HOUSE OF REPRESENTATIVES

Explanatory Memorandum

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

Chapter 6 - Reasonable benefit limits

Summary of proposed amendments

Purpose of amendment: Transfer administration of the reasonable benefit limits (RBLs) from the Insurance and Superannuation Commissioner to the Commissioner of Taxation.

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

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

Date of effect: Applies to eligible termination payments (other than ISC-directed commutation payments) made on or after I July 1994 and to superannuation pensions and annuities which commence to be paid on or after that date.

Background to the legislation

The purpose of the RBLs is to limit the amount of concessionally taxed superannuation benefits received by a person. The existing RBL rules are in the Occupational Superannuation Standards Act 1987 (OSS Act) and the Occupational Superannuation Standards Regulations. Administration of the RBLs is the responsibility of the Insurance and Superannuation Commissioner.

Under the OSS Act a person's RBL is expressed as a multiple of the person's highest average salary in any three consecutive years. When a person is paid a superannuation benefit, that benefit together with any previous benefits, are measured against the person's RBL. If the total of those benefits exceeds the person's RBL, the excess is taxed at the person's marginal rate of income tax. In the case of a superannuation pension or annuity, the excess amount of the pension or annuity must be commuted so that the resulting eligible termination payment (ETP) is taxed at the person's marginal rate of income tax.

Explanation of proposed amendments

From 1 July 1994 the administration of the RBLs is to become the responsibility of the Commissioner of Taxation. Therefore, the proposed amendments will insert the RBL rules into the Income Tax Assessment Act 1936 (the Act). Consequential amendments to the OSS Act will be made to remove its RBL provisions.

The proposed amendments will also change the existing RBL rules to simplify their operation from I July 1994.

The following explanation of the proposed amendments begins with an overview of the RBL provisions, then looks at each of the steps in the RBL process, and concludes by discussing consequential amendments.

1. Overview

The proposed amendments will insert new Division 14 of Part III into the Act which deals with RBLs. [Clause 60]

The objects of the new Division are:

•

to provide for a system of RBLs for certain eligible termination payments (ETPs), superannuation pensions and annuities;

•

to require the payer of an ETP, pension or annuity to give to the Commissioner of Taxation (the Commissioner) information about the benefit;

•

to allow the Commissioner to determine the extent to which the ETP, pension or annuity exceeds a person's RBL;

•

if an ETP exceeds the RBL - to generate an excessive component which is included in the person's assessable income (under subsection 27B(3) of the Act) and is not subject to any concessional tax treatment; and

•

if a pension or annuity exceeds the RBL - to generate an excessive amount which will be used to work out the proportion of the pension or annuity which will not be rebatable (under Subdivision AAB of Division 17 of the Act). {Section 1401

There are a number of steps in the RBL process, namely:

•

the payer of a superannuation benefit is obliged to notify the Commissioner of the payment of the benefit, subject to certain exceptions [Subdivisions C and F];

•

once notified the Commissioner is required to determine whether the benefit is in excess of the person's RBL [Subdivision D];

•

in order to make that determination the Commissioner must ascertain the following:

-

the amount of the benefit which counts towards the RBI.s [Subdivision H and J];

-

- the amount of previous benefits which count towards the person's RBL [Section 140ZA];

-

whether the benefit is to be assessed against the person's lump sum RBL or pension RBL and the amount of the relevant RBL [Subdivision G];

-

if the benefit is in excess of the person's RBL and the amount of any excess [Subdivision E];

•

if the benefit is a superannuation pension or annuity, the Commissioner must also determine the rebatable proportion of that pension or annuity [Subdivision K]. [Section 140A]

Each of the above steps will be examined separately below. A simple example of the operation of the RBLs is set out in Division 14. [Section 140B]

Division 14 also contains a number of interpretation provisions [Subdivision B]. These provisions give meanings to terms used in the Division. For convenience, the terms are explained in the sections dealing with the provisions in which the terms are used. Also, at the end of this Chapter there is a glossary of commonly used terms.

The inclusion of Division 14 in the Act and the changes to simplify the treatment of the excessive amount of a superannuation pension or annuity gives rise to consequential amendments to other sections of the Act. These are also discussed below.

2. Notification Requirements

Payer Obligations

A 'payer' is a person or other entity (other than a continuously non-complying ADF - see section 27A of the Act) that makes, or is liable to make, a payment of a benefit. [Subsection 140C(1)]

If, on or after 1 July 1994, a payer makes an ETP in relation to a person or commences to pay (see comments below) a superannuation pension or an immediate annuity (i.e., an annuity that is presently payable) on or after that date, the payer must give the Commissioner a notice, subject to the exceptions outlined below. The information to be included in the notice will be specified in the regulations. The receipt of this notice by the Commissioner effectively triggers the process for determining whether the benefit exceeds the person's RBL. [Subsection 140M(1)]

A superannuation pension or annuity commences to be paid at the beginning of the commencement day of the pension or annuity. The 'commencement day' of a pension or annuity is the first day of the period to which the first payment of the pension or annuity relates. [Subsection 140C(1) and section 140J].

Exceptions

There are three circumstances where a payer does not have to notify the Commissioner.

Firstly, if the benefit is an ETP and all or part of the ETP is rolled over (as defined in section 27A of the Act), for these purposes. The amount of the ETP rolled over is taken to have never been paid. Although the amount of the ETP rolled over is not assessed against the person's RBL at that time, when the benefit is finally paid to the person from the rollover institution it will be assessed against the person's RBL. [Section 140D]

Secondly, a payer will not have to notify the Commissioner if the payer is an employer of the recipient of the benefit, or the trustee of a superannuation fund, and the benefit does not exceed $5,000. An ETP will be taken to be paid from a superannuation fund if the ETP is not paid by the superannuation fund, but is in effect funded from the superannuation fund (e.g., the Commonwealth Superannuation Scheme). [Sub subparagraph 140M(1)(a)(i)(B)and section 140E]

Thirdly, a payer will not have to notify the Commissioner if the ETP, superannuation pension or annuity does not count towards the person's RBL (these benefits are discussed later in the section on the 'Benefits to be Counted Towards a Person's RBL'). [Paragraph 140M(1)(b)]

Notice Requirements

The payer must give the Commissioner a notice containing information as required by the regulations. The information specified in the regulations must either concern the relevant ETP, pension or annuity or be necessary to enable the Commissioner to make a final determination in relation to the recipient's RBL. [Subsection 140M(2)]

The notice must be in a form approved in writing by the Commissioner. Such approval may require or permit a notice to be given in writing or in accordance with specified software requirements on a specified kind of data processing device. A 'data processing device' is any article or material (e.g., a disc) from which information is capable of being reproduced with or without the aid of any other article or device [Subsection 140C(1)].

