HOUSE OF REPRESENTATIVES

Explanatory Memorandum

(Circulated by the authority of the Treasurer, the Hon. John Dawkins, M.P.)

General Outline and Financial Impact

The Taxation Laws Amendment (Superannuation) Bill 1992 will amend various Acts (unless otherwise indicated all amendments refer to the Income Tax Assessment Act 1936) by making the following changes:

Limits on Deductions for Superannuation Contributions

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Limits the amount of the deductions available to an employer or self employed person for contributions to a superannuation fund.

Date of effect: The 1994-95 year of income and subsequent years.

Proposal announced: Treasurer's 'Security in Retirement -Planning for Tomorrow Today' Statement of 30 June 1992.

Financial impact: This proposal combined with the measures relating to Reasonable Benefit Limits is expected to increase revenue by $20 million in 1995-96.

Deductions and rebates for personal superannuation contributions

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Replaces the existing deduction and rebate arrangements for employees who have employer superannuation support with a new rebate.

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Extends the concept of a substantially self-employed person.

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Clarifies the circumstances in which a person is an eligible person and therefore entitled to a tax deduction for personal superannuation contributions.

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Ensures that a payment of superannuation guarantee charge (SGC) counts as employer superannuation support in the year for which it is payable.

Date of effect: 1 July 1992.

Proposal announced: Treasurer's 'Security in Retirement-Planning for Tomorrow Today' Statement of 30 June 1992.

Financial impact: These measures are expected to increase revenue by $230 million in 1993-94.

Superannuation Pensions and Roll-over/Annuities

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Introduces a new 15% rebate on superannuation pensions paid from taxed superannuation funds and on pensions paid from taxed superannuation funds and on annuities purchased wholly with rolled-over eligible termination payments (ETPs) to replace the existing rebate arrangements. The rebate will apply to all such superannuation pensions and roll-over annuities payable to taxpayers who are aged 55 or more, regardless of when the pension or annuity commenced to be payable.

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Limits the undeducted purchase price (UPP) for rebatable superannuation pensions and rebatable ETP annuities to the post-June 1983 undeducted contributions.

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Includes in the definition of an ETP the unused undeducted purchase-price (UUPP) of a commuted superannuation pension or roll-over annuity and of the residual capital value of a superannuation pension or roll-over annuity so that UUPP can be rolled-over.

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Extends the meaning of pensions and annuities to ensure that appropriate tax treatment is given to allocated pensions and allocated annuities.

Date of effect: The amendments extending the meaning of pensions and annuities apply to pension payments made after the date of Royal Assent and to annuities purchased after that date. The other changes apply from 1 July 1994.

Proposal announced: Treasurer's 'Security in Retirement -Planning for Tomorrow Today' Statement of 30 June 1992.

Financial impact: The rebate proposal is likely to involve an indeterminate but not significant cost in the short-term. Longer term costs could be greater if the measure is successful in encouraging greater use of pensions and annuities, with this cost offset by lower age pension outlays. The UPP proposal will result in an indeterminate but not significant revenue gain. The UUPP proposal will have an indeterminate effect on the revenue. The change to the meaning of pension and annuity is not expected to have any revenue implications.

Rolling-over Eligible Termination Payments

Elections to Roll-over an Eligible Termination Payment

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Removes the ability of taxpayers to choose which part of an eligible termination payment is rolled-over (except undeducted contributions and concessional component).

Date of effect: On or after 1 July 1992.

Proposal announced: The Treasurer's 'Security in Retirement - Planning for Tomorrow Today' Statement of 30 June 1992.

Financial impact: A small increase to tax revenue is expected.

The 90 day Roll-Over Period

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Removes the current 90 day roll-over period so that eligible termination payments must be rolled-over directly from the source of the payment to a complying superannuation fund, a complying approved deposit fund, a deferred annuity or an immediate annuity.

Date of effect: From 1 July 1994.

Proposal announced: The Treasurer's 'Security in Retirement - Planning for Tomorrow Today' Statement of 30 June 1992.

Financial impact: Insignificant.

