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 1993 will amend various Acts (unless otherwise indicated all amendment refer to the Income Tax Assessment Act 1936 ) by making the following changes:

Continuously Complying Fixed Interest Approved Deposit Funds

•

Enables approved deposit funds (ADFs) to take into account profits from the disposal of securities to determine whether they qualify as continuously complying fixed interest ADFs.

Date of effect: 1 July 1988.

Proposal announced: Treasurer's Press Release No 138 of 4 September 1992.

Financial impact: The proposal has no revenue implications.

Notice requirements for personal superannuation contributions

•

Provides for a taxpayer to be eligible for a deduction for personal superannuation contributions to a complying superannuation fund only if:

-

the taxpayer gives a notice to the fund stating the amount of their personal superannuation contributions that they are intending to claim as a tax deduction; and

-

they receive an acknowledgment of the notice from the fund indicating that the fund will include the amount covered by the notice as taxable contributions.

•

Provides that personal superannuation contributions will not be treated as taxable contributions by a complying superannuation fund unless the fund has received a notice from the member stating that he or she is intending to claim a deduction for his or her contributions.

Date of effect: Contributions made to a fund on or after 1 July 1992, other than contributions made by a person who has ceased to be a member of the fund before the date of Royal Assent.

Proposal announced: Not previously announced.

Financial impact: The proposal will not have any financial impact.

Death Benefit ETPs

•

Taxes death benefit eligible termination payments (ETPs) within the deceased's reasonable benefit limits (RBLs) as follows:

-

benefits paid to dependants will be exempt from tax;

-

benefits paid to non-dependants will be taxed as ordinary ETPs. However, the post-June 1983 component of such ETPs will be taxed at a maximum rate of 15 % (plus medicare levy) if paid from a taxed source or 30% (plus medicare levy) if paid from an untaxed source.

•

Taxes benefits in excess of the deceased's RBL entitlement will be taxed as an excessive component of an ETP.

•

Enables lump sum benefits arising as a result of superannuation pensions or annuities that have commenced to be payable to receive the same taxation treatment as death benefit ETPs.

Date of effect: 1 July 1994

Proposal announced: The measures were announced by the Treasurer in his Security in Retirement - Planning for Tomorrow Today statement on 30 June 1992.

Financial impact: The proposals are not expected to have any revenue implications.

Reasonable Benefit Limits

•

Assesses lump sum superannuation benefits paid to a person, as the result of the death of another person, against the deceased's reasonable benefit limit (RBL).

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 amendments are not expected to have any effect on revenue.

Taxation of excessive component

•

Ensures the excessive component of an eligible termination payment is taxed at the top marginal rate of tax (currently 47%) plus Medicare levy.

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 limits on deductions for superannuation contributions and reasonable benefit limits, is expected to increase revenue by $20 million in 1995-96.

Allocated annuities

•

Ensures that income derived by an annuity provider in respect of allocated annuity policies is exempt from tax and that allocated annuities are not qualifying securities for Division 16E purposes.

Date of effect: Annuities purchased on or after 22 December 1992.

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

Financial impact: None.

Amendments to the Occupational Superannuation Standards Act

The Occupational Superannuation Standards Act 1987 (OSS Act) will be amended by making the following changes:

Amendments relating to transferred retiree members of superannuation funds

•

Allows 'transferred retiree members' to fund benefits from any ETP, rather than only direct fund to fund transfers.

Date of effect: Royal Assent

Proposal announced: Not previously announced.

Financial Impact: No significant impact on the revenue.

Amendments relating to the notifications of breaches of superannuation fund conditions

•

Allows the Regulations to specify circumstances in which employer-sponsors should be notified, and which employers to notify.

Date of effect: Proclamation

Proposal announced: Not previously announced.

Financial Impact: No impact on revenue.

•

Provides that subsection 12(3A) of the Principle Act applies and has always applied to breaches, or so much of the breach that occurred after 30 June 1992.

Date of effect: Royal Assent.

Proposal announced: Not previously announced.

Financial impact: No impact on revenue.

Amendments relating to prospectuses

•

Allows the Commissioner to exempt (conditionally or otherwise) individual funds from the prospectus provisions, or to modify their application. Any of the Commissioner's decisions are reviewable.

Date of effect: Royal Assent.

Proposal announced: Not previously announced.

Financial Impact: No effect on revenue.

Amendments relating to disclosure of information about particular superannuation funds

•

Formalises the arrangements under which the ISC releases certain information and allows the release of information that is voluntarily passed on by funds.

Date of effect: Royal Assent

Proposal announced: Not previously announced.

Financial impact: No effect on revenue.

Amendment relating to reporting of eligible termination payments for reasonable benefit limits

•

Clarifies that certain payers of ETPs, in addition to superannuation funds and ADFs, are eligible for the exemption from RBL reporting of payments up to the threshold amount prescribed in the regulations.

Date of effect: 24 December 1991

Proposal announced: Not previously announced.

Financial impact: No significant effect on the revenue.

Amendments relating to defined benefit superannuation schemes

•

Modifies the current definition of defined benefit superannuation scheme in the Superannuation Guarantee (Administration) Act 1992 (the Act) to allow the trustee of a scheme which is not a defined benefit superannuation scheme to elect that the scheme be treated as a defined benefit superannuation scheme for the purposes of the Act.

Date of effect: Apply to assessment issued in the 1992-93 year and subsequent years.

Proposal announced: Not previously announced.

Financial impact: Nil.

Clauses involved in the proposed amendments

Preliminary

Clause 1: Stipulates the short title of the Act as being Taxation Laws Amendment (Superannuation) Act 1993.

Clause 2: Stipulates the commencement dates of the provisions of the Bill.

Income Tax Assessment Act 1936

Clause 3: Defines "Principal Act" as meaning the Income Tax Assessment Act 1936 for the amendments proposed in Part 2 of the Bill.

Continuously complying fixed interest Approved Deposit Funds

[See pages 17-18 for further detail]

Clause 4: Amends the definition of fixed interest complying ADF in subsection 290A(4) to ensure that profits on the disposal of securities are taken into account in the same way as interest in working out whether an ADF has satisfied the 90% test.

Clause 5: Proposes that the amendments apply with effect from 1 July 1988.

Notice requirements for personal superannuation contributions

[See pages 19-27 for further detail]

Clause 6: Removes existing subsections 82AAT(1) to (1D) (inclusive) and replaces them with new subsections 82AAT(1) to (1E) which outline the conditions that an eligible person must satisfy in order to be entitled to a deduction for their personal superannuation contributions.

Clause 7: Makes a minor consequential amendment to proposed paragraph 82AAT(2A)(a) (which is contained in Taxation Laws Amendment (Superannuation) Bill 1992).

Clause 8: Removes redundant definitions from subsection 267(1).

Clause 9: Amends section 274 to ensure that personal contributions paid to a superannuation fund are taxable contributions only if the member has notified the fund that he or she is intending to claim a deduction for the contributions.

Clause 10: Makes consequential amendments to section 276.

Clause 11: Provides that the amendments apply to contributions made to a fund on or after 1 July 1992, other than contributions made by a person who has ceased to be a member of the fund before the date of Royal Assent.

Death Benefit ETPs

[See pages 29-42 for further detail]

Clause 12: Amends section 27A to:

•

extend paragraphs (aa), (ba) and (ca) of the definition of ETP in subsection 27A(1) to payments made to dependants;

•

insert in subsection 27A(1) a definition of death benefit ETP;

•

omit subsections 27A(4), (4A), (5BA) and (12D);

•

extend subsection 27A(12B) so that death benefit ETPs cannot be rolled-over; and

•

amend paragraph 27A(12C)(a) so that an ETP received as a result of the commutation of a reversionary superannuation pension can only be rolled-over by the spouse of the original pensioner.

Clause 13: Inserts new section 27AAA to identify the types of payments that are treated as death benefit ETPs and to provide concessional treatment for death benefits that are paid to dependants.

Clause 14: Inserts new subsection 27B(1A) so that the post-June 1983 component of death benefit ETPs are included in the recipient's assessable income.

Clause 15: Amends section 159S by removing a number of redundant definitions and inserting definitions of s.27B(1A)(a) amount and s.27B(1A)(b) amount . Amends the definition of eligible assessable income.

Clause 16: Removes the existing section 159SA and inserts a new section 159SA to identify the maximum rates of tax payable on eligible assessable income.

Clause 17: Removes sections 159SB, 159SC, 159SD and 159SE.

Clause 18: Amends section 159SG by removing paragraphs (1)(a) and (1)(b).

Clause 19: Removes section 159SH.

Clause 20: Proposes that the amendments apply to payments made on or after 1 July 1994.

Reasonable Benefit Limits

[See pages 43-46 for further detail]

Clause 21: Inserts new section 140CA to assess a death benefit eligible termination payment (ETP) against the deceased's reasonable benefit limit (RBL).

Clause 22: Removes subsection 140S(2) so that the Commissioner is no longer required to revise a determination in relation to an ETP paid to the trustee of a deceased estate where dependants of the deceased will benefit from the ETP. Such an ETP is to be assessed against the deceased's RBL irrespective of who will benefit from the ETP.

Clause 23: Removes paragraphs 140ZC(2)(f) and (i) to ensure certain death benefits are counted for RBL purposes.

Clause 24: Inserts new subsection 140ZF(5) to ensure a death benefit ETP is assessed against the deceased's pension RBL rather than the lump sum RBL.

Clause 25: Provides that the proposed amendments apply to ETPs made on or after 1 July 1994.

Taxation of excessive component

[See pages 47-66 for further detail]

Clause 26: Amends section 59AB of the Act to link the determination of notional income under the section to the calculation in Schedule 9 of the Rates Act of the rate of tax on ordinary taxable income (as defined by clause 44 ).

Clause 27: Amends section 86 of the Act corresponding to the amendment of section 59AB by clause 38.

Clause 28: Amends subsection 149A(1) to ensure that an excessive component of an ETP is not included in taxable income or assessable income of a primary producer for the purpose of calculating a primary production rebate, complementary tax or average income. The exclusion also extends to death benefits included in assessable income under proposed subsection 27B(1A) (see Chapter 3 ).

Clause 29: Provides the date of application of the proposed amendments made by clauses 38, 39 and 40 , i.e. the 1994-95 and all later years of income.

Clause 34: Amendment of assessments.

Income Tax Rates Act 1986

Clause 35: Defines Principal Act as meaning the Income Tax Rates Act 1986 for the amendments proposed in Part 3 of the Bill.

Clause 36:

•

Amends the 'special income component' definition in subsection 3(1) of the Rates Act to ensure allowable deductions from assessable income reduce the special income component (as currently defined) before reducing the excessive component.

•

Provides a definition of the EC part of taxable income as the part of taxable income which comprises an excessive component of an ETP.

•

Provides a definition of ordinary taxable income as the amount of taxable income (if any) which is not an excessive component.

Clause 37: Amends Schedule 7 of the Rates Act to provide tax rates for taxable income which includes an excessive component.

Clause 38: Amends Schedule 8 of the Rates Act as a consequence of the amendment to clause 1 of Schedule 7.

Clause 39: Amends Schedule 9 of the Rates Act to provide tax rates for taxable income which includes notional income and an excessive component.

Clause 40: Amends Schedule 10 of the Rates Act as a consequence of the amendment to clause 1 of Schedule 7.

Clause 41: Amends Schedule 11 of the Rates Act to provide tax rates for taxable income of minors which includes an excessive component.

Clause 42: Amends Schedule 12 of the Rates Act to provide tax rates applicable to a trustee in respect of a minor's share of net income of a trust estate which includes an excessive component.

Clause 43: Provides the date of application of the proposed amendments, i.e. the 1994-95 and all later years of income.

Allocated annuities

[See pages 67-68 for further detail]

Clause 30: Inserts a definition of annuity in subsection 110(1) by reference to section 3 of the Occupational Superannuation Standards Act 1987 (OSSA) so that the income derived by life assurance companies in respect of allocated annuity policies will be exempt from tax.

