Explanatory Statement

Issued by the authority of the Assistant Treasurer

Explanatory Statement

Superannuation Industry (Supervision) Act 1993

Superannuation Industry (Supervision) Regulations (Amendment)

The Superannuation Industry (Supervision) Act 1993 (the, Act) and the Superannuation Industry (Supervision) Regulations (the Principal Regulations) provide for the prudent management of certain superannuation funds, approved deposit funds and pooled superannuation trusts and for their supervision by the Insurance and Superannuation Commissioner.

Section 353 of the Act provides that the Governor-General may make Regulations for the purposes of the Act.

The Regulations are necessary to amend the Principal Regulations in order to introduce a new system of preserving superannuation benefits in regulated superannuation funds and approved deposit funds. Preservation is the requirement under which a person's benefit is retained in a regulated superannuation fund, approved deposit fund or retirement savings account (RSA) until retirement on or after the attainment of the superannuation preservation age (currently 55 years). The superannuation preservation age is the age at which a fund member or RSA holder may obtain access upon retirement to accumulated benefits that have been preserved.

This new system, announced by the Treasurer in the 1997-98 Budget, will improve and simplify the preservation rules by requiring that, from 1 July 1999, all contributions made by or on behalf of a member be preserved on entry to a regulated superannuation fund. Generally, all earnings of regulated superannuation funds and approved deposit funds from that date will also be preserved. (Refer to Regulations 5, 6, 7, 8, 9, 18, 19, 20 and 22).

The method of determining non-preserved benefits is also simplified by 'grandfathering' the amount of a member's non-preserved benefits as at 1 July 1999. This will overcome administrative problems associated with the method of determining non-preserved benefits that is currently prescribed in the Principal Regulations to take effect from 1 July 1998 for most regulated superannuation funds. (Refer to Regulations 4, 10, 11, 12, 13, 14, 15 and 16)

The Regulations also gradually increase the superannuation preservation age (which is currently 55 yew) from 2015, so that by 2024 it will be 60 years. This measure was also announced by the Treasurer in the 1997-98 Budget. This will have the effect of retaining many people's superannuation benefits in the superannuation system for a longer period than is currently the case, and is consistent with the Government's retirement income policy- (Refer to Regulation 4).

The Regulations are described in detail in the Attachment.

The Regulations commence on 30 June 1998.

ATTACHMENT

Regulation 1 - Commencement

Regulation 1 provides that these Regulations will commence on 30 June 1998.

Regulation 2 - Amendment

Regulation 2 provides that the Superannuation Industry (Supervision) Regulations (the Principal Regulations) are amended as set out in these Regulations.

Regulation 3 - Regulation 5.03 (Investment returns)

Subregulation 5.03(2) of the Principal Regulations provides that the trustee of a regulated superannuation fund or an approved deposit fluid must determine the investment return to be credited or debited to a member's benefit in the fund in a way that is fair and reasonable between the members of the fund and the kind of benefits of these members.

Regulation 3 amends subregulation 5.03(2) by making it subject to Division 6.1, in addition to the member-protection standards (ie, subregulation 5. 17(2) and regulation 5.18) and regulation 5.01B. This is to recognise that Division 6.1 prescribes how investment returns are to be credited and debited in respect of benefits in the various preservation benefit categories. These preservation benefit categories are also defined in Division 6.1.

Regulation 4 - Regulation 6.01 (Interpretation)

Regulation 4 makes a number of amendments to regulation 6.01 of the Principal Regulations as a result of the introduction of the new preservation arrangements which will have effect from 1 July 1999, and also as a result of the gradual increase in the preservation age from 55 years to 60 years.

Part 6 of the Principal Regulations prescribes the payment standards in relation to regulated superannuation funds. At present, there are two different preservation systems prescribed in Part 6:

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the system that applied from the commencement of the fund's 1994/95 year of income or the day that the fund elected to be regulated, until the 'changeover day'. Under this system, the types of benefits that make up preserved benefits and unrestricted non-preserved benefits are defined. with restricted non-preserved benefits being the residual amount of the member's benefits in the fund; and

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the system that applies from the 'changeover day' (for most funds, the 'changeover day', but for these Regulations, would be 1 July 1998). Under this system, the types of benefits that make up restricted non-preserved benefits and unrestricted non-preserved benefits are defined, with preserved benefits being the residual amount of the member's benefits in the fund.