Taxation of redundancy, early retirement and invalidity payments

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Provides a limit on the concessionally taxed amount of bona fide redundancy payments and approved early retirement scheme payments.

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Exempts amounts within that limit from tax.

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Prevents bona fide redundancy payments and approved early retirement scheme payments being paid from a superannuation fund.

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modifies the meaning of invalidity payment and requires verification of the recipient's disability by two legally qualified medical practitioners.

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Creates a new ETP component comprising invalidity payments made On or after 1 July 1994 (the post-June 1994 invalidity component).

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Exempts the post-June 1994 invalidity component from tax.

Date of effect: 1 July 1994

Proposal announced: Treasurer's 'Security in Retirement -Planning for Tomorrow Today' Statement of 30 June 1992.

Financial impact: The proposed limit on bona fide redundancy payments (BFRPs) and approved early retirement scheme payments (AERSPs) will generate an indeterminate but not significant revenue gain. The exemption from tax of the post-June 1994 invalidity ,component and amounts of BFRPs and AERSPs within the limit will cost $20 million in 1995-96.

Reasonable Benefit Limits

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Transfers administration of the reasonable benefit limits (RBLs) from the Insurance and Superannuation Commissioner to the Commissioner of Taxation.

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Makes the RBLs a set dollar amount rather than a multiple of a person's highest average salary.

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Makes other minor changes to simplify the treatment of the excessive amount of pensions and annuities for RBL purposes.

Date of effect: 1 July 1994.

Proposal announced: Treasurer's 'Security in Retirement -Planning for Tomorrow Today' Statement of 30 June 1992.

Financial impact: This proposal combined with the measures relating to limits on deductions for superannuation contributions is expected to increase revenue by $20 million in 1995-96.

Amendments of the Occupational Superannuation Standards Act 1987

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Removes provisions relating to reasonable benefit limits

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Allows superannuation funds to retain a member's benefit for up to 90 days while the member decides ' whether to rollover the benefit

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Allows retired persons to transfer their benefits into Superannuation funds

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Inserts definitions of pension and annuity

Date of effect: 1 July 1994 for first two amendments and date of Royal Assent for the remainder.

Proposal announced: Treasurer's 'Security in Retirement -Planning for Tomorrow Today' Statement of 30 June 1992

Financial impact: Insignificant.

Superannuation Guarantee Charge

The proposed amendments will amend the Superannuation Guarantee (Administration) Act 1992 ("the Act") to:

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ensure that, if an employer's superannuation contribution under an industrial award in place prior to 21 August 1991 is based on the earnings of a standard employee, then the earnings of the standard employee can be the employee's "notional earnings base";

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extend this measure to apply where superannuation contributions, based on the earnings of a standard employee, are made under a law in place prior to 21 August 1991. In that case the earnings of the standard employee can also be the employee's "notional earnings basel';

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exclude payments of salary or wages which are prescribed in the Regulations from the calculation of the superannuation guarantee charge. A complementary Regulation will be made to prescribe certain payments of salary or wages which are alternatives to Social Security payments;

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clarify that a superannuation guarantee obligation arises when salary or wages of $450 or more is paid to an employee in a month;

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ensure that, in calculating the shortfall, the amount of the employee's salary or wages cannot exceed the maximum contribution base; extend the time for an employer to obtain a statement from a fund so that contributions to it are deemed to be made to a complying superannuation fund. The extended time will be 30 days after the date of introduction of this amendment; exclude any period of unpaid leave from the calculation of the reduced charge percentage in defined benefit scheme cases; and correct an error in the indexation calculations in section 15 by replacing the reference to the year '1992-93' with '1993-94'.

Date of effect: The amendments to the notional earnings base, excluded salary or wages and the $450 exemption threshold apply from 1 July 1992. The other amendments apply from the date of introduction of the amendments.

Financial impact: The amendments are not expected to have a significant financial impact.

Clauses involved in the proposed amendments

Clause 1: stipulates the title of the Act to be Taxation Laws Amendment (Superannuation) Act 1992.

Clause 2: sets out the commencement dates for the provision of the Bill

Clause 3: stipulates the "Principal Act" is the Income Tax Assessment Act 1936.