The notice is to be given to the Commissioner by one of the following days:

•

if the payer is advised by the recipient, (on or before the 10th day of the month following the month in which the payment was made,) that the recipient has applied for a tax file number by the end of the 14th day of the second month after the month in which the payment was made;

or

•

in any other case - by the end of the 14th day of the month after the month in which the payment was made;

However, the Commissioner has a discretion to extend the time for giving notices [Subsections 140M(3) and (4)].

Example

A payer makes an ETP to a person on 30 November 1994. The recipient advises the payer on 2 December 1994 that an application for a tax file number has been made to the Commissioner and a response has not yet been received.

The payer must give the notice of payment of the ETP to the Commissioner by the end of 14 January 1995 unless the Commissioner allows otherwise.

If the recipient had provided the tax file number to the payer at the time the ETP was made, the payer would need to give the notice to the Commissioner by 14 December 1994 unless the Commissioner allows otherwise. The information required to be given in the notice will include the tax file number of the recipient of the benefit, if the number has been provided to the payer. In order to facilitate the quotation of the person's tax file number to the payer, the person may quote the tax file number to the payer when the ETP is made, or the first payment of the pension or annuity is made, by informing the payer in a manner approved by the Commissioner. The payer may be informed of the tax file number by the benefit recipient, or by another person acting for the recipient. [Section 14ON]

If a payer gives the Commissioner a notice concerning the payment of a benefit, the payer must at the same time give a copy of the notice to the recipient. [Section 140PJ

Payer Obligations on Rollover

Although a payer is not taken, for the purposes of the notification obligations, to have made an ETP where the ETP is rolled over, certain notification obligations may still be placed on payers on rollover of an ETP.

The payer of an ETP that is rolled over must notify the Commissioner of the rollover if each of the following are satisfied:

•

the person becomes entitled to receive an ETP; the entitlement arose on or after 1 July 1994;

•

the ETP arises from either:

-

the commutation of a superannuation pension or immediate annuity; or

-

the residual capital value of a superannuation pension or annuity; and

•

the person rolls over all or part of the ETP.

The information to be included in the notice will be specified in the regulations and must concern the ETP, pension or annuity. The purpose of this notice is to allow the Commissioner to take into account the ETP in determining the amount of the original pension or annuity to be counted towards the person's RBL. [Subsections 140Q(1) and (2)]

The notice must be in a form approved in writing by the Commissioner. Such approval may require or permit a notice to be given in writing or in accordance with specified software requirements on a specified kind of data processing device.

The notice is to be given to the Commissioner by the end of the 14th day of the month after the month in which the entitlement to the ETP arose or on such further day as the Commissioner allows. [Subsections 140Q(3) and (4)]

Failure to notify

If a payer fails to notify the Commissioner of the payment of a benefit or the rollover of an ETP as required, the payer will be in breach of section 8C of the Taxation Administration Act 1953. That section deals with the failure to comply with requirements under a taxation law. The penalty on conviction for a first offence is a fine of not more than $2,000.

3. Benefits to be Counted Towards a Person's RBL

Apart from the exceptions outlined below, each of the following benefits are to be counted towards a person's RBL:

•

an ETP made in relation to a person on or after 16 February 1990;

•

a superannuation pension which has a commencement day on or after 16 February 1990;

•

an annuity which has a commencement day on or after 16 February 1990. [Subsection 140ZC(1)]

The benefits which fall within the above three types of benefits but which are not to be counted against a person's RBL are as follows:

•

an ETP made before 1 July 1990 by the person's employer, where the person was not an associate (as defined in section 26AAB of the Act) of the employer at the time the ETP was made;

•

an ETP arising from the commutation of, or the residual capital value of, a superannuation pension or annuity which:

-

has a commencement day before I July 1990; or

-

did not meet the pension and annuity standards (as defined in Part IIIB of the OSS Act);

•

a residual pension or annuity which is payable on the partial commutation of another pension or annuity which:

-

has a commencement day before 1 July 1990; or

-

did not meet the pension and annuity standards;

•

a superannuation pension or annuity, or an ETP arising from the commutation of a superannuation pension or annuity, which is payable to a person as the result of the death of another person and is a reversion of another pension or annuity that was already payable to that other person;

•

an ETP paid in relation to the person as a result of the death of that person;

•

an ETP paid to a charitable or religious body;

•

a superannuation pension or annuity paid to a person under 18 years of age because of the death of another person, or a disability of another person where two legally qualified medical practitioners have certified that the disability is likely to prevent the person from ever being employed in a capacity for which the person is reasonably qualified by reason of education, training or experience;

•

an ETP arising from the commutation of a superannuation pension or annuity payable as a result of the death of another person, and the payment is made to a spouse or child of the deceased within 6 months of the person's death or 3 months after the granting of probate of the will or letters of administration of the estate, whichever occurs later. [Subsection 140ZC(2)]

4. Determination if Benefit is in Excess

Commissioner's determination

Once the Commissioner receives a notice of payment of a benefit from a payer, the Commissioner must (subject to the exception outlined below) determine whether the ETP, pension or annuity which was paid or commenced to be paid to the person is in excess of the person's RBL If the benefit is in excess of the person's RBL the Commissioner must also determine the amount of the excess and, in the case of a rebatable superannuation pension or rebatable ETP annuity (terms defined in section 159SJ of the Act), the rebatable proportion of the pension or annuity. Such a determination is known as a 'final determination'. The Commissioner must make the final determination within 60 days after receiving the notice. [Subsections 140R(1),C) and (3)]

The exception to the above, is where the payer fails to provide the recipient's tax file number to the Commissioner. In such circumstances, the Commissioner cannot make a final determination, although the Commissioner may make an interim determination (see discussion below). [Subsection 140R(4)]

Interim Determinations

The Commissioner must make an interim determination rather than a final determination if both of the following are satisfied:

•

the Commissioner has received a notice from a payer (and is therefore required to make a final determination) but the notice does not specify the person's tax file number; and

•

the Commissioner does not have sufficient information to make the determination, or the notice does not specify the benefit recipient's tax file number.