The preservation arrangements that are to apply from 1 July 1999 will also define the amount of a member's restricted non-preserved benefits and unrestricted non-preserved benefits, with preserved benefits being the residual amount of the member's benefits in the fund. However, the method of defining these restricted non-preserved benefits and unrestricted non-preserved benefits will be different than under the 'changeover day' system.

In order to ensure that the majority of regulated superannuation funds, who have not already implemented the 'changeover day' system, do not have to incur unnecessary administration costs to implement this system in 1998 and then make further administrative changes to implement the 1 July 1999 preservation system, it has been decided that these funds will not implement the 'changeover day' system.

However, regulated superannuation funds who have implemented the 'changeover day' system before the commencement of these Regulations will be permitted to continue operating under this system until 30 June 1999. After that date, they will have to implement the 1 July 1999 preservation system, as will all other funds.

1. Subregulation 4.1 replaces the existing definition of 'changeover day' in subregulation 6.01(2). The new definition of 'changeover day' does not permit a 'changeover day' to be declared and/or implemented after the commencement of these Regulations. Rather, the term 'changeover day' will only apply to those members (called 'type B members' - see subregulation 4.3 of these Regulations for details) who have already had a 'changeover day' declared and implemented in respect of them before the commencement of these Regulations.

For these 'type B members', this 'changeover day' is the day in either the1996,1997 or 1998 calendar year that was fixed for them as the 'changeover day' under the Principal Regulations in force before the commencement of these Regulations, and which was implemented before the commencement of these Regulations.

It should be noted that, after the commencement of these Regulations, a person who joins a fund which had implemented the 'changeover day' system in respect of all or some of its members might be classed as a 'type B member' and therefore he subject to the 'changeover day' system. This is due to the effect of the existing subregulation 6.01(4) and the definition of 'type B member' (see subregulation 4.3 of these Regulations for details of this definition).

Similarly, after the commencement of these Regulations, a person who joins a fund which had not implemented the 'changeover day' system in respect of all or some of its members might he classed as a 'type A member' and therefore be subject to the 'pre-changeover day' system. This is due to the effect of the existing subregulation 6.01(4) and the definition of 'type A member' (see subregulation 4.3 of these Regulations for details of this definition).

Although subregulation 6.01(4) is being deleted by subregulation 4.4 of these Regulations, paragraph 6.01(4)(b) currently allows a trustee's decision on the 'changeover day' to be made prospectively in relation to future members (ie, in this case. persons who joined the fund after the commencement of these Regulations and who would be classed as type B members' when they join the fund). In other words, the definitions of 'type A members' and 'type B members' apply to current and future members of regulated superannuation funds.

2. Subregulation 4.2 omits the definition of 'RSA changeover day' from subregulation 6.01(2). This is because retirement savings accounts (RSAs) will be subject to the same 1 July 1999 preservation system as other superannuation entities, and will not be required to implement the 'RSA changeover day' system that was intended to operate from 1 July 1998. As no RSA provider had implemented the 'RSA changeover day' system in respect of the RSAs which it provides before the commencement of these Regulations, the term 'RSA changeover day' is no longer required.

3. Subregulation 4.3 inserts three new definitions into subregulation 6.01(2).

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The first definition is that of 'preservation age'. The superannuation preservation age is the age at which a fund member or RSA holder may obtain access upon retirement to accumulated benefits that have been preserved. This definition prescribes the gradual increase in the preservation age that was announced in the 1997-98 Federal Budget. The effect of this definition will see the preservation age rise gradually over a period of 10 years from 55 years of age in 2015 to 60 years of age on 1 July 2024.

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The second and third definitions are that of 'type A member' and '" B member'. These definitions essentially divide members of regulated superannuation funds into two classes:

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those who have not had a 'changeover day' system implemented for them (ie, 'type A members'); and

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those who have had a 'changeover day' system implemented for them (ie, 'type B members').

These definitions are necessary to recognise that, before the 1 July 1999 preservation system (which will apply universally to all members), there are two different preservation systems operating concurrently for members of regulated superannuation funds. As these two systems calculate a member's preserved benefits and restricted non-preserved benefits differently, the different types of members need to be recognised.

From 1 July 1999, there will be no need to distinguish between 'type A members' and B members'.

It should be noted that a person who belongs to multiple funds may be a 'type A member' in one fund and a 'type B member' in another.

