - 90 ]

General deduction provisions extended

3.40 Superannuation entities can deduct amounts incurred in obtaining contributions even if the contributions are not assessable. [ Schedule 1, item 1, section 295 - 95 ]

3.41 Complying funds and complying approved deposit funds can deduct amounts for investing in pooled superannuation trusts even though the income from those investments is not assessable. [ Schedule 1, item 1, section 295 - 100 ]

Distributions to pooled superannuation trust unit holders

3.42 Income received by a complying fund, a complying approved deposit fund or a pooled superannuation trust as a result of holding units in a pooled superannuation trust is not assessable [ Schedule 1, item 1, section 295 - 105 ]. They are also not subject to tax when they dispose of the units. Any CGT gain or loss is disregarded (and CGT is the primary code in this situation) [ Schedule 1, item 1, sections 295 - 85 and 118 - 350 of the ITAA 1997 ].

Subdivision 295-C: Contributions included

3.43 Subdivision 295-C explains the contributions that are assessable. It is subject to Subdivision 295-D, which gives complying funds and complying approved deposit funds the option of excluding some contributions.

3.44 There are three types of contributions:

•

those made on behalf of someone else;

•

those made for the contributor's own benefit; and

•

those transferred from other funds.

3.45 The Superannuation Industry (Supervision) Act 1993 and regulations outline the types of contributions particular superannuation entities are entitled to receive. This explains why particular contributions are made assessable in the hands of some entities only.

3.46 The tables in Subdivision 295-C, which set out what is included in assessable income, apply to RSA providers only to the extent that amounts are paid to RSAs they provide. [ Schedule 1, item 1, section 295 - 205 ]

Contributions on behalf of someone else

3.47 Generally, contributions on behalf of someone else will be made by an employer on behalf of an employee. They may be paid directly to the fund by the employer or by the Commissioner who has collected them from the employer under the Superannuation Guarantee (Administration) Act 1992 or the Small Superannuation Accounts Act 1995 .

3.48 They are assessable in the hands of the superannuation entity to which they are made [ Schedule 1, item 1, section 295 - 160 ]. However, contributions made on behalf of a spouse or temporary resident of Australia are generally not assessable [ Schedule 1, item 1, sections 295 - 165, 295 - 175 and 295 - 185 ]. Government co-contributions and contributions for a child are also generally not assessable [ Schedule 1, item 1, section 295 - 170 ].

3.49 A complying superannuation fund can, with the agreement of the contributor, choose not to include contributions made directly to it by an employer in its assessable income. This effectively shifts liability to pay the tax on those contributions to the recipient of the benefit when it is paid out. [ Schedule 1, item 1, section 295 - 180 ]

Personal contributions and roll-over amounts

3.50 Only personal contributions for which the contributor has provided a valid notice of intent to deduct are assessable. These are generally contributions made by self-employed persons who receive less than 10 per cent of their income as an employee. [ Schedule 1, item 1, section 295 - 190, item 1 in the table ]

3.51 These contributions are included in assessable income in the income year in which the fund or RSA provider receives a notice from the contributor saying they will be claiming a deduction. [ Schedule 1, item 1, subsections 295 - 190(2 ) and ( 3 )]

3.52 If the amount of the contributor's deduction is reduced, an adjustment is made to the taxable income calculation of the superannuation provider. If the superannuation provider is notified of the reduction after it has lodged its return, it is entitled to a deduction in the income year in which it is notified [ Schedule 1, item 1, subsection 295 - 490(1 ), item 2 in the table ]. Alternatively, the fund or RSA provider has the option to amend its return to exclude the reduction amount, but only if that would result in a greater reduction in tax for that year than the reduction that would occur for the income year in which the notice is received [ Schedule 1, item 1, section 295 - 195 ]. This alternative option is currently at the Commissioner's discretion, but is now essentially a self-assessing provision for the fund or RSA provider. This change is in line with the Review of Self Assessment which recommended that all discretions which go to the determination of a taxpayer's liability be reviewed, and where practicable be replaced with tests that a taxpayer can apply at the time of lodgement.

3.53 The untaxed element of a superannuation benefit that is rolled over into a complying fund or RSA provider is also assessable in the income year in which the roll-over occurs, but only to the extent that it is not an 'excess untaxed roll-over amount'. An amount will be an excess untaxed roll-over amount if it exceeds $1 million. [ Schedule 1, item 1, subsection 295 - 190(1 ), item 2 in the table and subsection 295 - 190(4 )]

Transfers from foreign funds

3.54 An Australian (resident) superannuation fund may be assessable on an amount transferred to it from a non-resident superannuation fund. [ Schedule 1, item 1, section 295 - 200 ]

Former constitutionally protected funds

3.55 A complying superannuation fund that was previously a constitutionally protected fund may be assessable on certain amounts of rolled over superannuation benefits. [ Schedule 1, item 1, section 295 - 210 ]

Subdivision 295-D: Contributions excluded

3.56 Subdivision 295-D gives complying funds and approved deposit funds the option of reducing the contributions included in their assessable income.