Clause 31: Inserts a definition of annuity in subsection 116E(1) by reference to section 3 of OSSA so that the income derived by registered organisations in respect of allocated annuity policies will be exempt from tax.

Clause 32: Inserts a definition of annuity in subsection 159GP(1) by reference to section 3 of OSSA so that allocated annuities are not qualifying securities.

Clause 33: Proposes that the amendments apply to annuities purchased on or after 22 December 1992.

Taxation Laws Amendment (Superannuation) Act 1992

Clause 62: Defines Principal Act as meaning the Taxation Laws Amendment (Superannuation) Act 1992 for the amendments proposed in Part 6 of the Bill.

Clause 63: Repeals section 35 of Taxation Laws Amendment (Superannuation) Act 1992.

Clause 64: Proposes that the amendments apply to annuities purchased on or after 22 December 1992.

Clause 65: Amends section 51 of Taxation Laws Amendment (Superannuation) Act 1992.

Amendments to the Occupational Superannuation Standards Act

Transferred retiree members of superannuation funds

[See pages 69-70 for further detail]

Clause 44: Defines "Principal Act" as meaning the Occupational Superannuation Standards Act 1987 (OSS Act) for the amendments proposed in Part 4 of the Bill.

Clause 45: Amends section 3 of the OSS Act by omitting subparagraph (b) of the definition of "transferred retiree member" in subsection (1) and substituting a paragraph which explains that the payment which funds the benefit of such a member must represent the roll-over of an eligible termination payment within the meaning of that phrase in the Tax Act.

Clause 46: Provides that the date of application of the proposed amendments, in relation to amounts paid to the trustee of a fund, is after the commencement of this section.

Notification of breaches of superannuation funds conditions

[See pages 71-74 for further detail]

Clause 47: Provides for the Regulations to specify circumstances in which employer sponsors should be notified or not notified, and which employers to notify, in the event of a breach of a superannuation fund condition which the trustees of the fund wish to ensure will be disregarded by the Commissioner.

Clause 48: Provides that the amendments made by Clause 47 apply to a breach, or so much of a breach, that occurred after the commencement of this section.

Clause 49: Provides that subsection 12(3A) applies, and has always applied, to a breach, or so much of a breach, that occurred after 30 June 1992.

Prospectuses

[See pages 75-78 for further detail]

Clause 50: Provides for the amendment of the definition in section 3 of the OSS Act of "reviewable decision" to include reference to the provisions outlined in Clause 51.

Clause 51: Allows the Commissioner to exempt, conditionally or otherwise, individual funds from the prospectus provisions, or to modify their application.

Clause 52: Makes decisions made in respect of Clause 51 reviewable.

Disclosure of information about superannuation funds

[See pages 78-81 for further detail]

Clause 53: Formalises the arrangements under which the Commissioner releases information and extends the ability of the Commissioner to disclose certain information that is voluntarily provided by superannuation funds.

Amendments relating to reporting of eligible termination payments for reasonable benefit limits

[See pages 83-84 for further detail]

Clause 54: Inserts new subsection 15G(4) to clarify that certain payers of ETPs are eligible for the exemption from RBL reporting of payments up to the threshold amount prescribed in the regulations.

Clause 55: Proposes that the amendments apply from 24 December 1991.

Amendments to the Superannuation Guarantee (Administration) Act 1992 - definition of defined benefit superannuation schemes

[See pages 85-89 for further detail]

Clause 56: Provides that the amendments apply to the Superannuation Guarantee (Administration) Act 1992 (the Act).

Clause 57: Omits the definition of 'defined benefit superannuation scheme' from subsection 6(1).

Clause 58: Inserts new sections 6A and 6B. New section 6A inserts a new definition of 'defined benefit superannuation scheme'. This definition:

•

restates the definition deleted from section 6; and

•

adds a new category of superannuation scheme to the definition, being a scheme in relation to which a conversion notice has effect.

New section 6B defines what a conversion notice is, and sets out the date on which a conversion notice may take effect and the conditions which must be satisfied for a conversion notice to be effective. The section also provides for the revocation of a conversion notice and sets out the conditions which must be satisfied for a revocation to be effective.

Clause 59: Amends section 10 by adding a further circumstance in which a benefit certificate ceases to have effect.

Clause 60: Amends section 23 by adding a new subsection (8A). New subsection 23(8A) ensures that contributions to a scheme at a time when a conversion notice is in force, are not claimed a second time, for example, as prepaid contributions, in a period before or after the period in which the conversion notice is effective.

Clause 61: Proposes that the amendments apply to assessments in respect of the 1992-93 and subsequent financial years.

Chapter 1 Continuously Complying Fixed Interest Approved Deposit Funds

Summary of proposed amendments

Purpose of amendment: To ensure that approved deposit funds (ADFs) will be able to take into account profits from the disposal of securities to determine whether they qualify as continuously complying fixed interest ADFs.

Date of effect: 1 July 1988

Background to the legislation

Section 290A of the Income Tax Assessment Act 1936 exempts from tax certain income derived by continuously complying fixed interest approved deposit funds (ADFs).

The purpose of section 290A is to relieve certain depositors in complying ADFs from some of the impact of tax otherwise payable by ADFs on investment income. In general terms, income of the ADF that is attributable to those depositors investments with the ADF as at 25 May 1988 is exempt, so long as the ADF passes the benefit of the exemption onto relevant depositors.

The exemption applies to income that is derived on deposits held in ADFs as at 25 May 1988 by two groups of depositors. Namely:

•

people who were aged 55 or older as at 25 May 1988; and

•

people who were aged 50 or older at that date and who had deposits in an ADF consisting of an approved early retirement scheme payment, a bona fide redundancy payment or an invalidity payment.

The exemption is only available to ADFs that qualify as continuously complying fixed interest ADFs as defined in subsection 290A(4). Section 290A does not apply to exempt any income derived by superannuation funds. A fixed interest ADF is defined in subsection 290A(4) to be a complying ADF where both the following conditions are satisfied:

•

not less than 90% of the ADF's normal assessable income consists of interest, or payments in the nature of interest, or income that is assessable under the accrual rules for deferred interest securities in Division 16E of Part III; and

•

the assets of the ADF do not consist of units in a pooled superannuation trust or of CS policies issued by a life insurance company or registered organisation.

If an ADF breaches the conditions for exemption in any year, the exemption is lost forever.

Explanation of proposed amendments

Paragraph (a) of the definition of fixed interest complying ADF in subsection 290A(4) is being extended to include profits on the disposal, redemption, cancellation or maturity of a security in the categories of income that qualify for inclusion in the 90% test. The term security is defined in subsection 303(1) to include, among other things, bonds, debentures, bills of exchange, deposits with banks or other financial institutions and other loans. [Clause 4]

Chapter 2 Notice requirements for personal superannuation contributions

Summary of proposed amendments

Purpose of amendment: To amend the Income Tax Assessment Act 1936 so that a taxpayer will be eligible for a deduction for personal superannuation contributions to a complying superannuation fund only if:

•

the taxpayer gives a notice to the fund stating the amount of their personal superannuation contributions that they are intending to claim as a tax deduction; and

•

they receive an acknowledgment of the notice from the fund indicating that the fund will include the amount covered by the notice as taxable contributions.

Personal superannuation contributions will not be treated as taxable contributions by a complying superannuation fund unless the fund has received a notice from the member stating that he or she is intending to claim a deduction for his or her contributions.

Date of effect: Contributions made to a fund on or after 1 July 1992, other than contributions made by a person who has ceased to be a member of the fund before the date of Royal Assent.

Background to the legislation

Section 274 of the Income Tax Assessment Act 1936 specifies those amounts received by a superannuation fund or approved deposit fund (ADF) that are included in taxable contributions. Paragraph 274(1)(a) essentially deals with employer contributions to superannuation funds. Paragraph 274(1)(b) deals with personal superannuation contributions. Paragraph 274(1)(c) concerns amounts rolled-over to ADFs.

The general scheme of paragraph 274(1)(b), which relates to personal superannuation contributions, is that only contributions which qualify for a deduction are taxable contributions. However, the trustee of a superannuation fund must assume that all personal superannuation contributions are taxable contributions unless they receive notification to the contrary, even though the vast majority of personal superannuation contributions do not qualify for a deduction.

Subsection 274(2) excludes from taxable contributions any amount covered by a subsection 82AAT(1A) notice given to the trustee of the fund before the date on which the trustee lodges the fund's income tax return for the year of income. If the notice is given to the fund after that date, the contribution is still a deductible contribution but the fund is entitled to claim relief under section 276.

A subsection 82AAT(1A) notice is given by the contributor to advise the fund that the contributor is not going to claim an income tax deduction for the contributions, or for part of the contributions, which they have made to the fund. The notice must be given in a form and manner approved by the Commissioner and is irrevocable.

Generally speaking, a person who receives superannuation support from an employer or some other person is not entitled to a deduction for their personal superannuation contributions. Subsection 274(4) provides a mechanism to prevent such contributions from being treated as taxable contributions. That section allows for a notice to be given by an approved person (who is usually the employer) stating that the approved person is satisfied that the member concerned is not entitled to a deduction for their personal superannuation contributions.

Subsection 274(3) provides that, if the trustee of a fund receives a subsection 274(4) notice before lodging the fund's income tax return for the year of income, contributions by the member covered by the notice for the year concerned are not taxable contributions. If the notice is given to the fund after that time, then the contributions for the member concerned will be taxable contributions but the fund will be entitled to relief under section 276.

Section 276 applies when a subsection 82AAT(1A) notice or a subsection 274(4) notice is given to the trustee of a fund after the fund has lodged its income tax return for the year concerned. In this situation contributions will have incorrectly been included as taxable contributions of the fund for the year. Section 276 provides relief for the fund in one of two ways. One way is to treat the amount of the contributions concerned as a deduction for the year in which the trustee actually receives the notice. The other is to treat the contributions concerned as not having been taxable contributions of the fund in the year the contributions were made.

Explanation of proposed amendments

Deductibility of personal superannuation contributions

A person who makes personal contributions to a superannuation fund will be entitled to a deduction for those contributions only if all of the following conditions are met:

•

the person is an eligible person (as defined in subsection 82AAS(1));

•

the contributions are made to obtain superannuation benefits for the person, or for dependants of the person in the event of their death

•

the fund is a complying superannuation fund; and

•

the member has given a subsection 82AAT(1A) notice to the fund in relation to the contributions and has received acknowledgment of the notice from the superannuation fund.

The deduction cannot exceed the amount covered by the notice and is subject to the limits in subsection 82AAT(2) [New subsection 82AAT(1)].

The notice must state the member's intention to claim a deduction for the whole or a part of the contributions covered by the notice [New subsection 82AAT(1A)].

The following restrictions apply to subsection 82AAT(1A) notices:

(a)

a subsection 82AAT(1A) notice cannot cover the whole or part of any contributions covered by an earlier notice.

This will ensure that, if a member gives more than one notice to a fund in respect of contributions for an income year, the trustee of a fund will not double count contributions covered by more than one notice when working out the fund's taxable contributions [New paragraph 82AAT(1B)(a)];

(b)

a subsection 82AAT(1A) notice cannot be given to the trustee of a fund once a person has ceased to be a member of the fund.

This condition is imposed because the trustee of the fund will have calculated the components of the eligible termination payment (ETP) made to the member on the understanding that contributions not covered by notices at the time of payment are undeducted contributions.

Once the member has left the fund it is too late for the fund to include the relevant contributions as taxable contributions [New paragraph 82AAT(1B)(b)];

(c)

a subsection 82AAT(1A) notice cannot be withdrawn or revoked.

This will ensure that the fund can rely on notices and therefore include contributions as taxable contributions with some degree of certainty [New paragraph 82AAT(1B)(c)].

However, the amount covered by a subsection 82AAT(1A) notice can be reduced at any time (provided the person is still a member of the fund). The member must ensure that the amount covered by a subsection 82AAT(1A) notice is not reduced below the amount that has been allowed as a deduction.

Consequently, if a member claims a deduction for contributions and all or part of that claim is subsequently disallowed, the member can notify the fund which can adjust its taxable contributions accordingly.

