House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Treasurer the Hon John Dawkins, M.P.)

Pensions and annuity rebates

Overview

5.1 The Bill will amend the Income Tax Assessment Act 1936 (the Act) to extend the rebate that applies to superannuation pensions and roll-over annuities paid from a taxed source to:

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superannuation pensions and roll-over annuities purchased by rolling over an eligible termination payment (ETP) representing the commutation of a deferred annuity; and

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superannuation pensions and roll-over annuities purchased by rolling over an ETP representing the commutation of a pension from an untaxed superannuation fund.

Summary of the amendments

Purpose of the amendments

5.2 The purpose of the proposed amendments is to overcome some technical deficiencies in the existing law and to ensure that the pension and annuity rebate provisions operate as intended.

Date of effect

5.3 The amendments will apply to superannuation pensions and annuities which first commenced to be paid on or after 1 July 1988.

Background to the Legislation

5.4 A rebate of tax is available for superannuation pensions paid from taxed superannuation funds and annuities purchased wholly with rolled-over ETPs that first commenced to be payable on or after 1 July 1988. The rebate is intended to compensate for the fact that, from 1 July 1988, income tax is imposed on superannuation funds and on the superannuation business of life insurance companies and registered organisations.

5.5 The level of the rebate depends on when the superannuation pension or annuity first commenced to be payable and the source of the ETP rolled-over to purchase the pension or annuity.

5.6 Generally speaking, the rebate is calculated by multiplying the post-June 1983 portion of the purchase price of the assessable pension or annuity by the final percentage for the pension or annuity.

5.7 To determine the final percentage for the pension or annuity, rebatable superannuation pensions and rebatable ETP annuities are broken into the following components under section 159SN and section 159SV of the Act respectively:

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a commutation component - that part of the purchase price of the pension or annuity attributable to a commutation type ETP (excluding any amount that is specified component). A commutation type ETP is an ETP arising from the commutation of a pension or annuity entitlement. The final percentage of a commutation component is based on the rebate percentage that applied to the original pension or annuity and will range from 3% to 15%, depending on when the underlying pension or annuity first commenced to be payable;

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a specified component - that part of the purchase price of the pension or annuity attributable to an ETP, other than a commutation type ETP, rolled-over from an untaxed source. The final percentage of a specified component is 15% reflecting the fact that the post-June 1983 component of such an ETP is included in the assessable income of a roll-over fund; and

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an ordinary component - that part of the purchase price of the pension or annuity that is not a commutation component or a specified component. The final percentage of an ordinary component ranges from 3% to 15% depending on when the pension or annuity first commenced to be payable.

5.8 Under the current rebate arrangements a rebate is not available if:

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a superannuation pension or roll-over annuity is purchased with an ETP arising from the commutation of a deferred annuity and no annuity payments were made under the deferred annuity contract. If a deferred annuity is commuted prior to any annuity payments being made under the deferred annuity contract, the underlying annuity never commences to be payable. Therefore the underlying annuity is not a rebatable superannuation pension or a rebatable ETP annuity and the underlying percentage is nil;

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a superannuation pension or roll-over annuity is purchased with an ETP arising from the commutation of a superannuation pension from an untaxed source even though on entry into the roll-over fund the post-June 1983 component of such an ETP is included in the assessable income of the roll-over fund. The level of the rebate is based on the underlying percentage. The underlying percentage is nil because the underlying superannuation pension was paid from an untaxed superannuation fund.

Explanation of the Amendments

Superannuation pensions and roll-over annuities purchased by rolling over an ETP arising from the commutation of a deferred annuity

5.9 The definition of commutation type ETP in subsection 159SJ(1) of the Act will be amended to exclude ETPs received on the commutation of a deferred annuity. A deferred annuity is defined in subsection 27A(1) to mean an annuity other than an immediate annuity. An immediate annuity is an annuity that is presently payable. Consequently, a superannuation pension or roll-over annuity purchased with an ETP received on the commutation of a deferred annuity will be an ordinary component and receive the same treatment as a superannuation pension or roll-over annuity purchased with an ETP rolled-over from an approved deposit fund [Clause 20; Amended definition of commutation type ETP in subsection 159SJ(1)] .

Example

5.10 Deborah received an ETP from a taxed superannuation fund in 1989. She elected to roll-over the ETP to purchase a deferred annuity. In 1992 Deborah commuted the deferred annuity entitlement before the annuity commenced to be paid and received a commutation type ETP. She rolled-over the ETP to purchase a roll-over annuity which first commenced to be payable on 1 May 1992. The annuity will be an ordinary component and Deborah will be entitled to a rebate of 12% of the post-June 1983 portion of the purchase price of the annuity.

Superannuation pensions and roll-over annuities purchased by rolling over of an ETP arising from the commutation of a superannuation pension from an untaxed source

5.11 The definition of specified component in paragraph 159SN(b) and paragraph 159SV(b) of the Act will be amended so that an ETP received on the commutation of a superannuation pension from an untaxed source which is rolled-over to purchase a superannuation pension or roll-over annuity will be a specified component and get the benefit of a 15% rebate on the post-June 1983 portion of the purchase price of the pension or annuity. [Clause 21 and Clause 22; Amended paragraph 159SN(b) and paragraph 159SV(b)]

Example

5.12 Janet retired from her job in the public service on 15 August 1991 and received an entitlement to a superannuation pension from a public sector superannuation scheme. Janet elected to commute her pension entitlement and received an ETP from an untaxed source. She rolled-over the ETP to purchase a roll-over annuity. On entry into the roll-over fund, the post-June 1983 component of the ETP is included in the assessable income of the roll-over fund. The annuity will be a specified component and Janet will be entitled to a rebate of 15% of the post-June 1983 portion of the purchase price of the annuity.

Application of the amendments

5.13 The amendments, which will always be of benefit to taxpayers, will apply to superannuation pensions and roll-over annuities which first commenced to be paid on or after from 1 July 1988 and apply until 30 June 1994. [Clause 23] Amendments made by Taxation Laws Amendment (Superannuation) Act 1992 will remove the current arrangements and replace them with effect from 1 July 1994 with a system that is both simpler and more generous.