Senate

Explanatory Memorandum

(Circulated by the authority of the Treasurer the Hon Ralph Willis, M.P.)

CHAPTER 10 - SUPERANNUATION - REASONABLE BENEFITS LIMITS

Overview

10.1 The Bill will amend Division 14 of Part III of the Income Tax Assessment Act 1936 (the Act), which deals with reasonable benefit limits that apply to concessionally taxed superannuation benefits, to overcome a number of technical deficiencies with the new provisions and to ensure that the provisions operate as intended.

Summary of the amendments

10.2 The proposed amendments will:

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ensure that the non-rebatable proportion of a pension or annuity is taxed as an excessive component on the commutation or roll-over of the whole or part of the pension or annuity entitlement [clause 95] ;

•

allow information held by the Commissioner of Taxation to be used to identify the tax file number of a deceased person and enable a final reasonable benefit limit (RBL) determination to be made in relation to the assessment for RBL purposes of a death benefit eligible termination payment (ETP) [clause 100] ;

•

require superannuation funds to report payments of less than $5000 [clause 103] ;

•

ensure that the Insurance and Superannuation Commissioner does not have to report payments of less than $5000 [clause 103] ;

•

ensure that the qualifying portions of ETPs previously received by a person are counted in determining whether a superannuation pension or annuity that does not meet the pension and annuity standards is to be assessed against the person's lump sum RBL [clause 106] .

Date of effect

10.3 The amendments will apply to ETPs paid on or after 1July 1994 and to pensions or annuities where the first day of the period to which the pension or annuity relates is on or after 1July1994.

Background to the legislation

10.4 Taxation Laws Amendment (Superannuation) Act 1992 inserted Division14 of Part III of the Act to transfer the administration of the reasonable benefit limits (RBLs) from the Insurance and Superannuation Commissioner to the Commissioner of Taxation. At the same time changes were made to introduce flat dollar RBLs (rather than RBLs based on a multiple of salary) and to simplify the treatment of the excessive amount of pensions and annuities. The new provisions come into effect on 1July1994.

10.5 The purpose of RBLs is to limit the amount of concessionally taxed superannuation benefits received by a person.

10.6 Since the insertion of Division 14, some technical and administrative problems with the operation of the provisions have emerged.

Explanation of the amendments

Commutation or roll-over of a pension or annuity with an excessive component

10.7 The amendments will ensure that a taxpayer who receives an eligible termination payment (ETP) representing the commutation or partial commutation of, or residual capital value of, a pension or an annuity which contains an excessive component is taxed appropriately. The excessive component of an ETP is taxed at the highest marginal rate of tax (currently 47% plus medicare levy). Similarly, if that ETP is rolled-over to purchase another superannuation pension or annuity, the rebatable proportion of the original pension or annuity will be transferred to the new pension or annuity. [Clause 95]

10.8 The effect of the proposed amendments is to take the RBL determination made at the time of commencement of the pension or annuity and apply that RBL determination to subsequent dealings with that pension or annuity.

10.9 Therefore, new subsection 140R(1A) provides that the Commissioner must make a RBL determination to the effect that an ETP is in excess of the person's RBL if the ETP is made to a person as a result of:

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the commutation or partial commutation of, or residual capital value of, a superannuation pension or annuity; or

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the commutation or partial commutation of a reversionary pension or annuity payable as the result of the death of another person.

10.10 The extent of the excess is worked out using the formula:

Amount of ETP * (1 - Rebatable proportion of the superannuation pension or annuity).


[Clause 96]

10.11 Similarly, new subsection 140R(1B) provides that if a residual pension or residual annuity is payable on the commutation, or partial commutation, of another superannuation pension or annuity, then the Commissioner must make a RBL determination to the effect that the pension or annuity is in excess of the person's RBL and the rebatable proportion of the pension or annuity is the same as the rebatable proportion of the original pension or annuity. [Clause96]

10.12 The rebatable proportion of a superannuation pension or annuity is determined by section 140ZQ. Essentially the rebatable proportion of the pension or annuity reflects that part of the capital value or purchase price of the pension or annuity which is within the recipient's RBLs and therefore qualifies for the new 15% rebate.

10.13 A residual pension or residual annuity referred to in new140R(1B) and paragraph140ZC(2)(c) includes a pension or annuity that is purchased with the roll-over of an ETP representing the commutation or partial commutation of, or residual capital value of, another superannuation pension or annuity.

Example

Oscar purchases an allocated pension on 1 October 1994. The purchase price of the allocated pension is $500000. Oscar has no other superannuation benefits. As an allocated pension does not meet the pension and annuity standards, the purchase price of the pension is measured against the lump sum RBL of $400000. Therefore, Oscar receives an RBL determination advising that his pension contains an excessive amount and that the rebatable proportion of the pension is 80%. On 1May1999 Oscar decides to commute his allocated pension and receives an ETP of $380000. Oscar's ETP will contain an excessive component of:

$380000 * (1 - 0.80) = $76000.


If Oscar rolled-over his ETP to purchase another pension or annuity, the rebatable proportion of his new pension or annuity would be 80%. Similarly, if Oscar elected to keep part of his ETP (say, $100000) and rolled-over the balance to purchase a new pension or annuity, the rebatable proportion of his new pension or annuity would be 80%. The ETP of $100000 he retained would have an excessive component of:

$100000 x (1 - 0.80) = $20000.


