House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello MP)

Chapter 7 - Superannuation and family law

Outline of chapter

7.1 Schedule 7 to this bill amends the Income Tax Assessment Act 1936 (ITAA 1936) to provide appropriate taxation treatment for superannuation annuities that have been split on marriage breakdown. The broad aim of these amendments is to ensure that where a superannuation annuity is split upon marriage breakdown then the taxation consequences will be the same as those that currently apply where an equivalent benefit in a superannuation fund is split.

7.2 Schedule 7 also amends the ITAA 1936 to correct minor anomalies in relation to how the taxation law applies when superannuation benefits are split on marriage breakdown.

Context of amendments

7.3 Legislation under Part VIIIB of the Family Law Act 1975 which allows separating couples to split their superannuation on marriage breakdown commenced on 28 December 2002.

7.4 This legislation, and related legislation, provided for the splitting of superannuation on marriage breakdown but it did not apply to superannuation-like annuity products, such as annuities purchased from life offices (and other organisations) with rolled-over superannuation money.

7.5 The Government has recently amended the Family Law Act 1975 to allow these superannuation annuities to be split between separating couples on marriage breakdown in the same way as other equivalent superannuation benefits.

7.6 As a result of the amendments to the Family Law Act 1975, amendments are required to the income taxation law so that superannuation annuities split on marriage breakdown are taxed in the same way that equivalent superannuation benefits are taxed on marriage breakdown.

7.7 In addition to the amendments dealing with superannuation annuities, Schedule 7 also includes amendments to correct minor anomalies in relation to how the taxation law applies when superannuation benefits are split on marriage breakdown. These amendments clarify the law in several areas and give effect to the original policy intent of the superannuation and family law arrangements.

Summary of new law

7.8 These amendments to the income taxation law extend the same taxation treatment currently provided to superannuation split on marriage breakdown to superannuation annuities split upon marriage breakdown.

7.9 If the superannuation annuity is an immediate annuity (ie an annuity that is presently payable) that has been split on marriage breakdown, then the amendments will ensure it is subject to the same taxation arrangements as apply to a pension in a superannuation fund that has been split in similar circumstances.

7.10 If the superannuation annuity is a deferred annuity (ie an annuity not payable on purchase) that has been split on marriage breakdown, then the amendments will ensure it is subject to the same taxation arrangements as apply to a superannuation interest in the accumulation phase that has been split in similar circumstances.

7.11 These amendments to the income taxation law also correct minor anomalies and are intended to:

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ensure appropriate taxation treatment where a non-member spouse receives a share of superannuation as a result of a payment split after the death of his or her former member spouse

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ensure the appropriate taxation treatment of payments made to a non-member spouse, or retained for a non-member spouse in the superannuation system, when superannuation is split

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clarify the taxation treatment of a contribution to superannuation made for the benefit of a non-member spouse to satisfy family law obligations

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allow a trustee or retirement savings account provider to reject a member spouse's request to treat contributions as deductible if, because of a family law related split, there are not sufficient monies in the member spouse's account to meet any income taxation liability that would arise for the fund or provider on treating those contributions as deductible, and

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ensure a member spouse's pension is appropriately reassessed against the reasonable benefit limits whenever the pension is reduced to satisfy a family law obligation.

Comparison of key features of new law and current law

Detailed explanation of new law

Death benefit eligible termination payments

7.12 Amendments made to sections 27ACA and 27AAA of the ITAA 1936 are designed to correct unintended outcomes that may arise from the current law.

Clarifying which eligible termination payment paragraph applies when a payment is made to the non-member spouse on the death of the member spouse

7.13 An amendment to section 27ACA ensures that if a payment is made to the non-member spouse because a splittable payment has become payable to another person on the death of the member spouse then that payment will always be taken to be an eligible termination payment under paragraph (ba) of the definition of 'eligible termination payment' in section 27A. This provides more certainty over how that payment will be treated for taxation purposes.

7.14 The amendment ensures it does not matter to whom the splittable payment is initially payable, as the payment to the non-member spouse in this situation is considered an eligible termination payment under paragraph (ba) of the definition of eligible termination payment. [Schedule 7, item 8, subsection 27ACA(1)]

Ensuring that payments to a non-member spouse are only death benefits if the non-member spouse is a dependant (within the ordinary meaning of that expression)

7.15 An amendment to section 27AAA ensures that where the non-member spouse receives a payment as a result of a payment split on marriage breakdown after the death of the member spouse, the payment will only be considered a death benefit eligible termination payment (and thus eligible for special taxation treatment) if the non-member spouse was a dependant (in the ordinary sense of the word) of the member spouse immediately before the member spouse's death. [Schedule 7, items 5 and 6, subsection 27AAA(7A)]

7.16 This amendment corrects an anomaly in the current law under which a payment to a non-member spouse may be considered a death benefit eligible termination payment simply because the non-member spouse is a former spouse, rather than because they would otherwise be considered a dependant.

