House of Representatives

Explanatory Memorandum

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

Chapter 1 - Splitting of superannuation contributions

Outline of chapter

1.1 Schedule 1 to this Bill amends the Income Tax Assessment Act 1936 (ITAA 1936) to provide for the taxation consequences of the Government's election commitment to allow members of accumulation funds to split their superannuation contributions with their spouse. The amendments will provide:

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for a new payment called a 'contributions-splitting eligible termination payment' (ETP) which will arise when a member's contributions are split in accordance with regulations. Amendments to the Superannuation Industry (Supervision) Regulations 1994 , the Retirement Savings Account Regulations 1997 and the Income Tax Regulations 1936 will provide the framework for the operation of contributions splitting. The amended regulations will also work in conjunction with this Bill to define under what circumstances an amount paid or transferred to an account is to be considered to be a contributions splitting ETP. Broadly it is intended that the regulations will provide that if a member (the splitting spouse) requests that part of their contributions be split in favour of their spouse (the receiving spouse) and the split is in accordance with any rules on contributions splitting specified in the regulations then the payment or transfer to give effect to the split will be considered to be a contributions-splitting ETP;

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that a contributions-splitting ETP is a qualifying ETP;

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that the payment or transfer of an amount that meets the definition of a 'contributions-splitting ETP' is to be considered to be an ETP roll-over;

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for the deeming of a zero day eligible service period where a contributions-splitting ETP is paid or transferred;

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for the Commissioner of Taxation (Commissioner) to have the ability to collect information regarding contributions-splitting ETPs to assist in the administration of the measure, if necessary; and

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that a notice of intention to claim a deduction for eligible superannuation contributions cannot be made to a superannuation fund if a contributions-splitting application has been made in respect of those contributions and has not been rejected. In effect this means that a notice of an intention to claim a deduction must be made before a splitting request.

Context of amendments

1.2 Superannuation has traditionally been seen as a means to encourage savings for the purposes of replacing employment income following retirement. Therefore, historically, superannuation contributions have generally only been allowed in respect of individuals in the workforce.

1.3 The Government's proposal to allow splitting of superannuation contributions will further build on the Government's achievements in increasing the accessibility of superannuation. In particular, the ability to split employer superannuation contributions will assist couples that cannot afford to make voluntary contributions. It will also assist spouses that stay home to care for a family to accumulate their own superannuation. This measure is expected to benefit women in particular.

1.4 Superannuation contributions splitting will provide:

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low income or non-working spouses with their own superannuation assets under their own control and their own income in retirement; and

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single income couples with better access to two ETP low-rate thresholds and two reasonable benefit limits in a similar way to dual income families.

1.5 The exact details of how the contribution-splitting regime will operate will be specified in regulations.

Summary of new law

1.6 Schedule 1 ensures that amounts paid or transferred as a contributions-splitting ETP to a superannuation account belonging to a fund member's spouse are treated as a roll-over and therefore are not taxed as contributions upon receipt in the receiving spouse's account.

1.7 The Schedule also allows regulations to be made to specify information that must be provided to the Commissioner where a contributions-splitting ETP is made. This will allow information on contributions-splitting ETPs to be collected by the Commissioner, if necessary.

1.8 Finally, the Schedule prevents a notice of intention to claim a tax deduction for eligible superannuation contributions from being lodged with a superannuation fund if a contributions-splitting application has been made. In effect this means that a notice of an intention to claim a deduction must be made before a splitting request. However, in the event that a contributions-splitting application was made and subsequently rejected, a notice of intention to claim a deduction can still be lodged.

Comparison of key features of new law and current law

Detailed explanation of new law

Amounts that are moved to a spouse under contributions splitting will be ETP roll-overs

1.9 Item 1 of Schedule 1 inserts a definition of a contributions-splitting ETP into the ITAA 1936. The term is defined as an amount paid to a superannuation fund, a life assurance company (for the purposes of paying into a 'deferred annuity') or approved deposit fund, or transferred within a superannuation fund for the benefit of the taxpayer (in this case the spouse of the member whose contributions are being split) where the payment or transfer occurs in accordance with the relevant regulations. [Schedule 1, item 1]

1.10 Item 2 of Schedule 1 makes a technical drafting amendment to improve the wording of the ETP definition. [Schedule 1, item 2]

1.11 The definition of 'eligible service period' in subsection 27A(1) is amended to provide that the ETP of a contributions-splitting ETP is deemed to be zero days. Consequently this provision makes it clear that a contributions-splitting ETP will never have any pre-July 1983 component. [Schedule 1, item 3]

1.12 Items 4 to 7 of Schedule 1 make technical drafting amendments to improve the wording of the ETP definition. [Schedule 1, items 4 to 7]

1.13 Paragraph (b) of the definition of an ETP in subsection 27A(1) is amended to make it clear that a contributions-splitting ETP will not be considered an ETP under this paragraph. Rather, a contributions-splitting ETP will be an ETP by virtue of new paragraph (bb). [Schedule 1, items 8 and 9]

1.14 Items 10 to 14 of Schedule 1 make technical drafting amendments to improve the wording of the ETP definition. [Schedule 1, items 10 to 14]

1.15 An amendment is made to subsection 27A(12) to make it clear that a contributions-splitting ETP will always be a qualifying ETP. [Schedule 1, item 15]

1.16 Classifying the contribution-splitting ETP as a qualifying ETP will facilitate the rolling over of the ETP. Taxpayers can only elect to roll-over qualifying ETPs.

Taxation components of a contributions-splitting ETP

1.17 The relevant concessional tax rate for an ETP depends on whether or not the ETP was paid from a taxed source or an untaxed source. Generally a payment from a taxed superannuation fund will contain a taxed element. Therefore the table in subsection 27AB(1) is amended to include an amount that is a contributions-splitting ETP as having a taxed element to the extent that it is paid from a taxed superannuation fund. [Schedule 1, item 16]

1.18 An amendment is made to the ETP roll-over provisions in section 27D. This allows for regulations to be made to specify that a contributions-splitting ETP will be considered a roll-over and to require other details (such as the taxation components of the contributions-splitting ETP) relevant to that roll-over to be prescribed. [Schedule 1, item 17]

Reporting to the Commissioner

1.19 An entity which makes a contributions-splitting ETP must provide the Commissioner with a statement setting out details of the payment, if required by the regulations. [Schedule 1, item 18]

Notices required to claim a taxation deduction not able to be given for contributions that have been split

1.20 Subsection 82AAS(1) is amended to include a reference to the definition of a contributions-splitting ETP as contained in subsection 27A(1) of the ITAA 1936. [Schedule 1, item 19]

1.21 A new paragraph is inserted into subsections 82AAT(1B) and (1CC) to ensure that notices of intention to claim a deduction for superannuation contributions by eligible persons can not be lodged in respect of contributions which are already the subject of a contributions-splitting application. This avoids administrative complexity and prevents a claim for a tax deduction where the contributions in question have already been paid, transferred or allotted to a superannuation account of the spouse of the fund member. [Schedule 1, items 20 and 22]

1.22 The effect of items 20 and 22 is that if the taxpayer (the splitting spouse) wishes to both claim a tax deduction under section 82AAT and split some or all of a year's contributions with their spouse, then they must first lodge the necessary notice to claim the deduction before requesting that the contributions be split.

1.23 Items 21 and 23 provide that the definition of contributions-splitting application , as used in items 20 and 22, means an application designated as a contributions-splitting application in the regulations. [Schedule 1, items 21 and 23]