Explanatory Statement

Issued by authority of the Minister for Revenue and Assistant Treasurer

EXPLANATORY STATEMENT - Statutory Rules 2004 No. 404

Superannuation Industry (Supervision) Act 1993

Retirement Savings Accounts Act 1997

Superannuation Industry (Supervision) Amendment Regulations 2004 (No. 11)

Retirement Savings Accounts Amendment Regulations 2004 (No. 5)

The purpose of the Regulations is to make minor and technical amendments to the income stream provisions of the Superannuation Industry (Supervision) Regulations 1994 and the Retirement Savings Accounts Regulations 1997.

Retirement Savings Accounts Amendment Regulations 2004 (No. 5)

Subsection 200(1) of the Retirement Savings Accounts Act 1997 (the RSA Act) provides in part that the Governor-General may make regulations prescribing matters required or permitted by the RSA Act to be prescribed, or necessary or convenient to be prescribed for carrying out or giving effect to that Act.

The Retirement Savings Accounts Regulations 1997, among other matters, set out regulatory standards for pensions under the RSA Act. These standards cover such matters as the payment rules for pensions.

The Regulations create an exception to the rule which requires a minimum pro-rata income payment to be made from an RSA market-linked pension prior to it being commuted to a lump sum. This rule was put in place to ensure that the requirement to make payments at least annually from an RSA market-linked pension cannot be circumvented in order to obtain a tax advantage. Current exceptions to this rule apply to commutations resulting from death and for certain specified purposes (for example, to give effect to a payment split under family law).

The Regulations create an additional exception to the minimum pro-rata payment requirement in the case of partial commutations of pensions. The exception applies where, immediately after a partial commutation, sufficient funds are left in the pension account balance to meet the total required payment amount for the year.

Details of the Regulations are set out in Attachment A.

Superannuation Industry (Supervision) Amendment Regulations 2004 (No. 11)

Subsection 353(1) of the Superannuation Industry (Supervision) Act 1993 (the SIS Act) provides, in part, that the Governor-General may make regulations prescribing matters required or permitted by the SIS Act to be prescribed, or necessary or convenient to be prescribed for carrying out or giving effect to that Act.

The Superannuation Industry (Supervision) Regulations 1994 (the SIS Regulations), among other matters, set out regulatory standards for annuities and pensions under the SIS Act. These standards cover such matters as the term, payment rules and restrictions on commutation.

The Regulations achieve three purposes.

The first purpose is to create an exception to the rule which requires a minimum pro-rata payment to be made from an income stream prior to commutation. This rule, which was put in place in 2003, strengthened the standards for the provision of annuities and pensions by ensuring that the requirement to make payments from an income stream at least annually could not be circumvented to obtain a tax advantage. Current exceptions to this rule apply to commutations resulting from death and for certain specified purposes (for example, to give effect to a payment split under family law).

The Regulations create an additional exception to the minimum pro-rata payment requirement in the case of partial commutations of account-based income streams. Account-based income streams comprise allocated annuities and pensions and market-linked annuities and pensions. The exception applies where, immediately after a partial commutation, sufficient funds are left in the income stream account balance to meet the minimum required payment amount for the year (or, in the case of a market-linked income stream, the total payment amount for the year).

The change makes the income stream integrity rules more compatible with the automated payment systems used by income stream providers, in the process reducing processing costs for providers. This is also consistent with the amendment to the Retirement Savings Accounts Regulations 1997.

The second purpose of the Regulations is to make a technical amendment to align the rule which allows a complying income stream to be commuted within 6 months of its commencement with the corresponding rule in the Social Security Act 1991. Complying income streams are those which meet the pension and annuity standards prescribed in the Income Tax Assessment Act 1936.

Amendments to the Social Security Act 1991 and the SIS Regulations were made in 2003 for the purpose of clarifying that the 6 month commutation rule for a complying annuity or pension is a once-only "cooling off" period that cannot be extended through a rollover to another complying annuity or pension. The social security rules reflect this intention by preventing the use of the 6 month window where the income stream arises from the commutation of another complying income stream. The superannuation rules, however, inadvertently impose stricter conditions which prevent the use of the 6 month commutation window where the income stream arises from the commutation of any other income stream.

The Regulations align the 6 month rule in the SIS Regulations and the Social Security Act 1991.

The final purpose of the Regulations is to make a minor technical amendment to clarify the operation of the rule which allows a complying lifetime income stream to be commuted on the death of the primary beneficiary within a certain period. The period for the purposes of this rule is the lesser of 20 years or the primary beneficiary's life expectancy on the commencement day of the income stream.