No adjustment can be made once a member leaves a fund because once benefits have been paid out it is too late for the fund to make the necessary adjustments [New subsection 82AAT(1C)].

Notices must be given in the form and manner approved in writing by the Commissioner of Taxation [New subsection 82AAT(1D)]. The essential information to be included in a subsection 82AAT(1A) notice is the amount of contributions that the member is intending to claim as a tax deduction and confirmation that the amount covered by the notice has not been included in an earlier notice.

If a person has not received the necessary acknowledgment from the fund, they are not entitled to a deduction for their contributions. The acknowledgment must be given by the trustees of the fund without delay [New subsection 82AAT(1A)].

Generally speaking, the acknowledgment will be considered to have been given without delay if the trustee of a fund acknowledges a subsection 82AAT(1A) notice:

•

by 30 June of the financial year in which the contribution to which the subsection 82AAT(1A) notice relates is made; or

•

within 30 days of receipt,

whichever is later.

Failure by the trustees to give an acknowledgment will be a breach of section 8C of the Taxation Administration Act 1953. If a person gives a notice and receives the necessary acknowledgment after they have received their notice of assessment for the relevant year of income, the Commissioner may amend the assessment to allow the deduction [New subsection 82AAT(1E].

Taxable contributions for complying superannuation funds

A complying superannuation fund will include personal superannuation contributions received in a particular year in its taxable contributions for the year of income only if it has received a subsection 82AAT(1A) notice from the member before the date on which the trustee lodges the fund's income tax return for the year. Contributions do not include ETPs that have been rolled-over [New subparagraph 274(1)(b)(i)].

If a subsection 82AAT(1A) notice is received by the fund after the fund has lodged its income tax return for the year in which the contributions were made, the fund will include the contributions in its taxable contributions in the year the notice is given [New subsection 274(2)].

If an amount has been included as taxable contributions of a complying superannuation fund and the member subsequently gives a subsection 82AAT(1C) notice reducing the amount covered by a subsection 82AAT(1A) notice, the fund can claim a deduction for the amount covered in the subsection 82AAT(1C) notice in the year the notice is received. However, if the fund is unable to fully utilise the deduction because, for example, it has no assessable income, the fund can seek to have the assessment for the year in which the contribution was included in its assessable income amended [Amended section 276].

Application of the proposals

The new notice arrangements apply to personal superannuation contributions made to a fund on or after 1 July 1992, other than contributions made by a person who has ceased to be a member of the fund before the date of Royal Assent of the Bill [Clause 11] . Therefore, taxpayers who are members of the fund after the date of Royal Assent of the Bill will qualify for a deduction in the 1992-93 year of income only if they give the fund a subsection 82AAT(1A) notice and receive the necessary acknowledgment from the fund.

The deductibility of personal superannuation contributions by taxpayers who leave a fund prior to the date of Royal Assent will be determined under the existing law. This is because taxpayers who have left the fund will have been paid out benefits on the basis of the current law and the current understanding of the fund in relation to the tax treatment of contributions.

Example 1

Jacqui is a self-employed person who contributes $12000 to a complying superannuation fund in the 1992-93 income year. On 30 June 1993 she gives the fund a subsection 82AAT(1A) notice stating that she is going to claim a deduction of $9750 (ie, $3000 plus 75% of $9000) in respect of her personal superannuation contributions. The fund acknowledges the notice immediately upon receipt and indicates that it will include $9750 in its taxable contributions. Jacqui complies with all the requirements in section 82AAT and is entitled to a deduction of $9750 for her personal superannuation contributions.

As the fund received the notice prior to lodging its return for the 1992-93 income year it will include the $9750 in its taxable contributions for that income year.

Example 2

Robert is a self-employed person who contributes $5000 to a complying superannuation fund in the 1992-93 year of income. On 1 May 1992 he gives a subsection 82AAT(1A) notice to the fund stating that he is going to claim a deduction of $3000 of his personal superannuation contributions for the year. The fund immediately acknowledges the notice and indicates that it will include $3000 in its taxable contributions for the year.

Robert lodges his income tax return at the end of October and realises that he is entitled to claim more than $3000 as an income tax deduction for the year. He gives the fund an additional subsection 82AAT(1A) notice for $2000. The fund acknowledges the notice and Robert makes a claim for $5000 for personal superannuation contributions. As the second notice was given to the fund after it lodged its return for the 1992-93 income year, the fund will include the $2000 in its taxable contributions for the 1993-94 income year.

Following an audit of his return in September 1995, Robert's claim is reduced by $500 to $4500 (ie, $3000 plus 75% of $2000). Robert gives the fund a subsection 82AAT(1C) notice for $500 to the fund reducing the amount included in the second subsection 82AAT(1A) notice to $1500. The fund claims a section 276 deduction for $500 in the 1995-96 income year for the excess contributions previously included in its taxable contributions.

Example 3

Suzanne works for an employer for the first two months of the income year. During that time her employer makes contributions to a superannuation fund. She also contributes to the same fund. After leaving the employer she becomes a self-employed person. She takes an ETP from her previous employer's fund and rolls the ETP over to a personal superannuation fund. That part of the ETP representing a return of Suzanne's contributions are treated as undeducted contributions.

At the end of the income year Suzanne realises that she qualifies as a substantially self-employed person (ie, less than 10% of her assessable income was derived from her employment). She wants to claim a deduction for her contributions to her former employer's fund and seeks to give a subsection 82AAT(1A) notice in respect of those contributions to the fund. As Suzanne has left the fund the notice is invalid and cannot be accepted by the fund. Consequently Suzanne is unable to claim a deduction for her contributions to the employer's fund.

Chapter 3 Death Benefit ETPs

Summary of proposed amendments

Purpose of amendment:

•

Death benefit eligible termination payments (ETPs) within the deceased's reasonable benefit limits (RBLs) will be taxed as follows:

-

benefits paid to dependants will be exempt from tax;

-

benefits paid to non-dependants will be taxed as ordinary ETPs. However, the post-June 1983 component of such ETPs will be taxed at a maximum rate of 15% (plus medicare levy) if paid from a taxed source and 30% (plus medicare levy) if paid from an untaxed source.

•

Benefits in excess of the deceased's RBL entitlement will be taxed as an excessive component of an ETP.

•

Lump sum benefits arising as a result of superannuation pensions or annuities that have commenced to be payable will receive the same taxation treatment as death benefit ETPs.

Date of effect: 1 July 1994

Background to the legislation

Eligible termination payments (ETPs) are taxed in accordance with Subdivision AA of Division 2 of Part III of the Income Tax Assessment Act 1936. The most common types of ETPs that qualify as death benefits are:

•

employer related payments made after the death of an employee (other than amounts representing unused annual leave or accrued long service leave);

•

lump sum payments from superannuation funds made after the death of the member; and

•

payments from approved deposit funds (ADFs) made after the death of the member.

Recipients of death benefit ETPs fall within three main categories: dependants, non-dependants and trustees of deceased estates. The current taxation treatment of death benefit ETPs varies depending on the type of benefit and the category of the recipient receiving the payment.

Payments directly to dependants

Death benefits ETPs paid to dependants generally receive more concessional tax treatment than that which would apply had the deceased person received the benefit. A dependant for these purposes includes a spouse (including a de facto spouse or former spouse) and a child under 18 years of age.

The types of death benefits received by dependants and their general tax consequences are set out in Table 1.

Payments directly to non-dependants

Lump sum death benefits received by a non-dependant are taxed as ETPs. A non-dependant is a person who is not a dependant at the time of death of the deceased or at the time of payment of the benefit.

The types of death benefits received by non-dependants and their general tax consequences are set out in Table 2.

Payments to trustees of the deceased's estate

The tax treatment of lump sum death benefits payable directly to the trustee of the deceased estate depends largely on the type of death benefit paid and the extent to which dependant beneficiaries are likely to benefit from the payment.

The types of death benefit ETPs received by trustees of deceased estates and their general tax consequences are set out in Table 3.

The above tables illustrate that the taxation arrangements applying to death benefit ETPs are diverse and depend on the form of benefit, the manner of receipt and the relationship of the recipient to the deceased. Anomalies also arise when a non-dependant receives a death benefit ETP via an estate. The benefit is taxed in the hands of the trustee at the ETP tax rates according to the deceased's age. If the same benefit was received directly by the non-dependant, the benefit would be assessed in the recipient's hands according to the recipient's age.

Explanation of proposed amendments

Death benefit ETPs paid to both dependants and non-dependants will be classified into four categories. Category 1 and 3 benefits are payments made to the trustees of the deceased's estate. Category 2 and 4 benefits are payments made directly to the beneficiaries.

Category 1 death benefit ETPs

The first category of death benefit ETPs are payments made after the death of a taxpayer to the trustee of the taxpayer's estate that are:

•

payments from the deceased's employer, apart from payments of unused annual leave or accrued long service leave (paragraph (a) of the definition of ETP in subsection 27A(1) of the Income Tax Assessment Act);

•

payments from superannuation funds (paragraph (b) of the ETP definition);

•

payments from approved deposit funds (paragraph (c) of the ETP definition);

•

payments representing the commutation of a superannuation pension where the election to commute was made prior to the death of the deceased but the payment was not made until after their death (paragraph (d) of the ETP definition);

•

payments representing the residual capital value of a superannuation pension (paragraph (e) of the ETP definition);

•

payments representing the commutation of an annuity where the election to commute was made prior to the death of the deceased but the payment was not made until after their death (paragraph (g) of the ETP definition);

•

payments representing the residual capital value of an annuity (paragraph (h) of the ETP definition).

[New subsection 27AAA(2): Table 1 Item 1]

Category 2 death benefit ETPs

The second category of death benefit ETPs cover most payments made directly to a beneficiary. Payments under the relevant paragraph of the definition of an ETP will always qualify as death benefit ETPs. Category 2 death benefit ETPs consist of:

•

payments made directly from the deceased's employer, apart from payments of unused annual leave or accrued long service leave (paragraph (aa) of the ETP definition);

•

payments made directly from the deceased's superannuation fund (paragraph (ba) of the ETP definition);

•

payments made directly from the deceased's approved deposit fund (paragraph (ca) of the ETP definition);

•

lump sum payments made directly or indirectly from the deceased's superannuation fund where the beneficiary or some other person had a right to elect to receive a superannuation pension in lieu of the capital sum (paragraph (db) of the ETP definition);

•

payments representing the residual capital value of a superannuation pension payable to the deceased (paragraph (f) of the ETP definition);

•

lump sum payments made directly or indirectly from the deceased's superannuation fund where the beneficiary or some other person had a right to elect to receive a annuity in lieu of the capital sum (paragraph (gb) of the ETP definition);

•

payments representing the residual capital value of an annuity payable to the deceased (paragraph (j) of the ETP definition).

[New subsection 27AAA(2): Table 1 Item 2]

To achieve the outcome that all benefits paid directly from employers, superannuation funds and ADFs to both dependants and to non-dependants are death benefit ETPs within the scope of Item 2, subparagraph (ii) of paragraphs (aa), (ba) and (ca) of the definition of ETP in subsection 27A(1) is being removed [Subclause 12].

Category 3 death benefit ETPs

The third category of death benefit ETPs are payments made to the trustee of the estate of the deceased. Payments under the relevant paragraph of the definition of an ETP that applies to category 3 type death benefit ETPs will always qualify as death benefit ETPs. Category 3 death benefit ETPs consist of:

•

lump sum payments made directly or indirectly from the deceased's superannuation fund to the trustee of the deceased's estate where the beneficiary or some other person had a right to elect to receive a superannuation pension in lieu of the capital sum (paragraph (da) of the ETP definition);

•

lump sum payments made directly or indirectly from the deceased's superannuation fund to the trustee of the deceased's estate where the beneficiary or some other person had a right to elect to receive an annuity in lieu of the capital sum (paragraph (ga) of the ETP definition);

[New subsection 27AAA(2): Table 1 Item 3]

Category 4 death benefit ETPs

The final category of death benefit ETPs are payments made directly to a beneficiary. Category 4 death benefit ETPs consist of:

•

payments representing the commutation of a superannuation pension (paragraph (d) of the ETP definition) where there is required link with the deceased person and the payment is made in the specified period;

•

payments representing the commutation of an annuity (paragraph (g) of the ETP definition) where there is required link with the deceased person and the payment is made in the specified period;

[New subsection 27AAA(2): Table 1 Item 4]

The required link for paragraph (d) and (g) ETPs to qualify as Item 4 type death benefit ETPs is that the pension or annuity must be:

•

a reversionary pension or annuity (ie, a pension or annuity that is the continuation, usually at a lesser rate, of a pension or annuity that was payable to the deceased); or

•

a pension or annuity that became payable as the result of the death of another person.