Transferring liability to an investment vehicle

3.57 The superannuation provider in relation to a complying superannuation fund or a complying approved deposit fund can agree with a life insurance entity or a pooled superannuation trust to transfer contributions to it. The trustee must hold sufficient investments in the transferee to cover the tax payable by the transferee as a result of the transfer. [ Schedule 1, item 1, sections 295 - 260 and 295 - 320, item 1 in the table, item 13, paragraph 320 - 15(1 )( i )]

Applying pre-1 July 1988 funding credits against contributions

3.58 The superannuation provider in relation to a complying superannuation fund can choose to reduce the contributions otherwise included in its assessable income by applying its available funding credits to the contributions. These credits represent the fund's unfunded liability for benefits accrued prior to funds becoming taxable on 1 July 1988. [ Schedule 1, item 1, section 295 - 265 ]

3.59 The superannuation provider in relation to a complying superannuation fund can also reduce the contributions otherwise included in its assessable income in anticipation of APRA confirming the amount of credits available as at 1 July 1988. However the credits will not be considered available for the income year to the extent that the notice received differs from the amount anticipated. [ Schedule 1, item 1, section 295 - 270 ]

Subdivision 295-E: Other income amounts

3.60 Subdivision 295-E includes some amounts in assessable income and excludes other amounts.

Amounts included

3.61 These amounts are included in assessable income:

•

contributions transferred to a pooled superannuation trust by a complying fund or complying approved deposit fund [ Schedule 1, item 1, section 295 - 320, item 1 in the table ];

•

an amount worked out by reference to the market value of the assets of a superannuation fund that changes its status from complying to non-complying or from non-resident to resident [ Schedule 1, item 1, section 295 - 320, items 2 and 3 in the table, sections 295 - 325 and 295 - 330 ]; and

•

the recoupment by a complying superannuation fund or an RSA provider of an insurance premium that it has deducted [ Schedule 1, item 1, section 295 - 320, items 4 and 5 in the table ].

Amounts excluded

3.62 These amounts are excluded from assessable income:

•

a bonus on a life insurance policy received by a complying superannuation fund, a complying approved deposit fund or a pooled superannuation trust (other than a reversionary bonus) [ Schedule 1, item 1, section 295 - 335, item 1 in the table ];

•

income derived by a pooled superannuation trust that is attributable to an investment in it by a constitutionally protected fund [ Schedule 1, item 1, section 295 - 335, item 2 in the table ]; and

•

a bonus on a life insurance policy that is an RSA received by an RSA provider (other than a reversionary bonus) [ Schedule 1, item 1, section 295 - 335, item 3 in the table ].

Subdivision 295-F: Exempt income

3.63 Subdivision 295-F exempts some amounts from income tax.

Amounts used to fund current pension liabilities

3.64 The following is exempt income:

•

income derived by a complying superannuation fund from assets dedicated to funding its current pension liabilities [ Schedule 1, item 1, section 295 - 385 ];

•

income derived by a complying superannuation fund needed to fund current pension liabilities for which assets have not been dedicated [ Schedule 1, item 1, sections 295 - 390 and 295 - 395 ]; and

•

income derived by a pooled superannuation trust attributable to the current pension liabilities of unitholders that are complying superannuation funds [ Schedule 1, item 1, section 295 - 400 ]. A formula is used to determine the proportion that is considered exempt. The trustee can however elect to use an alternative amount for determining the proportion of exempt income in certain situations [ Schedule 1, item 1, subsection 295 - 400(3 )]. This alternative option is currently at the Commissioner's discretion, but is now essentially a self-assessing provision for the trustee.

Other exempt income

3.65 The following income is also exempt:

•

a grant of financial assistance under Part 23 of the Superannuation Industry (Supervision) Act 1993 [ Schedule 1, item 1, section 295 - 405, item 1 in the table ]; and

•

amounts credited to an RSA from which a pension is being paid [ Schedule 1, item 1, section 295 - 405, items 2 and 3 in the table and section 295 - 410 ].

Subdivision 295-G: Deductions

3.66 Subdivision 295-G deals with deductions relating specifically to an entity's superannuation activities. It specifies amounts that are deductible and amounts that are not.