Limits on Deductions for Superannuation Contributions

Clause 4: Proposes to repeal existing subsections 82AAC(2) and (2A) and to insert new subsections 82AAC(2) to (2H) to limit the amount of the deductions for employer superannuation contributions for the 1994-95 year of income and all subsequent years.

Clause 5: Proposes to repeal existing subsection 82AAT(2) and to insert new subsections 82AAT(2) to (2C) to limit the amount of the deductions available to a self employed person for contributions to a superannuation fund for the 1994-95 year of income and all subsequent years.

Clause 6: Proposes that the amendments made by clauses 4 and 5 apply to assessments for the 1994-95 year of income and all subsequent years

Deductions and rebates for personal superannuation contributions

Subclause 7(1):

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Omits various definitions from subsection 82AAS(1) which are no longer required in that subsection because of the proposed amendments.

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Inserts a definition of eligible employment in subsection 82AAS(1) for the purposes of new subsection 82AAS(3).

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Omits subsection 82AAS(2A) to prevent employees with employer superannuation support receiving a tax deduction for personal superannuation contributions.

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Inserts new subsection 82AAS(3) to extend the concept of a substantially self-employed person by removing the requirement that the employer superannuation support be restricted to industrial award superannuation.

Subclause 7(2):

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Amends paragraph 82AAS(2)(a) to clarify the operation of the 'reasonable to expect' test in determining whether a person is an eligible person.

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Inserts new sub-subparagraph 82AAS(2)(b)(ii)(D) to allow former employees and employees who no longer have employer superannuation support to be eligible persons even if they have accrued superannuation benefits.

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Inserts new subsections 82AAS(4)-(7) to ensure that a payment of superannuation guarantee charge (SGC) counts as employer superannuation support in the year for which it is payable.

Clause 8 Amends subsection 82AAT(2) to provide a single deduction limit for all eligible persons.

Clause 9: Replaces the current rebate for personal superannuation contributions with a new rebate. The clause also inserts definitions of 'complying superannuation fund', 'dependant' and 'eligible personal superannuation contributions'.

Clause 10: Amends section 177A to omit references to the current rebate.

Clause 11: Omits subsections 177B(5) and (6) which refer to the current rebate.

Clause 12: Amends section 177C to omit references to the current rebate.

Clause 13: Amends section 177F to omit references to the current rebate.

Clause 14: Amends section 221YAB to replace the reference to the current rebate with a reference to the new rebate.

Clause 15: Amends subsection 262A(4A) to ensure that the record-keeping requirements relating to the current rebate will still apply in cases where the rebate has been received in income years prior to 1 July 1992.

Clause 16: Inserts in subsection 267(1) the definitions omitted from subsection 82AAS(1) by subclause 10(1) which are relevant to Part IX of the Act.

Clause 17: Provides for the dates of application of the proposed amendments.

Clause 18: Ensures that regulation 12A of the Income Tax Regulations, which, for the purposes of subsection 82AAT(2), specifies a limit on deductions for personal superannuation contributions, also applies to the proposed amended subsection.

Superannuation Pensions and Roll-over Annuities

Clause 19: Omits from subsection 1595J(1) a number of definitions which are no longer necessary as a result of the simplified rebate arrangements and omits subsection 1595J(2). Inserts in subsection 1595J(1) new or amended definitions of death or disability benefit, first payment date, rebatable ETP annuity, rebatable proportion, rebatable superannuation pension, rebatable 27H amount and recipient.

Clause 20: Removes section 1595K.

Clause 21: Re-locates and reorders section 1595L so that it becomes section 275C. Transfers associated definitions from subsection 1595J(1) and section 1595K to the new section 275C.

Clause 22: Inserts a new subsection 1595M(1) to calculate the new rebate entitlement for a rebatable superannuation pension.

Clause 23: Removes sections 1595N to 1595R (inclusive) because they are no longer necessary under the new simplified rebate arrangements.

Clause 24: Amends section 1595L1 to calculate the new rebate entitlement for a rebatable ETP annuity.

