House of Representatives

Taxation Laws Amendment Bill (No. 4) 2003

Explanatory Memorandum

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

Chapter 1 Internal roll-overs

Outline of chapter

1.1 Schedule 1 to this bill will amend the ITAA 1936 to ensure that roll-over transactions which occur wholly within the one superannuation fund or annuity provider (internal roll-overs) are treated in the same way for RBL purposes as roll-overs which occur between funds or providers (external roll-overs). In doing so, the amendments will remove an anomaly in the law which leads to the double counting of benefits for RBL purposes in situations involving internal roll-overs.

Context of amendments

1.2 The ITAA 1936 requires the payment of certain benefits, such as ETPs, superannuation pensions and annuities to be reported to the ATO. The purpose of these arrangements is to allow the value of superannuation benefits to be tracked and recorded against an individual's RBL. The RBL limits the value of concessionally taxed superannuation benefits which a person can receive over their lifetime.

1.3 Currently, the RBL reporting arrangements prevent double counting of benefits for RBL purposes in situations where pensions or annuities which have commenced are stopped and externally rolled over - that is, where the resulting ETP is either contributed back into the accumulation phase of superannuation or applied towards the provision of another pension or annuity. (Rolling over an ETP essentially allows it to be transferred within the superannuation system without triggering a tax liability.)

1.4 Double counting of benefits in these situations is avoided by reporting the rolled over ETP to the ATO. The ATO then adjusts (reduces) the value of the benefit which was reported previously when the pension or annuity commenced. In the case of external roll-overs, these arrangements ensure that the same superannuation benefit is not counted twice for RBL purposes when it is eventually paid out of the system again.

1.5 Under the current law, an internal roll-over is not an ETP and therefore cannot be reported to the ATO for RBL purposes. This is because the definition of 'eligible termination payment' requires an actual payment to have been made in respect of the taxpayer and no such payment is made in the case of a roll-over which occurs within a fund.

1.6 An internal roll-over can occur, for example, where a person commutes a pension which is being paid to them from a superannuation fund and returns the commutation amount to the accumulation phase within the same fund. An internal roll-over can also occur where a person rolls over the RCV of an annuity to commence another annuity with the same annuity provider.

1.7 The current inability to report internal roll-overs resulting from the commutation or RCV of a pension or annuity leads to double counting of benefits for RBL purposes. As a result, there is potential for the associated benefit to have an excessive component when it is eventually paid out of the superannuation system. The excessive amount of a superannuation benefit is the amount of the benefit in excess of the taxpayer's RBL (in 2002-2003 these amounts are $562,195 (lump sum RBL) and $1,124,384 (pension RBL)). Where a benefit is paid as an ETP the excessive component is taxed at 48.5% (the Government has announced a measure to reduce the effective tax rate on the excessive component of an ETP from a superannuation fund). Where a benefit is paid as a pension, the excessive component is ineligible for the pension and annuity rebate which is available to superannuation income streams.

Summary of new law

1.8 This measure will ensure that internal roll-overs are treated as ETPs for purposes of the income tax law. To this end, this bill expands the definition of 'eligible termination payment' to cover internal roll-over transactions. Together with other amendments contained in this bill, this change will require internal roll-overs to be reported to the ATO and taken into account for RBL purposes, thereby avoiding the double counting of benefits problem which arises under the current law.

1.9 This bill inserts four new paragraphs into the definition of 'eligible termination payment' in subsection 27A(1) of the ITAA 1936. These paragraphs deal with the various internal roll-over situations which can arise and correspond with existing paragraphs of the definition of 'eligible termination payment' relating to commutation amounts and residual capital values of pensions and annuities. Amounts covered by these four new paragraphs are called internal roll-over amounts .

1.10 An internal roll-over also needs to be a qualifying ETP so that it can be rolled over within the superannuation system without triggering a tax liability. To achieve this, amendments are also required to subsections 27A(12), 27A(13) and section 27D of the ITAA 1936.

1.11 As a result of these amendments, an internal roll-over will come within the scope of the relevant RBL provisions of the ITAA 1936. This means that the internal roll-over will be reportable to the Commissioner and that the RBL amount of the pension or annuity can be reduced by the rolled over amount so as to avoid double counting of benefits for RBL purposes.