The interim determination must be whether the benefit paid to the person is in excess of the person's RBL. If the benefit is in excess of the person's RBL the Commissioner must also determine the amount of the excess and, in the case of a rebatable superannuation pension or rebatable ETP annuity, the rebatable proportion of the pension or annuity. The Commissioner must make the interim determination within 60 days after receiving the notice. [Subsection 140T(1)]

If the notice from the payer does not specify the recipient's tax file number, in spite of any other provisions the Commissioner's interim determination must be that the whole of the RBL amount of the ETP, superannuation pension or annuity is in excess of the recipient's RBL. In such cases, if the benefit is a rebatable superannuation pension or rebatable ETP annuity, the determination will also be that the rebatable proportion of the pension or annuity is zero. [Subsection 140T(2)]

If the interim determination is that the benefit is not in excess of the person's RBL, the interim determination will be treated as a final determination. [Subsection 140T(3)]

The Commissioner when making an interim determination, can make the following assumptions:

•

if the Commissioner does not know if a reversion applies to a superannuation pension, or the level of the reversion - assume that a reversion of 85% applies;

•

if the Commissioner does not know the indexation rate (if any) of a pension assume it is indexed at the 'standard indexation rate' (see comments below);

•

if the Commissioner does not know if a superannuation pension is a rebatable superannuation pension - assume it is;

•

if the Commissioner does not know if a benefit is paid as a result of the death of another person - assume it is not;

•

if the Commissioner does not know if a superannuation pension or annuity satisfies the pension or annuity standards - assume it does not;

•

if the Commissioner does not know if an ETP arises from the commutation, or residual capital value, of a superannuation pension or annuity that had commenced to be paid - assume it does not;

•

if the Commissioner does not know if a superannuation pension or annuity payable to a person, as the result of the death of another person, is payable as a reversion of another superannuation pension or annuity that was already payable to the other person - assume it is not;

•

if the Commissioner does not know if a superannuation pension is payable for life - assume it is.

[Section 140U]

The Commissioner may determine 'the standard indexation rate' before a financial year as being the standard indexation rate applicable to that particular year. [Section 140V]

Notification of determinations

If the Commissioner makes a final determination or interim determination that a benefit is in excess of the person's RBL, the Commissioner must give the person the following:

(a)

in the case of a final determination - a copy of the determination, and a written statement setting out the basis on which the determination was made;

(b)

in the case of an interim determination - as per paragraph (a) above together with a notice stating:

•

that the person may, within the specified time (see the next section on review of determinations), apply to the Commissioner for an amendment of the interim determination;

•

the additional information the Commissioner needs in order to make a final determination and the manner (as approved by the Commissioner) in which the person may provide the additional information;

•

if the additional information is, or includes, the person's tax file number - that because the Commissioner has not been notified of the person's tax file number, the interim determination is to the effect that the whole of the RBL amount of the benefit is in excess of the person's RBL, and if the benefit is a rebatable superannuation pension or rebatable ETP annuity, the rebatable proportion of the pension or annuity is zero. {Subsection 140W(1)]

The Commissioner may give the above documents to a person whose benefit is not in excess of their RBL if he thinks it is desirable to provide those documents. [Subsection 140 W(2)]

The Commissioner must also give a copy of a final determination or interim determination upon request in respect of an ETP made in relation to the person, or a superannuation pension or annuity paid to the person. Such a request must be accompanied by a fee (if any) as specified in the regulations. If the Commissioner receives such a request, he must give the person a copy of the determination together with a statement setting out the basis on which the determination was made. [Section 140Z]

Review of final determinations and interim determinations

There are certain circumstances where a final determination or interim determination can be reviewed.

The Commissioner can revise a final determination in three circumstances. Firstly, if the Commissioner has made a final determination in relation to the commencement of payment of a superannuation pension or annuity and the person commutes all or pan of the pension or annuity within 6 months of the commencement day of the pension or annuity. The Commissioner must revise the final determination, within 60 days after receiving the notice of the commutation, to take account of the ETP arising on commutation. [Subsection 140S(1)]

Secondly, the Commissioner must revise a final determination if he has made a determination in respect of an ETP and later reduces the amount of the ETP under subsections 27A(4) or (4A) of the Act. Under those subsections the Commissioner can reduce an ETP made to the estate of a deceased taxpayer to the extent to which the dependants of the taxpayer will benefit from the estate. The Commissioner must revise the final determination, within 60 days after the reduction of the ETP, to take account of the reduction. [Subsection 1405(2)]

Thirdly, the Commissioner may revise a final determination, at any time, by making any alterations that he thinks necessary in order to correct any error made by the Commissioner, or to take account of any further material or information that has become available since the determination was made. [Subsection 1405(3)]

A revised determination is taken to be a final determination. In revising the determination, the Commissioner's powers are not wider than the powers in making the original determination./Subsections 1405(4) and (5)]

The Commissioner can also amend an interim determination in any way he considers necessary if:

•

the person to whom the interim determination relates applies for an amendment, within a specified time period (see discussion below); and

•

the Commissioner obtains any additional information necessary for the making of a final determination.

The Commissioner may amend the interim determination within 60 days of receiving the application. The amended interim determination will have effect as a final determination. [Subsection 140X(1) and (6)]

The time limits for applying for an amendment of an interim determination are from the day on which a copy of the determination was given to the person and ending on:

•

if the Commissioner determined that the person's benefit was not in excess of their RBL - the end of the first financial year after the financial year in which the benefit was paid or commenced to be paid; or

•

in any other case - 60 days after a copy of the interim determination was given to the person;

However, the Commissioner has a discretion to extend the time for amending a determination

[Subsection 140X(2)]

An application for amendment of an interim determination must be in writing and in the form approved in writing by the Commissioner. [Subsection 140X(3)]

If the Commissioner makes an interim determination in relation to a person and the person fails to apply for an amendment within the specified time, or the Commissioner does not receive sufficient information to make a determination, the interim determination will have effect as a final determination. Sufficient information for this purpose is either the additional information requested in the notice of the interim determination or sufficient information to make a final determination as agreed by the Commissioner. The Commissioner cannot agree that sufficient information is available to make a final determination if the person's tax file number still has not been given to the Commissioner. [Subsections 140X(4) and (5)]