Clause 25: Removes sections 1595V to 1595Y (inclusive) because they are no longer necessary under the new simplified rebate arrangements.

Clause 26: Transfers definitions which are no longer needed in subsection 1595J(1) to section 275B where those terms are still relevant.

Clause 27: Proposes that these amendments apply to payments of annuities or pensions made on or after 1 July 1994.

Clause 28: Replaces the current definition of UPP with a new definition of UPP so that, for rebatable superannuation pensions and rebatable ETP annuities, UPP consists only of undeducted contributions.

Clause 29: Makes a minor consequential technical amendment to subsection 275B(3).

Clause 30: Amends paragraphs (d), (da), (db), (e), (f), (g), (ga), (gb), (h) and (j) of the definition of an ETP in subsection 27A(1) to include UUPP as part of the ETP. Replaces the current definition of undeducted contributions with a new definition of undeducted contributions so that UUPP is treated as undeducted contributions and makes a minor consequential technical amendment to subsection 27A(7).

Clause 31: Amends paragraph 27AB(3)(b) to remove subparagraph (i) which has become redundant as a consequence of these amendments.

Clause 32: Amends paragraphs 27H(3A)(a) and 27H(3A)(b) relating to the matters the Commissioner will have regard to when reducing the deductible amount following the partial commutation of a superannuation pension or annuity.

Clause 33: Proposes that, apart from the amendments to section 27H(3A), the amendments apply to ETPs made on or after 1 July 1994. The amendments to subsection 27H(3A) applies to pensions and annuities which commence to be payable after 1 July 1994.

Clause 34: Inserts definitions of annuity and pension in subsection 27A(1) by reference to section 3 of the Occupational Superannuation Standards Act 1987 and amends the definition of eligible annuity in subsection 27A(1) to ensure that ETPs can be rolled-over to purchase annuities which meet the pension and annuity standards specified in the Income Tax Regulations.

Clause 35: Amends the definition of RA policy in subsection 110(1) so that annuities which meet the pension and annuity standards are taxed appropriately in the hands of life assurance companies and registered organisations

Clause 36: Inserts definitions of annuity and pension in subsection 221A(2) so that the PAYE provisions apply to annuities and pensions within the extended meaning.

Clause 37: Inserts definitions of annuity and pension in subsection 267(1) so that the extended meanings apply appropriately to pensions paid by complying superannuation funds.

Clause 38: Proposes that the amendments apply to annuities purchased after the date of Royal Assent and pension payments made after the date of Royal Assent.

Clause 39: Insert a transitional provision to ensure that Regulations made in accordance with the amended definition of eligible annuity in subsection 27A(1) may apply to annuities purchased during any period after the date of Royal Assent.

Rolling-Over Eligible Termination Payments

Clause 40: Removes subsection 27A(10) which contains provisions to truncate the eligible service period of an eligible termination payment (ETP).

Clause 41: Removes subsection 27AA(2) which contains the Commissioner's discretion to increase the pre-July 83 component of an ETP. This provision is now incorporated in new subsection 27AC.

Clause 42: Inserts subsection 27AC to calculate the components of the retained amount of the ETP (ie, the components of the ETP not rolled-over).

Clause 43: Amends section 27B to include the taxed and untaxed elements of the retained amount of the post-June 83 component of an ETP in a taxpayer's assessable income in the year the ETP is made.

Clause 44: Amends section 27C to include 5% of the retained amounts of the pre-July 83 and concessional components of an ETP in a taxpayer's assessable income in the year the ETP is made.

Clause 45: Inserts new subsections 27D(4), 27D(5), 27D(6) and 27D(7) to include the steps that must be used to calculate the amount of the pre-July 83 component and the taxed and untaxed elements of the post-June 83 component to be included in a taxpayer's election to roll-over an ETP.

Clause 46: Sets out the commencement date of the amendments made by Clauses 40 - 45.

Clause 47 and 48: Removes the definitions and references to roll-over period from Subdivision AA of Division 2 of Part III.

