House of Representatives

Tax and Superannuation Laws Amendment (2013 Measures No. 1) Bill 2013

Explanatory Memorandum

(Circulated by the authority of the Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP)

Chapter 1 - Taxation of interest on unclaimed money

Outline of chapter

1.1 Schedule 1 to this Bill amends the income tax and superannuation law to ensure tax is not payable on interest paid by the Commonwealth in relation to unclaimed money reclaimed from 1 July 2013.

1.2 References in this chapter are to the Income Tax Assessment Act 1997 unless otherwise specified.

Context of amendments

1.3 In the 2012-13 Mid-Year Economic and Fiscal Outlook (MYEFO), the Government announced reforms to the treatment of unclaimed money.

1.4 Unclaimed money is money held by an institution on behalf of an owner, where the institution has lost contact with and cannot locate the owner, and the money is held in:

·
a bank account;
·
a First Home Saver Account;
·
a life insurance policy;
·
superannuation; or
·
corporate property.

1.5 Different rules apply to each type of unclaimed money.

1.6 Unclaimed superannuation is further divided into three classes:

·
'general' unclaimed superannuation;
·
unclaimed superannuation of former temporary residents; and
·
lost member accounts.

1.7 The reforms announced in the 2012-13 MYEFO widened the circumstances in which money is unclaimed money. Generally this has resulted in money being recognised earlier as lost or unclaimed and therefore required to be transferred to the Australian Taxation Office (ATO) (for superannuation) or the Australian Securities and Investments Commission (ASIC) (for all other forms of unclaimed money). This allows these agencies to take active steps to reconnect individuals with their funds sooner, helping to reunite people with their money and preventing the funds from being gradually eroded by fees and charges.

1.8 The reforms also provide for the payment of interest on the unclaimed money for the period it is held by the Government after 1 July 2013. The Government will pay interest at a rate linked to the Consumer Price Index to preserve the real value of the unclaimed money.

1.9 Under the current law, in most cases this interest paid by the Commonwealth on the unclaimed money would be subject to income tax. This is inconsistent with the Government's objective of ensuring the real value of unclaimed money is preserved, as individuals would receive the real value reduced by the relevant tax on the amounts of interest. To achieve its objective, the Government is legislating to ensure that interest paid by the Commonwealth on unclaimed money is generally not subject to income tax.

Summary of new law

1.10 Schedule 1 amends the law to ensure that income tax is not generally payable on interest paid by the Government in relation to unclaimed money reclaimed from 1 July 2013.

1.11 For unclaimed superannuation money, Part 1 of Schedule 1 makes a payment of interest a tax free component of a superannuation benefit. Consistent with other tax free superannuation benefits, these interest payments are non-assessable non-exempt income.

1.12 For other forms of unclaimed money, Part 2 of Schedule 1 makes a payment of interest on these forms of unclaimed money exempt income.

Comparison of key features of new law and current law

New law Current law
Unclaimed superannuation
Interest paid by the Commonwealth on payments of unclaimed superannuation from 1 July 2013, other than interest paid to former temporary residents, is a tax free component of a superannuation benefit. The taxable treatment of interest paid by the Commonwealth on payments of unclaimed superannuation varies.

Some payments of interest are a taxable component of a superannuation benefit. Others are not a superannuation benefit and are subject to income tax under ordinary principles. In some cases the treatment is ambiguous or unclear.

Unclaimed superannuation and Departing Australia Superannuation Payments
Interest paid on the return of unclaimed superannuation to former temporary residents after 1 July 2013 is subject to Departing Australia Superannuation Payment (DASP) tax at a rate of 45 per cent.

Interest paid to current residents of Australia in respect of unclaimed superannuation is not subject to DASP tax.

DASP tax applies to payments of amounts of superannuation, including payments of interest on unclaimed superannuation, to former temporary residents.

Different rates of DASP tax apply to components of the superannuation benefit, depending on whether they are tax free or taxable and, if taxable, whether they have been taxed in the fund.