Classification of amounts retained in superannuation for the non-member spouse

7.17 Section 27ACA of the ITAA 1936 currently contemplates the situation where a payment is made directly to the non-member spouse (or their legal personal representative). It is possible, however, that the amount for the non-member spouse may be retained in the superannuation system (eg paid into another fund for the non-member spouse).

7.18 This amendment ensures that this possibility is covered by clarifying that if this occurs then there will be an eligible termination payment roll-over for the non-member spouse. This allows the appropriate eligible termination payment components to be calculated under subsection 27ACA(2). [Schedule 7, item 7, paragraphs 27ACA(1)(b) and (c)]

Splitting of eligible annuities

7.19 New subsection 27ACB(1A) of the ITAA 1936 deals with the situation where an eligible annuity (within the meaning of Part VIIIB of the Family Law Act 1975 ) is split on marriage breakdown and, in circumstances to be prescribed in regulations, an annuity is created for the non-member spouse or an amount is transferred to a superannuation fund for the non-member spouse. It is intended that the circumstances prescribed in the regulations will include where a deferred annuity is split and amounts remain in the superannuation system for both the member spouse and non-member spouse.

7.20 In such circumstances, subsection 27ACB(1A) provides that there is an eligible termination payment for the non-member spouse equal to the value of the amount split for the non-member spouse and this eligible termination payment is considered to have been rolled-over. Similarly, the remaining value of the annuity is considered to be an eligible termination payment for the member spouse and rolled-over. These provisions effectively mirror subsection 27ACB(1), which provides for an equivalent outcome if superannuation interests are split in accordance with relevant regulations under the Superannuation Industry (Supervision) Regulations 1994. The relevant taxation components of the eligible termination payments under subsection 27ACB(1A) are then calculated under subsections 27ACB(2) to (4). [Schedule 7, items 13 and 14, subsection 27ACB(1A)]

7.21 An eligible annuity is defined in the Family Law Act 1975 and means an annuity purchased wholly out of rolled-over amounts. Only eligible annuities can be split under Part VIIIB of the Family Law Act 1975.

7.22 Where a new annuity is created for the non-member spouse, the new annuity may be provided by either the same annuity provider as the original eligible annuity, or by another annuity provider.

Untaxed element of post-June 1983 component of an eligible termination payment

7.23 The untaxed element of the post-June 1983 component of an eligible termination payment is now included in the identified components of an eligible termination payment which are subject to an interest split. [Schedule 7, item 16, paragraph 27ACB(5)(e)]

7.24 This amendment corrects an anomaly in the current law and ensures that the untaxed element of the post-June 1983 component of an eligible termination payment is split on marriage breakdown in the same way as the other identified components of an eligible termination payment.

Contributions to superannuation for a non-member spouse

7.25 Under the Family Law (Superannuation) Regulations 2001 (eg Regulation 14H) it is possible for a member spouse to satisfy a payment split obligation on marriage breakdown by making a contribution to superannuation for the non-member spouse. If the contribution is sufficient to meet the non-member spouse's entitlement, the non-member spouse is not entitled to any further amounts under the payment split. The nature of such a contribution is that it should most appropriately be considered an undeducted contribution to the fund and should also not qualify as an eligible spouse contribution under section 159T of the ITAA 1936.

7.26 These amendments ensure that a contribution to a regulated superannuation fund or to a retirement savings account made by a member spouse on behalf of a non-member spouse to satisfy a payment split:

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is not an allowable deduction [Schedule 7, item 18, subsection 82AAC(1A)]

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is not an eligible spouse contribution [Schedule 7, item 53, subsection 159T(1A)] , and

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is not a taxable contribution [Schedule 7, items 55 and 56, subsection 274(4)].

Impact of a split on the ability to claim a deduction for earlier superannuation contributions

7.27 A self-employed person may claim a taxation deduction under section 82AAT of the ITAA 1936 for his or her own contributions to superannuation, including a retirement savings account. To do so the person must give a relevant notice to the trustee or retirement savings account provider and the fund or provider must acknowledge that notice. The fund or provider then becomes liable to pay income taxation on those contributions.

7.28 Section 82AAT is amended to provide that the trustee or retirement savings account provider may reject the person's notice (and hence not treat the contributions as deductible) if, after the contribution was made and before the notice is given, the person's benefit has been split under family law (the exact circumstances will be prescribed in regulations) and as a result the remaining benefit is insufficient to meet the income taxation that would be payable by the fund or retirement savings account provider if the contributions in question were treated as deductible. [Schedule 7, items 24 to 27, subsections 82AAT(1A), (1AA), (1CB) and (1CBA)]

Reasonable benefit limits

7.29 These amendments to the reasonable benefit limits provisions of the ITAA 1936 deal with the implications for reasonable benefit limits assessing and reporting when an eligible annuity (within the meaning of Part VIIIB of the Family Law Act 1975 ) is split on marriage breakdown. The general aim of these amendments is to ensure that the split of an eligible annuity will have the same taxation consequences (both for reasonable benefit limits purposes and other relevant provisions such as section 27H of the ITAA 1936) as a split of a superannuation pension. These amendments also address some existing anomalies in the law to ensure the correct treatment of superannuation split on marriage breakdown.