Clause 49: Provides that the amendments to abolish the 90 day roll-over period (ie, Clauses 47 and 48) apply in relation to amounts paid on or after 1 July 1994.

Taxation of redundancy, early retirement and invalidity payments

Clause 50:

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Excludes from the definition of ETP the tax-free amount of a BFRP and an AERSP made on or after 1 July 1994.

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Redefines the concessional component of an ETP so that it comprises BFRPs, AERSPs and invalidity payments which are made before 1 July 1994 only.

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Inserts a definition of the post-June 1994 invalidity component in subsection 27A(1).

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Inserts a definition of the tax-free amount of a BFRP and an AERSP in subsection 27A(1).

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Inserts new subsections 27A(19)-(21) to specify the tax-free amount for the 1994/95 income year, and to index that amount to average weekly earnings for subsequent income years.

Clause 51: Amends subsection 27AA(1) by inserting references to the new post-June 1994 invalidity component to identify it as a separate component of an ETP, and to enable the calculation of the pre-July 1983 component of an ETP containing the post-June 1994 invalidity component.

Clause 52: Amends subsection 27AC by inserting references to the new post-June 1994 invalidity component to identify that component in the retained amount of an ETP, and to enable the calculation of the retained amount of the pre-July 1983 and post-June 1983 component of an ETP containing the post-June 1994 invalidity component. (Subsection 27AC is inserted by clause 42, explained in Chapter 4).

Clause 53:

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Inserts new subsection 27CB(1) to exempt from income tax and capital gains tax the post-June 1994 invalidity component of an ETP and the tax-free amount of a BFRP and AERSP.

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Inserts new subsection 27CB(2) to facilitate calculation of BFRPs and AERSPs made on or after 1 July 1994.

Clause 54:

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Inserts new sub-subparagraph 27D(1)(b)(iii)(E) to enable the post-June 1994 invalidity component of an ETP to be rolled over.

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Inserts new paragraph 27D(5)(aa) and amends paragraph 27D(5)(c) to enable calculation of the extent to which the rolled-over amount (called the applied amount) of an ETP containing the post-June 1994 invalidity component consists of that component and the pre-July 1983 and post-June 1983 components. (Subsection 27D(5) is inserted by clause 45, explained in Chapter 4).

Clause 55:

Inserts new paragraph 27E(4)(aa) to ensure that AERSPs made on or after 1 July 1994 cannot be paid from superannuation funds.

Inserts new subsection 27E(6) to facilitate calculation of

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AERSPs made on or after 1 July 1994.

Clause 56:

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Inserts new paragraph 27F(1)(aa) to ensure that BFRPs made on or after 1 July 1994 cannot be paid from superannuation funds.

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Inserts new subsection 27F(3) to facilitate calculation of BFRPs made on or after i July 1994.

Clause 57: Replaces current subparagraph 27G(b)(i) with a new subparagraph to modify the meaning of invalidity payments made on or after 1 July 1994, and to require verification of the recipient's disability by two legally qualified medical practitioners.

Reasonable Benefit Limits

Clause 58: Proposes to amend section 27A of the Act to remove references to 'ISC-directed commutation payment' as a result of changes to simplify the treatment, for reasonable benefit limit (RBL) purposes, of the excessive amount of pensions and annuities.

Clause 59: Proposes to amend section 27AA of the Act, as a consequence of the Commissioner of Taxation taking responsibility for administration of the RBLs, to remove references to actions to be taken by the Insurance and Superannuation Commissioner.

Clause 60: Proposes to insert new Division 14 into the Act to allow the Commissioner of Taxation to takeover responsibility for the administration of the RBLs and to simplify the RBL rules.

Clause 61: Determines the application date for clauses 58 and 59.

Clause 62: Amendment of assessments.

Amendments Relating To Reasonable Benefit Limits

Clauses involved in the proposed amendments

Clause 63: Stipulates the "Principal Act" is the Occupational Superannuation Standards Act 1987.

Division 2 - Amendments relating to reasonable benefit limits (RBLs)

Clause 64: Amends section 3 by omitting paragraphs (aa) and (ab) of the definition of "reviewable decision" in subsection 3(1).