Death or disability benefits payable

3.67 A complying superannuation fund can deduct part of the premiums it pays on insurance policies to cover its liability to pay death or disability benefits to fund members. It can also deduct the amount it could reasonably expect to pay for such a policy if it does not have one. [ Schedule 1, item 1, sections 295 - 460, 295 - 465 and 295 - 480 ]

3.68 Alternatively, the fund can choose to deduct an amount for its future liability to pay death or disability benefits. [ Schedule 1, item 1, section 295 - 470 ]

3.69 An RSA provider can also deduct premiums it pays on insurance policies to cover its liability to pay death or disability benefits. [ Schedule 1, item 1, section 295 - 475 ]

Increased amount of superannuation lump sum death benefits

3.70 A complying superannuation fund or a complying approved deposit fund can deduct an amount to ensure that the amount of death benefits paid to a spouse, former spouse or child is not reduced as a result of contributions being taxed. It is not appropriate to allow the deduction if those individuals cannot reasonably be expected to benefit from the estate. Therefore, the deduction is only available to the extent that the spouse, former spouse or child of the deceased can reasonably be expected to benefit from the estate. [ Schedule 1, item 1, section 295 - 485 ]

3.71 Where a death benefit is paid to a deceased estate the deduction is reduced to the extent that the intended recipient cannot reasonably be expected to benefit [ Schedule 1, item 1, subsection 295 - 485(4 )]. The deduction available is currently at the discretion of the Commissioner, who has regard to the extent to which the recipient can be expected to benefit from the payment. This is replaced with an objective test of reasonableness.

Other deductions

3.72 These amounts can also be deducted:

•

contributions included in assessable income that are fringe benefits (because they will be taxed as fringe benefits in the hands of the contributor);

•

personal contributions to the extent the contributor's deduction for them has been reduced (but only if the superannuation fund or RSA provider has not exercised the option in section 295-195);

•

a levy imposed under the Superannuation (Financial Assistance Funding) Levy Act 1993 ; and

•

contributions paid back to an employer by a superannuation fund that has never complied with the Superannuation Industry (Supervision) Act 1993 (to ensure overall consistency with payments of benefits by such funds to their members).

[ Schedule 1, item 1, section 295 - 490 ]

Amounts that cannot be deducted

3.73 These amounts cannot be deducted:

•

benefits paid by superannuation funds or RSA providers [ Schedule 1, item 1, section 295 - 495, items 1 to 3 in the table ];

•

amounts credited to RSAs [ Schedule 1, item 1, section 295 - 495, item 4 in the table ]; and

•

a repayment of financial assistance under the Superannuation Industry (Supervision) Act 1993 [ Schedule 1, item 1, section 295 - 495, item 5 in the table ].

Subdivision 295-H: Components of taxable income

3.74 Subdivision 295-H works out the components of the taxable income of complying funds, complying approved deposit funds, pooled superannuation trusts and RSA providers for the purpose of applying tax rates.

Complying superannuation funds, complying approved deposit funds and pooled superannuation trusts

3.75 The income of a complying superannuation fund, complying approved deposit fund or pooled superannuation trust is split into a 'non-arm's length component' and a 'low tax component'. [ Schedule 1, item 1, section 295 - 545 ]

3.76 The non-arm's length component comprises non-arm's length dividends received from private companies, non-fixed interest trust distributions, and any income derived from transactions where the parties are not dealing with each other at arm's length [ Schedule 1, item 1, subsection 295 - 545(2 ) and section 295 - 550 ]. This component is reduced by any deductions attributable to that income and is then taxed at the highest marginal rate. 'Derived' in this context is applicable to both ordinary and statutory income.

3.77 The remaining part of the entity's taxable income is the low tax component which is taxed at a concessional rate (currently 15 per cent). [ Schedule 1, item 1, subsection 295 - 545(3 )]

3.78 In Part IX of the ITAA 1936, the Commissioner has a discretion to decide that it is unreasonable that a dividend from a private company be treated as 'special income' (or 'non-arm's length income') where it is derived by a complying superannuation fund, complying approved deposit fund, or a pooled superannuation trust. This is replaced with an objective test that the amount be consistent with an 'arm's length dealing'. [ Schedule 1, item 1, subsections 295 - 545(2 ) and ( 3 )]

RSA providers

3.79 RSA providers must work out the assessable income attributable to providing RSAs (the 'RSA component') so it can be taxed at the same concessional rate as applies to complying funds. The balance of their income (the 'standard component') is taxed at the standard company rate. [ Schedule 1, item 1, section 295 - 555 ]

3.80 RSA providers are effectively taxed as if their RSA activities and their other activities are carried on by two separate entities. This ensures they are treated consistently with funds and pooled superannuation trusts which only have superannuation activities.

3.81 RSA income cannot be offset against a loss from the provider's other activities. So if the RSA component is more than the provider's total taxable income it will have both a taxable income and a loss. Its taxable income will equal the RSA component but it will also be entitled to carry forward a loss in relation to its other activities. [ Schedule 1, item 1, subsection 295 - 555(3 )]

New Dictionary terms

3.82 Section 995-1 of the ITAA 1997 will be amended to insert additional definitions in the Dictionary. The definitions, and their equivalents in the old law, are identified and commented on in Table 3.1.