If an interim determination has effect as a final determination because the person has not applied for an amendment or sufficient information has not been provided, the Commissioner may amend that final determination in any way he considers necessary if:

•

the person applies in writing for an amendment of the final determination; and

•

the person was unable to apply for an interim determination within the specified time because of circumstances beyond the person's control; and

•

the person can provide relevant information that was not available to the Commissioner when the interim determination was made. [Subsection 140X(7)]

The amended final determination will have effect as a final determination. [Subsection 140X(9)]

If the Commissioner amends an interim determination and the resulting determination is that the benefit is in excess of the person's RBL, he must give the person a copy of the amended determination, and a written statement setting out the basis on which the determination was amended. The Commissioner may also give these documents to a person whose benefit is not in excess of their RBL, if he thinks it is desirable to provide the documents. [Subsection 140X(8)]

In amending an interim determination or final determination, the Commissioner's powers are not wider than the powers available in making the original determination. [Subsections 140X(10) and (11)]

A person who is dissatisfied with a final determination or interim determination may also object against that determination. The objection is to be in a manner set out in Part IVC of the Taxation Administration Act 1953. Therefore, the objection process will be similar to objections against other taxation decisions made by the Commissioner. In order to ensure a person can object against a final determination which is revised by the Commissioner, such a revision is taken to be an amendment of a final determination for the purposes of section 14ZV of the Taxation Administration Act 1953. [Subsection 1405(6) and section 140Y]

5. Determination Process

The Commissioner will go through the following process in determining if a benefit is excessive:

(a)

if the benefit is to be counted towards the person's RBL, ascertain the amount of the benefit which is to be counted;

(b)

calculate the person's lump sum RBL and pension RBL;

(c)

determine which of the lump sum RBL or pension RBL applies to the person;

(d)

determine if the amount of the benefit which is to be counted against the person's RBL is in excess of the relevant RBL and the amount of that excess (if any);

(e)

if the benefit is a superannuation pension or annuity -determine the rebatable proportion of the pension or annuity.

Each of these steps are discussed below.

A. How much of the benefit is counted towards the person's RBL?

Once it is ascertained that a benefit is to be counted towards a person's RBL it is necessary to determine how much of the benefit is to count towards the RBL. The amount of a benefit which counts towards the RBL is known as the 'RBL amount'. The calculation of the RBL amount will depend on whether the benefit is an ETP, superannuation pension or annuity.

ETPs

An ETP is usually paid by a superannuation fund, ADF, life assurance company, registered organisation or an employer. The calculation of the RBL amount of an ETP will depend on the payer who makes the ETP.

If an ETP that counts towards a person's RBL is paid by the trustees of a superannuation fund or ADF, the RBL amount of the ETP is the sum of:

•

100% of the retained amount of the pre-July 83 component of the ETP;

•

100% of the taxed element of the retained amount of the post-June 83 component of the ETP; and

•

85% of the untaxed element of the retained amount of the post June 83 component of the ETP. (The meanings of these components of an ETP are discussed below). [Section 140ZH]

Example

A person receives an ETP of $70,000 from a superannuation fund. The components of the ETP are as follows:

The RBL amount of the ETP is as follows:

if an ETP is paid by a life assurance company or registered organisation and the ETP arises as a result of the commutation of either the whole or part of an annuity that met the pension and annuity standards or a deferred annuity (i.e., an annuity that is not presently payable), the RBL amount of the ETP is the whole amount of the ETP less any part of the ETP that consists of the retained amount of the undeducted contributions, the retained amount of the

concessional component, the retained amount of the post-June 1994 invalidity component or the non-qualifying component. [Section 140ZI]

If an ETP is paid in relation to a person by the person's employer, the RBL amount of the ETP is:

•

if the employee is an associate (as defined in section 26AAB of the Act) of the employer - the sum of all of the retained amount of the pre-July 83 component of the ETP and 85% of the retained amount of the post-June 83 component; or

•

in any other case - 85% of the part of the retained amount of the post-June 83 component as per the following table:

An 'employee' for this purpose includes a director or other officer (however described) of a body corporate and a person engaged under a contract for services. An 'employer' has a corresponding meaning. [Section 140ZJ]

Example

An employee is paid an ETP of $20,000 by the employer in the 1994-95 year. The retained amount of the post-June 83 component of the ETP is $18,000 and the retained amount of the pre-July 83 component is $2,000. The employee is not an associate of the employer.

The RBL amount of the benefit is $15,300 (i.e., 100% of 85% of the post-June 83 componento.

Reference is made above to the retained amounts of certain components of an ETP. These terms will have the same meaning as in new section 27AC of the Act. For the purposes of the RBLs, those meanings will also apply to ETPs made before 1 July 1992. The meanings of these terms are discussed in the explanation of section 27AC (see Chapter 4). [Subsection 140C(1) and section 14OF]

In determining the retained amounts of the particular components of an ETP, paragraph 27AA(1)(ca) and subsection 27AA(3) of the Act should be ignored. This ensures that, in calculating the RBL amount of a benefit, the retained amount of the components of an ETP are the amount of those components before any excessive component is calculated. [Section 140G]

Superannuation pensions

If the benefit which counts towards a person's RBL is a superannuation pension (other than a disability superannuation pension - see discussion below), the RBL amount of the pension is:

•

if the pension is a rebatable superannuation pension (as defined in section 1595J of the Act) - the capital value of the pension (see discussion below);

•

in any other case - the amount worked out under the following formula:

Capital Value * (Pre-July 83 eligible + (0.8 * Post-June 83 eligible service period)/Total eligible service period)


where:

'Capital value' is the capital value of the pension (see discussion below);

'Pre-July 83 eligible service period' is the number of whole days in the eligible service period of the pension which occurred before 1 July 1983;

'Post-June 83 eligible service period' is the number of whole days in the eligible service period of the pension which occurred on or after 1 July 1983;

'Total eligible service period' is the total number of whole days in the eligible service period of the pension.