10.14 New subsection 140T(2B) and subsection 140T(2C) insert identical provisions to allow the Commissioner to make an interim RBL determination to the same effect if, for example, the Commissioner has insufficient information to make a final RBL determination. [Clause 97]

10.15 Clause 98 effectively removes subparagraph 140ZC(2)(b)(ii), subparagraph 140ZC(2)(c)(ii) and paragraph 140ZC(2)(e) so that a benefit must be reported for RBL purposes in accordance with section 140M if it is:

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an ETP representing the commutation or partial commutation of, or residual capital value of, a superannuation pension or annuity provided that the commencement day for the pension or annuity was on or after 1July1990; or

•

a residual pension or residual annuity provided that the commencement day for the original pension or annuity was on or after 1July1990.

10.16 The proposed amendments will apply to ETPs arising from the commutation or partial commutation of, or residual capital value of, a superannuation pension or annuity paid on or after 1 July 1994 and to pensions or annuities purchased with the roll-over of an ETP representing the commutation of, or residual capital value of, another superannuation pension or annuity where the first day of the period to which the first payment of the original pension or annuity related was on or after 1 July 1994. [Clause 99]

Tax file number where interim determinations - death benefits

10.17 Division 14 will be amended to allow information held by the Commissioner of Taxation to be used to identify the tax file number (TFN) of a deceased person and enable a final RBL determination to be made in relation to the assessment for RBL purposes of a death benefit ETP. [Clause 100]

10.18 Generally speaking, if the payer of a benefit that has to be reported for RBL purposes does not provide details of the recipient's TFN, an interim RBL determination is made to the effect that the whole of the benefit is an excessive benefit (subsection 140T(2)). The recipient is then able to notify the Commissioner of his or her TFN and enable the Commissioner to revise the determination and issue a final RBL determination identifying the appropriate amount of excessive component, if any.

10.19 A death benefit ETP (which is defined in section 27AAA of the Act), is measured against the deceased's RBL to determine the excessive component. In the absence of the deceased's TFN, the Commissioner is obliged to issue an interim RBL determination to the effect that the whole of the benefit is excessive. However, the beneficiary may not know the deceased's TFN and therefore may be unable to supply appropriate information to allow the Commissioner to revise his determination.

10.20 New subsection 140T(2A) will allow the Commissioner to overlook the requirement to issue a determination to the effect that the whole of the benefit is excessive if, in relation to a death benefit ETP, the Commissioner is satisfied that the deceased has a TFN. This will allow the Commissioner to use other information held to identify the deceased's TFN for RBL purposes. [Clause 101]

10.21 The amendment will apply to death benefit ETPs made on or after 1July1994. [Clause 102]

Payer notification obligations

10.22 Division 14 will be amended to:

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require superannuation funds to report payments of less than $5000; and

•

ensure that the Insurance and Superannuation Commissioner does not have to report payments of less than $5000.

[Clause 103]

10.23 If a superannuation fund pays a benefit to a member of less than $5000, there is currently no requirement for the superannuation fund to notify the Commissioner for RBL purposes. However, since Division 14 was inserted in the Act, the Superannuation Industry (Supervision) Act (SIS Act) has been introduced. Under the SIS Act superannuation funds will not have to pay benefits in a single lump sum or on a set day. This effectively allows people to make multiple withdrawals from superannuation funds and leaves the $5000 minimum reporting requirements open to manipulation and abuse.

10.24 An associated concern is that from 1 July 1994 the Insurance and Superannuation Commission (ISC) will supervise the administration of unclaimed moneys within the superannuation industry. Under those arrangements the ISC will accept unclaimed superannuation moneys and pay them into consolidated revenue. If the moneys are subsequently claimed, the ISC will make payments from the consolidated revenue to the superannuation fund member. Such payments will be ETPs. It is expected that the majority of payments from the ISC under these arrangements will be small amounts. Therefore, to ease the ISC's administrative burden, an amendment to the Act will exclude the ISC from reporting payments to the Commissioner of Taxation of less than $5000.

10.25 Amended sub-subparagraph 140M(1)(a)(i)(B) will ensure that the trustees of superannuation funds do have to report payments of less than $5000 and that the Insurance and Superannuation Commissioner does not have to report payments of less than $5000. [Clause 104]

10.26 The amendment will apply to payments made on or after 1July1994. [Clause105]

Superannuation pensions and annuities not meeting standards

10.27 Amendments to Division 14 will ensure that the qualifying portions of ETPs previously received by a person are counted in determining whether a superannuation pension or annuity that does not meet the pension and annuity standards is to be assessed against the person's lump sum RBL. [Clause 106]

10.28 When the Occupational Superannuation Standards Regulations (OSS Regulations) relating to the assessment of benefits against the lump sum RBL were transferred to the Act, the paragraph relating to the qualifying portions of any ETPs previously made to a person was inadvertently omitted.

10.29 New paragraph 140ZF(3)(ba) will ensure that the qualifying portions of ETPs previously received by a person are counted in determining whether a superannuation pension or annuity that does not meet the pension and annuity standards is to be assessed against the person's lump sum RBL. [Clause 107]

10.30 The qualifying portion of an ETP is the amount worked out under section140ZG. Essentially, it represents the amount of an ETP previously received by a person that has been counted for RBL purposes indexed by movements in full time adult average weekly ordinary times earnings.

10.31 The amendment will apply to pensions and annuities where the first day of the period to which the first payment of the pension or annuity relates is on or after 1 July 1994. [Clause 108]

Transitional provision - Alleviation of notice requirements

10.32 Clause 109 is a transitional measure which ensures that payers who are required to report benefits only because of the application of the proposed amendments will have 28 days after the commencement of the provisions to meet their obligations. This will ensure that payers will not be subject to penalties under the Taxation Administration Act 1953 for failing to report benefits as required by section 140M of the Act between 1July1994 and the Royal Assent of the Bill.