House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Treasurer, the Hon J. B. Hockey MP)

Chapter 4 - Greater certainty in relation to fund mergers

Outline of chapter

4.1 Schedule 4 to the Bill amends the Income Tax Assessment Act 1997 (ITAA 1997) and Income Tax (Transitional Provisions) Act 1997 (ITTPA) to ensure that individuals whose superannuation benefits are involuntarily transferred from one superannuation plan to another plan without their request or consent are not disadvantaged through that transfer. Schedule 4 to the Bill also amends the Taxation Administration Act 1953 (TAA 1953) to remove the need for a roll-over benefit statement to be provided to an individual whose superannuation benefits are involuntarily transferred.

Context of amendments

4.2 An individual's superannuation benefits may be transferred from one superannuation plan to another plan in circumstances that may be outside the control of the individual, including as a result of a merger under a successor fund arrangement.

4.3 The proportioning rule is designed to remove an individual's capacity to reduce their potential tax liability by manipulating the tax components of their superannuation benefits. The rule determines the tax free and taxable components of a superannuation benefit, and is applied when a benefit is paid from a superannuation plan, including by way of a roll-over.

4.4 The proportioning rule applies to transfers between superannuation plans (a superannuation fund, approved deposit fund or retirement savings account) that are made without a specific request from or consent of an individual ('involuntary transfer'), as these transfers are payments of superannuation benefits and are also roll-over superannuation benefits if the transfers are between complying superannuation plans. An involuntary transfer of a superannuation benefit may occur under a successor fund arrangement; or where there is a compulsory transfer of an accrued default amount to a MySuper product in another complying superannuation plan; or where a transfer is made to an eligible rollover fund.

4.5 In some circumstances an individual may be potentially disadvantaged through the application of the proportioning rule when their benefits are involuntarily transferred into a new plan.

4.6 Where an individual's benefit is paid from a superannuation interest not supporting an income stream, the tax free component of the interest is limited to the value of the interest at the time the transfer is made. In circumstances where the value of the interest was less than the sum of the contributions and crystallised segments of the interest in the original plan (because the plan had incurred investment losses after the individual had made personal contributions to the plan) an individual could not recoup this difference in tax free component in the new plan. By contrast, if the individual had remained in the original plan, they could recoup this difference through an increase in the value of their interest from future plan earnings. The amount of tax free component of the interest could then be greater when a benefit is later paid from the plan.

4.7 These amendments will remove a possible impediment to a fund merger or rationalisation arrangement proceeding by ensuring that, where an individual's benefits in a superannuation plan are involuntarily transferred to a new superannuation plan, the individual will remain in the same taxation position, as if the transfer had not occurred.

4.8 The amendments will also remove the unnecessary burden for the original plan provider to give roll-over benefit statements to former members, depositors or account holders affected by the transfer. These individuals will still receive information on the transfer in accordance with disclosure obligations under the Corporations Regulations 2001.

Summary of new law

4.9 Schedule 4 amends the ITAA 1997 to ensure that where an individual's benefits are involuntarily transferred to a new superannuation plan the individual will remain in the same taxation position, as if the transfer had not occurred. For superannuation interests in the original plan that were not supporting an income stream, the new superannuation plan will recognise the value of the individual's contribution segment and crystallised segment in the original plan (or proportion thereof), immediately prior to the benefit payment. In the case of a superannuation interest in the original plan that was supporting an income stream that began to be paid on or after 1 July 2007, the income stream commenced in the new plan will retain the same tax components as the income stream in the original plan. For an income stream in the original plan that began to be paid before 1 July 2007, amendments to the ITTPA will ensure that the income stream commenced in the new plan will be treated in the same way as the income stream in the original plan was under that Act.

4.10 Amendments to the TAA 1953 will also remove the need for the original superannuation plan to give a roll-over benefit statement to each former member, depositor or account holder affected by the transfer.

Comparison of key features of new law and current law

Detailed explanation of new law

4.11 All superannuation benefit payments, including roll-over superannuation benefit payments, may be made up of two components, a tax free component and a taxable component.

4.12 The proportioning rule (section 307-125 of the ITAA 1997) specifies how to calculate the tax free and taxable components for most superannuation benefits.

4.13 For benefits paid from a superannuation interest not supporting an income stream, the value of the interest and its components must be worked out at the time the benefit is paid. For benefits paid from an interest supporting an income stream, the value of the interest and its components must generally be determined at the time the income stream commenced.