[Section 140ZK]

The 'eligible service period' of a superannuation pension is as follows:

(a)

unless all or part of the capital value of the pension relates to the roll over of an ETP - the period commencing on the earlier of the day the person joined the superannuation fund or the first day of employment to which the pension relates (including any qualifying period before the person could join the fund and any period the person was not a member of the fund) and ending at the end of the commencement day of the pension; or

(b)

if all or part of the capital value of the pension relates to the roll over of an ETP, and the eligible service period of the ETP begins earlier than the beginning of the period in (a) above - the period commencing on that earlier day and ending at the end of the commencement day of the pension.

The 'eligible service period' of an ETP is defined in section 27A of the Act. [Subsection 140C(1)]

Example

A taxpayer commences to receive a superannuation pension with a capital value of $200,000. The person has an eligible service period of 5475 days. The eligible service period prior to 1 July 1983 is 1095 days. Therefore, the eligible service period on or after i July 1983 is 4380 days. The pension is not a rebatable superannuation pension.

The RBL amount of the pension is calculated as follows:

$200,000 * (1095 + (0.8 * 4380))/5475 = $168,000


If the pension was a rebatable superannuation pension, the RBL amount of the pension would be $200,000.

The RBL amount for a disability superannuation pension is different to the RBL amount for a superannuation pension-A 'disability superannuation pension' is a superannuation pension payable to a person because of the disability of the person, where two legally qualified medical practitioners have certified that the disability is likely to result in the person being unable ever to work in a particular capacity for which the person is reasonably qualified because of education, experience or training [Subsection 140C(1)].

The RBL amount of a disability superannuation pension is:

8

if the pension is a rebatable superannuation pension - the accrued retirement benefit component of the pension (see discussion below); or

•

in any other case - the amount worked out under the following formula:

Accrued Pro-July 83 eligible * (Pre-July eligible service period + (0.8 * Post June 83 eligible service period))/Total eligible service period.


where:

'Accrued retirement benefit component' is the accrued retirement benefit component of the pension (see discussion below);

'Pre-July 83 eligible service period' is the number of whole days in the eligible service period of the pension which occurred before 1 July 1983;

'Post-June 83 eligible service period' is the number of whole days in the eligible service period of the pension which occurred on or after 1 July 1983;

'Total eligible service period' is the total number of whole days in the eligible service period of the pension. [Subsection 140ZL(1)]

The accrued retirement benefit component of a disability superannuation pension is calculated as follows:

Capital value -(Capital value * Pension days)/ Accrual days


where:

'Capital value' is the capital value of the pension at the commencement day of the pension;

'Pension days' is:

•

if the commencement day of the pension is before the person's 65th birthday - the number of whole days from the commencement day and ending at the end of the person's 651h birthday;

•

in any other case - zero.

'Accrual days' is the number of whole days from the first day of the eligible service period of the pension and ending at the end of the person's 651h birthday. [Subsection 140ZL(2)1

Example

A taxpayer commences to receive a disability superannuation pension with a capital value of $160,000. The number of days between the commencement day of the pension and the person's 651h birthday is 1460. The person's eligible service period is 7280 days of which 2550 occurred before 1 July 1983. Therefore, the eligible service period on or after 1 July 1983 is 4730 days. The pension is not a rebatable superannuation pension. The accrued retirement benefit component is calculated as follows:

$160,000 - ($160.000 x 1460)/(7280+1460) = $133,272


The RBL amount of the disability superannuation pension is calculated as follows:

133,272 * (2550 + (0.8x4730))/7280 = $115,954


If the disability superannuation pension was a rebatable superannuation pension, the RBL amount would be $133,272.

Capital value of a superannuation pension

It is necessary to know the capital value of a superannuation pension in order to ascertain the RBL amount of the pension. Subject to the exceptions discussed below, the capital value of a superannuation pension is calculated as follows:

[Annual value * Pension valuation factor -- Undeducted purchase price + Residual capital value


where:

'Annual value' is the annual value of the pension, which is the amount worked out by multiplying the amount of the first regular payment of the pension by the greatest number of payments of the pension that could be made in a 12 month period from the commencement day of the pension;

'Pension valuation factor' is the pension valuation factor of the pension as ascertained in accordance with the regulations;

'Undeducted purchase price' is the undeducted purchase price (as defined in section 27A of the Act) of the pension;

'Residual capital value' is the present value of the residual capital value, if any, of the pension. The present value of the residual capital value is to be worked out in accordance with a method determined in writing by the Commissioner. [Subsection 40ZO(1), (4), and (5)]

Example

A person commences to be paid a pension. Assume the following:

The capital value of the pension is calculated as follows:

[($1,000 * 12) x 141- $8,000 + $15,000 = $175,000


There are two exceptions to the above. Firstly, if the superannuation pension is not payable for life, then the capital value is the amount calculated in accordance with a method determined by the Commissioner in writing. [Subsection 140Z0(2)]

Secondly, if the superannuation pension arises as a result of an arrangement under which the person ceases to be entitled to a superannuation pension (the 'old pension') from a superannuation fund and becomes entitled to a superannuation pension (the 'new pension') from another superannuation fund, the capital value is the amount worked out as follows:

[Excess annual value * Pension valuation factor] - Excess undeducted purchase price + Excess residual capital value


where:

'Excess annual value' is the amount by which the annual value of the' new pension exceeds the annual value of the old pension;

'Pension valuation factor' is the pension valuation factor for the pension as ascertained in accordance with the regulation

'undeducted purchase price' is the amount by which the undeducted purchase price of the new pension exceeds the undeducted purchase price of the old pension;

' Excess residual capital value' is the amount by which the residual capital value of the new pension exceeds the residual capital value of the old pension. [Subsection 140Z0(3)]

If a person rolls over an ETP arising from the commutation, or residual capital value, of all or part of a pension that has commenced to be paid, the amount of the capital value of the original pension is to be reduced. If the roll over occurred before 1 July 1992 the amount of the capital value of the pension is reduced by the amount of the ETP rolled over (other than the undeducted contributions and the concessional component. If the roll over occurs on or after 1 July 1992 the RBL amount of the pension is reduced by:

•

if the roll over is within 12 months of the commencement day of the pension - the amount rolled over (other than the undeducted contributions, the concessional component and the post-June 1994 invalidity component); or

•

in any other case - the amount worked out using the formula:

Amount rolled over * Index number for payment quarter /index number for second-last quarter


where:

