Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello MP)Chapter 3 - Taxation of superannuation entities
Outline of chapter
3.1 This chapter makes minor additions to the law to clarify or complement the operation of the superannuation entity taxation provisions in the Tax Laws Amendment (Simplified Superannuation) Bill 2006 (main Bill). For example, it makes changes to ensure the current arrangements for foreign superannuation schemes are maintained and clarifies when a superannuation fund's central management and control will be considered ordinarily in Australia.
3.2 It also outlines minor additions to the law to support the increased quotation of tax file numbers (TFNs) to superannuation funds and retirement savings accounts (RSA) and the no-TFN contributions tax.
3.3 The old superannuation entity provisions in Part IX of the Income Tax Assessment Act 1936 (ITAA 1936) are repealed. Updates to references in other Acts to these old provisions are also outlined to clarify the policy intent going forward.
Additions to the law created by the main Bill
Ensuring consistent treatment of employees and the self-employed
3.4 To clarify the provisions, and better reflect the policy intent, amendments are made to sections 295-460* [F2] and 295-470* of the Income Tax Assessment Act 1997 (ITAA 1997) to ensure these provisions cover the self-employed. [Schedule 1, items 217 and 218]
Contributions made by certain trustees
3.5 The rewritten provisions in Division 295* of the ITAA 1997 do not exclude certain contributions from superannuation entities' assessable income, where they are made for the benefit of someone else by the trustee of a complying superannuation fund, complying approved deposit fund, pooled superannuation trust or exempt life assurance fund. This exclusion was previously in Part IX of the ITAA 1936 (sub-subparagraphs 274(1)(a)(i)(A) and (B)), so a provision to this effect is inserted into Subdivision 295-C* of the ITAA 1997. [Schedule 1, item 215]
Amounts transferred from foreign superannuation schemes
3.6 Rewritten provisions in section 295-200* of the ITAA 1997, setting out the taxation arrangements applying to amounts transferred to certain superannuation funds from foreign superannuation funds have been inadvertently narrowed by excluding foreign superannuation schemes. Amendments are made to ensure that amounts transferred from foreign superannuation schemes continue to be captured in the assessable income of certain entities in the same way as if they were paid from a foreign superannuation fund. [Schedule 1, item 216]
Australian superannuation fund: the 'ordinarily' requirement
3.7 Subsection 295-95(2)* of the ITAA 1997 defines 'Australian superannuation fund', which replaces the definition of 'resident superannuation fund' in section 6E of the ITAA 1936. Unlike the definition of 'resident superannuation fund', the new 'Australian superannuation fund' does not have a specific 'two-year temporary absence rule', but instead has a more general requirement that the central management and control of the fund 'ordinarily' be in Australia.
3.8 To provide certainty to trustees of superannuation funds, especially trustees of self-managed superannuation funds (for whom the old 'two-year temporary absence rule' was mainly directed), a provision is inserted into the definition of 'Australian superannuation fund', which explains that a superannuation fund is considered ordinarily in Australia even if the central management and control is temporarily outside Australia, where it is for a period of less than two years. [Schedule 1, item 214]
3.9 Other amendments are made to provisions introduced by the main Bill to clarify provisions and better reflect the policy intent. These amendments restrict the ability of trustees to choose to treat certain contributions as untaxed benefits (and exclude them from assessable income of the fund) if they are paid out of the fund within a year, to public sector superannuation schemes in existence before 5 September 2006. [Schedule 3, items 33, 34 and 38 to 41]
Transitional provisions: notices given and acknowledged under former sections
3.10 The assessable income of complying superannuation funds and RSA providers includes contributions covered by valid and acknowledged notices under section 290-170* of the ITAA 1997. Section 290-170* permits a person who is eligible for a deduction under section 290-150* of the ITAA 1997 (for contributions they have made to a complying superannuation fund or RSA provider) to claim a deduction where they have given the trustee a notice specifying the amount of the contributions they intend to claim as a deduction, and where they have received an acknowledgement of the notice from the trustee.
