Explanatory Memorandum(Circulated by Authority of the Treasurer, The Hon. P.J. Keating, M.P.)
This Bill proposes a number of changes to the arrangements for taxing superannuation, termination of employment and kindred payments which were inserted into the law by the Income Tax Assessment Amendment Act (No. 3) 1984. The main features of the Bill are as follows:
Preservation of eligible service period on roll-over of an eligible termination payment (Clause 3, paragraph (k))
Under amendments proposed by the Bill, a drafting error in provisions relating to the calculation of the eligible service period of certain eligible termination payments is to be remedied. Where an eligible termination payment is attributable, by roll-over, to an earlier eligible termination payment, the principle underlying the law is that the eligible service period of the earlier payment is included in the eligible service period - but only to the extent that the pre - 1 July 1983 component of the earlier payment has been rolled-over. Under the existing law, where none of the pre - 1 July 1983 component is rolled over, the entire eligible service period of the earlier eligible termination payment is included in the eligible service period of the later payment. The proposed amendments will correct this drafting error and ensure that, where none of the pre - 1 July 1983 component of the earlier payment is rolled-over, no part of the eligible service period relating to service or fund membership prior to 1 July 1983 is preserved.
As announced on 22 January 1985, the proposed amendments will apply from the date of first effect of the provisions relating to the taxation of eligible termination payments - that is, 1 July 1983.
Commutations and residual capital values of annuities and superannuation pensions (Clause 3, paragraphs (e), (f), (h) and (n), and clause 6)
This Bill will give effect to the proposal, announced on 18 February 1985, to prevent rolled-over eligible termination payments that are used to purchase annuities from being treated as unused undeducted purchase price of the annuities.
Under amendments proposed by the Bill, where an annuity wholly purchased with an eligible termination payment is commuted after 18 February 1985, or the residual capital value of the annuity becomes payable after that date, the amount of the eligible termination payment in respect of the commutation or residual capital value will not be reduced by any unused undeducted purchase price. Where the annuity was purchased partly by the roll-over of an eligible termination payment and partly from other funds, the unused undeducted purchase price will be calculated by reference only to the amount of those other funds.
The Principal Act will also be amended to ensure that an appropriate part of any undeducted contributions component or concessional component of the eligible termination payment rolled-over to buy the annuity - which, under the existing law, would form part of the tax-free unused undeducted purchase price - will, when received as part of an eligible termination payment in relation to the commutation or residual capital value of such an annuity, continue to be either tax-free (in the case of undeducted contributions) or included in assessable income only to the extent of 5% (in the case of the concessional component).
A consequential amendment of section 27H of the Principal Act is to be made to make it clear that, following the partial commutation of an annuity to which the proposed amendments apply, the calculation of the annual deductible amount to be excluded from the reduced annuity on account of undeducted purchase price can reflect the extent to which undeducted purchase price has already been recouped in the form of deductible amounts, unused undeducted purchase price and components of the eligible termination payment arising from the partial commutation.
The proposed amendments will also apply to commutations of superannuation pensions and payments of the residual capital value of superannuation pensions after the date this Bill was introduced into the Parliament.
Under the law, payments made in relation to the commutation of superannuation pensions and certain annuities are taxed as eligible termination payments. However, some doubt has been expressed that amounts received as consideration for the assignment or transfer of those pensions and annuities are taxable in that way. The Bill proposes an amendment to the law that will put the matter beyond doubt. An amount received in respect of the assignment or transfer, after the date the Bill was introduced into the Parliament, of a superannuation pension or annuity - being a pension or annuity that would, if commuted, give rise to an eligible termination payment - will be treated as an amount received on commutation of the pension or annuity, and thus taxable as an eligible termination payment.
By an amendment of the income tax law by the Income Tax Assessment Amendment Act (No. 5) 1984, benefits received on or after 7 December 1983 under certain tax avoidance arrangements (colloquially called "cherry picker schemes") associated with employer sponsored employee superannuation funds are included in full in the assessable income of the recipient. A consequential amendment is proposed by this Bill to ensure that any such benefits paid after the date it was introduced into the Parliament do not qualify for the more favourable tax treatment applicable to eligible termination payments.
The Bill will also make it clear that payments made after that date on the commutation of a superannuation pension or as the residual capital value of such a pension are taxed in accordance with the specific rules that relate to such payments. Under the existing law, there may be some scope for the argument that, notwithstanding that these particular payments are each separately dealt with in the definition of eligible termination payment, they may be treated alternatively as general payments from a superannuation fund that are subject to a different taxing rule.
A further amendment will provide that, where an eligible termination payment is in the form of a transfer of property - for example, a "golden handshake" consisting of a parcel of shares - any consideration paid in respect of that transfer will be taken into account in determining the net amount that is subject to tax. This amendment - of benefit to taxpayers - is to apply from 1 July 1983, the date from which the eligible termination payments legislation first applied.