'Amount rolled over ' is the amount rolled over (other than the undeducted contributions, the concessional component and the post-June 1994 invalidity component);

'Index number for payment quarter' is the index number for the quarter in which the commencement day of the pension occurs;

'Index number for second-last quarter' is the index number for the quarter two quarters before the quarter in which the roll over occurred. [Section 140ZP]

The 'index number' referred to above is the amount of the full time adult average weekly ordinary times earnings first published by the Australian Statistician for the middle month of the quarter. [Subsection 140C(1)]

Reference is made above, and also in the comments below on annuities, to the components of an ETP (other than the retained amounts of such components) where all or part of the ETP is rolled over. These references are to the amounts of the components of an ETP which the taxpayer has chosen to roll over under section 27D of the Act. For example, a reference to the undeducted contributions of an ETP rolled over to purchase an annuity means the amount of the undeducted contributions of the ETP which the taxpayer has chosen to rollover under section 27D. [Section 14OH]

Annuities

If the benefit which counts against a person's RBL is an annuity, the RBL amount of the annuity is as follows:

•

if the annuity did not commence to be paid because of the partial commutation of another annuity that met the pension and annuity standards - the sum of:

-

100% of the pre-July 83 component;

-

100% of the taxed element of the post-June 83 component; and

-

85% of the untaxed element of the post-June 83 component;

of the ETP rolled over to purchase the annuity;

•

if the annuity did commence to be paid because of the partial commutation of another annuity that met the pension and annuity standards - the sum of:

-

100% of the pre-July 83 component;

-

100% of the taxed element of the post-June 83 component; and

-

85% of the untaxed element of the post-June 83 component;

of the ETP rolled over to purchase the annuity reduced by the RBL amount of the ETP that arose as the result of that commutation. [Section 140ZM]

Example

A taxpayer purchases an annuity by rolling over an ETP of $60,000. The ETP was not a commutation of another annuity which met the pension and annuity standards. The components of the ETP are as follows:

The RBL amount of the annuity is as follows:

If a person rolls over an ETP arising from the commutation, or residual capital value, of all or part of an annuity that has commenced to be paid, the amount of the ETP rolled over to purchase the original annuity is to be reduced. If the roll over occurred before 1 July 1992 the amount of the ETP rolled over to purchase the original annuity is reduced by the amount of the current ETP rolled over (other than the undeducted contributions and concessional component). If the rollover occurs on or after 1 July 1992 the RBL amount of the ETP rolled over to purchase the original annuity is reduced by:

•

if the roll over is within 12 months of the commencement day of the annuity - the amount rolled over (other than the undeducted contributions, concessional component and post-June 1994 invalidity component); or

•

in any other case - the amount worked out using the formula:

Amount rolled over *Index number for payment quarter/Index number for second-last quarter


where:

'Amount rolled over' is the amount rolled over (other than the undeducted contributions, concessional component and post-June 1994 invalidity component);

'Index number for payment quarter ' is the index number for the quarter in which the commencement day of the annuity occurs;

'Index number for second-last quarter ' is the index number for the quarter two quarters before the quarter in which the roll over occurred. [Sections 140ZN]

B. What is the value of the person's lump sum RBL and pension RBL?

The RBL amount of a benefit is to be assessed against a person's lump sum RBL or pension RBL. The amount of the lump sum RBL and pension RBL will depend on the age of the person when they received the benefit and the year of income in which the benefit is received. There will also be a transitional lump sum RBL and pension RBL.

Standard RBL

The lump sum RBL for the 1994-95 year of income is $400,000 unless the person is less than 55 years of age and the benefit is an ETP, or superannuation pension or annuity that does not meet the pension and annuity standards. If a person is less than 55 years of age and receives such a benefit, the $400,000 is discounted (on a simple discount basis) by 2.5% for each whole year from the person's birthday immediately before, or on, either the day the ETP is made or the commencement day of the pension or annuity and ending on the day before the person's 55th birthday. For years following the 1994-95 year, the amount of the lump sum RBL will be indexed. [Subsection 140ZD(1)]

The pension RBL for the 1994-95 year of income is $800,000. This is not reduced if the benefit is received before age 55. For subsequent years this amount will be indexed. [Subsection 140ZD(2)]

The amount of the lump sum RBL or pension RBL must be determined for each benefit received during a year of income. Therefore, if a person turns 55 years of age during a year of income and receives benefits both before and after his or her birthday during that year, the benefits received before the birthday will be assessed against the pre-55 RBLs, while the benefits received after the birthday will be assessed against the RBL for benefits received after age 55.

Example

A taxpayer receives an ETP of $200,000 at age 49. The person's lump sum RBL is $400,000 discounted at 2.5% for 6 years. Therefore, the lump sum RBL is $340,000 (i.e., $400,000 x (1 - 0.15)). The person's pension RBL is $800,000.

For the 1995-96 year of income and all subsequent years the amount of the lump sum RBL and pension RBL will be calculated using the following formula:

Indexation factor * Previous indexable amount

The 'indexation factor' is the indexation factor for the year calculated under section 1595G of the Act. That is, the movement in the estimate of the full time adult average weekly ordinary time earnings, as published by the Australian Statistician, from the middle month of the March quarter two years prior to the year of income to the middle month of the March quarter immediately prior to the year of income.

The 'previous indexable amount' is the amounts of the lump sum RBL or pension RBL for the previous year. Therefore, for the 1995-96 year the previous indexable amount is $400,000 or $800,000. [Subsection 140ZD(3) and (4)]

Transitional RBLs

If a person has a transitional lump sum RBL or a transitional pension RBL which is greater than the standard RBLs above, the person may use the transitional RBL. The method for calculating the transitional RBLs are to be set out in the regulations [Subsection 140ZD(5) and section 140ZE]

C. Does the lump sum RBL or pension RBL apply?

The pension RBL will apply unless the lump sum RBL applies. Only pension and annuities that meet the pension and annuity standards will qualify for the higher pension RBL. The pension and annuity standards will be set out in the Regulations. Allocated pensions and allocated annuities will not come within the scope of the pension and annuity standards.

Whether the lump sum RBL applies will depend on the type of benefit and whether certain conditions are met.