3.11 The rewritten provision of Part IX of the ITAA 1936 (subsection 295-190(1)* of the ITAA 1997, item 1 in the table) that operates for the 2007-08 income year and future income years does not include in assessable income of complying superannuation funds and RSA providers, contributions covered by valid and acknowledged notices under the former sections (subsections 82AAT(1A) and (1CB) of the ITAA 1936).
3.12 If individuals want to claim deductions for personal contributions made before the 2007-08 income year, they need to lodge the notice under the former sections (subsections 82AAT(1A) and (1CB) of the ITAA 1936) as these are the subsections that still apply for contributions made before the 2007-08 income years (even if the notices are given to the trustee of the fund or RSA provider after 1 July 2007). A transitional provision deems valid notices given under these former sections to have the same effect, after 1 July 2007, as if they were notices given under the new rewritten section. This will ensure these contributions are included in assessable income of the fund or RSA. [Schedule 1, item 266, subsection 295-190(1 )]
3.13 The conditions under the former section 82AAT of the ITAA 1936 for notices on contributions made before the 2007-08 income year continue to apply.
3.14 Amounts covered by a section 290-170* notice in the ITAA 1997 (or subsection 82AAT(1A) or (1CB) notice in the ITAA 1936), can be reduced by giving the trustee a variation notice. This allows a member whose claim for a deduction has been wholly or partially disallowed to notify the fund or RSA provider, so they can adjust their assessable income accordingly. A transitional provision is inserted, which deems variation notices made under the former sections to have effect, after 1 July 2007, as if they were notices under section 290-180* of the ITAA 1997. This ensures the correct amount is included in the assessable income of the fund or RSA. [Schedule 1, item 266, subsection 295-190(2 )]
Transitional provisions: elections made under former sections
3.15 A transitional provision is needed to cover situations where a trustee makes an election in an income year prior to the 2007-08 income year under a Part IX provision in the ITAA 1936, which is taken to be an election for future income years. Since all the provisions of Part IX of the ITAA 1936 are repealed and rewritten, an election made under such a provision (eg, subsection 279(4)), where such an election is supposed to have continuing application, is deemed to continue to have effect as if made under Division 295* of the ITAA 1997. [Schedule 1, item 266, Subdivision 295-G]
Transitional provisions: rewritten provisions with limited continued application
3.16 Provisions in Part IX of the ITAA 1997 that were not rewritten into the ITAA 1997 due to their limited continued application are rewritten into the Income Tax (Transitional Provisions) Act 1997 . [Schedule 1, item 266, Subdivisions 295-B and 295-F]
3.17 The wording in these provisions is changed to improve readability. This rewording is not intended to modify the operation of the existing law. The Commissioner of Taxation's (Commissioner) discretion is replaced with an objective test. This change is in line with the Review of Self Assessment which recommended that all discretions which go to the determination of a taxpayer's liability be reviewed, and where practicable replaced with objective tests. This change is not intended to change the tax outcome. [Schedule 1, item 266, Subdivision 295-F, subsection 295-390(6 )]
TFN quotation for superannuation purposes
3.18 Section 202DHA* of the ITAA 1997 provides that when an individual makes a TFN declaration to their payer (their employer) they are also authorising their employer to provide their TFN to the superannuation provider to which their employer is making contributions. This section is amended to ensure it is not retrospective in its application.
3.19 When an individual makes a TFN declaration to their payer (their employer) on or after 1 July 2007 they are also authorising their employer to provide their TFN to the superannuation provider, or RSA provider to which their employer is making contributions. [Schedule 1, items 117 to 120]
Quotation of TFNs in relation to RSAs
3.20 The main Bill amends section 6 of the Superannuation Industry (Supervision) Act 1993 to allow the Commissioner to regulate the quotation of an individual's TFN by their payer (their employer) and the incorrect quotation of TFNs. Section 3 is similarly amended to allow the Commissioner to regulate a payer's legal responsibilities to quote TFNs to RSA providers.