4.14 Under section 307-210 of the ITAA 1997, the tax free component of a superannuation interest is so much of the value of the interest as consists of the contributions segment and the crystallised segment of the interest. The contributions segment of the interest will include the tax free component of any roll-over superannuation benefit that has been paid into the interest from another superannuation plan (see subsection 307-220(2) of the ITAA 1997).

4.15 The taxable component of a superannuation interest is the value of the interest less the tax free component of the interest (see section 307-215 of the ITAA 1997).

4.16 The application of the proportioning rule to certain involuntary roll-overs could disadvantage some individuals.

4.17 In the case of an involuntary transfer of benefits from an individual's interest in the original plan that was not supporting an income stream immediately before the transfer, where the sum of the contributions segment and the crystallised segment of the interest exceeds the value of the interest at the time of the transfer, the individual's tax free component of their interest in the new plan would be limited to the value of their interest in the original plan at the time of the transfer.

4.18 This could occur where the original plan experienced investment losses after the individual had made personal contributions that were not included in the plan's assessable income. The amount by which the sum of the segments exceeds the value of the interest in the original plan would not be recouped by earnings in the new plan. By contrast, if there had been no involuntary transfer, the individual could recoup this excess through new earnings to the original plan. The amount of tax free component of the interest could then be greater when a benefit is later paid from the plan.

Example 4.1: Loss of a tax free component through an involuntary roll-over under the current law

Since 1 July 2007, Harry has made $500,000 in personal contributions, from his after tax earnings, to Village Super. Harry has not commenced an income stream with Village Super. Harry's superannuation interest in Village Super therefore has a possible maximum contributions segment of $500,000.

The trustees of Village Super agree with the trustees of Civic Super to merge Village Super into Civic Super on 1 July 2015. Before the merger the two trustees also agree that Civic Super will provide members with equivalent rights to those in Village Super. At the merger date, Harry's interest in Village Super is valued at only $450,000.

The roll-over of Harry's benefits from Village Super to Civic Super, on 1 July 2015, would result in Harry losing $50,000 of the value of his contributions segment in Village Super. While the tax free component of the roll-over superannuation benefit paid to Civic Super would be the full amount of that benefit, this benefit is only $450,000, not the full $500,000 that could potentially be tax free. As a result, his contributions segment in Civic Super, following the merger is only $450,000.

If Harry's benefits had remained in Village Super his possible maximum contributions segment could have remained at $500,000 and might have been recouped by future earnings in Village Super.

4.19 In the case of an involuntary transfer of benefits from a superannuation interest in the original plan that was supporting an income stream immediately before the transfer, the income stream in the original plan ceases before the transfer is paid. The current law does not provide clear guidance on how the tax free and taxable components of the benefit paid to the receiving plan as part of an involuntary transfer are determined as the benefit does not arise from a commutation of an income stream.

4.20 This contrasts with the situation under paragraph 307-125(3)(c) of the ITAA 1997 where an income stream is commuted in the original plan (through a roll-over request from the income stream holder) and the commuted balance is used to commence a new income stream in a new plan. In that situation the tax free and taxable component proportions of the income stream paid from the new plan would be the same as the proportions for the income stream in the original plan.

4.21 Schedule 4 introduces a new definition to identify a particular form of a roll-over superannuation benefit, being an involuntary roll-over superannuation benefit. An involuntary roll-over superannuation benefit is:

•

a payment transferring a superannuation interest of a member of a superannuation fund, a depositor with an approved deposit fund or a holder of a retirement savings account (RSA) to a successor fund (other than a self managed superannuation fund) without the consent of the member, depositor or holder;

•

a payment transferring an accrued default amount of a member of a complying superannuation fund to a MySuper product in another complying superannuation fund as a result of an election under paragraph 29SAA(1)(b) of the Superannuation Industry (Supervision) Act 1993 (SIS Act) or under section 388 of the SIS Act, where the transfer happens between 1 July 2015 and 1 July 2017; or

•

a payment of consideration for the issue of a superannuation interest in an eligible rollover fund under section 243 of the SIS Act.