1.12 A number of definitional and other changes are also required to make reference to the new paragraphs in the definition of 'eligible termination payment' relating to internal roll-over amounts.

Comparison of key features of new law and current law
New law Current law
The definition of 'eligible termination payment' will be expanded to include four new paragraphs which cover internal roll-over transactions. A definition of 'internal roll-over amount' is inserted into subsection 27A(1). Internal roll-over amount is an ETP covered by any of the new paragraphs (daa), (ea), (gaa) or (ha) of the definition of 'eligible termination payment'. 'Eligible termination payment' is defined in subsection 27A(1) of the ITAA 1936. The definition of 'eligible termination payment' does not include internal roll-overs.
Subsection 27A(12) will be amended so that an internal roll-over amount is a qualifying ETP. A 'qualifying eligible termination payment' is defined in subsection 27A(12). The definition does not cover an internal roll-over.
Section 27D is amended so that certain details about an internal roll-over amount must be provided to the Commissioner. Section 27D provides that a taxpayer who elects to roll-over a qualifying ETP must provide certain details about the ETP to the Commissioner.

Detailed explanation of new law

Eligible termination payments

1.13 Subdivision AA of Part III of Division 2 of the ITAA 1936 sets out the taxation arrangements for superannuation and termination of employment payments.

1.14 Section 27A defines a number of terms for the purposes of Subdivision AA. The definition of 'eligible termination payment' in subsection 27A(1) includes a list of payments that are ETPs - for example, payments to a taxpayer on termination of their employment, payments from superannuation funds and payments to a taxpayer in relation to the commutation or RCV of a pension or annuity.

Internal roll-overs

1.15 Under the current law, an internal roll-over (i.e. a roll-over which occurs within a superannuation fund or annuity provider) is not an ETP. This is because the definition of 'eligible termination payment' requires an actual payment to have been made in respect of the taxpayer and no such payment is made in the case of a roll-over which occurs inside a superannuation fund or annuity provider.

Reasonable benefit limits

1.16 Division 14 of Part III of the ITAA 1936 provides for a system of RBLs that generally apply to ETPs, superannuation pensions and annuities. The purpose of the RBLs is to limit the amount of concessionally taxed superannuation benefits which can be received by a person over their lifetime.

1.17 Under the existing law, an internal roll-over is not an ETP and can not therefore be reported to the Commissioner for RBL purposes. This can lead to the double counting of superannuation benefits against a taxpayer's RBL.

Definition of 'eligible termination payment' to include internal roll-overs

1.18 This bill expands the definition of 'eligible termination payment' in subsection 27A(1) by inserting paragraphs (daa), (ea), (gaa) and (ha) to cover transactions that are internal roll-overs. The four new paragraphs cover the application of an amount resulting from the commutation or RCV of a superannuation pension or qualifying annuity.

1.19 A key feature of the transactions covered by the four new paragraphs is that they do not result in a payment; rather, they are internal transactions where the relevant amounts of money remain within the same superannuation fund or annuity provider.

1.20 New paragraph (daa) provides that where a superannuation pension is commuted (either partially or fully) and part or all of the resulting commutation amount remains in the fund or is applied immediately towards the provision of another superannuation pension by the same fund, then the amount remaining or applied is an ETP. [Schedule 1, item 3, subsection 27A(1)]

1.21 New paragraph (ea) provides that where the RCV of a superannuation pension becomes payable and part or all of the RCV remains in the fund or is applied immediately towards the provision of another pension by the same fund, then the amount remaining or applied is an ETP. [Schedule 1, item 4, subsection 27A(1)]

1.22 New paragraph (gaa) provides that where a qualifying annuity is commuted (either partially or fully) and part or all of the resulting commutation amount is applied immediately towards the provision of another qualifying annuity by the same annuity provider, then the amount so applied is an ETP. [Schedule 1, item 5, subsection 27A(1)]

1.23 New paragraph (ha) provides that where the RCV of a qualifying annuity becomes payable and part or all of the RCV is applied immediately towards the provision of another qualifying annuity by the same annuity provider, then the amount so applied is an ETP. [Schedule 1, item 6, subsection 27A(1)]

1.24 For an internal roll-over to meet the definition of 'eligible termination payment', it is a requirement that amounts which are applied in accordance with new paragraphs (daa), (ea), (gaa) and (ha) are attributable to the same taxpayer to whom the pension or annuity was payable. This means, for example, that an internal roll-over will not be taken to occur where an amount resulting from the commutation of a pension on the death of a taxpayer remains in the fund after the commutation.