It should also be noted that the definitions of 'type A member' and 'type B member' apply to current and future members of regulated superannuation funds (see above in point 1 for an explanation).

4. Subregulation 4.4 omits subregulations 6.01(2A), (2B), (3), (3A), (3B) and (4) from the Principal Regulations.

The reason for the omission of these provisions is because it is intended that:

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for those members of regulated superannuation funds who may have had a 'changeover day' fixed for them in the 1998 calendar year under the existing subregulation 6.01(2A); and

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this 'changeover day' has not yet occurred before the commencement of these

Regulations (ie, these members are 'type A members' - see subregulation 4.3 of these Regulations), then this 'changeover day' will not be applicable and will not be implemented .

This will prevent funds incurring unnecessary costs by implementing the current 'changeover day' system in 1998 and then implementing the new preservation arrangements on 1 July 1999.

It should he noted that the omission of subregulation 6.01(4) does not prevent the possibility of the 'changeover day' system applying in respect of future members of a regulated superannuation fund where the 'changeover day' system has already occurred (see above in point 1 for an explanation).

5. Subregulations 4.5, 4.6 and 4.9 make amendments to paragraph 6.01(5)(b), subparagraph 6.01(5)(b)(i) and paragraph 6.01(7)(a) respectively of the Principal Regulations. These amendments are necessary to implement the increase in the 'preservation age', which is given effect by subregulation 4.3 of these Regulations (see the first dot point under point 3 above).

Subregulation 6.01 (5) currently sets out tests under which a person is taken to be in 'severe financial hardship'. If a member of a regulated superannuation fund or an approved deposit fund satisfies one of the tests of 'severe financial hardship, they may apply to the trustee for release of part or all of their preserved benefits or restricted non-preserved benefits. One of these tests is based on the current ,preservation age' of 55 years.

The amendments made to paragraph 6.01 (5)(b) and subparagraph 6.01 (5)(b)(i) increase the ages specified in these provisions in line with the increase in the 'preservation age'. For example, and subject to the other requirements of subregulation 6.01(5), the 'age-based' test for 'severe financial hardship' for a person who was born on 1 July 1961 will be: where the person is aged at least 57 years and 39 weeks - that they have received Commonwealth income support for a cumulative period of 39 weeks after turning 57 years of age.

The amendment made to paragraph 6.01(7)(a) makes provision for the eventual replacement of the 'first' retirement age (currently 55 years) under the two-tiered retirement age system in accordance with the gradual increase in the 'preservation age' (inserted by subregulation 4.3 of these Regulations - see the first dot point under point 3 above). The eventual effect of this increase in the preservation age will be that from 1 July 2024, there will be only one retirement age: that is, 60 years, From this date, there will be only one requirement for retirement to occur: that is, that an arrangement under which the member was gainfully employed has come to an end on or after the member has reached 60 years of age.

6. Subregulation 4.7 amends subregulation 6.01(6) in order to broaden the scope of the item 'undeducted contributions' from its present use (which is just for the definition of 'restricted nonpreserved contributions' in subregulation 6.01(2)).

Regulation 5 - Regulation 6.02 (Preserved benefits in regulated superannuation funds - before the changeover day)

Regulation 5 omits the existing regulation 6.02 from the Principal Regulations, and replaces it with a new regulation 6.02, titled "Preserved benefits in regulated superannuation fluids - before 1 July 1999". The purpose of this new provision is to define the amount of preserved benefits in regulated superannuation funds before 1 July 1999 (ie, the start date for the new preservation arrangements) for all members, whether they be 'type A members' or 'type B members' (see subregulation 4.3 of these Regulations above for details of these terms).

1. Specifically, the new subregulation 6.02(1) is essentially the same as the existing subregulation 6.02(1) for 'type A members', and applies for these members until 1 July 1999. It also recognises that the existing subregulation 6.02(1) once applied for some members before their 'changeover day' (ie, 'type B members').

It should be noted that the new subregulation 6.02(1) is subject to regulations 6.06 and 6.12 and Subdivision 6.1.5 of the Principal Regulations.

2. Subregulation 6.02(2) in the new regulation 6.02 is identical to the existing subregulation 6.02(2). It should be noted that because regulation 6.02 will not have any effect after 30 June 1999, Schedule 2 of the Principal Regulations will also have no effect after 30 June 1999.

