HOUSE OF REPRESENTATIVES

Taxation Laws Amendment (Superannuation) Bill 1992

Explanatory Memorandum

(Circulated by the authority of the Treasurer, the Hon. John Dawkins, M.P.)

Chapter 4 - Rolling-over eligible termination payments

Summary of proposed amendments

Elections to Roll Over an Eligible Termination Payment

Purpose of amendment: To remove the ability of taxpayers to choose which part of an eligible termination payment (ETP) is rolled-over (except undeducted contributions and concessional component).

It is proposed that the amendments will apply to:

·
(a) an ETP made on or after 1 July 1992; and
·
(b) an ETP made before 1 July 1992 where:

(i)
the roll-over period ended on or after 1 July 1992; and
(ii)
no part of the ETP was rolled-over before 1 July 1992.

Date of Effect: 1 July 1992.

The 90 Day Roll-Over Period

Purpose of amendment: To remove the current 90 day roll-over period so that ETPs must be rolled-over directly from the source of the payment to a complying superannuation fund, a complying approved deposit fund, a deferred annuity or an immediate annuity.

It is proposed that this amendment will apply to amounts paid on or after 1 July 1994.

Date of Effect: 1 July 1994.

Part A: Elections to Roll-Over an Eligible Termination Payment

Background to the legislation

Certain payments, such as lump sum payments from superannuation funds, are taxed under Subdivision AA of Division 2 of Part III of the Income Tax Assessment Act 1936 (the Act) as ETPs.

Subsection 27AA(1) of the Act breaks ETPs into one or more of the following components:

·
concessional component (ie, approved early retirement scheme payments, bona fide redundancy payments and invalidity payments);
·
undeducted contributions (ie, superannuation contributions paid on or after 1 July 1983 which were not deductible to the taxpayer);
·
non-qualifying component (ie, part of the amount received on commutation or in respect of the residual capital value of certain annuities purchased partly with non-ETP moneys prior to 9 December 1987);
·
excessive component (ie, the amount by which the ETP exceeds the taxpayer's reasonable benefit limit);
·
pre-July 83 component (ie, the amount of the ETP which relates to the period before 1 July 1983); and
·
post-June 83 component (ie, the ETP reduced by all the other components).

The post-June 83 component is broken further into taxed and untaxed elements, depending on whether it comes from a taxed or an untaxed source, in accordance with section 27AB.

An ETP will have a pre-July 83 component only if the eligible service period relating to the payment commenced before 1 July 1983. The eligible service period of an ETP (defined in subsection 27A(1)) depends on where the ETP comes from. In the case of an ETP paid from an employer sponsored superannuation fund, the eligible service period is usually the period of fund membership or the period of employment with the sponsoring employer, whichever is longer. In some cases the Commissioner may substitute a higher amount for the pre-July 83 component (subsection 27AA(2)).

Further, the pre-July 83 and post-June 83 components are treated as an excessive component if an Insurance and Superannuation Commission determination has not been received when it should have been received (subsection 27AA(3)).

An ETP is split into components because each component is assessed differently. Each component is included in a taxpayer's assessable income in accordance with sections 27B and 27C. Under the existing provisions, the amount of each component of an ETP that has not been rolled-over (ie, retained) is initially worked out by subtracting from each component of an ETP received the amount of that component rolled-over.

The term rolled-over is defined in paragraph 27A(13)(a) of the Act. Essentially, a taxpayer can defer paying tax on some or all of their ETP under the current legislation by electing the amount of each component of their ETP (other than the non-qualifying and excessive components) they want paid (rolled-over) into a roll-over fund (ie, a complying superannuation fund, a complying approved deposit fund (ADF) or into an eligible annuity) (subsection 27A(12)). The non-qualifying and excessive components cannot be rolled-over. The amount or amounts rolled-over are referred to as the 'applied amount' or the 'applied amounts' (subparagraph 27D(1)(b)(ii)).

The amount of each component retained is included in a taxpayer's assessable income as follows:

·
undeducted contributions - not included in assessable income;
·
non-qualifying and excessive components - the full amount is included in assessable income;
·
pre-July 83 and concessional components - 5% of these amounts are included in assessable income; and
·
taxed and untaxed elements of the post-June 83 component - the full amount is included in assessable income.

A taxpayer is assessed on any lump sum or annuity payments received from a roll-over fund in the year they receive the payments. Any lump sum payment received from a roll-over fund is an ETP and must be broken into its appropriate components. The concessional component and undeducted contributions retain their identity in the roll-over fund. The pre-July 83 and post-June 83 components are calculated on the same basis as the original ETP. However, under the existing provisions, the eligible service period depends on the amount (if any) of the pre-July 83 component rolled-over. If the whole of the pre-July 83 component of the ETP is rolled-over, all of the pre-July 83 part of the service period is preserved. If the whole of the pre-July 83 component is not rolled-over, the pre-July 83 part of the eligible service period is reduced proportionately or truncated (subsection 27A(10)). For example, if one-half of the pre-July 83 component is rolled-over, then only one-half of the pre-July 83 service period is preserved. However, if the amount rolled-over is joined with another ETP that has a longer service period, the eligible service period of any subsequent payment from the roll-over fund will commence on the earliest date. The eligible service period of an ETP paid by a roll-over fund ends on the date the ETP is made.