[New subsection 27AAA(6)]

In addition, a paragraph (d) or (g) ETP with the required link will qualify as a death benefit ETP only if it is made within the specified period. The specified period is the longer of:

•

6 months after the date of death of the deceased person; or

•

3 months after the grant of probate of the deceased person's will or of letters of administration of the deceased person's estate.

[New subsection 27AAA(7)]

If a paragraph (d) or (g) ETP is made directly to a beneficiary outside the specified period, the amount received is taxed as an ordinary ETP in the recipients hands.

With the exception of paragraphs (d) and (g), each paragraph of the definition of ETP falls within only one Item in the Table of Death Benefits in new subsection 27AAA(2). Paragraphs (d) and (g) fall within two Items because they can be paid either:

•

to the trustee of the deceased's estate if the election to commute the pension or annuity was made by the deceased prior to death but the payment was not made until after death (Item 1 death benefit ETPs); or

•

directly to the beneficiary where the election to commute is made by the beneficiary, the requisite link exists and the payment is made within the specified period (Item 4 death benefit ETPs).

Death benefit ETPs paid directly to dependants

Death benefit ETPs paid to dependants will qualify for concessional tax treatment. A dependant is defined in subsection 27A(1) to include:

•

a spouse or former spouse (including a de facto spouse) of the deceased; and

•

a child under 18 years of age of the deceased.

If the benefit is paid directly to a dependant of the deceased it will be an Item 2 or Item 4 death benefit ETP . The ETP will be reduced so that it only consists of the notional excessive component, if any. Therefore, any amount received up to the notional excessive component is tax free [New subsection 27AAA(4)]. The notional excessive component is the excessive component of the death benefit ETP calculated assuming that the whole of the benefit is an ETP [New subsection 27AAA(5)].

Example

Joan receives a reversionary pension following the death of her husband. 3 months later she elects to commute the pension and receives a lump sum payment of $600 000. The payment is less than her husband's pension RBL entitlement. The payment represents the commutation of a superannuation pension (a paragraph (d) ETP), has the necessary link in terms of subsection 27AAA(6) and is made in the period specified in subsection 27AAA(7). The payment is an Item 4 death benefit under the Table in new subsection 27AAA(2). Therefore, the payment received by Joan will be tax free in accordance with new subsection 27AAA(4).

Death benefit ETPs paid directly to non-dependants

A death benefit ETP paid to a non-dependant will be an Item 2 or Item 4 death benefit ETP . The ETP will be taxed as an ordinary ETP and broken into its ordinary components based on the deceased's eligible service period. Apart from the post-June 1983 component, the ordinary tax treatment applies to each of the components of the ETP.

The post-June 1983 component of a death benefit ETP is included in assessable income [New subsection 27B(1A)] . However, a rebate applies to ensure that the post-June 1983 component of a death benefit ETP is taxed at a maximum rate of 15% (plus medicare levy) if paid from a taxed source or 30% (plus medicare levy) if paid from an untaxed source [Items 7 and 8 in Table 1 in new section 159SA].

Example

Leonard receives a lump sum payment from a taxed superannuation fund of $200 000 following the death of his brother. The payment is a paragraph (ba) ETP and comes within Item 2 of the Table of death benefit ETPs in new subsection 27AAA(2) . Leonard is a non-dependant and therefore does not qualify for the dependant's concession in new subsection 27AAA(4) . The ETP is broken into the following components:

•

undeducted contributions $25 000

•

pre-July 1983 component $60 000

•

post-June 1983 component $115 000

No part of the undeducted contributions will be included in Leonard's assessable income. 5% of the pre-July 1983 component (ie $3 000) will be included in his assessable income in accordance with subsection 27C(1) and taxed at marginal rates. The full amount of the post-June 1983 component will be included in Leonard's assessable income under new subsection 27B(1A) . However, the rebate in new section 159SA will apply to ensure that the rate of tax payable on that component will not exceed 15% plus medicare levy (see Item 7 in Table 1 of new subsection 159SA(1)) .

Death Benefit ETPs paid to the trustees of the deceased's estate

Death benefit ETPs paid to the trustee of the deceased's estate will be either Item 1 or Item 3 death benefit ETPs . The ETP is reduced by the amount the Commissioner considers appropriate having regard to the extent to which dependants of the deceased taxpayer may reasonably be expected to benefit from the estate. However, the ETP will not be reduced to the extent that it consists of notional excessive component, if any [New subsection 27AAA(3)] . The notional excessive component is the excessive component of the death benefit ETP calculated assuming that the whole of the benefit is an ETP [New subsection 27AAA(5)].

If the beneficiary of the deceased's estate is a non-dependant, the ordinary tax treatment applies to each of the components of the ETP. However, the rebate in new section 159SA applies to ensure that the tax payable on the post-June 1983 component of the death benefit ETP by the trustee of the estate will not exceed 15% (plus medicare levy) if paid from a taxed source or 30% (plus medicare levy) if paid from an untaxed source.

Example

The trustees of Janet's estate receive a lump sum superannuation payment (a paragraph (b) ETP) of $900 000. The payment is an Item 1 death benefit under the Table in new subsection 27AAA(2). The sole beneficiary of the estate is Janet's husband, Brad. $100 000 of the payment is in excess of Janet's pension RBL. The ETP is reduced to $100 000 in accordance with new subsection 27AAA(3) and taxed as an excessive component in the hand's of the trustee of the estate.

If a death benefit is paid to the trustees of the deceased's estate and distributed partly to a dependant and partly to a non-dependant, the payment is not an ETP to the extent that dependants can be expected to benefit from the estate [New subsection 27AAA(3)]. Each component of the ETP taxed in the trustees hands will be in the same proportion as the respective components of the original ETP (assuming that the whole of the payment is an ETP) reduced by the excessive component.

Example

Richard's superannuation benefit of $1 000 000 is paid to the trustees of his estate following his death. The ETP (which is a paragraph (b) ETP) is broken into the following components:

•

undeducted contributions $40 000

•

excessive component $160 000

•

pre-July 1983 component $210 000

•

post-June 1983 component $590 000

Richard's estate is distributed in equal shares to Christine (who is a dependant) and Isabelle (who is a non-dependant). The ETP qualifies as an Item 1 death benefit ETP in Table 1 of new subsection 27AAA(2). The death benefit ETP is reduced in accordance with new subsection 27AAA(3) to the extent that Christine will benefit from the estate. Consequently, the ETP will be reduced by $500 000 (ie. $1 000 000 x 50%) to $500 000. Each component of the ETP taxed in the trustees hands will be in the same proportion as the respective components of the original ETP (assuming that the whole of the payment is an ETP) reduced by the excessive component. The original ETP less the excessive component amounts to $840 000 ($1 000 000 - $160 000). The reduced ETP less the excessive component is $340 000 ($500 000 - $160 000). Therefore, the ETP in the trustee's hands will consist of the following components:

•

excessive component $160 000

•

undeducted contributions $16 190

($340 000 x $40 000/$840 000)


•

pre-July 1983 component $85 000

($340 000 x $210 000/$840 000)


•

post-June 1983 component $238 810

($340 000 x $590 000/$840 000)


•

Total ETP $500 000

Roll-over restrictions

In order for an ETP to be rolled-over, it must be a qualifying ETP. Death benefit ETPs are specifically excluded from being qualifying ETPs and therefore cannot be rolled-over in any circumstances [Subclause 12(d) - new subsection 27A(12B)].

Paragraph 27A(12C) prevents amounts received on the commutation of a reversionary annuity from being rolled-over by anyone other than the spouse of the person to whom the annuity was first payable. To ensure consistency in the treatment between pensions and annuities, it is proposed to impose the same restriction on ETPs representing the commutation of a reversionary pension from a superannuation fund. Paragraph 27A(12C) will not, of course, apply to payments which qualify as death benefit ETPs [Subclause 12(e)].

Chapter 4 Reasonable Benefit Limits

Summary of proposed amendments

Purpose of amendment: Assess lump sum superannuation benefits paid to a person, as the result of the death of another person, against the deceased's reasonable benefit limit (RBL).

Date of Effect: Applies to eligible termination payments (ETPs) made on or after 1 July 1994.

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 (OSS Regulations). However, the Taxation Laws Amendment (Superannuation) Act 1992 (the 'Superannuation Act') inserted the RBL rules into the Income Tax Assessment Act 1936 (the Act). This will allow the Commissioner of Taxation to have responsibility for the administration of the RBLs from 1 July 1994.

Under the existing RBL rules in the OSS Act and OSS Regulations, lump sum death benefits paid in relation to a person are assessed against that person's RBL. An exception is if the benefit is paid to a spouse or child of the deceased in which case the benefits are exempt from income tax. Amendments in the Superannuation Act changed these rules so that most lump sum death benefits are excluded from the RBL provisions.

Explanation of proposed amendments

The 'relevant deceased person' is the 'recipient' of an ETP that is a 'death benefit ETP' covered by Item 1 or Item 3 in Table 1 in section 27AAA. It is now proposed that if an ETP is a death benefit ETP, and the person to whom the ETP is made is not the relevant deceased person (i.e. death benefit ETPs covered by Item 2 and Item 4 in the Table 1 in section 27AAA), then the ETP will be assessed against the relevant deceased person's RBL. This will be achieved by treating the ETP as though it had been made in relation to the relevant deceased person for the purposes of working out the extent to which the ETP has an excessive component (i.e., the amount by which the ETP exceeds the person's RBL). The ETP will also be treated as relating to the relevant deceased person for the purposes of working out the excessive component of any other ETP which is made in relation to the relevant deceased person (or any other person). That is, the ETP will be treated as a previously received benefit of the deceased person for RBL purposes.

A 'death benefit ETP' is an ETP that is treated as a death benefit under new section 27AAA of the Act (see explanation in Chapter 3). The 'relevant deceased person' is as follows:

•

in the case of a death benefit covered by Item 1 in Table 1 in section 27AAA - the taxpayer mentioned in the applicable definition of 'eligible termination payment' in section 27A;

•

in the case of a death benefit covered by Items 2 or 3 in Table 1 in section 27AAA - the deceased person mentioned in the applicable definition of 'eligible termination payment' in section 27A;

•

in the case of a death benefit in Item 4 of Table 1 in section 27AAA - the deceased person mentioned in paragraph 27AAA(6)(a) or (b). [Clause 21 - new section 140CA]

As mentioned above, the death benefit ETP is only treated as being received by the deceased for the purposes of working out the excessive component. Therefore, the provisions of Division 14 dealing with determinations, notices, objections and other administrative procedures will apply to the person who was the actual recipient of the ETP for RBL purposes. Also, as explained in Chapter 3, if the ETP has an excessive component it will be included in the assessable income of the actual recipient of the ETP.

In assessing a death benefit ETP against the deceased's RBL, the deceased's pension RBL is to be used rather than the deceased's lump sum RBL. This will override the general rule that a person must receive at least half of their superannuation benefits as a pension or annuity in order to be eligible for the higher pension RBL. [Clause 24 - new subsection 140ZF(5)]

Example

A payer makes an ETP of $600 000 to a person during the 1994-95 year of income. The ETP is paid to the person as a result of the death of another person. The only superannuation benefits previously received by the deceased person was an ETP of $300 000. The deceased's pension RBL is $800 000.

Even though the benefit is made in relation to the recipient, the benefit is to be assessed against the deceased's pension RBL. Therefore, the ETP gives rise to an excessive component of $100 000 (i.e., [$600 000 + $300 000] - $800 000). The excessive component will be included in the recipient's assessable income.