3. Subregulation 6.02(3) of the new regulation 6.02 basically incorporates the existing regulation 6.03 for 'type B members'. (NB: the existing regulation 6.03 is amended by Regulation 6 of these Regulations to prescribe the preserved benefits of members in regulated superannuation funds on and after 1 July 1999.. that is, the start date for the new preservation arrangements for all members).

The existing regulation 6,03 prescribes a member's preserved benefits in a regulated superannuation fund on and after the 'changeover day'. Therefore, the only members it applied to before the commencement of these Regulations were those members who had a 'changeover day' implemented for them: in other words, 'type B members'.

The new subregulation 6.02(3) retains this calculation of Preserved benefits for 'type B members' until 30 June 1999: after this date. the calculation in the amended regulation 6.03 will apply to ill members.

It should be noted that the new subregulation 6.02(3) is subject to regulation 6.12 and Subdivision 6.1.5 of the Principal Regulations.

Regulation 6 - Regulation 6.03 (Preserved benefits in regulated superannuation funds - on and after 1 July 1999)

Prior to these Regulations, regulation 6.03 of the Principal Regulations defined the amount of preserved benefits of members in regulated superannuation funds on and after the 'changeover day'. Regulation 6 amends regulation 6.03 so that it now defines the amount of preserved benefits of members in regulated superannuation funds at any time on or after 1 July 1999 (ie, the start date for the new preservation arrangements) for all members, whether they be '" A members' or 'type B members' (see subregulation 4.3 of these Regulations for details of these terms).

Regulation 6.03 now calculates a member's preserved benefits in a regulated superannuation fund at any time on or after 1 July 1999 as the member's total benefits less the sum of.

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the amount of the member's restricted non-preserved benefits in the fund, as defined by new regulation 6.08 of the Principal Regulations (see Regulation 11 of these Regulations); and

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the amount of the member's unrestricted non-preserved benefits in the fund, as defined by regulation 6.10 of the Principal Regulations (see Regulation 14 of these Regulations for amendments made to regulation 6.10).

In other words, as a member's restricted non-preserved benefits and unrestricted non-preserved benefits are defined on and after 1 July 1999, a member's preserved benefits in a regulated superannuation fund at any time on or after 1 July 1999 is a residual amount.

Regulation 6.03 does not directly sate that all contributions made, and all earnings accumulated in respect of the period, on and after 1 July 1999 (with a limited exception - see the new Principal Regulation 6.16A inserted by Regulation 18 of these Regulations) are preserved benefits. However, because these contributions and earnings are not included in the definitions of a member's restricted non-preserved benefits and unrestricted non-preserved benefits on or after 1 July 1999, and because the member's preserved benefits in a regulated superannuation fund at any time on or after 1 July 1999 is a residual amount, these contributions and earnings are included in the member's preserved benefits. Of course, benefits which were preserved benefits before 1 July 1999 will remain Preserved benefits until a condition of release is satisfied in respect of those benefits.

It should be noted that regulation 6.03 is subject to regulation 6.12 and Subdivision 6.1.5 of the Principal Regulations.

Regulation 7 - Regulation 6.04 (Preserved benefits in regulated superannuation funds - rollover or transfer between funds during 1996, 1997 or 1998)

Regulation 7 omits regulation 6.04 from the Principal Regulations for the purposes of simplification. The circumstance that is currently dealt with in regulation 6.04 is that where a members preserved benefits are transferred or rolled over from a regulated superannuation fund where they had a 'changeover day' to a regulated superannuation fund where they have not had a 'changeover day'. In these circumstances, these benefits retained their preserved benefit character, despite the methods of calculating preserved benefits being different between the two funds.

The reason for its omission is that the circumstance outlined above is dealt with in a general form, if not specifically, by regulation 6.06.

Regulation 8 - Regulation 6.04A (Preserved benefits in RSM - rollover or transfer to regulated superannuation funds during 1998)

Regulation 8 omits regulation 6.04A from the Principal Regulations. The reason for its omission is that it is no longer necessary. Regulation 6.04A catered for situations where a person's preserved benefits were transferred or rolled over from an RSA where they had an 'RSA changeover day' in 1998 to a regulated superannuation fund where they have not had a 'changeover day', and ensured that these benefits retained their preserved benefit character. Because the 'RSA changeover day' will never occur as a result of amendments made to the Retirement Savings Accounts Regulations (made in conjunction with the amendments made by these Regulations), regulation 6.04A is no longer necessary and is therefore deleted.