1.25 A definition of 'internal roll-over amount' is inserted into subsection 27A(1). 'Internal roll-over amount' is an ETP covered by any of the paragraphs (daa), (ea), (gaa) or (ha) of the definition of 'eligible termination payment'. [Schedule 1, item 7, subsection 27A(1)]

1.26 This bill inserts a new subsection 27A(6) which gives the Commissioner the power to specify guidelines on how an internal roll-over amount is to be determined. It is intended that, in issuing such guidelines, the Commissioner will refer to relevant industry standards. Where the Commissioner issues such guidelines, an internal roll-over amount is to be calculated in accordance with them. [Schedule 1, item 10, subsection 27A(6)]

Qualifying eligible termination payments to include internal roll-overs

1.27 To provide consistent treatment between internal roll-overs and external roll-overs, a number of amendments are required to ensure that no taxation liability is triggered when an internal roll-over occurs.

1.28 To this end, it is necessary that an internal roll-over is taken to be a qualifying ETP. Accordingly, subsection 27A(12) is amended so that an internal roll-over is a qualifying ETP.

1.29 A taxpayer may elect to roll-over a qualifying ETP under section 27D. Accordingly, subparagraph (ia) is inserted into subsection 27D(1) to include a reference to details about internal roll-over amounts. [Schedule 1, items 11 and 17, subsection 27A(12) and subparagraph 27D(1)(b)(ia)]

1.30 Subsection 27A(13) explains the application of section 27D. This bill amends paragraph 27A(13)(a) to ensure that an amount is rolled over if it is an internal roll-over amount. [Schedule 1, item 12, paragraph 27A(13)(a)]

1.31 As a result of these amendments, an internal roll-over will be required to be reported under section 140Q. This will enable the Commissioner to take the internal roll-over into account in determining the RBL value of an individual's benefits.

Example 1.1 On 1 January 2003, Monica commences an allocated pension which has a capital value for RBL purposes of $300,000. The pension is comprised entirely of post-June 1983 amounts.A year after commencing the pension Monica decides to accept an offer to return to work. With the salary from her new job Monica no longer needs the income from the allocated pension. She commutes the pension on 31 December 2003 and rolls over the commutation amount of $280,000 to an accumulation account with the same superannuation fund.The internal roll-over of $280,000 is an ETP under new paragraph (daa) of the definition of 'eligible termination payment' in subsection 27A(1). It is also a qualifying ETP under subsection 27A(12). Monica's fund must report the roll-over of the ETP to the ATO under section 140Q. Under section 140ZP, the ATO then adjusts the capital value of the commuted pension by the amount rolled over ($280,000), reducing the capital value of the pension to $20,000.Three years later, Monica decides to give up work and commence a new allocated pension with the same super fund. With additional contributions and earnings, her accumulation account has grown to $310,000. Under section 140M, Monica's fund reports the commencement of a new pension with a capital value of $310,000.In determining whether the new pension is in excess of the RBL, the ATO takes account of Monica's previously received benefits, which amount to $20,000. The total value of Monica's benefits is now $330,000 ($310,000 plus $20,000). As this amount is below the lump sum RBL for the relevant year, the pension is not excessive and has a rebatable proportion of one.Without the amendments contained in this bill, the commutation and roll-over of Monica's original pension could not be reported to the ATO, and the capital value of the original pension could not be reduced under section 140ZP. At the time the second pension commenced, the total value of Monica's benefits would therefore be $610,000 ($300,000 plus $310,000) - in other words, the same superannuation benefit would effectively have been counted twice for RBL purposes.Note: For simplicity, the above example assumes no indexation.

Other definitions

1.32 The following amendments to definitions in Subdivision AA of Part III of Division 2 of the ITAA 1936 are required as a result of the amendments that expand the definition of 'eligible termination payment' to include internal roll-overs.