3.83 The Dictionary in the ITAA 1997, will also be amended to include terms previously defined in Part IX of the ITAA 1936.

Provisions of Part IX of the ITAA 1936 that have been changed for clarity

3.84 The minor changes in various provisions that are made for clarity do not change how the law operates under Part IX of the ITAA 1936 in regard to those provisions. The changes simply clarify how the provisions currently operate.

Section 295-90: Deductions for contributions

3.85 Superannuation entities can deduct amounts incurred in obtaining contributions even if the contributions are not assessable.

3.86 The rewritten section (section 295-90) clarifies that the provision applies to all contributions that are not assessable.

3.87 The way the section is worded in Part IX of the ITAA 1936 is unclear in regard to this, as it refers to contributions mentioned in specific sections. There is doubt about whether those sections refer to contributions such as non-deductible personal contributions.

Section 295-195: Exclusions of personal contributions

3.88 Superannuation funds and RSA providers do not include contributions in their assessable income unless the contributor advises they will be claiming a deduction.

3.89 The rewritten section states expressly that a notice from the contributor reducing the amount of a deduction has the effect of reducing the assessable income of the fund or provider if the reduction notice is received before the fund or provider lodges its return for the income year to which the contribution relates.

3.90 This is implicit in the current law but only the effects of a reduction notice received after lodgement are dealt with specifically.

Provisions amended for minor policy changes

3.91 The definition of 'Australian superannuation fund' replaces the existing definition of 'resident superannuation fund' in section 6E of the ITAA 1936 with the scope of the definition dealt with in a much simpler way. The main change is that there is no longer a specific temporary absence rule for trustees of the fund as an alternative condition to the requirement that the central management and control of the fund be in Australia.

3.92 The alternative test to the central management and control test (the two-year temporary absence rule) is generally satisfied if:

•

the trustees of the fund (or a director or directors of the corporate trustee) were temporarily absent from Australia;

•

the central management and control of the fund would have been in Australia if the trustees (or directors) were in Australia; and

•

the continuous period for which the trustee (or directors) had been outside Australia at that time did not exceed two years.

3.93 The definition of Australian superannuation fund does not use this alternative test. It deals with temporary absences of trustees by requiring that the central management and control of the fund ordinarily be in Australia. Satisfying the current two-year temporary absence rule described above (set out in subsections 6E(1A) and (1B) of the ITAA 1936) would normally satisfy the ordinarily requirement. That is, the trustee's time outside Australia does not exceed two years.

Example 3.1

A married couple are trustees of their self-managed superannuation fund that was established in 2001. In July 2007 the husband accepts a two year employment contract to work for an overseas government, intending to return to Australia after the contract is fulfilled. His wife joins him for the term of his contract. They make no contributions to the fund after leaving Australia.

In these circumstances it is accepted that the central management and control of the self-managed superannuation fund is ordinarily in Australia and the self-managed superannuation fund will be treated as an Australian superannuation fund. If the husband's employment contract was continually extended so that the couple remained overseas for a period considerably in excess of two years, central management and control of the self-managed superannuation fund would not ordinarily be in Australia and the self-managed superannuation fund would not be treated as an Australian superannuation fund.

Provisions of Part IX of the ITAA 1936 that have been inserted or amended due to the Simplified Superannuation reforms

Subdivision 295-I: No TFN contributions income

3.94 Subdivision 295-I provides a new category of income for superannuation and RSA providers that receive superannuation contributions which are included in assessable income where no TFN is attached to the receiving member's account.

3.95 Subdivision 295-I does not apply to RSA providers which are life insurance companies as they are taxed under Division 320 of the ITAA 1997. [ Schedule 1, item 1, section 295 - 5 ]

3.96 Superannuation and RSA providers are liable to pay tax on no-TFN contributions income. The tax applies to contributions made to a complying superannuation fund, non-complying superannuation fund or an RSA. [ Schedule 1, item 1, section 295 - 605 ]

3.97 Tax is imposed by the Income Tax Rates Act 1986 .

3.98 A particular rate of tax is imposed on no-TFN contributions income. [ Schedule 1, item 18, section 29 of the Income Tax Rates Act 1986 ]

3.99 Section 169 of the ITAA 1936 allows the Commissioner to make an assessment of the amount of no-TFN contributions income tax.

3.100 No - TFN contributions income applies to contributions included in the superannuation provider's assessable income by Subdivision 295-C for the income year in which 1 July 2007 occurs (or later income years) only if the contributions are made on or after 1 July 2007 and no TFN has been quoted by the end of the income year in which the contribution is made. [ Schedule 1, item 1, subsection 295 - 610(1 )]

3.101 Where no TFN has been quoted by the last day of the income year and a contribution is withdrawn or transferred out of the superannuation fund or RSA provider prior to the end of the income year, the individual will be taken not to have quoted his or her TFN.

