Explanatory Statement

Issued by the authority of the Assistant Treasurer

Explanatory Statement

Retirement Savings Accounts Act 1997

Retirement Savings Accounts Regulations (Amendment)

Section 200 of the Retirement Savings Accounts Act 1997 (the Act) provides that the Governor-General may make Regulations for the purposes of the Act.

The Act and the Retirement Savings Accounts Regulations (the Principal Regulations) allow banks, building societies, credit unions and life insurance companies to provide superannuation without a trust structure in the form of retirement savings accounts (RSAs), and provides for the functional supervision of RSAs and RSA providers by the Insurance and Superannuation Commission.

The Regulations are necessary following the enactment of the Taxation Laws Amendment Act (No. 3) 1997 which implements the 1996-97 Budget initiatives to provide a tax rebate for a person contributing to an RSA on behalf of a low-income or non-working spouse, and to provide an exemption from capital gains tax for proceeds of the sale of a small business where used for retirement income purposes.

In order to give effect to these initiatives, the Regulations:

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provide that benefits arising from contributions made in respect of a spouse will be fully preserved given the concessional taxation treatment which will apply to these benefits (refer regulations 3 and 4);

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preserve the benefits arising from the capital gains tax exempt component amount of the proceeds of the sale of a small business, where rolled over into an RSA (in order that the capital gains tax exemption may apply) (refer regulations 4 and 5); and

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allow RSAs to accept contributions by a contributing spouse made in respect of a spouse (refer regulation 6).

The Regulations are described in detail in the Attachment.

The Regulations will commence on gazettal.

Regulation 1 - Amendment

Regulation 1 provides that the Retirement Savings Accounts Regulations (the Principal Regulations) are amended as set out in these Regulations.

Regulation 2 - Regulation 1.03 (Interpretation)

Regulation 2 inserts new definitions of 'capital gains tax exempt component' and 'eligible spouse contributions' in regulation 1.03 of the Principal Regulations. These terms have the meanings given by the Income Tax Assessment Act 1936 (the Tax Act) and define expressions used in these Regulations.

Regulation 3 - Regulation 4.01 (Interpretation)

Regulation 3 amends the meaning of 'restricted non-preserved contributions' in subregulations 4.01(2) and 4.01(3) of the Principal Regulations with the effect of excluding eligible spouse contributions (defined in regulation 2) from being classified as 'restricted non-preserved contributions'.

The Taxation Laws Amendment Act (No. 3) 1997 (TLAA (No. 3)) amended the Tax Act to provide a tax rebate for a person contributing to superannuation on behalf of a low-income or non-working spouse.

The amendment made by regulation 3 is necessary because benefits arising from eligible spouse contributions (in respect of which a person may be entitled to claim the abovementioned tax rebate) must be preserved in the superannuation system until such time as an appropriate condition of release is satisfied (for example, in the case of a spouse who has never been gainfully employed, the attainment of age 65 or other non-employment related event such as death or severe financial hardship; in the case of a spouse who has, at any time, been gainfully employed, conditions of release also include retirement or permanent and temporary incapacity).

The requirement for benefits arising from eligible spouse contributions to be preserved recognises the concessional taxation treatment which will apply to these benefits whilst in the superannuation system and ensures that the intention behind the rebate, that is, that a spouse with intermittent work patterns has adequate opportunities and incentives to build up retirement income through superannuation savings, is achieved.

Regulation 4.05 of the Principal Regulations provides that preserved benefits in an RSA on or after the RSA changeover day (that is, the date of the new preservation arrangements, which for most RSAs will be 1 July 1998) is equal to the amount of the RSA holder's benefits less the sum of the amount of the RSA holder's restricted nonpreserved benefits and unrestricted non-preserved benefits.

As eligible spouse contributions will not be tax deductible under the Tax Act, in the absence of the amendment provided for by this regulation, after the RSA changeover day such contributions would fall within the meaning of undeducted contributions and restricted non-preserved contributions in the Principal Regulations (and would not be fully preserved).

Regulation 4 - Regulation 4.04 (Preserved benefits - before RSA changeover day)

Regulation 4 amends regulation 4.04 of the Principal Regulations to insert new paragraphs (d) and (c) to require benefits arising from eligible spouse contributions and capital gains tax exempt component amounts (each defined in regulation 2) to be preserved in an RSA before the RSA changeover day.

The amendment made by regulation 4 is necessary because benefits arising from eligible spouse contributions must be preserved in the superannuation system until such time as an appropriate condition of release is satisfied (for example, in the case of a spouse who has never been gainfully employed, the attainment of age 65 or other non-employment related event such as death or severe financial hardship; in the case of a spouse who has, at any time, been gainfully employed, conditions of release also include retirement or permanent and temporary incapacity).

The requirement for benefits arising from eligible spouse contributions to be preserved recognises the concessional taxation treatment which will apply to these benefits whilst in the superannuation system and ensures that a spouse with intermittent work patterns has adequate opportunities and incentives to build up retirement income through superannuation savings.

The regulation therefore expressly provides that benefits must be preserved where they arise from eligible spouse contributions.

The amendment provided for by regulation 4 is also necessary to expressly provide that benefits must be preserved if they arise from a capital gains tax exempt component amount rolled over to the RSA. This gives effect to the requirement that, in order to be able to claim the exemption from capital gains tax on the sale of a small business (available under the Tax Act by virtue of amendments introduced by TLAA (No. 3)), the capital gains tax exempt component amount arising from the proceeds of the sale must be rolled over to an RSA to be preserved.

Regulation 5 - Regulation 4.13 (Unrestricted non-preserved benefits)

Regulation 5 amends the meaning of unrestricted non-preserved benefits under regulation 4.13 of the Principal Regulations.

In order to be able to claim the exemption from capital gains tax on the sale of a small business (available under the Tax Act by virtue of amendments introduced by TLAA (No. 3)) an individual must rollover the amount of the capital gains tax exempt component (defined in regulation 2) of the proceeds of the sale to an RSA to be preserved.

In the absence of the amendment provided for by regulation 5, the capital gains tax exempt component amount would fall within a type of unrestricted non-preserved amount under subregulation 4.13(2) of the Principal Regulations and therefore would not be preserved.

Regulation 5 expressly excludes capital gains tax exempt component amounts from the meaning of unrestricted non-preserved benefits in subregulation 4.13(2). Therefore the benefits arising from capital gains tax exempt component amounts will not be unrestricted non-preserved benefits but rather will be fully preserved benefits in an RSA.

Regulation 6 - Regulation 5.03 (Acceptance of contributions)

Regulation 6 amends subregulation 5.03(1) of the Principal Regulations in order to allow RSAs to accept eligible spouse contributions (defined in regulation 2).

Regulation 5.03 of the Principal Regulations currently provides that an RSA, in respect of an RSA holder under age 65, can accept contributions only if.

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the contributions are mandated employer contributions; or

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the contributions are non-mandated contributions and the RSA holder:

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has, at any time in the period of 2 years immediately preceding the date of acceptance, engaged in full-time or part-time gainful employment; or

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ceased gainful employment because of ill health; or

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is on authorised leave from his or her employer to carry out the parental responsibility of raising children.

TLAA (No. 3) amended the Tax Act to provide a tax rebate for a person contributing to superannuation on behalf of a low-income or non-working spouse. It is therefore necessary to insert new paragraph 5.03(1)(c) in the Principal Regulations to allow RSAs to accept eligible spouse contributions (in respect of which a person may be entitled to claim the abovementioned tax rebate) where these contributions do not meet the above conditions.