The Regulations clarify this rule so that it refers to the primary beneficiary's life expectancy rounded up to the next whole number. This is consistent with other uses of the term life expectancy in the SIS Regulations and is needed because a person's actuarially estimated life expectancy will not usually be a period of whole years.

Details of the Regulations are set out in Attachment B.

The amendments apply retrospectively. Regulations 1, 2 and 3 and Schedule 1 of the amendments to the SIS Regulations are taken to have commenced on 1 October 2003. Schedule 2 of those amendments is taken to have commenced on 20 September 2004. The amendment to the RSA Regulations is taken to have commenced on 20 September 2004. These dates correspond with the original commencement dates of the provisions that are amended by the respective schedules.

Retrospective application of the amendments is considered appropriate to ensure that the amended provisions operate in the way that was originally intended, with effect from their date of commencement, and to avoid disadvantaging income stream providers whose systems were ensuring a level of integrity consistent with the original rules. The Office of Legislative Drafting has advised that the amendments do not contravene subsection 48 (2) of the Acts Interpretation Act 1901, as the amendments remove past liabilities without imposing new ones.

Neither the RSA Act nor the SIS Act specifies conditions that need to be met before the power to make the Regulations may be exercised.

The Office of Regulation Review has advised that a Regulation Impact Statement (RIS) is not required to be included with the Regulations because the changes are of a minor or machinery of government nature and do not substantially alter existing arrangements.

Attachment A - Details of the Retirement Savings Accounts Amendment Regulations 2004 (No. 5)

Regulation 1 specifies the name of the Regulations as the Retirement Savings Accounts Amendment Regulations 2004 (No. 5).

Regulation 2 provides that the Regulations are taken to have commenced on 20 September 2004. This aligns with the commencement date of the provisions to which the Regulations relate and avoids disadvantaging income stream providers whose systems were ensuring a level of integrity consistent with the original rules.

Regulation 3 provides that Schedule 1 amends the Retirement Savings Accounts Regulations 1997.

Schedule 1 - Amendments

Item 1

The Regulations insert a new paragraph 1.08 (2) (ba) to specify that the requirement to make a minimum pro-rata payment prior to the commutation of an RSA market-linked pension does not apply in situations where the commutation would leave sufficient funds in the pension account balance to meet the total required payment amount for the year, taking account of payments already made in the year to date.

Attachment B - Details of the Superannuation Industry (Supervision) Amendment Regulations 2004 (No. 11)

Regulation 1 specifies the name of the Regulations as the Superannuation Industry (Supervision) Amendment Regulations 2004 (No. 11).

Regulation 2 provides that Regulations 1, 2 and 3 and Schedule 1 are taken to have commenced on 1 October 2003, and that Schedule 2 is taken to have commenced on 20 September 2004.

The commencement date for Schedule 1 aligns with the commencement date for the income stream integrity rules which the Regulations amend.

The commencement date for Schedule 2 aligns with the commencement date for the extended guarantee period for lifetime income streams and the Regulations for the market-linked income stream which the Regulations amend.

The retrospective commencement dates for Schedules 1 and 2 ensure that the amended provisions operate in the way that was originally intended, with effect from their date of commencement, and avoid disadvantaging income stream providers whose systems were ensuring a level of integrity consistent with the original rules.

Regulation 3 provides that Schedules 1 and 2 amend the Superannuation Industry (Supervision) Regulations 1994.

Schedule 1 - Amendments

Items 1 to 4

The Regulations amend subregulations 1.05 (2) and (9) and subregulations 1.06 (2) and (7) to allow a complying lifetime or life expectancy annuity or pension to be commuted within 6 months of its commencement, provided that the annuity or pension was not funded from the commutation of another complying income stream. The Regulations align this rule in the SIS Regulations and the Social Security Act 1991.

Item 5

The Regulations insert a new paragraph 1.07A (2) (ba) to specify that the requirement to make a minimum pro-rata payment prior to the commutation of an allocated annuity or an allocated pension does not apply where the commutation would leave sufficient funds in the income stream account balance to meet the minimum required payment for the year, taking account of payments already made in the year to date.

Schedule 2 - Amendments

Items 1 and 2

The Regulations amend subregulations 1.05 (2) and 1.06 (2) to clarify that the reference to the primary beneficiary's life expectancy in sub-subparagraphs 1.05 (2) (f) (ii) (A) and 1.06 (2) (e) (ii) (A) is to the primary beneficiary's life expectancy rounded up to the next whole number.

Item 3

The Regulations insert a new paragraph 1.07C (2) (ba) to specify that the requirement to make a minimum pro-rata payment prior to the commutation of a market-linked income stream does not apply in situations where the commutation would leave sufficient funds in the income stream account balance to meet the total required payment amount for the year, taking account of payments already made in the year to date.