3.102 Contributions will not form part of the no-TFN contributions income if the superannuation interest or RSA existed prior to 1 July 2007 and the total contributions included in the superannuation fund or RSA provider's assessable income for an income year is $1,000 or less. [ Schedule 1, item 1, subsection 295 - 610(2 )]

3.103 An individual will be taken to have quoted their TFN to the superannuation provider if they have quoted or are taken to have quoted their TFN for superannuation purposes under the ITAA 1997, the Superannuation Industry (Supervision) Act 1993 or the Retirement Savings Account Act 1997 . [ Schedule 1, item 1, section 295 - 615 ]

3.104 A superannuation fund or RSA provider cannot reduce their no-TFN contributions income using any of the provisions in Subdivision 295-D. [ Schedule 1, item 1, section 295 - 620 ]

3.105 Where the Commissioner makes an assessment of no-TFN contributions income tax, the notice of assessment may be included in a notice of any other assessment under the ITAA 1997. [ Schedule 1, item 1, subsection 295 - 625(1 )]

3.106 Where certain conditions are met the Commissioner is taken to have made a no-TFN contributions income tax assessment. [ Schedule 1, item 1, subsection 295 - 625(2 )]

3.107 The assessment conditions are met where a superannuation provider first provides the Commissioner with an income tax return for an income year and the Commissioner has not already made a no-TFN contributions income tax assessment for the provider for that year. [ Schedule 1, item 1, subsection 295 - 625(3 )]

3.108 The no-TFN contributions income tax assessment is taken to have been made on the day of the return and is taken to be an assessment of the amount of income tax payable on the no-TFN contributions income of the provider. [ Schedule 1, item 1, subsection 295 - 625(4 )]

3.109 A return is considered to be a notice of assessment signed by the Commissioner and given to the provider on the day of the return. [ Schedule 1, item 1, subsection 295 - 625(5 )]

Division 295-J: No-TFN income tax offset

3.110 Subdivision 295-J allows a superannuation provider to obtain a refund of no-TFN contributions income tax paid where a TFN is subsequently quoted.

3.111 A superannuation provider may obtain a tax offset for amounts of tax paid on no-TFN contributions income for an income year commencing on or after 1 July 2007. [ Schedule 1, item 1, subsection 295 - 675(1 )]

3.112 The tax offset can only be claimed for tax paid on no-TFN contributions income of an earlier year. A provider cannot pay no-TFN contributions income tax for a contribution and claim a tax offset for that same contribution in the same income year. [ Schedule 1, item 1, subsection 295 - 675(1 )]

3.113 The tax offset is only available if an individual quotes their TFN in the current year, and no-TFN contributions income tax of that individual's contribution was payable in one of the three most recent income years. [ Schedule 1, item 1, subsection 295 - 675(2 )]

3.114 For example, if a contribution was no-TFN contributions income for the 2007-08 income year the tax offset can only be claimed in the year the individual first quotes their TFN up until the end of the 2010-11 income year.

3.115 While the superannuation provider is entitled to claim the tax offset, the amount of the offset is to be credited to the individual's account.

3.116 The tax offset is a refundable tax offset and the rules contained in Division 67 of the ITAA 1997 apply.

3.117 The amount of the tax offset for an income year is the sum of the amount of tax payable on no-TFN contributions income for which a TFN has subsequently been quoted. [ Schedule 1, item 1, section 295 - 680 ]

3.118 Contributions which do not satisfy the conditions specified in section 295-675 do not count towards the sum of the tax offset.

Part IIG: Interest on certain offsets relating to no-TFN contributions income of superannuation funds and RSA providers

3.119 In certain circumstances interest will be payable to a superannuation provider under the Taxation (Interest on Overpayments and Early Payments) Act 1993 where an individual quotes a TFN to the provider resulting in a tax offset under Subdivision 295-J of the ITAA 1997.

3.120 Where:

•

an individual has quoted their TFN to their employer before the end of an income year;

•

their employer failed to comply with the requirements set out in section 299C of Superannuation Industry (Supervision) Act 1993 which requires them to inform the superannuation provider to which they make contributions of the individual's TFN before the end of the income year;

•

due to the employers failure to comply with section 299C of the Superannuation Industry (Supervision) Act 1993 contributions made to that superannuation provider formed part of its no-TFN contributions income;

•

tax payable on that no-TFN contributions income counted towards the no-TFN contributions tax offset of the superannuation provider for the current year; and

•

the tax offset has been applied in an assessment in respect of the superannuation provider for the current year,

then interest will be payable. [ Schedule 1, item 36, section 8ZD of the Taxation ( Interest on Overpayments and Early Payments ) Act 1993 ]

3.121 The interest is payable for a period from the day the no-TFN contributions income tax was paid or the day the tax was required to be paid (whichever is the later) until the day on which the assessment of the no-TFN income tax offset is made. [ Schedule 1, item 36, section 8ZE of the Taxation ( Interest on Overpayments and Early Payments ) Act 1993 ]

3.122 The interest rate is the base interest rate in section 8AAD of the Taxation Administration Act 1953 . [ Schedule 1, item 36, section 8ZF of the Taxation ( Interest on Overpayments and Early Payments ) Act 1993 ]

3.123 Interest payable under the Taxation (Interest on Overpayments and Early Payments) Act 1993 is assessable income under section 15-35 of the ITAA 1997.