3.21 The Commissioner has the general administration of Division 2 in Part 11 of the Retirement Savings Accounts Act 1997 , which relates to the quotation of a holder's TFN and Division 4A of Part 11 of that Act, which relates to the incorrect quotation of TFNs. [Schedule 1, item 278]
3.22 The Australian Prudential Regulation Authority (APRA) has the general administration of Part 11 of the Retirement Savings Accounts Act 1997 , except Divisions 2 and 4A. [Schedule 1, item 277]
3.23 An employee can quote their TFN to their payer in connection with the operation or the possible future operation of the Retirement Savings Accounts Act 1997 and other 'Superannuation Acts' on or after 1 July 2007 in connection with the operation of Division 3 of Part VA of the ITAA 1936. If the conditions in section 133 of the Retirement Savings Accounts Act 1997 are satisfied the payer must then inform the trustee of the entity to which they make contributions, of the employee's TFN. [Schedule 1, items 280 and 281]
3.24 An individual is taken to have quoted their TFN to another person if the individual informs the other person of the TFN in a manner approved by APRA, in the specified approved form, or the individual is taken to have quoted their TFN in relation to the Retirement Savings Accounts Act 1997 and the 'Superannuation Acts' under any of the provisions in Division 4 of the Retirement Savings Accounts Act 1997 . [Schedule 1, item 282]
3.25 The main Bill inserts Division 3A into the Superannuation Industry (Supervision) Act 1993 which relates to the incorrect quotation of a TFN. Equivalent provisions are inserted into the Retirement Savings Accounts Act 1997 concerning the incorrect quotation of a TFN to a RSA provider. [Schedule 1, item 283]
Interest on the no-TFN income tax offset of RSA providers
3.26 To ensure that RSA providers are treated consistently with other superannuation providers, interest payable under the Taxation (Interest on Overpayments and Early Payments) Act 1983 includes that interest is payable where an employer has failed to comply with the requirements set out in section 133 of the Retirement Savings Accounts Act 1997 . [Schedule 1, item 394]
RSA providers that are life insurance companies
3.27 Life insurance companies that are RSA providers are taxed under Division 320 of the ITAA 1997 in a broadly comparable manner to other entities that derive similar kinds of income.
3.28 To ensure that RSA providers that are life insurance companies are treated consistently with other RSA providers they are:
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- taxed under Division 320 of the ITAA 1997 except to the extent that section 320-155 provides they are taxed under Subdivision 295-I* in relation to no-TFN contributions income and Subdivision 295-J* in relation to the no-TFN income tax offset of that Act [Schedule 1, items 212 and 213];
- •
- liable to pay tax on no-TFN contributions income [Schedule 1, items 228 and 229];
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- subject to Subdivisions 295-I* and 295-J* of the ITAA 1997 [Schedule 1 , item 233]; and
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- the rate of tax on their no-TFN contributions income is calculated at the top marginal tax rate (column 2 in the table in Part I of Schedule 7 to the Income Tax Rates Act 1986) plus the Medicare levy. The rate of tax generally payable on contributions for a life insurance company that is an RSA provider (set out in paragraph 23(4A)(ba) of that Act) is then subtracted from this rate [Schedule 1, items 31 and 32 of the Income Tax Rates Amendment (Superannuation) Bill 2007].
Consequential changes
3.29 The rewrite of Part IX of the ITAA 1936 into Division 295* in the ITAA 1997 as part of Simplified Superannuation means that Part IX is no longer needed and is repealed. [Schedule 1, item 8]
3.30 The rewrite and repeal of Part IX means references to the sections in that Part, within the ITAA 1936, the ITAA 1997 and other Acts (including, the Social Security Act 1991 and the Veterans' Entitlement Act 1986 ) are updated to refer to the new corresponding provisions in Division 295* of the ITAA 1997. [Schedule 1, items 18, 21, 39, 40, 57, 58, 72, 79, 88, 89, 101, 102, 108 to 111, 115, 116, 121, 148, 190, 191, 193, 195, 196, 198, 199, 203, 230 to 232, 234, 252, 273, 274, 276; items 1 and 2 of the Income Tax (Former Complying Superannuation Funds) Amendment Bill 2007; item 1 of the Income Tax (Former Non-resident Superannuation Funds) Amendment Bill 2007; Schedule 1, items 5, 6 and 8 of the Income Tax Amendment Bill 2007; items 1, 2, 4, 5, 11, 12, 15 and 18 of the Income Tax Rates Amendment (Superannuation) Bill 2007]
3.31 In updating some cross-references to Part IX of the ITAA 1936, especially those used for defining terms in other Acts, the actual substance of the definition from Part IX is included in the provision rather than referring to the new cross-reference in Division 295* of the ITAA 1997 [Schedule 1, item 353] . In the updating process, a few inoperative provisions in other Acts were identified. These provisions are repealed [Schedule 1, items 362 and 363] .