Regulation 9 - Regulation 6.06 (Effect of rollover or transfer on preserved benefits)

Regulation 9 amends regulation 6.06 of the Principal Regulations by making it subject to Subdivision 6.1.5 in addition to regulation 6.12.

Regulation 10 - Regulation 6.07 (Restricted non-preserved benefits in regulated superannuation funds - before the changeover day)

Regulation 10 omits the existing regulation 6.07 from the Principal Regulations, and replaces it with a new regulation 6.07 titled "Restricted non-preserved benefits in regulated superannuation funds - before 1 July 1999". The purpose of this new provision is to define the amount of restricted non-preserved benefits in regulated superannuation funds before 1 July 1999 (ie, the start date for the new preservation arrangements) for all members, whether they be 'type A members' or 'type B members' (see subregulation 4.3 of these Regulations for details of these terms).

1. The new subregulation 6.07(1) is essentially the same as the existing regulation 6.07 for 'type A members', and applies for these members until 1 July 1999. It also recognises that the existing regulation 6.07 once applied for some members before their 'changeover day' (ie, 'type B members').

It should be noted that the new subregulation 6.07(1) is subject to regulations 6.09 and 6,12 and Subdivision 6.1.5 of the Principal Regulations. The new regulation 6.09 (inserted by Regulation 12 of these Regulations) is essentially a simplification of the existing regulations 6.09 and 6.09A.

2. Subregulations 6.07(2), (3), (4) and (5) of the new regulation 6.07 basically incorporate the existing regulation 6.09. (NB: the existing regulation 6.08 is replaced by a new regulation 6.08 which prescribes the restricted non-preserved benefits in regulated superannuation funds at any time on or after 1 July 1999 (ie, the start date for the new preservation arrangements) for all members - see Regulation 11 of these Regulations).

The existing regulation 6.08 prescribes a member's restricted non-preserved benefits in a regulated superannuation fund on and after the 'changeover day'. Therefore, the only members it applied to before the commencement of these Regulations were those members who had a 'changeover day' implemented for them: in other words, '" B members'. The new subregulations 6.07(2)-(5) retain this calculation of restricted non-preserved benefits for 'type B members' until 30 June 1999: after this date, the calculation in the new regulation 6.08 will apply to all members.

It should be noted that the new subregulations 6.07(2), (3) and (4) are subject to regulation 6.12 and Subdivision 6.1.5 of the Principal Regulations.

Regulation 11 - Regulation 6.08 (Restricted non-preserved benefits in regulated superannuation funds - on and after the changeover day)

Regulation 11 omits the existing regulation 6.08 from the Principal Regulations, and replaces it with a new regulation 6-08 titled "Restricted non-preserved benefits in regulated superannuation funds - on and after 1 July 1999". This new provision defines the amount of restricted nonpreserved benefits in regulated superannuation funds at any time on or after 1 July 1999 (ie, the start date for the new preservation arrangements) for all members, whether they be 'type A members' or 'type B members' (see subregulation 4.3 of these Regulations for details of these terms).

1 . Subregulation 6.08(1) calculates the restricted non-preserved benefits of all 'type B members', and those 'type A members' who are not defined benefit members (as defined in subregulation 1.03(1)), in regulated superannuation funds at any time on or after 1 July 1999 as the sum of

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the amount of the member's restricted non-preserved benefits in the fund as at 30 June 1999, as calculated under new regulation 6.07 of the Principal Regulations (see Regulation 10 of these Regulations); and

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the amount of the member's restricted non-preserved benefits received from another regulated superannuation fund, an exempt public sector superannuation scheme or an RSA on and after 1 July 1999.

For those 'type A members' who are also defined benefit members, subregulation 6.08(1) calculates the restricted non-preserved benefits of these members in regulated superannuation funds at any time on or after 1 July 1999 as the sum of:

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the amount of the member's restricted non-preserved benefits received from another regulated superannuation fund, m exempt public sector superannuation scheme or an RSA on and after 1 July 1999; and

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depending on the decision of the trustee, either:

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the amount of the member's restricted non-preserved benefits in the fund as at 30 June 1999, as calculated under new regulation 6.07 of the Principal Regulations (see Regulation 10 of these Regulations); or

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the greater amount of:

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the member's restricted non-preserved benefits (as defined by new subregulation 6.07(1)) in the fund that would be payable to the member on 1 July 1999 if the member resigned from employment on that day; or

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the member' s restricted non-preserved benefits (as defined by new subregulation 6.07(1)) in the fund that would be payable to the member on 1 July 1999 if the member wore retrenched from employment on that day.