Ensuring that eligible annuity splits are treated the same as superannuation pension splits

7.30 Amendments to subsections 140M(1A) and (1C) ensure that where an eligible annuity is split, the same consequences will arise under these provisions as currently arise when a superannuation pension is split. Generally, this will mean that a new annuity is considered to have commenced for the non-member spouse and is assessed appropriately against his or her reasonable benefit limits and the reduced annuity paid to the member spouse is remeasured and assessed against his or her reasonable benefit limits. [Schedule 7, items 29 to 38, subsections 140M(1A) and (1C)]

Ensuring appropriate reasonable benefit limits treatment when amounts split in favour of the non-member spouse are retained in the superannuation system

7.31 Paragraph 140M(1C)(d) is amended to confirm that subsection 140M(1C) can be applied in the situation where a payment is not made directly to the non-member spouse but is retained in the superannuation system (eg paid into another fund for the non-member spouse). This ensures that the resulting reduced pension/annuity payments made to the member spouse can be remeasured and assessed against their reasonable benefit limits in this case. [Schedule 7, item 39, paragraph 140M(1C)(d)]

Removing unnecessary restriction on application of subsection 140M(1C)

7.32 Paragraph 140M(1C)(g) is amended to ensure that in any case where a pension continues for a member spouse after a split has been applied then that will be considered a new pension for the member spouse (and hence re-assessed against their reasonable benefit limits). The words 'as a result of the splittable payment becoming payable' have been removed as in some circumstances a benefit may be split in such a way that a 'splittable payment' never becomes payable. For example, the pension may have been partly commuted and the non-member spouse's share paid out - if this occurs no future 'splittable payments' can arise under relevant family law provisions. [Schedule 7, item 40, paragraph 140M(1C)(g)]

Commutation of an annuity under a payment split

7.33 Section 140UA currently deals with the impact of a commutation of a superannuation pension as a result of a split relating to family law. In particular, it specifies how any resultant eligible termination payments or pensions are to be assessed for reasonable benefit limits purposes. The amendments to section 140UA ensure that where an eligible annuity is commuted the same treatment applies as currently applies when a superannuation pension is commuted. [Schedule 7, items 41 to 47, subsections 140UA(1) and (2)]

Assessment against pension reasonable benefit limits

7.34 If the member spouse's annuity qualified for the pension reasonable benefit limits before a payment split on marriage breakdown, then it will continue to qualify for the pension reasonable benefit limits. Again, this ensures equivalent treatment to a superannuation pension split on marriage breakdown. [Schedule 7, items 48 to 50, section 140ZFA)]

Reduction in the reasonable benefit limits value of a pension or annuity as a result of a split

7.35 Subsection 140ZP(3) is amended so that it also applies in the situation where a payment is not made directly to the non-member spouse but is retained in the superannuation system (eg paid into another fund for the non-member spouse). [Schedule 7, item 52, subsection 140ZP(3)]

7.36 Subsection 140ZP(3) (as amended) provides that if a member's pension entitlement is reduced because of a split relating to family law then the capital value of that original pension is taken to be reduced in accordance with a method determined by the Commissioner of Taxation (Commissioner). This is to ensure that the member will no longer be assessed for reasonable benefit limits purposes on that part of their benefit that has been split in favour of the non-member spouse.

7.37 New subsection 140ZN(3) introduces an equivalent provision for eligible annuities that have been split relating to family law. In effect, the relevant reasonable benefit limits amount of the annuity that has been split will be reduced in accordance with a method determined by the Commissioner. [Schedule 7, item 51, subsection 140ZP(3)]

7.38 New subsection 140ZN(4) states that the determination made under subsection 140ZN(3) is a legislative instrument, but neither section 42 nor Part 6 of the Legislative Instruments Act 2003 applies to the determination. This subsection has no substantive effect but is merely to clarify the position for users. [Schedule 7, item 51, subsection 140ZN(4)]

Definitions

7.39 The terms 'eligible annuity', 'member spouse', 'non-member spouse', 'payment split', 'regulated superannuation fund', 'retirement savings account', 'splittable payment' and 'superannuation interest' are defined to have the same meaning as in Part VIIIB of the Family Law Act 1975. [Schedule 7, items 1 to 4, subsection 27A(1); items 10 and 12, subsection 27ACA(5); items 15 and 17, subsection 27ACB(5); items 19 to 23, subsection 82AAC(3); item 28, subsection 82AAT(4); item 54, subsection 159T(3); item 56, subsection 274(5)]