Contrary to the intended operation of the law, some doubt has been expressed as to whether non tax-deductible payments by an employer to purchase an annuity for an employee, or as contributions to a superannuation fund for an employee, may be treated in the hands of the employee as "undeducted purchase price" of the annuity or "undeducted contributions" of the superannuation benefits. The law is to be amended to make it clear that payments of that kind made by an employer after the date this Bill was introduced into the Parliament cannot be so treated.
Under the existing law, all or part of an eligible termination payment received on premature termination of the employment of a taxpayer under an approved early retirement scheme or a bona fide redundancy scheme may continue to be taxed under the rules that applied prior to 1 July 1983. The part of such a payment taxed in that way is the excess of the payment over the amount that would have been received if the employment of the taxpayer had been terminated at that time otherwise than by early retirement or redundancy.
The present test of premature termination of employment has regard to the date on which, by reason of reaching a particular age or completing a particular period of service, the taxpayer could voluntarily retire from employment. Accordingly, if the time has passed when an early retirement option could have been exercised, the taxpayer is excluded from eligibility for the concessional treatment.
That test will be eased by this Bill to enable the concessional treatment applicable to bona fide redundancy payments and approved early retirement scheme payments to be available where the termination of the taxpayer's employment occurs before the date, provided it is not later than the person's 65th birthday, on which employment would necessarily have been terminated by reason of the person attaining a particular age or completing a particular period of service. The proposed amendment - of benefit to taxpayers - is to apply from 1 July 1983.
Another amendment will enable the current value of retirement benefits forgone - for example, a superannuation pension on retirement - to be taken into account in determining, for the purposes of the early retirement and redundancy payment concessions, the amount that would have been received on voluntary termination of employment. This proposed amendment will apply to relevant payments made in respect of termination of employment after the date this Bill was introduced into the Parliament.
It is a requirement of the existing law that the rules of an approved deposit fund must provide for the repayment of deposits not later than the 65th anniversary of the depositor's birth - that is, normal retirement age. The Bill proposes an amendment to ensure that that requirement does not permit amounts deposited in an approved deposit fund by a person who has since died to be left in the fund to accumulate tax-free income until the date on which the depositor would have turned 65. Such deposits will have to be paid to the estate of the deceased depositor within 90 days of the grant of probate or letters of administration in relation to that estate.
A further amendment, effective from 1 July 1983, will enable the Commissioner of Taxation to disregard the temporary failure by an approved deposit fund to meet any of the statutory establishment tests. At present, the inadvertent failure of a fund to satisfy the tests means that, technically, eligible termination payments rolled-over into the fund are not freed from tax.
Where an eligible termination payment otherwise subject to tax is used to purchase an annuity for the taxpayer's benefit, or for the benefit of the taxpayer's dependants in the event of the taxpayer's death, the payment is freed from tax. Where that annuity is commuted, the amount received is intended to be treated as an eligible termination payment and subject to tax accordingly. However, under the existing law, that intention can be thwarted where an eligible termination payment and some additional moneys, even a token sum, are applied to purchase a deferred annuity that is then commuted. The amount received on commutation is not taxable because its source is an annuity that was not purchased wholly from an eligible termination payment.
That defect is to be remedied by this Bill. Where, after the date the Bill was introduced into the Parliament, an eligible termination payment is used to purchase a deferred annuity, the payment will not be freed from tax unless the annuity is purchased wholly out of that payment.
The Bill will also remedy a technical defect in the existing law and will ensure that "undeducted purchase price" can be excluded from the assessable amount of all annuities and not just "eligible annuities". This amendment - which will benefit taxpayers - will apply from 1 July 1983.
A further amendment will require pay-as-you-earn tax instalments to be deducted from annuities and supplements to pensions and annuities paid on or after the first day of the second month after that in which the Bill becomes law.
The fully taxable post-30 June 1983 component of an eligible termination payment is subject to a maximum rate of tax of 30% and, where the taxpayer is aged 55 or more, the first $50,000 is taxed at a maximum rate of 15%. Where the tax that would otherwise be payable at normal rates exceeds the tax at these maximum rates, a rebate is allowed.
Because of a drafting technicality, the rebate that reduces the rate of tax to 15% in "over 55" cases is not available where an eligible termination payment is received by the trustee of the estate of a deceased taxpayer even though, had the deceased lived, he or she would have been entitled to it.
Eligible termination payments made on or after 1 July 1983 to the trustee of the estate of a deceased person who was 55 or more at the date of death will be made subject to a rebate of tax in appropriate cases to reduce the rate of tax to 15%.
A more detailed explanation of the provisions of the Bill is contained in the notes that follow.