This means that on and after 1 July 1999, a member's restricted non-preserved benefits cannot be added to by any type of contributions made to the fund on behalf of the member, or by any investment earnings that have accumulated on a member's benefits in respect of the period on and after 1 July 1999. From 1 July 1999, all benefits arising from contributions made from that date, and investment earnings accumulating on restricted non-preserved benefits in respect of the period on and after 1 July 1999, will be required to be preserved by virtue of the effect of regulation 6.03 (as amended by Regulation 6 of these Regulations). Of course, benefits which were restricted nonpreserved benefits before 1 July 1999 will remain restricted non-preserved benefits until a condition of release is satisfied in respect of those benefits.

It should be noted that the new regulation 6.08 is subject to regulations 6.09 and 6.12 and Subdivision 6-1.5 of the Principal Regulations.

2. Subregulation 6.08(2) provides for the retrospective, changing of the preservation status of benefits arising from member contributions for which a deduction is later claimed.

Section 82AAT of the Income Tax Assessment Act 1936 (the Tax Act) allows self-employed or substantially self-employed persons to claim a deduction for personal contributions (ie, member contributions) made to a regulated superannuation fund at any time after the contributions have been made. When this occurs, contributions are classified in the fund as deducted contributions for taxation purposes, with a subsequent 'reclassification' of benefits from the restricted non-preserved benefits category (ie, where the contribution was originally allocated) to the preserved benefits category. This is because benefits arising from personal contributions for which a deduction has been claimed must currently be preserved.

To ensure that benefits arising from the above circumstances are also preserved under the preservation arrangements that will apply from 1 July 1999, new subregulation 6.08(2) provides that if.

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on or after 1 July 1999, when a deduction is allowed for a member under section 82AAT of the Tax Act in respect of a member contribution made before 1 July 1999; and

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the benefits arising from the contribution were initially allocated to restricted non preserved benefits;

these benefits will be reclassified as preserved benefits from the date of the deduction.

This provision would only apply in limited circumstances: that is, in respect of member contributions made before 1 July 1999 by self-employed or substantially self-employed persons for which they are allowed a deduction under section 82AAT of the Tax Act.

It should be noted that any benefits arising from member contributions made on or after 1 July 1999 are required to be preserved under regulation 6.03 of the Principal Regulations (as amended by Regulation 5 of these Regulations).

Regulation 12 - Regulation 6.09 (Restricted non-preserved benefits in regulated superannuation funds - rollover or transfer between funds during 1996, 1997 or 1998)

Regulation 12 omits regulation 6.09 from the Principal Regulations and replaces it with a new regulation 6.09, called "Effect of rollover or transfer on restricted nonpreserved benefits".. for the purposes of simplification. The new regulation 6.09 provides that a member's benefits in a regulated superannuation fund which wore restricted non-preserved benefits in the source from which they wore received continue to be restricted non-preserved benefits in the fund.

The circumstance that is dealt with in the existing regulation 6.09 is that where a member's restricted non-preserved benefits are transferred or rolled over from a regulated superannuation fund where they had a 'changeover day' to a regulated superannuation fund where they have not had a 'changeover day'. In these circumstances, these benefits retained their restricted non-preserved benefit character, despite the methods of calculating restricted non-preserved benefits being different between the two funds.

The new regulation 6.09 deals with the circumstance outlined above, if not specifically, in a general and much simpler manner. It also caters for any rollover or transfer of restricted non-preserved benefits to a regulated superannuation fund from any source (for example, another regulated superannuation fund, an RSA or an exempt public sector superannuation scheme).

It should be noted that the new regulation 6.09 is subject to regulation 6.12 and Subdivision 6.1.5 of the Principal Regulations.

Regulation 13 - Regulation 6.09A (Restricted non-preserved benefits in RSAs rollover or transfer to regulated superannuation funds during 1998)

Regulation 13 omits regulation 6.09A from the Principal Regulations. The reason for its omission is that it is no longer necessary. The regulation catered for situations where a person's restricted non-preserved benefits were transferred or rolled over from an RSA where they had an 'RSA changeover day' in 1998 to a regulated superannuation fund where they have not had a 'changeover day', and ensured that these benefits retained their restricted non-preserved benefit character. Because the 'RSA changeover day' will never occur as a result of amendments made to the Retirement Savings Accounts Regulations (made in conjunction with the amendments made by these Regulations), regulation 6.09A is no longer necessary and is therefore deleted.

