Supplementary Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)Chapter 2 - Reducing tax on the excessive component of eligible termination payments
Outline of chapter
2.1 Amendments 10 to 13 refine a number of items in Schedule 6 to the bill so that these items have their intended effect. That is, the amendments will ensure that the measure to reduce the effective rate of tax on the excessive component of an ETP paid by a superannuation fund will apply to an excessive component of a death benefit paid to a dependant of a deceased fund member.
Explanation of amendments
2.2 The amendments affect items 5 to 8 in Schedule 6 to the bill. Each of items 5 to 8 are identical in themselves, but apply in different situations. Items 5 to 8 insert a new rate of tax of 38% into the Income Tax Rates Act 1986 and specify the amount of an excessive component to which the new rate is applied.
2.3 The amount of the excessive component to which the new rate is applied involves calculating the amount that would have been the taxed element of the retained amount of the post-June 1983 component of the ETP if the amount of the excessive component of the ETP had been nil. The difference between that amount and the actual amount of the post-June 1983 taxed element is the amount to which the reduced tax rate applies.
2.4 Without the proposed amendment to Schedule 6, discussed in paragraph 2.6, these amounts would always be nil when a death benefit is paid to a dependant. This is because section 27AAA of the ITAA 1936 reduces all the components, except any excessive component, to nil (i.e. if there is an excessive component, only it will remain).
2.5 Therefore both parts of the calculation referred to in paragraph 2.3 would always be nil. Consequently the difference between the two amounts would always be nil and therefore the amount of the excessive component to which the lower tax rate of 38% would be applied would always be nil.
2.6 To overcome this result, the amendment instructs that the calculation is carried out disregarding section 27AAA of the ITAA 1936.
Example 2.1
Susan receives an ETP from the superannuation fund of her deceased husband, Tom. The amount of the ETP is $50,000 and it is entirely a post-June 1983 component (the whole of which is a taxed element).
Due to Tom's previous superannuation benefits, the Commissioner determines that $20,000 of the ETP is excessive. Therefore the taxed element of the post-June 1983 component is reduced to $30,000. Under section 27AAA of the ITAA 1936 the Commissioner further reduces the taxed element of the post-June 1983 component to nil.
If the excessive component had been nil and section 27AAA of the ITAA 1936 is disregarded, then the taxed element of the post-June 1983 component would have been $50,000. The difference between this amount and the taxed element of the post-June 1983 component of the ETP of $30,000 (after the Commissioner determined an excessive component, but still disregarding section 27AAA) is $20,000. This amount represents the post-June 1983 taxed element of the excessive component for the purposes of the measure and is taxed at 38%.Note: If section 27AAA is not ignored then the section would automatically reduce the $50,000 and $30,000 amounts in the previous paragraph of the example to nil. The difference between the two would be nil and consequently the entire excessive component would be taxed at 47%.