DASP tax applies even where the former temporary resident is again an Australian resident.

Unclaimed bank accounts
Interest paid by the Commonwealth in respect of unclaimed bank accounts is exempt from income tax. Interest paid by the Commonwealth in respect of unclaimed bank accounts is subject to income tax.
Unclaimed corporate property
Interest paid by the Commonwealth in respect of unclaimed corporate property is exempt from income tax. Interest paid by the Commonwealth in respect of unclaimed corporate property is subject to income tax.
Unclaimed First Home Saver Accounts
Interest paid by the Commonwealth in respect of unclaimed First Home Saver Accounts is exempt from income tax. Interest paid by the Commonwealth in respect of unclaimed First Home Saver Accounts is subject to income tax.
Unclaimed life insurance
Interest paid by the Commonwealth in respect of unclaimed life insurance amounts is exempt from income tax. Interest paid by the Commonwealth in respect of unclaimed life insurance amounts is subject to income tax.

Detailed explanation of new law

1.13 Schedule 1 ensures that income tax is not payable on interest paid by the Government after 1 July 2013 in relation to unclaimed money, with the exception of unclaimed money of former temporary residents. These amendments ensure that the application of income tax does not result in the real value of unclaimed money diminishing over time.

1.14 Where the interest is paid in relation to the unclaimed superannuation of a former temporary resident, Schedule 1 ensures that DASP tax applies appropriately to this payment.

1.15 This Schedule makes amendments in relation to three distinct areas: superannuation, general income tax and DASPs.

Superannuation amendments

1.16 Part 1 of Schedule 1 amends the ITAA 1997 to make interest paid by the Commonwealth in respect of unclaimed superannuation reclaimed after 1 July 2013 a tax free component of a superannuation benefit unless it is provided in relation to the unclaimed money of a former temporary resident. As a consequence of this treatment, the interest payments are non-assessable non-exempt income (see section 301-30).

1.17 This approach differs from that taken elsewhere in Schedule 1 for other forms of interest on unclaimed money. This alternative approach is required to ensure the payments of interest receive the appropriate treatment under the existing taxation and superannuation law.

1.18 Interest in respect of unclaimed superannuation relating to former temporary residents and lost member accounts was already included in the definition of 'superannuation benefit' (see item 5 of the table in subsection 307-5(1)). However, interest in respect of general unclaimed superannuation was not covered. These amendments extend the definition of 'superannuation benefit' to payments of interest under the general unclaimed superannuation provisions in subsections 17(2AB) and 17(2AC) of the Superannuation (Unclaimed Money and Lost Members) Act 1999 (S(UMLM) Act). [Schedule 1, Part 1, items 4 and 5, subsection 307-5(1), table item 5, columns 2 and 3]

1.19 Similarly, interest in respect of the unclaimed superannuation of former temporary residents and lost member accounts was also covered by the pre-existing rules for determining if a component of a superannuation benefit is tax free (see section 307-142). However, again interest in respect of general unclaimed superannuation provisions was not covered by these rules. Schedule 1 includes the rules for determining if and to what extent a superannuation benefit is tax free where the benefit includes a payment of interest under subsections 17(2AB) and 17(2AC) of the S(UMLM) Act. [Schedule 1, Part 1, items 6 and 7, paragraph 307-120(2)(e) and subsection 307-142(1)]

1.20 Without the amendments in Schedule 1, this interest would generally have been considered a taxable component of a superannuation benefit. The amendments ensure that the payment of interest by the Commonwealth in respect of unclaimed superannuation reclaimed after 1 July 2013 is generally a tax free component of a superannuation benefit. [Schedule 1, Part 1, items 8, 11, 14 and 17, subsections 307-142(2) and (3B) and 307-300(2) and (3A)]

1.21 The amendments also update the relevant guide material in the ITAA 1997 (including inserting new notes). [Schedule 1, Part 1, items 9, 10, 15 and 16, subsections 307-142(2) and 307-300(2)] .