·
Paragraphs (c) and (d) of the definition of 'eligible service period' in subsection 27A(1) mention ETP types relating to pensions and annuities. Amendments are made to include references to the corresponding internal roll-over ETP types (new paragraphs (daa), (ea), (gaa) or (ha) of the definition of 'eligible termination payment') [Schedule 1, items 1 and 2, subsection 27A(1)]
·
Similarly, the definition of 'undeducted contributions' is amended to include references to paragraphs (daa), (ea), (gaa) or (ha) which have been inserted into the definition of ETP [Schedule 1, items 8 and 9, subsection 27A(1)]
·
Subsection 27AAAA(2) which deals with the meaning of 'commutation ETP' is amended to include references to paragraphs (daa), (ea), (gaa) or (ha) which have been inserted into the definition of 'eligible termination payment' [Schedule 1, item 13, subsection 27AAAA(2)]
·
Paragraph 27AAAA(4)(b) is amended so that it applies in relation to internal roll-overs [Schedule 1, item 14, subsection 27AAAA(4)]
·
Subsection 27AB(1) includes a table which sets out the taxed element in respect of all types of ETPs. The table is amended to include references to paragraphs (daa), (ea), (gaa) or (ha) which have been inserted into the definition of 'eligible termination payment' [Schedule 1, items 15 and 16, subsection 27AB(1)]

Application and transitional provisions

1.33 The amendments apply to commutations of pensions and annuities, and residual capital values of pensions and annuities which become payable, on or after 1 July 2001. [Schedule 1, item 18]

REGULATION IMPACT STATEMENT

Policy objective

1.34 The policy objective is to amend the taxation laws to ensure that taxpayers are not disadvantaged when they stop a pension or annuity and roll-over the resulting commutation or residual capital value amount within the same superannuation fund or annuity provider. This can occur, for example, where a retiree commutes an allocated pension and starts accumulating superannuation again within the same fund as part of a decision to return to work or commence looking for work. It can also occur where a person rolls over the residual capital value of an annuity to start another annuity with the same annuity provider.

Assessment of impacts (costs / benefits)

1.35 The amendments contained in this bill will ensure that internal roll-overs are treated as ETPs. This change will enable these transactions to be reported to the ATO and taken into account for RBL purposes.

1.36 'Rolling over' an ETP allows it to be transferred within the superannuation system (e.g. from accumulation phase to pension phase or from pension to pension) without triggering a taxing event. This treatment is allowed on the basis that the associated benefit will be subject to tax once it is paid out of the system (either as an ETP or as a pension).

1.37 Currently, internal roll-over transactions are not reportable for RBL purposes. This is because the current system is based on the reporting of ETPs and, under the current law, an ETP does not arise from a roll-over which occurs within the same superannuation fund or annuity provider. The current treatment results in the double counting of benefits for RBL purposes, with the potential for an excessive benefits situation when the benefit is eventually paid out of the superannuation system.

1.38 This measure will potentially have implications for all providers and recipients of pensions and annuities.

1.39 This measure will benefit pension and annuity recipients by avoiding the double counting of benefits problem which is currently associated with internal roll-over transactions.

1.40 The current ETP regime requires funds to report roll-over transactions to the ATO for RBL assessment purposes. Within this existing framework, the reporting of internal roll-overs is not expected to result in additional compliance costs for superannuation funds or annuity providers.

Government revenue

1.41 The revenue impact of the proposed change to the treatment of internal roll-overs is not readily quantifiable.

Administrative costs

1.42 The ATO does not anticipate the need for any major systems changes to implement this measure.

Implementation options

1.43 The double counting of benefits problem associated with internal roll-overs could be addressed in an alternative way through regulation changes to enable internal roll-overs to be reported for RBL purposes without classifying them as ETPs. However, this approach would add to the complexity of the retirement income system by introducing a new category of reportable payment falling outside the definition of 'eligible termination payment'.

Consultation

1.44 Submissions were received from various industry stakeholders proposing that the Government take action to address the double counting of benefits problem associated with internal roll-overs under the current law.

1.45 Relevant industry and taxpayer representative groups were consulted. While there was broad agreement with the proposed legislative approach, a number of concerns of a technical nature were raised. These concerns were taken into consideration in finalising the amendments.


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