Treatment of late contributions

3.124 Some superannuation funds finance benefits by making large one-off contributions. As mentioned above, the 'trustee' of a complying superannuation fund can, with the consent of the contributor, elect for these contributions not to be included in assessable income. This effectively shifts liability to tax on those contributions to the recipient of the benefit when it is finally paid out. [ Schedule 1, item 1, section 295 - 180 ]

3.125 Some funds also allow their members to elect whether their benefits are paid from a taxed or untaxed source. Trustees will not be able to make this election (and therefore will not be able to offer this choice) where the superannuation plan comes into operation after 5 September 2006. [ Schedule 1, item 1, subsection 295 - 180(5 )]

Transitional arrangements for employment termination payments existing at 9 May 2006

3.126 As part of the Simplified Superannuation reforms the taxation of employment termination payments are changed to reflect the removal of the reasonable benefit limits system and benefits tax. Employment termination payments will have two components (tax free and taxable). The taxable component is taxed at no more than 15 per cent for amounts up to $140,000, the excess up to $1 million is taxed at the top marginal rate (plus the Medicare levy).

3.127 Since superannuation benefits paid to those over age 60 are tax free, employment termination payments will not be able to be rolled over into superannuation. Allowing roll-overs would have enabled people to put in place arrangements to avoid the intent of other parts of the reforms, namely the caps on contributions.

3.128 There are transitional arrangements in place for individuals with an entitlement to a payment on termination of employment specified in existing employment contracts as at 9 May 2006, provided payment is made prior to 1 July 2012. These payments are able to be directed into superannuation until 1 July 2012. Amounts of the taxable component of a directed termination payment paid into a superannuation fund are included in the assessable income of the fund [ Schedule 1, item 1, section 295 - 190, item 3 in the table ]. If the value of the taxable component of the directed termination payment exceeds $1 million then the excess is subject to additional taxation at the top marginal tax rate plus the Medicare levy.

Deductions for future liability to pay benefits

3.129 As mentioned above, complying superannuation funds can deduct part of their insurance premiums covering liability to pay death or disability benefits to fund members or choose to deduct an amount for their future liability to pay death or disability benefits. [ Schedule 1, item 1, sections 295 - 460, 295 - 465, 295 - 470 and 295 - 480 ]

3.130 A complying superannuation fund's choice to deduct an amount for the future liability to pay a death or disability benefit is limited to employees. The concessional tax treatment of employee invalidity benefits is extended to the self-employed. Consistent with this extension to the self-employed, the choice to deduct an amount for the future liability to pay a death or disability benefit is similarly extended to the self-employed.

Provisions of Part IX of the ITAA 1936 that have not been rewritten

3.131 Some provisions of the ITAA 1936 have not been rewritten into the ITAA 1997 for various reasons. The various provisions, what they are about, and the reason for their omission are commented on in Table 3.2.

Provisions of Part VA of the ITAA 1936 that have been inserted due to the Simplified Superannuation reforms

Section 202DHA: A TFN quoted for Division 3 purposes is taken to have been quoted for superannuation purposes

3.132 When an individual makes a TFN declaration to their payer (their employer) they are also authorising their employer to provide their TFN to the superannuation provider to which their employer is making contributions.

3.133 Under subsection 202C(1) of the ITAA 1936 an individual who is a recipient of eligible pay as you go (PAYG) payments may make a TFN declaration under Division 3, Part VA of the ITAA 1936, thus quoting their TFN to their payer (their employer).

3.134 If that individual is also a beneficiary of an 'eligible superannuation entity' or of a 'regulated exempt public sector superannuation scheme', by completing a TFN declaration, they are also authorising their payer (their employer) to quote their TFN to the trustee of their superannuation fund to which their employer is making contributions. [ Schedule 1, item 27, section 202DHA ]

3.135 For example, if an individual completes a TFN declaration in relation to their employment and they are a member of a superannuation fund, and their employer is making superannuation contributions for their benefit, the individual is also authorising their employer to quote their TFN to the trustee of the superannuation fund to which their employer makes contributions.

Provisions of the Superannuation Industry (Supervision) Act 1993 that have been amended due to the Simplified Superannuation reforms

Subsection 6(1): Administration of Divisions 1 and 3A of Part 25A

3.136 Section 6 has been amended to allow the Commissioner to regulate a payer's (employer's) legal responsibilities to quote TFNs to superannuation entities.