In effect, all three circumstances involve a transfer of an individual's benefits between superannuation plans without the consent of the individual concerned. [Schedule 4, items 1 and 5]

4.22 The Schedule also replaces the current definition of 'successor fund' in subsection 995-1(1) of the ITAA 97 with a new definition that includes a transfer from an approved deposit fund to another superannuation fund, approved deposit fund or RSA (being the successor fund). [Schedule 4, item 17]

4.23 The amendments remove the limitation that the crystallised and contributions segments of a superannuation interest cannot individually or cumulatively exceed the value of the interest. The tax free component of a superannuation interest (see section 307-210 of the ITAA 97) remains limited to so much of the value of the interest as consists of the contributions segment and crystallised segment. [Schedule 4, items 14 and 15]

4.24 The note to section 307-210 of the ITAA 1997 has been replaced with new subsection 307-210(2) confirming how the tax free component of a superannuation interest is reduced when a superannuation benefit is paid from the interest. This is done by firstly reducing the crystallised segment of the interest (but not below zero) by an amount equal to the tax free component of the superannuation benefit. If any amount of the tax free component of the superannuation benefit remains after the reduction of the crystallised segment (if the interest has one), then the contributions segment is reduced by this remaining amount. This has the effect of reducing the tax free component of the interest by the amount of the tax free component of the benefit. In practice this does not require superannuation plans to track these reductions for an interest supporting a superannuation income stream because the tax free and taxable components of benefits paid from such an interest reflect the proportions of those components of the interest at the time the income stream commenced. [Schedule 4, items 11 to 14 and 16]

4.25 The method for determining the contributions segment of a superannuation interest in section 307-220 of the ITAA 1997 is modified to disregard the tax free component of an involuntary roll-over superannuation benefit paid into the interest from an earlier interest (other than one that was supporting an income stream immediately before that benefit was paid). [Schedule 4, item 3]

4.26 If that involuntary roll-over superannuation benefit is covered by new paragraph 306-12(a) or (c) (that is, the roll-over is to a successor fund or an eligible rollover fund), an amount equal to the sum of the contributions segment and crystallised segment of the earlier interest immediately before that benefit was paid is included in the contributions segment of the new interest. This is because the entire value of the earlier interest must be transferred to the new fund in these circumstances. [Schedule 4, item 4]

4.27 If the involuntary roll-over superannuation benefit is covered by paragraph 306-12(b) (that is, the roll-over is a transfer of an accrued default amount), the amount of that benefit may be only part of the value of the earlier interest. In this circumstance the amount included in the contributions segment of the new interest is the same proportion of the sum of the contributions segment and crystallised segment of the earlier interest immediately before the involuntary roll-over superannuation benefit was paid, as that benefit was to the value of the earlier interest immediately before that benefit was paid. For example, if the amount of the benefit (the accrued default amount transferred) was half the value of the earlier interest at the relevant time, then half the sum of the contributions segment and crystallised segment of the earlier interest at the relevant time is included in the contributions segment of the new interest. [Schedule 4, item 4]

4.28 The effect of these amendments, for an involuntary roll-over from an interest that was not supporting an income stream immediately before the involuntary roll-over, is that the contributions segment of the new interest in the new plan will not be limited by the value of the old interest in the original plan immediately before the involuntary roll-over occurred. In circumstances where investment losses in the original plan are effectively 'recovered' in the new plan, any tax free component otherwise lost through the involuntary roll-over could then be recouped on a later benefit payment from the new plan.

Example 4.2: Treatment of the contributions segment through an involuntary roll-over under the new law

Since 1 July 2007, Harry has made $500,000 in personal contributions, from his after tax earnings, to Village Super. Harry has not commenced an income stream with Village Super. As at 1 July 2015, Harry's superannuation interest in Village Super has a contributions segment of $500,000 and a crystallised segment of zero.

The trustees of Village Super agree with the trustees of Civic Super to merge Village Super into Civic Super on 1 July 2015. Before the merger the two trustees also agree that Civic Super will provide members with equivalent rights to those in Village Super. As at 1 July 2015, Harry's interest in Village Super is valued at only $450,000.

On 1 September 2015, Harry decides to retire and withdraw all his superannuation benefits from Civic Super. On 1 September 2015, the value of Harry's interest in Civic Super has risen to $490,000. No contributions have been made to Civic Super since the merger by Harry or on his behalf.

Under the new law Harry's contributions segment in Civic Super would be $500,000. That is, it would consist of the sum of the contributions segment and the crystallised segment of Harry's earlier interest in Village Super immediately before the merger with Civic Super. The tax free component of Harry's benefit payment on retirement would therefore be the full amount of the benefit payment, being $490,000.