3.32 In rewriting Part IX of the ITAA 1936 and implementing other parts of Simplified Superannuation , various definitions are repealed, amended, or inserted into the Dictionaries in the ITAA 1936 and the ITAA 1997. Some definitions from Part IX of the ITAA 1936 are relocated within that Act, others are updated to reflect new terminology in the ITAA 1997. For instance, 'non-resident superannuation fund' has been changed to 'foreign superannuation fund' and 'resident superannuation fund' has changed to 'Australian superannuation fund', as these terms are more up-to-date and consistent with the terminology currently used in the ITAA 1997 for residency tests. Where new terms or concepts replace old terms or concepts, these are updated throughout both the ITAA 1936 and the ITAA 1997 accordingly. [Schedule 1, items 1, 19, 23 to 25, 29 to 33, 99, 109 to 111, 128 to 133, 148, 189, 192, 195, 221, 232, 234 to 236, 242, 243, 252 and 258]
3.33 The term 'foreign superannuation fund' already exists in the ITAA 1936 and the ITAA 1997 to a limited extent. Therefore this term is replaced with the term 'superannuation fund for foreign residents' to enable the term 'foreign superannuation fund' to be used to describe 'non-resident superannuation funds' (currently in section 6E of the ITAA 1936). The term 'superannuation fund for foreign residents' also more accurately describes the more restricted funds, as these are essentially foreign superannuation funds with foreign members. [Schedule 1, items 27, 34, 100 and 147]
3.34 Various other Acts also use terms which refer to definitions in Part IX of the ITAA 1936 that have been repealed or amended in the rewrite. These terms are also updated accordingly. [Schedule 1, items 275, 344, 345, 352 and 353; item 1 of the Income Tax (Former Non-resident Superannuation Funds) Amendment Bill 2007; Schedule 1, items 4 and 7 of the Income Tax Amendment Bill 2007; items 8, 10, 13, 19, 21, 25 to 30 of the Income Tax Rates Amendment (Superannuation) Bill 2007]
3.35 In the rewrite some defined terms were omitted and the substance of the defined term was outlined in the operative rule. One example is the term 'eligible entity'. This term is no longer used in new Division 295* of the ITAA 1997, the rest of that Act, or other Acts, instead the types of entities that were previously listed in the definition of 'eligible entity' are listed in the operative provisions (ie, 'eligible entity' is replaced with 'complying and non-complying approved deposit fund, complying and non-complying superannuation fund and pooled superannuation trust'). [Schedule 1, items 22, 28, 69, 70, 84 to 87, 98, 104, 107, 124 to 127, 134, 141, 200, 201, 202, 204; Schedule 1, item 3 of the Income Tax Amendment Bill 2007; items 4 and 5 of the Income Tax Amendment (Superannuation) Bill 2007]
3.36 Unlimited amendment periods for amending assessments that were contained in Part IX of the ITAA 1936, are centralised into the table listing all unlimited amendment periods in subsection 170(10AA) of the ITAA 1936. [Schedule 1, item 114]
3.37 Guide material in the ITAA 1997 is updated to refer to the new provisions of the ITAA 1997, including those concerning no-TFN contributions tax. [Schedule 1, items 150, 153, 154, 156, 159, 165, 173 and 174]
Application provisions
3.38 The amendments outlined in this chapter apply to the 2007-08 and later income years. This is intended to preserve the operation of repealed provisions outlined in this chapter for the 2006-07 and previous income years. [Schedule 1, item 406; item 2 of the Income Tax (Former Non-resident Superannuation Funds) Amendment Bill 2007; item 3 of the Income Tax (Former Complying Superannuation Funds) Amendment Bill 2007; item 9 of the Income Tax Amendment Bill 2007; item 35 of the Income Tax Rates Amendment (Superannuation) Bill 2007]