General rules

An ETP paid to a person will be assessed against the person's lump sum RBL if the sum of the amount of the ETP (other than any part of the ETP consisting of the retained amount of the undeducted contributions, the retained amount of the concessional component, the retained amount of the post-June 1994 invalidity component or the non-qualifying component) and the qualifying portions (see discussion below) of any previous ETPs or superannuation pensions or annuities that did not meet the pension and annuity standards is greater than:

•

if the current ETP is made before the person turned 55 years of age - the lesser of:

-

50% of the sum of the amount of the current ETP (other than the excluded components mentioned above) and the qualifying portions of all previous benefits received by the person; or

-

the persons' lump sum RBL for the year of income; or

•

in any other case - 50% of the lesser of:

-

the sum of the amount of the current ETP (other than the excluded components mentioned above) and the qualifying portions of all previous benefits received by the person; or

-

the person's pension RBL for the year of income. [Subsection 140ZF(1)]

A superannuation pension or annuity which commences to be paid to a person and which meets the pension and annuity standards will be assessed against the person's lump sum RBL if the sum of the capital value of the pension or the amount of the ETP rolled over to purchase the annuity (other than any part consisting of the undeducted contributions, the concessional component or the post-June 1994 invalidity component) and the qualifying portions of any previous superannuation pensions or annuities that met the pension and annuity standards is less than:

•

if the current pension or annuity commenced to be paid before the person turned 55 years of age - the lesser of:

-

50% of the sum of the capital value of the current pension, or the amount of the ETP rolled over to acquire the current annuity (other than the excluded components mentioned above), and the qualifying portions of all previous benefits received by the person; or

-

the person's lump sum RBL for the year of income;

•

in any other case - 50% of the lesser of:

-

the sum of the capital value of the current pension, or the amount of the ETP rolled over to purchase the current annuity (other than the excluded components mentioned above) and the qualifying portions of all previous benefits received by the person; or

-

the person's pension RBL for the year of income. [Subsection 140ZF(2)]

A superannuation pension or annuity which commences to be paid to a person and which does not meet the pension and annuity standards will be assessed against the person's lump sum RBL if the sum of the capital value of the pension or the amount of the ETP rolled over to purchase the annuity (other than any part consisting of the undeducted contributions, the concessional component or the post-June 1994 invalidity component) and the qualifying portions of any previous ETPs or superannuation pensions or annuities that did not meet the pension and annuity standards is greater than:

•

if the current pension or annuity is made before the person's turned 55 years of age - the lesser of:

-

50% of the sum of the capital value of the current pension, or the amount of the ETP rolled over to acquire the current annuity (other than the excluded components mentioned above), and the qualifying portions of all previous benefits received by the person; or

•

the person's lump sum RBL for the year of income; or

•

in any other case - 50% of the lesser of:

-

the sum of the capital value of the current pension, or the amount of the ETP rolled over to acquire the current annuity (other than the excluded components mentioned above), and the qualifying portion of all previous benefits received by the person; or

-

the persons' pension RBL for the year of income. [Subsection 140ZF(3)]

Example

During the 1994-95 year a taxpayer aged 62 years is paid an ETP of $380,000. The ETP consists of two components:

The taxpayer previously received an ETP and a superannuation pension which met the pension and annuity standards. The qualifying portion of the ETP was $260,000 while the qualifying portion of the pension was $300,000.

It follows that the sum of the amount of the current benefit ($310,000) and the qualifying portion of the previous ETP ($260,000) is $570,000. Therefore, the lump sum RBL will apply if that amount is greater than the lesser of:

$435,000 (i.e., 50% of $870,000 - i.e., the sum of all the benefits); or

$400,000 (i.e., 50% of $800,000 - i.e., the pension RBL).

As $570,000 exceeds $400,000 the lump sum RBL applies.

Exception

If a benefit paid to a person is to be assessed against the person's RBL because the above conditions are satisfied, the benefit will not be assessed against the lump sum RBL if:

the person has previously received one or more superannuation pensions or annuities which met the pension and annuity standards: and

the sum of the qualifying portions of those pensions and annuities is greater than 50% of the recipient's pension RBL for the year of income in which the current benefit is received. [Subsection 140ZF(4)]

Example

In the 1994-95 year a taxpayer is paid an ETP of $600,000. The ETP consists of two components:

The taxpayer previously received an ETP and a superannuation pension which met the pension and annuity standards. The qualifying portion of the ETP was $350,000 while the qualifying portion of the pension was $420,000.

As the person has previously received a superannuation pension which met the pension and annuity standards and is greater than 50% of the person's pension RBL for the current year, the lump sum RBL will not apply. This is the case even though the lump sum RBL would apply using the general rules because the sum of the amount of the current ETP and the qualifying portion of the previous ETP is greater than 50% of the person's pension RBL.

Qualifying portion of benefits

The qualifying portion of a previous benefit is used for determining whether a current benefit should be assessed against the lump sum RBL or pension RBL. A person will be taken to have previously received a benefit if the benefit counts towards the person's RBL and:

•

if the benefit is an ETP - the benefit was previously made in relation to the person;

•

if the benefit is a superannuation pension or annuity - the benefit was payable to the person and the commencement day of the benefit occurred before the day the current benefit commences to be paid. [Section 140K]

The qualifying portion is not always equal to the RBL amount of the benefit. The qualifying portion of a benefit is worked out as follows:

Capital amount * Index number for second-last quarter/Index number for payment quarter

The 'capital amount' of a benefit is:

•

if the benefit is an ETP - the amount of the ETP (other than the retained amount of the undeducted contributions, the retained amount of the concessional component, the retained amount of the post-June 1994 invalidity component or the non-qualifying component and any excessive component);

•

if the benefit is a superannuation pension - the capital value of the pension reduced by any excessive amount;

•

if the benefit is an annuity - the amount of the ETP rolled over to purchase the annuity other than the undeducted contributions, the concessional component or the post-June 1994 invalidity component and any excessive amount.