Under the RBL provisions in the Superannuation Act certain superannuation benefits are not counted towards a person's RBL. Included in those benefits are:

•

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

•

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 (paragraphs 140ZC(2)(f) and (i)).

As a consequence of assessing death benefit ETPs against the deceased's RBL, paragraphs 140ZC(2)(f) and (i) are to be removed. Therefore, the benefits mentioned above will count towards a person's RBL (i.e., the deceased's RBL). [Clause 23]

Under Division 14 of the Superannuation Act, the Commissioner must revise a final determination of whether a benefit exceeds a person's RBL if the determination relates to an ETP that is reduced under subsections 27A(4) or (4A) of the Act (see subsection 140S(2)). 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 purpose of subsection 140S(2) in revising the determination is to take account of the distribution to the dependants and therefore, reduce the amount of the benefit which counted towards the deceased's RBL. As a death benefit ETP is to be assessed against the deceased's RBL regardless of who is the recipient of the ETP, there is no longer a need for a revision of the determination. Therefore, subsection 140S(2) is to be omitted. [Clause 22]

The above amendments apply to ETPs made on or after 1 July 1994. [Clause 25]

Chapter 5 Taxation of Excessive Components

Summary of proposed amendments

Purpose of amendment: Amendment of the Income Tax Rates Act 1986 (the Rates Act) and the Income Tax Assessment Act 1936 (the Act) to ensure the excessive component of an eligible termination payment is taxed at the top marginal rate of tax (currently 47%) plus Medicare levy.

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

Background to the legislation

What is an excessive component?

There is a limit (the reasonable benefit limit) on the amount of an eligible termination payment (ETP) which receives concessional tax treatment. Amounts in excess of that limit form the excessive component (EC) of the ETP.

What is the current and proposed tax treatment of the excessive component?

Under the current law, the EC is included in assessable income by subsection 27B(3) of the Act. In this way it is taxed at the taxpayer's marginal rates of tax under the Rates Act.

From 1 July 1994, the EC is to be taxed at the top marginal rate of tax (currently 47%) plus Medicare levy. However, it is to continue to be included in the recipient's assessable income so that allowable losses and deductions incurred by the taxpayer during the year, or carried forward from prior years, may reduce the taxable amount of the EC. No tax will be payable on the EC if the taxpayer's losses and deductions exceed the EC and other assessable income for the year.

How is the proposed tax treatment of the excessive component to be implemented?

The tax rates on taxable income of individuals are contained in the schedules to the Rates Act. Some of these schedules need to be amended to apply the appropriate rate of tax to the EC and other parts of taxable income. The other parts of taxable income may include a special income component, which is currently defined in subsection 3(1) of the Rates Act as net capital gains, abnormal income or the sum of both. The special income component of taxable income is subject to concessional tax treatment known as notional averaging.

Notional income

Schedule 9 of the Rates Act applies special rates of tax to taxable income which includes notional income under section 59AB or section 86 of the Act.

Section 59AB applies where there is a cessation of a business because of the loss or disposal of its assets as a result of which the taxpayer's assessable income includes a balancing charge. Section 86 applies where a taxpayer receives a premium for a lease of not less than 25 months duration. Notional income is worked out on the basis of taxable income.

If taxable income includes an EC, it may be necessary in some cases to recalculate notional income by using ordinary taxable income as the basis for calculation rather than the whole of taxable income. This is explained below.

Explanation of proposed amendments

Identification of the excessive component in taxable income

To ensure the correct amount of tax is levied on the EC, two parts of taxable income are to be identified for the purposes of the Rates Act: ordinary taxable income and the EC part of taxable income. These terms are to be defined in subsection 3(1) of the Rates Act.

Ordinary taxable income is taxable income less the EC part of taxable income. The EC part of taxable income is generally the amount of EC included in the taxpayer's assessable income under subsection 27B(3) of the Act. However, in some cases taxable income will be less than or equal to the amount of the EC included in assessable income. This will happen when the taxpayer has tax deductions or carry forward losses equal to or exceeding non-EC assessable income (if any). In such cases the taxable income will comprise an EC part only and no ordinary taxable income. [Subclause 36(b) - new definition in subsection 3(1) of the Rates Act]

It is also necessary to identify the respective amounts of special income component and EC in taxable income where the sum of those components is more than taxable income (i.e. where the taxpayer has excess deductions, namely allowable deductions greater than his or her assessable income from sources other than the EC or special income component).

In such cases, any excess deductions are to reduce the special income component before reducing the EC. Therefore the definition of special income component in subsection 3(1) is to be amended so that, if taxable income includes an EC, the special income component is:

•

the amount of special income component as currently defined in subsection 3(1) reduced by the amount (if any) by which the sum of the special income component (as currently defined) and the EC exceeds taxable income.

[Subclause 36(a) - amended definition of special income component in subsection 3(1) of the Rates Act]

If the result of the above calculation is zero or less than zero, there will be no special income component included in taxable income and the whole of the taxable income will be taxed as an EC.

Amendment of Schedule 7

Schedule 7 provides the general rates of tax for individual taxpayers. Part I covers residents and Part II, non-residents. Each part contains three clauses:

•

clause 1 taxes income at the marginal rates specified in the relevant table;

•

clause 2 provides an averaging formula for taxing income containing a special income component; and

•

clause 3 provides an averaging formula for taxing income of primary producers containing a special income component.

Marginal tax rates under Schedule 7

Clause 1 of both Part I and Part II is to be amended so that:

•

the rate of tax on the EC part of taxable income is 47%; and

•

the rates of tax on ordinary taxable income are the marginal rates specified in the table in the clauses.

[Subclauses 37(a), (b), (e) and (f) - amended clause 1 of Parts I and II of Schedule 7 of the Rates Act]

Each part of taxable income will be identified and taxed separately. Therefore, in determining the tax on ordinary taxable income, the EC part is ignored.

Notional averaging under Schedule 7

Under clause 2 (for taxpayers other than primary producers) and clause 3 (for primary producers) of Parts I and II of Schedule 7, the tax payable on every dollar of taxable income containing a special income component is the sum of:

•

Component A , i.e. the amount of tax payable under clause 1 on taxable income reduced by the special income component (the reduced taxable income); and

•

Component B , i.e. five times the difference between:

-

the tax payable under clause 1 on the reduced taxable income (or average income for primary producers) plus one fifth of the special income component, and

-

the tax payable under clause 1 on reduced taxable income (or, for primary producers, average income);

divided by Component C (taxable income).

Essentially, the averaging provisions described above apply the average of the marginal rates of tax that would be payable on one fifth of the special income component to the whole of that component. To effect that, one fifth of the special income component is included in the 'top slice' of taxable income (i.e. the part of taxable income which attracts the highest marginal rate(s) of tax).

The averaging provisions would not, however, operate in the same way if the taxable income included an EC and was taxed according to the proposed amendments to clause 1. This is because, by separating the EC from ordinary taxable income and taxing it separately, the top slice of income occupied by the special income component would be lowered by the amount of the EC (i.e. it would usually be subject to lower rates of marginal tax).

The taxation of a special income component should not depend on whether taxable income includes an EC. Therefore clauses 2 and 3 of Parts I and II are to be amended so that the tax rate applicable to the special income component included in taxable income which also includes an EC is:

•

the rate (or the average of the rates if there is more than one) that would apply to one fifth of the component if it was included in the top slice of taxable income (including the EC) and taxed at the rates which apply to ordinary taxable income as specified in the table in clause 1.

The remaining part of the taxable income (i.e the reduced taxable income) is to be taxed according to clause 1 (as amended).

In clause 3 of both parts to Schedule 7, Component B is determined by calculating the tax on 'a taxable income equal to' the amounts specified in paragraphs (c) and (d) of the clause. Therefore, to implement the method described above for taxing the special income component, the clause is to be amended by inserting the proviso that Component B is calculated as if the taxable income referred to is ordinary taxable income (i.e. as if the whole of the taxable income was subject to the rates specified in the table in clause 1). [Subclauses 37(d) and (h) - amended clause 3 of Parts I and II of Schedule 7 of the Rates Act]

The same proviso is also to be inserted in clause 2 of both parts. However, for the proviso to operate effectively, paragraph (d) of clause 2 needs to be amended to replace the reference to Component A with a reference to tax payable on a taxable income equal to the reduced taxable income. That amendment is necessary because Component A is taxed at the rates specified in clause 1, including the 47% rate on the EC part of taxable income. In Component B, the whole of the reduced taxable income is to be taxed at the marginal rates which apply to ordinary taxable income as specified in the table in clause 1. [Subclauses 37(c) and (g) - amended paragraph 2(d) of Parts I and II of Schedule 7 of the Rates Act]

Examples

The following examples illustrate the application of Schedule 7 to taxable income containing an EC. They are based on 1991-92 rates of tax and, except where indicated, do not take into account rebates, credits or the Medicare levy.

Example 1

Matthew (a resident taxpayer) has a taxable income of $50,000 made up of:

•

pension $22,000

•

salary and wages $10,000

•

allowable deductions $2,000

•

excessive component $20,000

Therefore the EC part of his taxable income is $20,000. Ordinary taxable income is $50,000 - $20,000, i.e. $30,000.

Calculation of the gross tax payable on Matthew's taxable income of $50,000:

Step 1: Calculate the tax on the EC part of taxable income:

$20,000 x 47% = $9,400


Step 2: Calculate the tax payable on the ordinary taxable income:

This is calculated according to the table in clause 1 of Schedule 7; the marginal rates of tax in column 2 of the table are applied to the ordinary taxable income of $30,000,

i.e. $6,594

Step 3: Add the answers to Steps 1 and 2 together, i.e. the sum of the tax on the EC part of taxable income and the tax on the ordinary taxable income, to find the gross tax payable on Matthew's taxable income:

$9,400 + $6,594 = $15, 994


Example 2

Jane (a resident taxpayer) has a taxable income of $85,000 made up of:

•

excessive component $50,000

•

post-June 1983 component of an ETP $40,000

•

allowable deductions $ 5,000

Therefore the EC part of her taxable income is $50,000. Ordinary taxable income is $85,000 - $50,000, i.e. $35,000.

Calculation of the gross tax payable on Jane's taxable income of $85,000:

Step 1: Calculate the tax on the EC part of taxable income:

$50,000 x 47% = $23,500


Step 2: Calculate the tax payable on the ordinary taxable income:

This is calculated according to the table in clause 1 of Schedule 7; the marginal rates of tax in column 2 of the table are applied to the ordinary taxable income of $35,000,

i.e. $8,494

Step 3: Add the answers to Steps 1 and 2 together, i.e. the sum of the tax on the EC part of taxable income and the tax on the ordinary taxable income, to find the gross tax payable on Jane's taxable income:

$23,500 + $8,494 = $31,994


Under section 159SA of the Act, Jane is entitled to an ETP rebate on the post-June 1983 component of her ETP. Jane's ETP is from a taxed superannuation fund. Although Jane is over 55 she does not have a low rate threshold because of ETPs she received in previous years. Therefore the maximum rate of tax on the whole of the post-June 1983 component contained in ordinary taxable income is 15%.

Therefore the maximum tax Jane will pay on the post-June 1983 component contained in ordinary taxable income is 15% x $35,000 = $5,250.

The difference between this and the tax payable on the component at ordinary rates (calculated above in Step 2) is $3,244. Therefore Jane is entitled to an ETP rebate of $3,244.

Example 3

John (a resident taxpayer) has a taxable income of $55,000 made up of:

•

pension $30,000

•

net capital gain $10,000

•

excessive component $15,000

Therefore the EC part of his taxable income is $15,000. Ordinary taxable income is $55,000 - $15,000, i.e. $40,000.

Calculation of the gross tax payable on John's taxable income of $55,000:

Step 1: Calculate the special income component:

Paragraph (a) of the definition applies so the component is the net capital gain of $10,000.