3.137 APRA has the general administration of the listed provisions to the extent that administration of the provisions is not conferred on the Commissioner by paragraphs (e) or (g). [ Schedule 1, item 28, paragraph 6(1 )( a )]

3.138 APRA has the general administration of Part 25A except Division 1 which relates to the quotation of employees' TFNs. [ Schedule 1, item 29, subparagraph 6(1 )( a )( xii )]

3.139 The Commissioner has the general administration of the Part 24 and Divisions 2 to 5 of Part 25A to the extent that they relate to self-managed superannuation funds. [ Schedule 1, item 30, subparagraph 6(1 )( e )( v )]

3.140 The Commissioner has general administration of Division 1 of Part 25A relating to the quotation of an individual's TFN by their payer (their employer) and Division 3A of Part 25A relating to the incorrect quotation of TFNs. [ Schedule 1, item 31, paragraph 6(1 )( g )]

3.141 An employee can quote their TFN to their payer (their employer) in connection with the operation or the possible future operation of the Superannuation Industry (Supervision) Act 1993 and the other 'Superannuation Acts' or after 1 July 2007 in connection with the operation of Division 3 of Part VA of the ITAA 1936. If the other conditions in section 299C are satisfied the employer must then inform the trustee of the entity to which they make contributions, of the employee's TFN. [ Schedule 1, item 32, paragraph 299C(1 )( a )]

3.142 For example, where an employee quotes their TFN in connection with PAYG payments it is also taken to have been quoted in connection with the Superannuation Industry (Supervision) Act 1993 . Accordingly, where this quotation has occurred an employer has a responsibility, subject to the other conditions in section 299C, to quote the employee's TFN to the superannuation entity to which they make employer contributions, for the employee.

Paragraph 299P(a): Methods of quoting a TFN

3.143 An individual is taken to have quoted their TFN to another person if the individual informs the other person of the number in a manner approved by the regulator or in the specified approved form, or the individual is taken to have quoted their TFN in relation to the Superannuation Industry (Supervision) Act 1993 and the 'Superannuation Acts' under any of the provisions in Division 3 of the Superannuation Industry (Supervision) Act 1993 . [ Schedule 1, item 34, paragraph 299P(a )]

Division 3A: Incorrect quotation of a TFN

3.144 Where an assumed TFN recorded by a trustee is assessed by the Commissioner to either be cancelled, withdrawn or wrong, and the Commissioner can identify the beneficiary's TFN, the Commissioner may give notice of the TFN to the trustee. [ Schedule 1, item 35, subsection 299TA(1 )]

3.145 Where the Commissioner provides the beneficiary's TFN to the trustee, the beneficiary is taken to have quoted their TFN at the time and in the way the assumed TFN was quoted to the trustee. [ Schedule 1, item 35, subsection 299TA(2 )]

3.146 Where an assumed TFN recorded by a trustee is assessed by the Commissioner to either be cancelled, withdrawn or wrong, and the Commissioner is not satisfied that the beneficiary has a TFN, the Commissioner may provide a notice to the trustee. [ Schedule 1, item 35, subsection 299TB(1 )]

3.147 The notice provided to the trustee must identify the beneficiary and state that the Commissioner is not satisfied that the beneficiary has a TFN. [ Schedule 1, item 35, subsection 299TB(2 )]

3.148 The Commissioner must provide a copy of this notice to the beneficiary. [ Schedule 1, item 35, subsection 299TB(3 )]

3.149 If a notice under section 299TB is given to a trustee, the beneficiary is taken to have not quoted their TFN to the trustee at any time.

Application and transitional provisions

Application

3.150 These amendments apply from the 2007-08 and later income years. [ Schedule 1, item 2 ]

3.151 These amendments to Part 4 apply to TFN declarations made on or after 1 July 2007. [ Schedule 1, item 37 ]

Transitional provisions

No-TFN contributions and no-TFN tax offset

3.152 Transitional provisions have been introduced for Subdivisions 295-I and 295-J which apply to a superannuation fund or RSA provider whose 2006-07 income year ends after 1 July 2007. [ Schedule 1, item 25, section 295 - 610 ]

3.153 For these entities, the period of their 2006-07 income year after 1 July 2007 will be taken to be part of their 2007-08 income year for the purposes of Subdivisions 295-I and 295-J.

3.154 No-TFN contributions income for the 2006-07 income year (received on or after 1 July 2007) will be included in their 2007-08 income year and treated as if they had actually been made in the superannuation fund or RSA provider's 2007-08 income year.

Example 3.2

The XYZ superannuation fund's 2006-07 income year ends on 30 September 2007. It accumulates $100,000 of no-TFN contributions income between 1 July 2007 and the end of its 2006-07 income year on 30 September 2007.

As the XYZ superannuation fund's 2006-07 income year ends after 1 July 2007, the period between 1 July 2007 and 30 September 2007 is taken to be part of its 2007-08 income year.