The 'index number for second-last quarter' is the index number for the quarter two quarters before the quarter in which the current benefit was paid or in which the current benefit commenced to be paid;

The 'index number for payment quarter' is the index number for the quarter in which the previous benefit was paid or in which the commencement day of the previous benefit occurs. [Subsection 140ZG(1)]

No indexation will apply if the previous benefit was paid or commenced to be paid within 12 months of the current benefit. Therefore, both the above index numbers will be 1. [Subsection 140ZG(2)]

D. Does the benefit exceed the person' s RBL?

If the whole of a benefit does not count towards a person's RBL, then none of the benefit is in excess of the person's RBL. Also, a benefit is not in excess of the person's RBL if the benefit does count towards the person's RBL and the amount calculated under the formula outlined below is zero or less. The benefits which count towards a person's RBL are set out in the section on 'Benefits to be Counted Towards a Person's RBL'. [Subsection 140ZA(1)]

If the Commissioner is notified by a payer of the payment of a benefit to a person, and the amount calculated under formula outlined below in relation to the benefit is greater than zero, the benefit is in excess of the person's RBL. The amount of the excess benefit is equal to the amount calculated under the formula which exceeds zero. [Subsection 140ZA (2)]

The relevant formula is as follows:

RBL amount of + Sum of adjusted RBL amounts of previous benefits - Applicable RBL

where:

'RBL amount of current benefit' is the RBL amount of the current benefit (see the section on 'How much of the benefit is counted towards the person's RBL?'

'Applicable RBL' is:

•

if the benefit is to be assessed against the person's lump sum RBL - the lump sum RBL for the year of income in which the benefit is paid or commences to be paid; or

•

in any other case - the pension RBL for the year of income in which the benefit is paid or commences to be paid;

'Sum of adjusted RBL amounts of previous benefits' is the sum of the amounts worked out by applying, to each benefit that was previously paid or commenced to be paid to the person, the following formula:

RBL amount * Index number for second-last quarter/Index number for payment quarter


where:

'RBL amount' means the RBL amount of the previous benefit reduced by any excessive component or excessive amount.

'Index number for second-last quarter' is the index number for the quarter two quarters before the quarter in which the current benefit was paid or in which the commencement day of the current benefit occurred;

'Index number for payment quarter' is the index number for the quarter in which the previous benefit was paid or in which the commencement day of the previous benefit occurred. [Subsections 140ZA(2), (3) and (4)]

Indexation will not apply if the current benefit is paid or commences to be paid within 12 months of the previous benefit. [Subsection 140ZA(5)]

The Commissioner has a discretion to treat a benefit as not being excessive even though the benefit is excessive under the formula outlined above. This discretion may be used where the Commissioner is satisfied that, because of the special circumstances of. the case, all or part of the benefit should be treated as being within the person's RBL. The Commissioner may make a final determination or interim determination to that effect. [Section 140ZB]

E. What is the rebatable proportion of a superannuation pension or annuity?

If a benefit paid to a person is a superannuation pension or annuity, the Commissioner must also determine the rebatable proportion of the superannuation pension or annuity. The rebatable proportion is that part of the pension or annuity for which the recipient will receive an income tax rebate.

The rebatable proportion of a rebatable superannuation pension or rebatable ETP annuity (terms defined in section 159SJ of the Act) will equal one, if the pension or annuity does not count against the person's RBL or if none of the pension or annuity is in excess of the person's RBL. Therefore, the recipient will be entitled to a rebate for all of the superannuation pension or annuity. [Subsection 140ZQ(1)]

None of a rebatable superannuation pension or rebatable ETP annuity will be the rebatable proportion if all of the RBL amount of the pension or annuity is an excessive amount (i.e., it exceeds the person's RBL). The rebatable proportion will also be zero if the pension or annuity counts towards the person's RBL and the Commissioner does not make a determination in relation to the pension of annuity. [Subsections 140ZQ(2) and (3)1

In any other case, the rebatable proportion of a rebatable superannuation pension or rebatable ETP annuity will be calculated as follows:

(RBL amount - Excessive amount)/RBL amount


The 'RBL amount' is the RBL amount of the pension or annuity. The 'excessive amount' is the excessive amount of the pension or annuity. The RBL amount of the pension is set out in the section on 'Benefits to be Counted Towards a Person's RBU under the headings' Superannuation Pensions' and 'Annuities'. The 'excessive mount' is set out in the previous section titled 'Does the benefit exceed the person's RBL'.[Subsection 140ZQ(4)]

Example

A taxpayer commences to be paid a rebatable superannuation pension with an RBL amount of $300,000. Assume that the pension is in excess of the person's RBL by $100,000.

The rebatable proportion of the superannuation pension is calculated as follows:

$300,000 - $100,000 = 2/3


Therefore, two-thirds of each pension payment will be rebatable.

6. Consequential Amendments

Section 27A of the Act defines certain terms which are used in Subdivision AA of Division 2 of Part III of the Act which deals with the taxation treatment of ETPs, superannuation pensions and annuities.

The term 'ISC-directed commutation payment' is defined in section 27A to mean an ETP which arises because the Insurance and Superannuation Commissioner has directed that the excessive amount of a pension or annuity be commuted. The excessive amount of a pension or annuity is the amount by which the pension or annuity exceeds the person's RBL.

From 1 July 1994, if a pension or annuity is in excess of a person's RBL, the excessive amount will not have to be commuted. Instead, the recipient will not be entitled to a rebate for the excessive amount.

Therefore, the definition of 'ISC-directed commutation payment' in section 27A of the Act and the reference to such payments in the definition of 'excessive component' in section 27A will be deleted. Subsection 27A(12E) is also to be repealed. That subsection prevents an ISC-directed commutation payment from being rolled over. [Clause 58]

Subsections 27AA(3) and (6) of the Act treat the entire amount of an ETP as being in excess of a person's RBL (i.e., as an 'excessive component') if the Insurance and Superannuation Commissioner does not make a determination of whether a person's benefit exceeds their RBL. As the Commissioner of Taxation is taking over responsibility for administering the RBLs from 1 July 1994, paragraphs 27AA(3)(b) and (c) are to be amended and subsection 27AA(6) repealed to remove any reference to actions to be made by the Insurance and Superannuation

Commissioner in the RBL process. New paragraphs 27AA(3)(b) and (c) will treat the entire amount of an ETP as an 'excessive component' if the Commissioner of Taxation is notified of an ETP made to a person and the Commissioner does not make a determination in relation to the ETP. [Clause 59]

The amendments to sections 27A and 27AA of the Act apply to ETPs, other than ISC-directed commutation payments, made on or after 1 July 1994. [Clause 61]

Cross reference table