Regulation 14 - Regulation 6.10 (Unrestricted non-preserved benefits - regulated superannuation funds)

Regulation 14 makes two changes to regulation 6.10 of the Principal Regulations.

1 . Subregulation 14.1 amends paragraph 6.10(1)(d) in order to provide that only investment earnings that have accumulated on unrestricted non-preserved benefits in regulated superannuation funds in respect of the period before 1 July 1999 will be able to be included in unrestricted non-preserved benefits from that date. Any benefits arising from investment earnings that accumulate on unrestricted non-preserved benefits in respect of the period from 1 July 1999 will be required to be preserved by virtue of the effect of regulation 6,03 (as amended by Regulation 6 of these Regulations).

2. Subregulation 14.2 inserts a new subregulation 6.10(3) to provide for the retrospective changing of the preservation status of benefits arising from member contributions for which a deduction is later claimed.

Section 82AAT of the Income Tax Assessment Act 1936 (the Tax Act) allows self-employed or substantially self-employed persons to claim a deduction for personal contributions (ie, member contributions) made to a regulated superannuation fund at any time after the contributions have been made. When this occurs, contributions are classified as deducted contributions for taxation purposes, with a subsequent 'reclassification' of benefits from the restricted non-preserved benefits category (ie, where the member contribution was originally allocated) to the preserved benefits category. This is because benefits arising from personal contributions for which a deduction has been claimed must currently be preserved.

Before the deduction is claimed, it could be possible for a condition of release to be satisfied in respect of the restricted non-preserved benefits under subregulation 6.12(2), with these benefits becoming unrestricted non-preserved benefits. However, when the deduction is claimed, these unrestricted non-preserved benefits would be reclassified as preserved benefits.

To ensure that benefits arising from the above circumstances are also preserved under the preservation arrangements that will apply from. 1 July 1999, new subregulation 6.10(3) provides that if.

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on or after 1 July 1999, when a deduction is allowed for a member under section 82AAT of the Tax Act in respect of a member contribution made before 1 July 1999; and

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the benefits arising from the contribution were initially allocated to restricted non-preserved benefits and then allocated to unrestricted non-preserved benefits under subregulation 6.12(2);

these benefits will be reclassified as preserved benefits from the dare of the deduction.

This provision would only apply in limited circumstances: that is, in respect of member contributions made before 1 July 1999 by selfemployed or substantially self-employed persons for which they are allowed a deduction under section 82AAT of the Tax Act.

It should be noted that any benefits arising from member contributions made at any time on and after 1 July 1999 are required to be preserved under regulation 6.03 of the Principal Regulations (as amended by Regulation 6 of these Regulations).

It should also be noted that, depending on the governing rules of the fund, a condition of release of the same type that led to the reallocation of restricted non-preserved benefits to unrestricted non-preserved benefits may he able to be used for the allocation of preserved benefits to unrestricted non-preserved benefits under subregulation 6.12(1). Of course, it is up to the trustee of the fund to determine whether this 'second' condition of release has been satisfied.

Regulation 15 - Regulation 6.11 (Unrestricted non-preserved benefits - approved deposit funds)

Regulation 15 amends paragraph 6.11(1)(e) of the Principal Regulations in order to provide that only investment earnings that have accumulated on unrestricted non-preserved benefits in approved deposit funds in respect of the period before 1 July 1999 will be able to be included in unrestricted non-preserved benefits from that date. Any benefits arising from investment earnings that accumulate on unrestricted non-preserved benefits in respect of the period from 1 July 1999 will be required to be preserved by virtue of the effect of regulation 6.05.

Regulation 16 - Regulation 6.14 (Indexation)

Regulation 16 amends regulation 6.14 of the Principal Regulations so that it has no effect after 30 June 1999.

