Explanatory Memorandum
(Circulated by authority of the Minister for Housing and Assistant Treasurer the Hon Michael Sukkar MP)Chapter 2 Permanent tax relief for merging superannuation funds
Outline of chapter
2.1 Schedule 2 to this Bill amends the ITAA 1997, the SLAA 2012 and the TLAA 2010 to make permanent tax relief for merging superannuation funds.
Context of amendments
2.2 The CGT regime is the primary code for calculating gains or losses of complying superannuation funds. There are certain gains and losses that are treated on revenue account, such as those from a debenture stock or bond (see section 295-85 ITAA 1997).
2.3 The transfer of assets from one superannuation fund to another, under a merger between the two funds, will typically trigger a CGT event. Therefore, the asset transfer will lead to the realisation of capital gains and/or capital losses for the transferring fund. Following this asset transfer and the transfer of members' accounts to the receiving fund, the transferring fund will typically be wound up.
2.4 Capital losses are extinguished on the ending of an entity. As capital losses can be used to offset present and future capital gains, they carry some value - at most the value of the tax liability that would otherwise be payable on the reduced capital gains. This value is extinguished on the winding up of the transferring superannuation fund.
2.5 Similarly, revenue losses, such as foreign exchange losses, are also extinguished on the ending of an entity. Revenue losses also have a value as they can be offset against current year income, or carried forward where the entity continues to exist. However, where there is a merger and the transferring entity ceases to exist, the value of the revenue losses is also extinguished.
2.6 Valuations of members' superannuation interests may include the tax benefits of unrealised net capital losses or revenue losses. In the absence of optional loss relief and asset roll-over a merger may lead to a reduction in the value of members' superannuation interests. This can act as an obstacle to the superannuation fund merging with another fund because the trustee has to take this reduction into account when considering such a merger. The trustee may decide to abandon any merger plans where there is a significant negative impact on members' benefits. The optional loss relief and asset roll-over removes the impediment to eligible funds merging that would otherwise arise from the extinguishment of the losses.
2.7 This loss relief includes transfers to and from pooled superannuation trusts and life insurance companies as well as superannuation funds and approved deposit funds. Providing loss relief to superannuation fund mergers involving these kinds of entities recognises the commercial reality that a significant amount of superannuation is invested indirectly through pooled superannuation trusts and life insurance companies.
2.8 The loss relief and asset roll-over in Division 310 of the ITAA 1997 was introduced as a temporary concession to assist the superannuation industry to cope with the severe economic and financial market conditions in late 2008. The temporary loss relief and asset roll-over was granted for transfer events happening on or after 24 December 2008 and before 1 July 2011.
2.9 The tax relief was first extended to 30 September 2011 to further encourage consolidation in the superannuation industry. The relief was further extended to apply to mergers from 1 October 2011 to 1 July 2017 to facilitate the implementation of the MySuper reforms. The extension of the relief was designed to ensure there were no barriers for the superannuation industry to respond to the MySuper changes. Following the 2017-18 Budget, the Government then further extended the temporary taxation relief to 1 July 2020.
2.10 The Productivity Commission Inquiry Report - Superannuation: Assessing Efficiency and Competitiveness - was publicly released on 10 January 2019. Recommendation 21 of the Report provides:
The Australian Government should legislate to make permanent the temporary loss relief and asset rollover provisions that provide relief from capital gains tax liabilities to superannuation funds in the event of fund mergers and transfer events.
2.11 Following the Productivity Commission Inquiry Report, the Government announced in the 2019-20 Budget that it would make permanent the current temporary arrangements that are due to expire on 1 July 2020.
Summary of new law
2.12 The tax system currently contains temporary arrangements for loss relief and asset rollover that provide relief from CGT liabilities to superannuation funds in the event of fund mergers and transfer events. These temporary arrangements are due to expire on 1 July 2020. Schedule 2 makes the arrangements permanent.
Comparison of key features of new law and current law
| New law | Current law |
| A merging superannuation fund may choose loss relief and have access to asset roll-over where the transferring entity transfers assets to the receiving entity on or after 1 October 2011. | A merging superannuation fund may choose loss relief and have access to asset roll-over where the transferring entity transfers assets to the receiving entity on or after 1 October 2011 and before 2 July 2020. |
| The tax relief available under Division 310 for merging superannuation funds is permanent and is not automatically repealed on 1 July 2022. | The temporary tax relief available under Division 310 for merging superannuation funds will be automatically repealed on 1 July 2022. |
Detailed explanation of new law
2.13 To make permanent the operation of Division 310 of the ITAA 1997 concerning tax relief for merging superannuation funds, the application provisions for the loss relief and asset roll-over in the SLAA 2012 and the TLAA 2010 are amended to make the provisions apply on or after 1 October 2011. [Schedule 2, items 2, 4 and 5, item 19 to Schedule 1 to the SLAA 2012, and subitem 11(1) of Schedule 2 to the TLAA 2010]
2.14 The note in section 310-1 of the ITAA 1997 explains the periods in which mergers must occur for the loss relief provisions in Division 310 to apply. The note is amended to make clear that the provisions are permanent, and apply to mergers happening on or after 1 October 2011. [Schedule 2, item 1, section 310-1 ITAA 1997]
Consequential amendments
2.15 Parts 4 and 5 of the TLAA 2010 were intended to repeal the temporary loss relief provisions on 1 July 2022 and to provide for application arrangements following the repeal. Because the arrangements are being made permanent, these repeal and application provisions are no longer required and they are therefore repealed. [Schedule 2, items 3 and 6, table item 4 of subsection 2(1) and Parts 4 and 5 of Schedule 2 to the TLAA 2010]
Application and transitional provisions
2.16 The amendments apply in relation to transfer events that happen on or after 1 October 2011. All of the members of the original fund (the transferring entity) need to become members of a continuing fund (the receiving entity) on or after 1 October 2011 and the transferring entity needs to cease to hold all relevant assets on or after 1 October 2011. [Schedule 2, item 7]
2.17 While the application of the amendments is retrospective, the amendments operate only to make permanent the concessional taxation treatment that has been afforded to merging entities in the period 1 October 2011 to 1 July 2020. In this way, the retrospectivity is not disadvantageous to affected entities.