House of Representatives

Taxation Laws Amendment Bill (No. 5) 2001

Explanatory Memorandum

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

Chapter 2 - Change in status of constitutionally protected superannuation funds

Outline of chapter

2.1 Schedule 2 to this bill amends the income tax law and the superannuation surcharge legislation to facilitate the change in status of constitutionally protected superannuation funds that elect to become taxed superannuation funds. The amendments will ensure that members of constitutionally protected superannuation funds which have changed status are treated similarly for income tax and superannuation surcharge purposes with members who rollover benefits from an untaxed source to a taxed source.

Context of reform

2.2 Section 271A of the ITAA 1936 exempts from tax the income of superannuation funds that are listed as constitutionally protected superannuation funds in Schedule 14 to the Income Tax Regulations.

2.3 ETPs paid from constitutionally protected superannuation funds are paid from an untaxed source. That is, if the benefit is paid to a member who is aged 55 or more, the post-June 1983 component of the ETP is taxed at a maximum rate of 15% (plus the Medicare levy) up to the low rate threshold ($105,843 in the 2001-2002 income year) and 30% (plus the Medicare levy) on the excess. Similarly, pensions paid from constitutionally protected superannuation funds do not receive the 15% pension rebate.

2.4 However, if the member rolls over the ETP to, for example, a taxed superannuation fund, the assessable income of the taxed superannuation fund includes the specified rollover amount - that is, the post-June 1983 component of the rolled over ETP. If an ETP is subsequently paid from the fund to a member who is aged 55 or more, the post-June 1983 component of the ETP is tax free up to the low rate threshold. The excess is taxed at a maximum rate of 15% (plus the Medicare levy). Similarly, if a pension is subsequently paid from the fund to the member, the member is entitled to the 15% pension rebate.

2.5 Under the Constitutionally Protected Fund Act 1997, a member of a constitutionally protected superannuation fund is required to pay any superannuation surcharge debt either periodically or when he or she receives a benefit from the fund. However, if the member rolls over the benefit to, for example, a taxed superannuation fund, the member can direct the trustee of the taxed fund to pay some or all of the outstanding surcharge debt on the members behalf and reduce his or her benefits accordingly.

2.6 Currently the income tax and superannuation surcharge laws do not deal with the removal of a fund from the list of constitutionally protected superannuation funds. However, the Electricity Industry Superannuation Fund (formerly known as the Electricity Trust of South Australia Superannuation Fund) has sought to change its status to a taxed superannuation fund with effect from 1 July 2000.

Summary of new law

2.7 The amendments to the ITAA 1936 will ensure that where a constitutionally protected superannuation fund changes its status and becomes a taxed superannuation fund, the assessable income of the fund will include the amount that would be assessable if member benefits were rolled over from an untaxed source to a taxed source.

2.8 That is, the assessable income of the fund will include the amount that would be the specified rollover amount if all the benefits in the fund were paid out and rolled over to the fund.

2.9 Benefits subsequently paid from the fund will be treated as though they are paid wholly from a taxed source. However, a pension that commenced to be paid from the fund before the fund changed its status will not qualify for the 15% pension rebate.

2.10 The amendments to the Constitutionally Protected Fund Act 1997 will ensure that a member is liable to pay any outstanding superannuation surcharge debt when a constitutionally protected superannuation fund changes its status to a taxed superannuation fund. However, the member will be able to direct the trustee of the fund to pay some or all of the outstanding surcharge debt on the members behalf and reduce his or her benefits accordingly.

Comparison of key features of new law and current law
New law Current law

Amendments to the ITAA 1936

If a complying superannuation fund is removed from the list of constitutionally protected superannuation funds in the Income Tax Regulations, the assessable income of the fund will include the sum of the specified rollover amounts that would be included in assessable income if member benefits were rolled over to the fund from an untaxed source at the time the fund changed its status.

Any benefits paid from the fund after it ceases to be a constitutionally protected superannuation fund will be taxed as though they came wholly from a taxed source.

However, a member who receives a pension from the fund that commenced to be paid when the fund was constitutionally protected superannuation fund will not be entitled to the 15% pension rebate.

No amount would be included in the assessable income of a complying superannuation fund if it were removed from the list of constitutionally protected superannuation funds in the Income Tax Regulations.

However, any benefits paid from the fund after it ceased to be a constitutionally protected superannuation fund would be taxed as though they came wholly from a taxed source.

A member who received a pension from the fund that commenced to be paid when the fund was constitutionally protected superannuation fund would be entitled to the 15% pension rebate.

Amendments to the Constitutionally Protected Fund Act 1997

A member of a constitutionally protected superannuation fund will be liable to pay any outstanding superannuation surcharge debt at the time the fund changes status to a taxed superannuation fund. However, the member will be able to direct the trustee of the fund to pay some or all of the outstanding surcharge debt on the members behalf and reduce his or her benefits accordingly.