1.22 Schedule 1 further amends item 5 of the table in subsection 307-5(1) of the ITAA 1997 to individually specify each provision under which unclaimed money or interest on unclaimed money may be paid. This ensures that it is clear that payments of unclaimed money and payment of interest on this unclaimed money are distinct superannuation benefits. To be consistent with this approach, similar amendments have been made to the other references to these provisions in the ITAA 1997, the Superannuation (Departing Australia Superannuation Payment Tax) Act 2007 S(DASPT)) Act and the S(UMLM) Act. [Schedule 1, Part 1, items 1 to 3, 5 to 6, 12 to 13, 18 to 22 and 24 to 32, subsection 295-190(1A), section 301-125, subsections 301-170(2), (3) and (4), 307-5(1), 307-220(4), 307-300(1), 307-350(2B) of the ITAA 1997, subsection 5(2) of the S(DASPT) Act and subsection 17(2A), subparagraphs 20H(1)(b)(iii ). ( iv) and (vi), paragraphs 20H(1)(a) and 20M(1)(a), section 20P, subsections 24E(5) and 24G(4), paragraph 24L(1)(a) and subsection 29(4) of the S(UMLM) Act]

1.23 These amendments additionally clarify that interest paid on prior amounts of unclaimed money does not affect the determination of any subsequent amounts of unclaimed money by a former temporary resident under section 20H of the ITAA 1997. [Schedule 1, Part 1, items 22 to 25, subparagraphs 20H(1)(b)(iii), (iv) and (vi), paragraph 20H(2B)(a)]

1.24 Without this clarification, payments of unclaimed money to former temporary residents may have been reduced by the amount of any interest paid in relation to prior payments. This outcome would not have been consistent with the Government's intention to preserve the real value of unclaimed money.

General income tax amendments

1.25 For other types of unclaimed money, Part 2 of Schedule 1 inserts a new income tax exemption in Division 51 of the ITAA 1997.

1.26 This exemption provides that payments of interest are exempt from income tax where the interest relates to:

·
unclaimed bank accounts [Schedule 1, Part 2, item 34, subsection 51-120(a)] ;
·
unclaimed corporate property [Schedule 1, Part 2, item 34, subsection 51-120(b)] ;
·
unclaimed First Home Saver Accounts [Schedule 1, Part 2, item 34, subsection 51-120(c) and (d)] ; and
·
unclaimed life insurance amounts [Schedule 1, Part 2, item 34, subsection 51-120(e)] .

1.27 Part 2 of Schedule 1 also makes amendments to the relevant guidance material in the Act. [Schedule 1, Part 2, items 33 and 34, sections 11-15 and 51-120]

Departing Australia superannuation payments

1.28 Individuals residing outside Australia that are not Australian citizens, holders of a temporary or permanent visa, or current applicants for a permanent visa (former temporary residents - see section 20AA of the S(UMLM) Act) cease to be eligible for the tax concessions that apply to Australian superannuation.

1.29 The superannuation of former temporary residents is transferred to the Commonwealth as unclaimed superannuation (see sections 20C to 20G of the S(UMLM) Act).

1.30 Former temporary residents may claim these amounts back from the Commonwealth (section 20H of the S(UMLM) Act). As former temporary residents are generally no longer entitled to the tax concessions that apply to superannuation in Australia, the amount is returned as a DASP (see section 20H of the S(UMLM) Act and subsection 301-170).

1.31 Special tax arrangements apply to DASPs. These arrangements are intended to recover the tax benefits that applied while the money was held in the Australian superannuation system.

1.32 DASPs are specifically non-assessable and non-exempt income. However, recipients of a DASP are liable to pay income tax on the payment at a special rate (DASP tax) (section 301-175).

1.33 The rate of DASP tax is determined by the tax status of the particular components of the relevant superannuation benefit (see section 5 of the S(DASPT) Act). For amounts that are tax free components of the superannuation benefit, this rate is nil. For amounts that are taxable components, the rate of DASP tax is 35 per cent if they have been subject to tax in the fund, or 45 per cent if they were untaxed in the fund.