Step 2: Calculate the reduced taxable income, i.e. the taxable income less the special income component:

$55,000 - $10,000 = $45,000


(This comprises $15,000 EC and $30,000 ordinary taxable income)

Step 3: Calculate the tax payable on the reduced taxable income (under clause 1 of Schedule 7), i.e. the sum of:

•

$15,000 (EC part) x 47% = $7,050


•

$30,000 (ordinary taxable income) x rates set out in column 2 of the table = $6,594

= $13,644

This is Component A in clause 2 of Part 1 of Schedule 7.

Step 4: Calculate the tax on the special income component:

5 x the difference between (a) and (b):

(a)

tax payable on the reduced taxable income plus 20% of the special income component (assuming it is made up of ordinary taxable income):

i.e. tax on $45,000 + (20% x $10,000) at the rates set out in column 2 of the table

= $13,934

(b)

tax payable on the reduced taxable income (assuming it is made up of ordinary taxable income):

i.e. tax on $45,000 at the rates set out in column 2 of the table

= $13, 014

i.e. 5 x ($13, 934 - $13, 014)

= $4,600

This is Component B in clause 2 of Part I of Schedule 7

Step 5: Add the answers to Steps 3 and 4 together, i.e. the tax on the reduced taxable income and the tax on the special income component, to find the gross tax payable on John's taxable income:

$13,644 + $4,600 = $18,244


Example 4

Mary (a resident taxpayer) has a taxable income of $45,000 made up of:

•

salary and wages $10,000

•

net capital gain $25,000

•

excessive component $30,000

•

loss on rental property $20,000

Therefore the EC part of her taxable income is $30,000. Ordinary taxable income is $45,000 - $30,000, i.e. $15,000.

Calculation of the gross tax payable on Mary's taxable income of $45,000:

Step 1: Calculate the special income component:

The capital gain ($25,000) plus the EC part of taxable income ($30,000) exceeds the taxable income of $45,000 by $10,000, so paragraph (b) of the definition applies.

Therefore the special income component is:

$25,000 - $10,000 = $15,000


Step 2: Calculate the reduced taxable income, i.e. the taxable income less the special income component:

$45,000 - $15,000 = $30,000


(This comprises an EC part only)

Step 3: Calculate the tax payable on the reduced taxable income (under clause 1 of Schedule 7):

$30,000 (EC part) x 47% = $14,100


Step 4: Calculate the tax on the special income component:

5 x the difference between (a) and (b):


(a)

tax payable on the reduced taxable income plus 20% of the special income component (assuming it is made up of ordinary taxable income):

i.e. tax on $30,000 + (20% x $15,000) at the rates set out in column 2 of the table

= $7,734

(b)

the tax payable on the reduced taxable income (assuming it is made up of ordinary taxable income):

i.e. tax on $30,000 at the rates set out in column 2 of the table

= $6,594

i.e. 5 x ($7,734 - $6,594)

= $5,700

This is Component B in clause 2 of Part I of Schedule 7

Step 5: Add the answers to Steps 3 and 4 together, i.e. the tax on the reduced taxable income and the tax on the special income component, to find the gross tax payable on Mary's taxable income:

$14,100 + $5,700

= $19,800

Primary production income

Primary production rebates and complementary tax

A taxpayer to whom section 156 of the Act applies (referred to as a primary producer), or a trustee liable to be assessed on primary production income, is:

•

entitled to a rebate if the amount of tax payable on taxable income for the year exceeds the amount of tax that would have been payable on the taxable income at the prescribed notional rates; and

•

required to pay complementary tax if the amount of tax payable on taxable income for the year is less than the amount of tax that would have been payable on the taxable income at the prescribed notional rates.

The notional rate of tax applicable to section 156 is prescribed in Schedule 8 of the Rates Act.

A reference to taxable income in section 156 does not include any amount of the taxable income which is a net capital gain or abnormal income (paragraph 149A(1)(b)). Therefore the amount of the rebate or complementary tax is unaffected by the receipt of such income. A corresponding provision is required in relation to the EC part of taxable income to prevent a primary producer who receives an EC from having the tax payable on the EC partly off-set by a primary production rebate, or receiving a reduction in the complementary tax that would otherwise have been payable if the EC was not included in taxable income.

Therefore paragraph 149A(1)(b) is to be amended by excluding the EC part of taxable income from the definition of taxable income for primary production purposes. [Clause 28 - amended paragraph 149A(1)(b) of the Act]

Corresponding to the exclusion of the EC from taxable income, paragraph 149A(1)(a) is also to be amended to ensure that, as with net capital gains, assessable income for primary production purposes does not include the EC part of taxable income. [Clause 28 - amended paragraph 149A(1)(a) of the Act]

The amendments to subsection 149A(1) also exclude from taxable and assessable income death benefits assessable under proposed subsection 27B(1A). This exclusion is explained in Chapter 3.

Average income

The proposed amendments to subsection 149A(1) will also have the effect of removing the EC from the calculation of average income (which is based on taxable income of the current year and prior years). This is appropriate because, if the rebate or complementary tax is not able to off-set tax on the EC, it would be inappropriate to include the EC in calculating average income (since it would increase that income and reduce the rebate or increase the complementary tax otherwise payable).

Schedule 8

In Schedule 8 of the Rates Act, Division 1 of Parts I and II, and clause 2(a) of Division 2 of Part I, provide for the determination of notional rates of tax based on the tax payable on average income. Since average income will not contain an EC, no amendment is required to the determination of notional rates.

Clause 2(b) of Division 2 of Part I, and Division 2 of Part II, provide for the determination of a notional tax rate on the basis of certain primary production trust income. The proposed amendments to subsection 149A(1) explained above (in conjunction with subsection 149A(2), which extends the operation of subsection 149A(1) to trust income) will ensure the primary production trust income does not include an EC. Therefore no amendment is required to the determination of notional rates in relation to trust income either.

However, subparagraph (2)(b)(ii) of Division 2 of Part I does need to be amended because it refers to taxable income in the table in clause 1 of Schedule 7. As explained above, 'taxable income' in the table is to be replaced by 'ordinary taxable income'. Therefore a corresponding amendment is required to Schedule 8. [Clause 38 - amended subparagraph (2)(b)(ii) of Division 2 of Part I of Schedule 8 of the Rates Act]

Schedule 9 (notional income)

Notional income

Schedule 9 of the Rates Act provides for the rate of tax on the taxable income of a taxpayer deriving notional income under section 59AB or section 86 of the Act. The rate applicable to the whole of the taxable income is the average rate (calculated under Schedule 7) that would apply to a taxable income equal to the notional income.

Both subsection 59AB(4) and subsection 86(1) provide that the notional income calculated under those provisions is determined for the purpose of any Act whereby a rate of tax upon the taxable income of a taxpayer is fixed by reference to a notional income. Currently, Schedule 9 of the Rates Act applies a single rate of tax, fixed by reference to notional income, to taxable income. However, the amendments to Schedule 9 described below apply more than one rate to taxable income containing notional income and an EC. Therefore subsection 59AB(4) and subsection 86(1) are to be amended so they apply to determine a notional income for the purpose of any Act that fixes a rate or rates of income tax by reference to a notional income. [Clauses 26 and 27 - amended subsections 59AB(4) and 86(1) of the Act]

Rates of tax prescribed by Schedule 9

If taxable income includes an EC, it is not appropriate for the average rate of tax determined under Schedule 9 to apply to the whole of the taxable income. Therefore the EC is isolated and taxed at 47%. [Subclauses 39(a) and (c) - new paragraph 1(a) of Parts I and II of Schedule 9 of the Rates Act]

The rate of tax applicable to the ordinary taxable income is to be based on the notional income. However, since the EC is treated separately, the notional income should not include an amount attributable to the EC. Therefore the rate of tax applicable to ordinary taxable income is to be the amount of tax payable (under Schedule 7) on a taxable income equal to the non-EC notional income, divided by the number of whole dollars in the non-EC. [Subclauses 39(a) and (c) - new paragraph 1(b) of Parts I and II of Schedule 9 of the Rates Act]

Non-EC notional income is the notional income calculated in accordance with section 59AB or section 86 as if ordinary taxable income rather than taxable income was used as the basis for the calculation. If ordinary taxable income is zero, there is no notional income. [Subclauses 39(a) and (c) - new paragraph 1(b) of Parts I and II of Schedule 9 of the Rates Act]

Notional averaging under Schedule 9

The formulae provided in clause 2 of Parts I and II of Schedule 9 for notional averaging of a special income component are essentially the same as those provided for notional averaging in Schedule 7, except that, in Component B, "reduced notional income" (i.e. notional income reduced by the special income component) is used instead of "reduced taxable income".

The use of reduced notional income instead of reduced taxable income is not relevant for present purposes. Therefore the definition of Component B is to be amended in the same way as clause 3 in Schedule 7 (explained above). The amendment will ensure that in Component B the EC part of reduced notional income is taxed at ordinary marginal rates. [Subclauses 39(b) and (d) - amended clause 2 of Parts I and II of Schedule 9 of the Rates Act]

Example

The following example illustrates the application of Schedule 9 to taxable income containing an EC. It is based on 1991-92 rates of tax and does not take into account rebates, credits or the Medicare levy.

Samantha is a resident taxpayer. The assets of Samantha's business were destroyed in a fire and the business ceased as a result. Because of insurance proceeds she received on the depreciated assets, her assessable income included a balancing charge under section 59AB of the Act.

Her taxable income for the year is $26,000, made up of:

•

excessive component $20,000

•

Balancing charge $10,000

•

allowable deductions $ 4,000

Therefore the EC part of her taxable income is $20,000. Ordinary taxable income is $26,000 - $20,000, i.e. $6,000.

Calculation of the gross tax payable on Samantha's taxable income of $26,000:

Step 1: Calculate the tax on the EC part of taxable income:

$20,000 x 47% = $9,400


Step 2: Calculate non-EC notional income:

Notional income calculated under section 59AB of the Act using ordinary taxable income instead of taxable income, i.e. one third of $6,000 (subsection 59AB(6))

= $2,000.

Step 3: Calculate tax payable on ordinary taxable income, i.e. tax payable on notional income at the rates contained in the table in clause 1 of Schedule 7:

Tax on $2,000 = 0

Therefore tax payable on ordinary taxable income is zero.

Step 4: Add the answers to Steps 1 and 3 together, i.e. the sum of the tax on the EC part of taxable income and the tax on the ordinary taxable income, to find the gross tax payable on Samantha's taxable income:

$9,400 + zero = $9,400


Rates of tax on other types of income

Trust income

Schedule 10 of the Rates Act provides for the rates of tax payable by a trustee under section 98 or 99 of the Act. The rates provided are determined by reference to the rates in Schedules 7 and 9, which are to be amended as explained below.

As with Schedule 8, an amendment is required to paragraph 2(b) of Part I of Schedule 10 to replace 'taxable income' with 'ordinary taxable income'. [Clause 40 - amended paragraph 2(b) of Part I of Schedule 10 of the Rates Act]

General income of minors

The taxation of income of minors is addressed in Schedules 11 and 12 of the Rates Act. Schedule 12 applies where a trustee is liable to be assessed under section 98 of the Act. Both Schedules are divided into Part I (residents) and Part II (non-residents).

Clause 2 of both parts in both schedules provides for the tax rate on eligible taxable income of minors (or, in Schedule 12, the trust beneficiary's share of that income). Broadly speaking, eligible taxable income is unearned income of minors. However, it does not include amounts received after the death of a person from a superannuation fund, approved deposit fund or employer (i.e. it does not include an ETP). Therefore clause 2 will not apply to an EC received by a minor and it does not need to be amended.

As with Schedule 10, the tax rates on other income of a minor are generally determined by reference to Schedules 7 and 9 (clause 1 of Parts I and II of Schedules 11 and 12). Therefore no amendment is required to clause 1 either.

Notional averaging under Schedules 11 and 12

Clause 3 of both parts of Schedules 11 and 12 provides for a rate of tax payable on the whole of a minor's taxable income which includes a special income component (Schedule 11) or a capital gains component (Schedule 12). Therefore the clause needs to be amended so that, where a minor's taxable income also includes an EC, the appropriate tax rate can be applied to the EC.