Clause 65: Repeals Part IIIA

Clause 66: Amends section 16 by omitting from subsection (1) "(ab)" and by omitting subsections (1A) and

Clause 67: Amends section 17 by omitting ",or a person" and "or the person" wherever occurring.

Clause 68: Amends section 22 by omitting paragraph (d).

Clause 69: The application provision repeals part IIIA from 1 July 1994 with appropriate qualification for benefits paid up to 30 June 1994 but processed after that date.

Division 3 -Amendments to allow superannuation funds to retain a member's benefits for up to 90 days while the member decides whether to roll-over the benefit

Clause 70: Inserts new subsection (6) in section 3 of the Occupational Superannuation Standards Act so that a fund would not fail to meet the definition of "superannuation fund" in subsection 3(1) notwithstanding that it delayed provision of the benefit at the member's request for up to 90 days. New subsection (7) clarifies that subsection (6) is not intended to otherwise interfere with the payments of benefits consistent with paragraph (b) of the "superannuation fund" definition.

Clause 71: The clause provides that the amendment applies to benefits arising on or after 1 July 1994.

Division 4 -Amendments to allow retired persons to transfer their benefits into superannuation funds

Clause 72: Inserts new sub-paragraph (b) (iv) into the definition of "superannuation fund" in subsection 3(1), allowing the provision of pensions for a transferred retiree member of the fund. The clause also inserts the definition of a "transferred retiree member" into subsection 3(1) including a description of the permitted sources of transferred benefits which will be superannuation funds, approved deposit funds, life assurance companies, or registered organisations.

Clause 73: Sets the date of application of the amendment to date of assent of the legislation.

Division 5 -Amendments relating to minimum standards for pensions and annuities

Clause 74: Inserts into subsection 3(1) new definitions for "annuity" and "pension" in terms of regulations to be made under the Occupational Superannuation Standards Act.

Clause 75: Inserts into section 7 a new provision to clarify the role of the regulations in prescribing the form in which pensions are to be provided by a fund if it is to meet the definition set out in the regulations.

Clause 76: Provides for transitional arrangements in respect of the regulations.

Superannuation Guarantee Charge

Clause 77: Provides that the amendments apply to the Superannuation Guarantee (Administration) Act 1992.

Clause 78: Amends section 13 to ensure that, if an employer's superannuation contribution under an industrial award, or a law, in place prior to 21 August 1992 is based on a percentage of the earnings of a standard employee, then the earnings of the standard employee can be the employee's "notional earnings base".

Clause 79: Makes a consequential amendment to subsection 23(9) to include a reference to federal, state and territory laws.

Clause 80: Inserts new section 25A to apply if an employer's requisite superannuation contribution, under an award in place prior to 21 August 1991, is a fiat dollar superannuation contribution which is increased according to changes in the earnings of a standard employee. In that case the earnings of the standard employee can be the employee's "notional earnings base".

Clause 81: Sets out the application date for clauses 78, 79 and 80.

Clause 82: Corrects an error in the indexation calculations in section 15 by replacing the reference to the year '1992-93' with '1993-94'.

Clause 83: Ensures that, in calculating the shortfall, under section 18, the amount of the employee's salary or wages cannot exceed the maximum contribution base.

Clause 84: Ensures that, in calculating the shortfall, under section 19, the amount of the employee's salary or wages cannot exceed the maximum contribution base.

Clause 85: Excludes any period of unpaid leave from the calculation of the reduced charge percentage in defined benefit scheme cases.

Clause 86: Extends the time for an employer to obtain a statement from a fund so that contributions to it are deemed to be made to a complying superannuation fund. The extended time will be 30 days after the date of introduction of this amendment.

Clause 87: Excludes payments of salary or wages which are prescribed in the Regulations from the calculation of the superannuation guarantee charge. (A complementary Regulation will be made to prescribe certain payments of salary or wages which are alternatives to Social Security payments). The clause will also clarify that a superannuation guarantee obligation arises when salary or wages of $450 or more is paid to an employee in a month.

Clause 88: Sets out the application date for clause 87.