By contrast, under the old law, Harry's contribution segment in Civic Super would have been limited to the value of the tax free component of the roll-over benefit paid from Village Super into Civic Super, being $450,000. Harry's retirement benefit payment would have therefore consisted of a $450,000 tax free component and a $40,000 taxable component.

4.29 Similarly, under the amendments, where an involuntary roll-over superannuation benefit is paid from a superannuation interest in the original plan that, immediately before the benefit was paid to the new plan, was supporting a superannuation income stream that began to be paid on or after 1 July 2007, the new income stream paid from the new plan will retain the same proportion of tax free and taxable components as the original income stream in the original plan. This will ensure there is no disadvantage to an individual in receipt of an income stream because of an involuntary roll-over. [Schedule 4, item 2]

4.30 Where the superannuation income stream from the original plan began to be paid before 1 July 2007 and section 307-125 of the ITTPA applied to the income stream immediately before the involuntary roll-over superannuation benefit was paid, the amendments will ensure that section applies to the new superannuation income stream paid from the new plan where the new income stream is commenced using only the amount of the involuntary roll-over superannuation benefit. This is only relevant in respect of an involuntary roll-over superannuation benefit covered by new paragraph 306-12(a) of the ITAA 97 (successor fund transfers) as amounts supporting income streams are not accrued default amounts and eligible rollover funds do not pay income streams.

4.31 The amendments, in effect, treat the new income stream paid from the new plan as a continuation of the income stream paid from the original plan. This is achieved through section 307-125 of the ITTPA applying to the new income stream as if references in section 307-125 of the ITTPA to the new income stream or to the superannuation interest supporting that income stream (in relation to a time, or event happening, before the payment of the involuntary roll-over superannuation benefit) respectively include references to the income stream paid from the original fund or the superannuation interest that was supporting that income stream. Such references are described in substance, rather than form. For instance, one of the events in subsection 307-125(3) of the ITTPA will be treated as having happened to the new income stream if one of those events had happened to the original income stream. (Although the involuntary transfer itself does not give rise to the happening of one of those events.) Similarly, benefits paid after 30 June 2007 from either the original or new income stream are taken into account when applying paragraph 307-125(6)(b) of the ITTPA to the new income stream. [Schedule 4, items 6 and 7]

4.32 The amendments will also remove the need for the provider of a transferring plan to provide roll-over benefit statements to former members, depositors or account holders for involuntary roll-over superannuation benefits. These individuals will still receive information on the transfer in accordance with disclosure obligations under the Corporations Regulations 2001. They may also request information on the roll-over from their original plan under section 390-15 of Schedule 1 to the TAA. [Schedule 4, item 8]

Application and transitional provisions

4.33 The amendments made by items 1 to 8 of Schedule 4 apply in relation to involuntary roll-over superannuation benefits paid on or after 1 July 2015. The amendments made by items 10 to 17 of Schedule 4 commence on 1 July 2015. [Schedule 4, item 9]

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 Tax and Superannuation Laws Amendment (2014 Measures No. 7) Bill 2014 - Providing certainty for superannuation fund mergers

4.34 This Schedule is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

4.35 An individual's superannuation benefits may be transferred from one superannuation plan to another plan in various contexts including as a result of the merger or rationalisation of a superannuation plan.

4.36 Currently, transfers of superannuation benefits between plans may trigger the proportioning rule, which is an integrity rule designed to remove individual member's capacity to manipulate the tax free and taxable components of their superannuation benefits.

4.37 As an integrity rule addressing the behaviour of individual members, the proportioning rule was intended to apply only to transactions within the control of those members. This measure will ensure that the proportioning rule does not impact on transactions that are beyond the control of individual members.

4.38 The changes in this Schedule will ensure that individuals whose superannuation benefits are involuntarily transferred from one superannuation plan to another plan without their request or consent are not disadvantaged through the transfer. The Schedule will also remove the need to provide a roll-over benefit statement, in addition to other disclosure information required under the Corporation Regulations 2001, to each individual in these circumstances.

Human rights implications

4.39 The Schedule does not engage any of the applicable rights or freedoms.

Conclusion

4.40 This Schedule is compatible with human rights as it does not raise any human rights issues.