The formulae provided in clause 3 are slightly different from the formulae provided in Schedules 7 and 9. However the differences are not material and clause 3 is to be amended in the same way as clause 3 of Schedule 7 (explained above). The amendment will ensure the EC in reduced taxable income (or, in Schedule 12, the reduced share) is taxed at 47% in Component A, but will be taxed at ordinary marginal rates in Component B. [Clauses 41 and 42 - amended clause 3 of Parts I and II of Schedules 11 and 12 of the Rates Act]

Chapter 6 Allocated annuities

Summary of proposed amendments

Purpose of amendment: To ensure that income derived by an annuity provider in respect of allocated annuity policies is exempt from tax and that allocated annuities are not qualifying securities for Division 16E purposes.

Date of Effect: Annuities purchased on or after 22 December 1992.

Background to the legislation

Division 7 of Part 1 of Taxation Laws Amendment (Superannuation) Act 1992 made appropriate amendments to the income tax law to recognise allocated pensions and allocated annuities as pensions and annuities for income tax purposes. Division 5 of Part 3 made the necessary amendments to the Occupational Superannuation Standards Act 1987 (OSSA). Statutory Rule No 463 of 1992 was made on 24 December 1992 to insert pension and annuity standards in the Occupational Superannuation Standards Regulations.

The amendments did not adequately ensure that the income derived by life assurance companies and registered organisations in respect of allocated annuity policies is exempt from tax.

It is also necessary to ensure that allocated annuities are treated as annuities for Division 16E purposes. The term qualifying security is defined in subsection 159GP(1). Annuities, other than annuities which fall within subsection 159GP(10), are specifically excluded from this definition. As allocated annuities are not annuities within the ordinary meaning of the term they do not get the benefit of this exclusion and therefore may be qualifying securities.

Explanation of proposed amendments

Tax treatment of allocated annuity funds in the annuity provider's hands

Income derived by life assurance companies that relates to immediate annuities which qualify as eligible policies is exempt from tax under section 112A. The proposed amendments ensure that allocated annuities purchased wholly with ETP moneys that meet the minimum standards specified under OSSA qualify as eligible policies. Consequently the income derived by life assurance companies which relates to such annuities will be exempt from tax. [Clause 30]

The proposed amendments also ensure that income derived by registered organisations that relates to allocated annuity policies purchased wholly with ETP moneys that meet the minimum standards specified under the OSSA will be exempt from tax. [Clause 31]

Division 16E

The proposed amendments ensure that allocated annuities purchased wholly with ETP moneys that meet the minimum standards specified under OSSA are not qualifying securities for Division 16E purposes. [Clause 32]

Chapter 7 Amendments to the Occupational Superannuation Standards Act

Amendments relating to transferred retiree members of superannuation funds

Summary of the proposed amendments

Purpose of amendment: To amend subsection 3(1) of the Occupational Superannuation Standards Act 1987 (OSS Act) to amend the definition of "transferred retiree member" in such a way as to allow such a member's benefit to be funded from any rolled over eligible termination payment (ETP). This will increase the opportunity for people to choose between pension providers.

Date of effect: Royal Assent

Background to the legislation

A superannuation fund cannot retain the monies of a member when he or she retires. An exception to this general rule is where the fund is paying a bona fide pension or income stream to the retired person from assets accumulated during their working life and now held in the fund as a source for the pension payment.

A recent amendment to the OSS Act allows a superannuation fund to accept a direct payment of monies from another superannuation fund on behalf of a retired person. This amendment has made it easier for the retiree to choose a pension provider which best suits his or her circumstances, thereby encouraging retirees to choose the pension option and encouraging competition among pension providers. The key to this provision is the definition of a "transferred retiree member", who is the only retired person on whose behalf monies may be transferred to a superannuation fund.

Eligible termination payments may be made to or on behalf of retired people by superannuation funds, approved deposit funds, deferred annuities and by their previous employer. The retiree then has 90 days to decide what to do with this benefit. However, having retired, these monies currently cannot be then placed with a superannuation fund. However, it is reasonable that the recipient's choices within the 90 days should include rollover to a superannuation fund that will provide a pension funded by the rolled over monies.

The proposed amendments will amend the definition of "transferred retiree member" to include a member who has retired and whose benefit in a new fund is funded by a payment that is the rollover of an eligible termination payment within the meaning of that phrase in the Tax Act. This retains the existing recognition of direct fund to fund transfers, and includes other rollover transactions that take place within the standard 90 day period.

Explanation of the proposed amendments

Section 3 of the OSS Act will be amended by omitting paragraph (b) of the definition of "transferred retiree member" in subsection (1) and substituting paragraphs which explain that the payment which funds the benefit of such a member must represent the roll-over of an eligible termination payment (within the meaning of section 27A of the Tax Act) [Clause 45].

The amendments made by Division 2 apply in relation to amounts paid to the trustees of a fund after the commencement of this section [Clause 46].

Amendments relating to the notification of breaches of superannuation fund conditions

Summary of proposed amendments

Purpose of amendment: To amend subsection 12(3A) of the Occupational Superannuation Standards Act 1987 (OSS Act) to:

•

excuse superannuation funds from having to notify all of their contributing employers in the event of funds becoming aware of a failure to meet the superannuation fund conditions, provided that circumstances prescribed by the OSS Regulations exist;

•

limit the employers to be notified to those employers to be specified in the OSS Regulations; and

•

clarify that subsection 12(3A) has always applied to breaches that continued or occurred after 30 June 1992 and in the case of breaches which continue after 30 June 1992 only to the extent that they relate to 1992/93 and later years.

Date of effect: Amendments relating to when notification is required or not required, and which employer-sponsors to notify - Proclamation.

Amendments related to application of subsection 12(3A) - Royal Assent.

Background to the legislation

Contributions must be paid to superannuation funds which comply with the superannuation fund conditions (ie funds which have received or will receive a notification of compliance from the Insurance and Superannuation Commissioner) in order to reduce employers' Superannuation Guarantee obligations. The OSS Act provides circumstances in which the Commissioner must overlook a breach of the superannuation fund conditions, in particular, where the fund fixes the breach within 30 days (or such longer period as is approved by the Commissioner) and has notified the Commissioner and all employers who have contributed to the fund about the breach.

Minor breaches which are fixed within 30 days should generally not result in a fund having to incur the expense of notifying all contributing employers (there are a large number of contributing employers in some funds) in order to maintain the fund's capacity to accept Superannuation Guarantee contributions.

However, to provide appropriate prudential supervision and information to members, there should remain scope for the Insurance and Superannuation Commissioner to require a fund to notify all contributing employers even if a breach is rectified within 30 days (for example if a single employer fund repeatedly loans the bulk of its assets back to the employer, who repays within 30 days). It is also appropriate to allow the Commissioner scope to excuse a fund from notifying all contributing employers even if a breach exists for longer than 30 days, for example in the case of a breach with a very minor impact on members.

It is the intention of the Government to recommend to the Executive Council regulations, under the authority of the proposed amendment, which would enable the Insurance and Superannuation Commissioner to request, or to excuse, a superannuation fund from notifying all contributing employers about a breach, notwithstanding the time taken to rectify it. If the breach is rectified within 30 days funds need not notify employers unless the Commissioner requires it. If the breach lasts over 30 days, funds must notify employers unless the Commissioner agrees otherwise.

It is also intended to recommend regulations which would enable the Commissioner to prescribe which employer-sponsors should receive notification. The Government's intention is to limit notification to those employers who may have been, or may be affected by the breach(es) rather than requiring notification of all employers who ever contributed to the fund.

Explanation of proposed amendments

Section 12(3A) of the OSS Act will be amended by omitting subparagraph (3A)(a)(i) and substituting subparapgraphs (3A)(i), (3A)(ia)(A)&(B) and (3A)(ib)(A)&(B) which provide that the Commissioner must disregard a breach of the superannuation fund conditions provided that certain criteria have been met [Clause 47].

These criteria are:

•

the trustee must notify the Commissioner of the breach as soon as practicable after becoming aware of the breach [subparagraph 12(3A)(i)];

•

if the trustee's response to the breach is covered by the OSS regulations and the trustee has complied with any written notice under the OSS regulations requesting the trustee to take all reasonable steps to notify the breach to all prescribed employer-sponsors in relation to the fund [subparagraph 12(3A)(ia)(A)&(B)]; or

•

if the trustee's response to the breach is not covered by the OSS regulations and the trustee has not been given a written waiver from the requirements of this subparagraph, the trustee took all reasonable steps to notify the breach to all prescribed employer-sponsors in relation to the fund [subparagrpah 12(3A)(ib)(A)&(B)].

The amendments made by Section 47 apply in relation to a breach of a superannuation fund condition. If the breach continued over a period the amendments apply to so much of the breach as occurred after the commencement of this amendment, in any other case the amendments apply if the breach occurred after the commencement of this amendment [Clause 48].

Transitional arrangements will apply so that paragraph 12(3A) only applies to breaches occurring or continuing after 1 July 1992 and only with respect to the period commencing on 1 July 1992 [Clause 49].

Amendments relating to prospectuses

Summary of proposed amendment

Purpose of amendment: To insert Section 12A into the Occupational Superannuation Standards Act 1987 (OSS Act) to enable the Insurance and Superannuation Commissioner (the Commissioner) to exempt (conditionally or otherwise) individual funds, from compliance with any or all of the prospectus requirements contained in the Occupational Superannuation Standards Regulations (OSS Regulations), or to modify the application of the provisions.

Date of effect: Royal Assent

Background to the legislation

The OSS Regulations require certain publicly offered superannuation funds to lodge a prospectus with the Commissioner. This has been a requirement since 24 February 1993. Most publicly offered superannuation funds had previously been required to lodge a prospectus with the Australian Securities Commission (the ASC) until 22 December 1992, when the ASC requirement was removed. The ASC had, when administering these requirements, a substantial discretionary power within the Corporations Law which permitted a flexible response in dealing with a superannuation fund's compliance with the prospectus provisions. Operational experience has shown the need for the Commissioner to have a discretionary power, similar to that exercised by the ASC, to appropriately deal with the administration of the prospectus requirements.

The amendment will give the Commissioner power to exempt (conditionally or otherwise) funds from the prospectus provisions or to modify the application of the provisions. It is proposed that the SIS legislation which is expected to come into operation in July 1994 will provide similar powers to the Commissioner.

Explanation of the proposed amendments

Section 3 of the OSS Act will be amended by extending the definition of "reviewable decision" to include the following circumstances:

•

a decision of the Commissioner refusing to give an exemption under section 12A in relation to a fund;

•

a decision of the Commissioner to vary or revoke or refusing to vary or revoke an exemption under section 12A in relation to a fund;

•

a decision of the Commissioner to make a determination under section 12A in relation to a fund;

•

a decision of the Commissioner to vary or revoke or refusing to vary or revoke a determination under section 12A in relation to a fund [Clause 50].

New section 12A will operate in respect of standards relating to prospectuses. Section 12A provides that:

•

the Commissioner may, by written notice to the trustee of a fund, exempt the fund from compliance with the standard;

•

the exemption may be made either generally or as otherwise provided in the exemption;

•

the exemption may be unconditional or subject to such conditions (if any) as are specified in the exemption;

•

if the Commissioner makes a decision refusing an application for an exemption, the Commissioner must give to the applicant a written notice setting out the decision and giving the reasons for the decision;

•

the Commissioner may, by written notice given to the trustee of a fund, vary or revoke an exemption applicable to the fund;

•

if the Commissioner makes a decision to vary or revoke an exemption, or refusing to vary or revoke an exemption, the Commissioner must give the trustee of the fund concerned a written notice giving the reasons for the decision;

•

the Commissioner may, by written notice given to the trustee of a fund, determine that the standard is to have effect, in its application in relation to the fund and in relation to a specified prospectus, as if it were modified in the manner specified in the determination;

•

the determination may have effect either generally or as otherwise specified in the determination;

•

if a determination is made, the standard has effect accordingly;

•

a notice of determination must give the reasons for making the determination;

•

the Commissioner may, by written notice given to the trustee of a fund, vary or revoke a determination applicable to the fund;

•

if the Commissioner makes a decision to vary or revoke a determination or refusing to vary or revoke a determination, the Commissioner must give the trustee of the fund concerned a written notice giving the reasons for the decision;

•

an exemption given in response to an application made within 90 days after the commencement of this section may be expressed to have taken effect on a day that is:(a) on or after 24 February 1993; and (b) earlier than the day on which the notice of exemption was given [Clause 51].