1.34 As with other types of unclaimed money, recipients of DASPs are entitled to receive interest from the Commonwealth from 1 July 2013.

1.35 As outlined above, as a result of these amendments, interest paid by the Commonwealth on unclaimed superannuation reclaimed after 1 July 2013 is generally a tax free component of a superannuation benefit.

1.36 However, for payments to former temporary residents, this would not be appropriate as the interest would have been calculated based on the pre-DASP tax amount without any adjustment to remove the benefit of the superannuation tax concessions.

1.37 To address this, the amendments provide that payments of interest on the unclaimed money of former temporary residents are not a tax free component of a superannuation benefit. [Schedule 1, Part 1, item 11, subsection 307-142(3C)]

1.38 Instead, these payments are a taxable component of a superannuation benefit. Schedule 1 also specifically provides that these amounts are not taxed in the fund. [Schedule 1, Part 1, items 14 and 17, subsections 307-300(2) and (3A)]

1.39 As a result of this change, payments of interest on the unclaimed money of former temporary residents reclaimed after 1 July 2013 are a taxable component of a superannuation benefit that has been untaxed in the fund and are subject to DASP tax at a rate of 45 per cent.

1.40 This treatment only applies to payments to individuals who are former temporary residents when the payment is made (or the estates of individuals who die while they are a former temporary resident). Individuals who were former temporary residents, but who obtain Australian citizenship or a visa before reclaiming their unclaimed superannuation are treated in the same way as other Australian residents. The same treatment applies to payments to the estates of individuals who die while entitled to reside in Australia.

Application and transitional provisions

1.41 Part 1 of Schedule 1 (the superannuation and DASP amendments) commences from Royal Assent. This is consistent with the commencement date of the provisions providing for the payment of interest on unclaimed superannuation in the Treasury Amendment (Unclaimed Money and Other Measures) Act 2012 . [Clause 2(1), Item 2 of the table]

1.42 Part 2 of Schedule 1 (the general income tax amendments) commences from 1 July 2013. This is consistent with the commencement date of the provisions providing for the payment of interest on unclaimed money other than superannuation in the Treasury Amendment (Unclaimed Money and Other Measures) Act 2012 . [Clause 2(1), Item 3 of the table]

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Taxation of interest on unclaimed moneys

1.43 This Schedule is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 .

Overview

1.44 Schedule 1 to this Bill amends the income tax and superannuation law to exempt from taxation the interest paid by the Commonwealth on unclaimed money from 1 July 2013.

Human rights implications

1.45 Consistent with other forms of interest, interest paid to former temporary residents under this measure is not subject to ordinary income tax. However, unlike other forms of interest it is subject to Departing Australia Superannuation Payments Tax.

1.46 This difference in treatment raises issues in relation to the right of equality and non-discrimination contained in Article 26 of the International Covenant on Civil and Political Rights, which prohibits discrimination on the basis of specified grounds, including race, colour, sex, language, religion, political or other opinion, national or social origin, property, birth or other status. 'Other status' is a broad category which can include grounds such as residence.

1.47 However, not all differences in treatment are contrary to the right of equality and non-discrimination. In particular, where differences in treatment are based on reasonable and objective criteria and are intended to achieve a legitimate purpose.

1.48 There is a well-established body of international law and practice recognising that taxation laws of a State can differentiate between the tax treatment of residents of that State and the tax treatment of non-residents. For example, treaties to prevent double taxation use residence status as a way to allocate taxing rights between States. At the same time, discrimination between residents of the same State on the basis of their nationality is prohibited.

1.49 Consistent with this body of law and practice, Australia's tax law includes a number of concessions for superannuation that are recovered in the event a person permanently departs Australia.

1.50 In light of this, there is no basis to conclude that this different treatment amounts to discrimination on the basis of 'other status' under the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 .

Conclusion

1.51 This Schedule is compatible with human rights as it does not raise any human rights issues.

Assistant Treasurer, the Hon David Bradbury


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