The $100,000 of no-TFN contributions made prior to 30 September 2007 (in its 2006-07 income year) will be taken to have been contributed in its 2007-08 income year.

Consequential amendments

Income Tax Assessment Act 1936

3.155 An assessment under section 295-610 is intended to fall within the definition of 'assessment'. [ Schedule 1, item 3, subsection 6(1 )]

3.156 A full self assessment taxpayer must, in a return for an income year specify its taxable income or its net income, the amount of tax payable and the amount of interest payable by the taxpayer under section 102AAM. If the full assessment taxpayer is a company and is a superannuation fund or RSA provider the company must also specify its no-TFN contributions income and the amount of the income tax payable on that income. [ Schedule 1, item 4, section 161AA ]

Income Tax Assessment Act 1997

3.157 A consequential amendment is needed to include constitutionally protected funds as exempt (Government) entities so as to ensure all their income is exempt from income tax in the appropriate way under the ITAA 1997, since it was exempt in Part IX of the ITAA 1936. [ Schedule 1, item 7, section 11 - 15 and item 8, section 50 - 25 ]

3.158 A number of consequential amendments are needed to replace references to Part IX of the ITAA 1936 with the equivalent Division 295 provisions. [ Schedule 1, Part 2, item 5, section 9 - 1, item 6, section 9 - 5, item 40, subparagraph 320 - 15(1 )( i ), item 14, subsection 320 - 15(3 )]

3.159 A number of consequential amendments are needed to incorporate new definitional terms arising in the rewrite. [ Schedule 1, item 10, Subdivision 118 - G, item 11, paragraph 118 - 515(1 )( b ), item 12, section 118 - 520, item 50, section 995 - 1, definition of ' Australian superannuation fund', item 55, section 995 - 1, definition of ' endowment policy', item 60, section 995 - 1, definition of ' foreign superannuation fund', item 65, section 995 - 1, definition of ' non - arm's length income', item 70, section 995 - 1, definition of ' quoted ( for superannuation purposes)', item 75, section 995 - 1, definition of ' RSA component', item 80, section 995 - 1, definition of ' segregated current pension assets', item 85, section 995 - 1, definition of ' segregated non - current assets', item 90, section 995 - 1, definition of ' standard component', item 95, section 995 - 1, definition of ' superannuation fund for foreign residents', item 100, section 995 - 1, definition of ' whole of life policy' ]

3.160 A number of amendments are needed in Division 320 (relating to life insurance companies), as some provisions applying to these entities were in Part IX. However, when rewritten into the ITAA 1997, they are more appropriately located in Division 320 which contains rules applying to life insurance companies. [ Schedule 1, item 13, paragraph 320 - 15(1 )( i ), item 14, subsection 320 - 15(3 ), item 15, section 320 - 107 ]

3.161 The refundable rules for tax offsets apply to the tax offset in respect of no-TFN contributions income under Subdivision 295-J. [ Schedule 1, item 9, section 67 - 25 ]

3.162 The definition of 'quoted for superannuation purposes' has the same meaning as in section 295-615.

Income Tax Rates Act 1986

3.163 A separate rate of tax applies to no-TFN contributions income (defined by section 295-675). [ Schedule 1, item 18, subsection 29(1 )]

3.164 The separate rate of tax is applicable to a trustee of a complying superannuation fund, a non-complying superannuation fund or company (other than a life insurance company) that is an RSA provider.

3.165 The rate of tax is calculated as the top marginal tax rate (Column 2 of the table in Part I of Schedule 7 to the Income Tax Rates Act 1986 ) plus the Medicare levy. The rate of tax generally payable on contributions (under paragraph 26(1)(a), subsection 26(2) or paragraph 23(4BA)(a)) is then subtracted from this rate. [ Schedule 1, item 18, subsection 29(2 )]

3.166 For example, for the 2007-08 income year, Column 2 of the table in Part I of Schedule 7 to this Act specifies a rate of tax at 45 per cent. The Medicare levy tax rate of 1.5 per cent is then added to this amount, totalling 46.5 per cent. The rate of tax under paragraph 26(1)(b) for a complying superannuation fund (15 per cent) is then subtracted from 46.5 per cent.

3.167 The rate of tax applicable to no-TFN contributions income is 31.5 per cent.

3.168 The amount of tax payable for no-TFN contributions income is payable in addition to the ordinary income tax payable on contributions.

3.169 For example, for 2007-08 no-TFN contributions income will be taxed at a rate of 31.5 per cent. This income will also form part of the superannuation fund or RSA provider's assessable income and be taxed as part of its taxable income (generally at a rate of 15 per cent). [ Schedule 1, item 1, paragraph 26(1 )( a ), subsection 26(2 ) or paragraph 23(4BA )( a ) of the Income Tax Rates Act 1986 ]