In this section 'modification' includes addition, omission and substitution.

Section 16 of the OSS Act is also amended to reflect the changes made to the definition of reviewable decision as outlined in Clause 50 of this Bill [Clause 52].

Amendments relating to disclosure of information about particular superannuation funds

Summary of the proposed amendments

Purpose of amendment: To amend Section 18(2A) of the Occupational Superannuation Standards Act 1987 (OSS Act) to allow, as an exception to the secrecy requirements of Section 18, the Insurance and Superannuation Commission (ISC) to provide the public with certain information about funds.

Date of effect: Royal Assent

Background to the legislation

The Superannuation Guarantee (Administration) Act 1992 (SG Act) requires that contributions paid by employers to meet their Superannuation Guarantee (SG) obligations must be paid to a complying superannuation fund.

Under the secrecy provisions of the OSS Act the ISC is prohibited from disclosing protected information. Protected information is essentially information obtained under the OSS Act relating to the affairs of the fund.

An amendment to the OSS Act which coincided with the passage of the SG Act, allowed the ISC to publish:

•

the names of superannuation funds that have received a notice of compliance or non compliance;

•

reasonable information to enable contact with the fund.

In addition, the OSS Act allows for information to be disclosed where, in the Minister's opinion, it is 'in the public interest'.

Experience since the SG Act was introduced has shown that employers and the public generally are also interested to know whether funds have ever lodged a return with the ISC, and whether their absence from the list is for that reason or simply because their return is still being processed prior to the issue of a notice. On 27 October 1992 the Minister Assisting the Treasurer approved in the public interest that the ISC may provide information on the compliance status and fund contact details for all superannuation funds. This approval was given to allow the provision of the information by the ISC until the OSS Act could be amended.

The ISC has established a public access database (PADB) which provides information to any enquirer via computer modem or telephone enquiry. In order to enable information about the compliance status of a fund to be disseminated more quickly, the proposed amendments would allow information in relation to a compliance notice to be disclosed via the PADB when a decision is taken (which may be before a notice is despatched). This will markedly shorten the period between when funds lodge a return and when their compliance status is public knowledge. It will therefore reduce the number of enquiries about a fund's status.

Since the ISC has been operating the PADB, trustees and managers have received more enquiries from the public concerning the making of SG contributions to funds. However, in many circumstances the fund is either unable or unwilling to accept SG contributions in respect of the particular enquirer. Obvious examples are single employer funds which can only accept the employer's employees as members. Other funds are either administratively or legally unable to accept members from outside particular geographical areas, or from outside particular industries.

Therefore, in the interests of providing more useful information to the public, the annual return form for funds for ISC lodgement for the 1991/92 year of income invites the provision of information on a voluntary basis on whether the fund wishes to accept SG contributions, and if so from which geographical area, and in respect of which industry. It would also be useful for funds if this information was available to employers and employees.

Explanation of the proposed amendment

Subsection 18(2A) of the OSS Act will be repealed and substituted with a subsection which provides that the Commissioner is not prevented from disclosing particular information about a superannuation fund. Information that can be provided includes:

•

whether or not the trustee of the fund has lodged a return under section 12 of the OSS Act

•

whether of not a decision has been made by the Commissioner to give a notice, or a particular kind of notice, in relation to the fund under section 12 in respect of a particular year of income;

•

whether or not a notice, or a particular kind of notice, has been given by the Commissioner under sections 10, 12 or 13 in relation to the fund in respect of a particular year of income;

•

whether or not the trustee of the fund has asked the Commissioner to give the trustee a notice under subsection 13(1) in respect of a particular year of income;

•

whether the trustee of the fund has told the Commissioner that the trustee is willing to accept a particular kind of contribution;

•

an address at which business relating to the fund may be transacted;

•

such other information as is reasonably necessary to enable members of the public to contact a person who has a function in relation to the fund [Clause 53].

Amendments relating to reporting of Eligible Termination Payments for Reasonable Benefit Limits

Summary of proposed amendment

Purpose of amendment: To amend subsection 15G(4) of the Occupational Superannuation Standards Act 1987 (OSS Act) to clarify that certain payers of eligible termination payments (ETPs) are eligible for the exemption from reasonable benefit limit (RBL) reporting of payments up to the threshold amount prescribed in the regulations.

Date of effect: 24 December 1991

Background to the legislation

The definition of "payer" in subsection 15E(1) of the OSS Act was amended with effect from 24 December 1991 so that, except for continuously non-complying approved deposit funds, any person or other entity paying an ETP, superannuation pension or annuity is obliged to report the benefit to the Insurance and Superannuation Commissioner for RBL purposes. The effect of the amendment was to bring within the RBL reporting obligation certain payers of benefits that had not previously had to report.

Subsection 15G(4), removes the administrative burden of reporting small amounts by providing an exemption from reporting small ETP payments to superannuation funds and employers below a threshold amount - prescribed in the regulations, currently $5,000. There is an inconsistency in that payers of ETPs which are not superannuation funds or employers must report all ETP payments, including small payments below the threshold amount. The amendment is designed to put all ETP payers on the same footing, except for defined categories of payers, such as approved deposit and deferred annuity funds, where the depositor had withdrawal rights akin to those for a bank savings account except where benefits are preserved. The exemption is not extended to ADFs and deferred annuity funds because partial withdrawals are allowed from these funds and if the threshold exemption applied, persons could circumvent the RBLs by making a number of small withdrawals below the threshold.

Explanation of the proposed amendment

All payers will be exempted from reporting ETP payments below the RBL reporting threshold, except if payers are ADFs, registered organisations or life assurance companies and the payment is made from a source other than a superannuation fund or it is made by a registered organisation or a life assurance company in their capacity as an employer. [subsection 15G(4) - Clause 54]

Chapter 8 Amendments to the Superannuation Guarantee (Administration) Act 1992 - definition of defined benefit superannuation schemes

Summary of proposed amendments

Purpose of amendment: To allow the trustee of a superannuation scheme which is not a defined benefit superannuation scheme within the meaning of the Superannuation Guarantee (Administration) Act 1992 (the Act) to elect that the scheme be treated as a defined benefit superannuation scheme for the purposes of the Act. The amendments will also allow a trustee to elect that such a scheme cease to be treated as a defined benefit superannuation scheme.

Date of Effect: The amendments will apply to assessments issued in the 1992-93 year and subsequent years.

Background to the legislation

For the purposes of the Act, the level of support provided by an employer for employees in a defined benefit superannuation scheme is determined on the basis of the superannuation benefits members will receive when they leave the scheme. It is independent of contributions made to the fund by the employer during a particular period. The level of support is determined by an actuary and is called the 'notional employer contribution rate' (subsection 10(2)). The Act presently allows reserves or surpluses in a defined benefit superannuation scheme to be taken into account in working out the level of superannuation support provided by an employer. The notional employer contribution rate reflects the use of any reserves or surpluses in providing the benefits of members.

There are no corresponding provisions in relation to schemes which are not defined benefit superannuation schemes within the meaning of the Act (these schemes are commonly referred to as 'defined contribution funds'). For the purposes of the Act, the level of superannuation support provided by an employer contributing to a defined contribution fund is calculated taking into account only those contributions made by the employer to the fund. A transfer of an amount of surplus funds by a trustee to a member's account does not generally constitute a contribution by the member's employer to the fund. Therefore, the amount of any surplus funds which are used in providing the benefits of members cannot be taken into account in working out the level of support provided by an employer for employees.

Explanation of proposed amendments

The proposed amendments will allow the trustee of a defined contribution fund to elect that the fund be treated as a defined benefit superannuation scheme for the purposes of the Act. If such an election is made, employers providing support in the fund will be treated as if they are employers in a defined benefit superannuation scheme. Consequently, employers providing support in the fund will be able to obtain a benefit certificate from an actuary which specifies a notional employer contribution rate in relation to the employees specified in the certificate. The notional employer contribution rate will reflect any surplus funds which are used in providing the benefits of members.

The definition of defined benefit superannuation scheme will be omitted from section 6 of the Act. A new definition will be inserted which:

•

restates the old definition; and

•

provides that a scheme, other than a scheme falling within the old definition, is a defined benefit superannuation scheme if a conversion notice has effect in relation to the scheme. In this case, the scheme commences to be a defined benefit superannuation scheme from the day on which the conversion notice takes effect, regardless of whether an assessment is made, or superannuation guarantee charge is paid, in respect of a contribution period that ended after the conversion notice took effect.

[New section 6A]

What is a conversion notice?

A conversion notice is a written notice by a trustee of a superannuation fund, given to the Insurance and Superannuation Commissioner, stating that the fund is to be treated as a defined benefit superannuation scheme for the purposes of the Act. That is, it is the mechanism by which, for superannuation guarantee purposes only, a trustee elects that a defined contribution fund be treated as a defined benefit superannuation scheme [New subsection 6B(1)].

When does a conversion notice take effect?

Subject to the conditions discussed below, a conversion notice takes effect from the day specified in the notice [New subsection 6B(2)] . A conversion notice cannot be expressed to take effect on a date before the first day of the financial year in which it is given to the Insurance and Superannuation Commissioner unless it is given before 15 August of a year, in which case, it may be expressed to take effect from the first day of the preceding financial year (i.e., 1 July of the preceding year) [New subsection 6B(3)].

For a conversion notice to be effective, the trustee must, before giving the notice, give to all employers contributing to the fund for the benefit of an employee written notice of:

•

the trustee's intention to give the conversion notice to the Insurance and Superannuation Commissioner; and

•

the proposed date on which the notice will take effect.

[New subsection 6B(4)]

While a conversion notice is in effect the trustee must also give to any employer who begins contributing to the fund written notice of:

•

the giving of the conversion notice; and

•

the date of effect of the notice,

within 30 days of the employer beginning to contribute to the fund [New subsection 6B(5)] .

Can a conversion notice be revoked?

Yes. Subject to the conditions discussed below, a trustee can revoke a conversion notice by giving to the Insurance and Superannuation Commissioner a written notice, called a revocation notice, which specifies a date on which the conversion notice is revoked. That date cannot be earlier than the date the revocation notice is given to the Insurance and Superannuation Commissioner [New subsection 6B(2)].

For a revocation notice to be effective, the trustee must, before giving the revocation notice to the Insurance and Superannuation Commissioner, give to all employers contributing to the fund for the benefit of an employee written notice of:

•

the trustee's intention to give the revocation notice to the Insurance and Superannuation Commissioner; and

•

the proposed date on which the notice will take effect.

[New subsection 6B(4)]

Notices given by post

Any notice given under section 6B will be taken as having been given by a trustee to the Insurance and Superannuation Commissioner or an employer if it is posted to that person [New subsection 6B(6)].

Benefit certificates given to schemes in relation to which conversion notices are in effect

Subject to the provisions of subsection 10(3) of the Act, a benefit certificate obtained from an actuary in relation to a scheme which is a defined benefit superannuation scheme by virtue of a conversion notice being in effect, is effective until the conversion notice is revoked [New paragraph 10(3)(d)].

Can contributions used to calculate the level of employer support provided while a conversion notice is effective in relation to a scheme be used a second time to calculate the level of employer support provided in a period when the conversion notice is not effective?

No. Contributions by an employer to a superannuation scheme in relation to which a conversion notice is in force and which are used to calculate the level of employer support provided under section 22, cannot be taken into account again under section 23. New subsection 23(8A) ensures that contributions cannot be claimed a second time as:

•

prepaid contributions, in a period occurring after the conversion notice is revoked or ceases to have effect; or

•

contributions in a period prior to the period the conversion notice was effective.

[New subsection 23(8A)]

Glossary of commonly used terms