It is necessary to retain regulation 6.14 until 30 June 1999 because of the continued effect of new subregulation 6.07(5) for the calculation of restricted non-preserved benefits for 'type B members' until 30 June 1999 (see Regulation 10 of these Regulations). However, after this date, the calculation of restricted non-preserved benefits will change for all members (see Regulation 11 of these Regulations), and these benefits will not be indexed. As a result, after 30 June 1999, regulation 6.14 will no longer be necessary

Regulation 17 - Regulation 6.16 (Redistribution of member benefits within a fund in certain circumstances by operation of governing rules or action of trustee)

Regulation 17 amends regulation 6,16 of the Principal Regulations by replacing the references to those specific regulations that define a member's preserved benefits, restricted non-preserved benefits and unrestricted non-preserved benefits with references to the Subdivisions in which these regulations are found- These amendments remove the need to amend regulation 6.16 after 30 June 1999 in order to remove references to redundant regulations (ie, after 30 June 1999, regulations 6,02 and 6.07).

Regulation 18 - New regulation 6.16A (When non-preserved benefits may be reduced)

The 1999 preservation arrangements as announced in the 1997-98 Budget stated that all investment returns on benefits accruing on or after 1 July 1999 are to be allocated to a member's preserved benefit component.

In situations where a member's benefits in a fund are largely or wholly made up of restricted nonpreserved benefits and/or unrestricted non-preserved benefits and the investment returns debited to a member's benefits in a period are negative, it is possible that these negative investment returns may exceed the total amount of a member's preserved benefits in die fund.

In order to address this situation, Regulation 18 inserts new regulation 6.16A into the Principal Regulations as an exception to the general rule that all investment returns (as defined by Principal subregulation 5.01(1)) accruing in respect of the period from 1 July 1999 must be preserved. It applies if, on or after 1 July 1999, the amount of a negative investment return in respect of the period after 30 June 1999 to be debited against a member's benefits is more than the amount of the member's preserved benefits.

Under regulation 6.16A, the priority for debiting negative investment returns is:

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first against a member's preserved benefits;

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then (if required) against a member's restricted non-preserved benefits; and

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then (if required) against a member's unrestricted non-preserved benefits.

It should be noted that all positive investment returns accruing in respect of the period from 1 July 1999 are required to be preserved under Principal Regulation 6.03 (as amended by Regulation 6 of these Regulations). This means that, from 1 July 1999, if a member's restricted non-preserved benefits and/or unrestricted non-preserved benefits have been reduced by the debiting of negative investment returns in respect of the period after 30 June 1999, these benefits will not be able to be 'restored' to their 'pre-reduction,' level by subsequent positive investment returns. This is consistent with the Government's policy that all benefits accruing from 1 July 1999 which receive concessional tax treatment should be preserved.

It should also be noted that this regulation would not apply to members of 'capital guaranteed funds' (as defined by Principal subregulation 2.01(1)), as the benefits of these members cannot be reduced by negative investment returns in any case.

Regulation 19 - Regulation 6.18 (Voluntary cashing of preserved benefits in regulated superannuation funds)

Regulation 19 amends regulation 6.18 of the Principal Regulations to provide that paragraph 6.18(2)(b) has no effect after 30 June 1999. This amendment is a consequence of all investment earnings accruing from 1 July 1999 on all benefits having to be preserved.

Regulation 20 - Regulation 6.19 (Voluntary cashing of restricted non-preserved benefits in regulated superannuation funds)

Regulation 20 amends regulation 6.19 of the Principal Regulations to provide that paragraph 6.19(2)(b) has no effect after 30 June 1999. This amendment is a consequence of all investment earnings accruing from 1 July 1999 on all benefits having to be preserved.

Regulation 21 - Regulation 6.21 (Compulsory cashing of benefits in regulated superannuation funds)

Regulation 21 inserts subregulation 6.21(3A) into the Principal Regulations. This new provision requires the trustee of a regulated superannuation fund to take ongoing reasonable efforts in determining the member's ongoing employment status upon and after the member attaining age 65.

If, after reasonable efforts have been made, the trustee is unable to establish the member's ongoing gainful employment status, the trustee must presume the member is not gainfully employed for compulsory cashing purposes, and therefore must cash the member's benefits as soon as practicable in accordance with regulation 6.21.

Regulation 22 - Regulation 6.23 (Voluntary cashing of preserved benefits in approved deposit funds)

Regulation 22 amends regulation 6.23 of the Principal Regulations to provide that paragraph 6.23(2)(b) has no effect after 30 June 1999. This amendment is a consequence of all investment earnings accruing from 1 July 1999 on all benefits having to be preserved.