A member of a constitutionally protected superannuation fund is required to pay any superannuation surcharge debt either annually or when he or she receives a benefit from the fund. However, if the member rolls over the benefit to, for example, a taxed superannuation fund, the member can direct the trustee of the taxed fund to pay some or all of the outstanding surcharge debt on the members behalf and reduce his or her benefits accordingly.

Detailed explanation of new law

Amendments to the ITAA 1936

2.11 The assessable income of a complying superannuation fund that ceased to be a constitutionally protected superannuation fund at any time during the current income year or at the end of the previous income year will include the sum of the specified rollover amounts that would be included in assessable income if accumulated member benefits were:

paid out of the fund immediately before it ceased to be a constitutionally protected superannuation fund; and
rolled over to the fund immediately after it ceased to be a constitutionally protected superannuation fund.

[Schedule 2, item 2, section 281A]

2.12 Subsection 267(1) defines a specified rollover amount to mean the untaxed element of the post-June 1983 component of an ETP.

2.13 The accumulated member benefits are the amounts of contributions and earnings accumulated in the fund at the time it ceases to be a constitutionally protected superannuation fund. Accumulated member benefits do not include:

unfunded benefits accrued on behalf of the member; and
contributions that are due but not yet paid to the fund - employer contributions that are due but not yet paid to the fund will be taxable contributions at the time they are paid to the fund.

2.14 This amendment will ensure that a constitutionally protected superannuation fund that changes its status will be in broadly the same position that it would have been had it paid tax since 1988.

2.15 Consequently, unless the fund uses the subsection 274(7) transfer mechanism to transfer from the fund to the member the tax on contributions made in the year a benefit is paid from the fund, future lump sum benefits paid by the fund will be paid as ETPs coming wholly from a taxed source. That is, if the benefit is paid to a member who is aged 55 or more, the post-June 1983 component of the ETP will be tax free up to the low rate threshold. The excess will be taxed at a maximum rate of 15% (plus the Medicare levy).

2.16 Similarly, the 15% rebate that applies to superannuation pensions paid from taxed superannuation funds will apply to pensions that commence to be paid from the fund after it changes status. However, the rebate will not be available in respect of a pension that commenced to be paid when the fund was a constitutionally protected superannuation fund. [Schedule 2, item 1, subsection 159SM(3)]

Amendments to the Constitutionally Protected Funds Act 1997

2.17 A member will be liable to pay any outstanding superannuation surcharge debt when a constitutionally protected superannuation fund changes its status. The amount of the members liability will be the lesser of:

the outstanding amount in the members surcharge debt account; and
15% of the employer-financed component of that part of the value of the age retirement benefits of the member at the time when the fund ceases to be a constitutionally protected superannuation fund that accrued in the period between 20 August 1996 and the time when the fund changes its status.

[Schedule 2, item 6, subsection 15(6A)]

2.18 However, if a member is liable to pay any outstanding superannuation surcharge debt when the constitutionally protected fund changes status, the member may choose to direct the trustee to pay the whole or any part of the debt and to reduce the members benefits accordingly. The trustee is required to comply with the members direction. [Schedule 2, items 7 and 8, subsections 15(8AA) and (8B)]

2.19 In addition, the amendments ensure that where a superannuation surcharge assessment covers the period when a superannuation fund was a constitutionally protected superannuation fund and the assessment is made after the fund loses its constitutionally protected fund status, the Commissioner must issue the assessment to the superannuation provider rather than to the member. [Schedule 2, item 5, subsection 14(3)]

Example 2.1 Alex is a member of a constitutionally protected superannuation fund which changes its status to a taxed superannuation fund on 1 July 2002. A superannuation surcharge liability for the year ending 30 June 2002 is raised in respect of Alex on 30 November 2002. The surcharge assessment will issue to the trustee of the fund (as the superannuation provider) rather than to Alex.As the fund is no longer a constitutionally protected superannuation fund, the trustee of the fund will need to comply with the requirements of the Superannuation Contributions Tax (Assessment and Collection) Act 1997 . Therefore:

the trustee of the fund will be liable to pay the assessment unless Alexs benefits have been rolled over to another superannuation provider or paid to Alex;
if Alexs benefits have been rolled over to another superannuation provider, that other superannuation provider will be liable to pay the assessment; or
if the benefits have been paid to Alex, Alex will be liable to pay the assessment.

2.20 The amendments also correct a grammatical error in paragraph 9(2)(b). [Schedule 2, item 4, paragraph 9(2)(b)]

Application and transitional provisions

2.21 The amendments apply from 1 July 2000.

2.22 The Electricity Industry Superannuation Fund has sought to have its constitutionally protected superannuation fund status removed with effect from 1 July 2000. Therefore, as a transitional measure, the amendments ensure that subsection 48(2) of the Acts Interpretation Act 1901 (which provides that regulations generally have no effect prior to their date of notification) does not apply to regulations that are introduced to omit the following items from Schedule 14 to the Income Tax Regulations with effect from 1 July 2000:

item 501 - Electricity Corporations Act 1994 ;
item 502 - Electricity Trust of South Australia Act 1946 ; and
item 509 - Superannuation (Benefit Scheme) Act 1992 .

[Schedule 2, item 3]


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