Example 1

Assume Michael (whose eligible service period is 20 years, 10 of which occurred prior to 1 July 1983) is entitled to the following ETP:

Pro-July 83 component ($20 000 x 10/20) 20 000
Post-June 83 component
($40 000- 20 000- 20 000) 0
Undeducted contributions 20 000
-------
$40 000
-------

If Michael wants to roll-over $20 000, he can elect under the existing law to roll-over all of his undeducted contributions, all of his pre-July 83 component or a combination of both components. If he elects to roll-over all of his pro-July 83 component, he will not have to include anything in his assessable income in the year the ETP is made (Sections 27B and 27C).

Michael will be assessed on any lump sum or annuity payments received from the roll-over fund in the year(s) he receives the payments.

In addition, by rolling over all of his pro-July 83 component, Michael retains the pro-July 83 part of his eligible service period in the roll-over fund.

The current law relating to rolling-over ETPs allows taxpayers who have pro-July 83 service the ability to avoid much of the tax on the post-June 83 components of their ETP. This can be done by rolling over all of an ETP. Most of the amount is then withdrawn. The amount withdrawn is an ETP and split into its pro-July 83 and post-June 83 components. The taxpayer then elects to re-roll the post-June 83 component back into the roll-over fund and is assessed on only 5% of the pro-July 83 component. The post-June 83 component rolled back into the fund re-acquires the service date of the original benefit, that being the service date for the moneys that were left in the roll-over fund. Consequently, on subsequent withdrawal part of the post-June 83 component is effectively converted into a pro-July 83 component. This process can be repeated as

often as necessary to convert virtually all the benefit to a pre-July 83 component.

The Bill will overcome this by mending:

·
subsection 27D, with effect from 1 July 1992, so that taxpayers cannot elect which part of an ETP (other than undeducted contributions and the concessional component) is rolled-over. For example, a taxpayer will not be able to elect to retain just the pre-July 83 component and roll-over the post-June 83 component. Nor will they be able to roll-over the pre-July 83 component into one fund and the post-June 83 component into another; and
·
the method of calculating the amount of an IETP to be included in assessable income.

Explanation of proposed amendments

Election to roll-over an ETP

Under the existing provisions a taxpayer can elect the amount of each component of their ETP (other than the non-qualifying and excessive components) they want to roll-over (section 27D). The Bill will continue to allow taxpayers to elect the amount of their undeducted contributions and concessional components they want to roll-over. However, from 1 July 1992, a number of steps will need to be followed to identify the extent to which the amount(s) rolled-over (referred to as 'applied amounts') consist of:

(a)
the taxed element of the post-June 83 component;
(b)
the untaxed element of the post-June 83 component; or (c) the pre-July 83 component.

[New subsection 27D(4)]

The steps that will be used to calculate the amount of these components included in each applied amount are:

Step 1
calculate the notional components of the applied amount; and
Step 2
determine the amount (if any) of the pre-July 83 component to be included in the applied amount.

Step 1-Calculate the notional components of the applied amount

The notional components of the applied amount will be calculated as follows:

·
notional concessional component and notional undeducted contributions - this will be the respective amounts of the concessional component and undeducted contributions the taxpayer elects to include in the applied amount [New paragraphs 27D(5)(a) and 27D(5)(b)I;
notional pre-July 83 component - this will be the amount of the applied amount that relates to the period before 1 July 1983. It will be calculated in the same way as it was calculated for the ETP. That is, it will be the lesser of the amounts worked out using the following formulae [New paragraph 27D(5)(c)].

Formula 1:

[ Applied amount - Notional concessional component ] * Pre-July 83 Total period

or

Formula 2:

[ Applied amount - Notional concessional component ] - Notional Undeducted contributions

Where:

Pre-July 83 is the number of whole days (if any) in the eligible service period that occurred before 1 July 1983; and

Total period is the number of whole days in the eligible service period

Note: the number of days included in 'Pre-July 83' and 'Total period' will always be the same as that used to calculate the components of the original ETP. That is, it will not be necessary to truncate the pre-July 1983 service period relating to an ETP under any circumstances. Consequently the Bill will repeal subsection 27A(10) [Clause; 40].

·
notional post-June 83 component - this will be the applied amount reduced by the other notional components [New paragraph 27D(5)(d)].

Step 2-- The pre-July 83 component of the applied amount

The amount of the pre-July 83 component included in the taxpayer's election to roll-over will be the amount (if any) of the notional pre-July 83 component of the applied amount [New subsection 27D(6)].

Taxed and untaxed elements of the post-June 83 component of the applied amount

If the applied amount includes a notional post-June 83, the taxpayer's election to roll-over must specify the amount of the taxed and untaxed elements of the post-June 83 component to be included in the applied amount. The Bill will insert rules into section 27D to work out the amount of each of these elements to be included in each applied

amount. However, these amounts can only be worked out after the retained amount of the post-June 83 component has been calculated (ie, after Step 4 on page 72).

The rules to work out the amount of the taxed and untaxed elements to be included in both the applied amount and the retained amount of the ETP are then set out in Step 5 on page 72.

Payments from a roll-over fund

A taxpayer will continue to be assessed on any lump sum or annuity payments received from a roll-over fund in the year(s) they receive the payments. A lump sum payment received will be an ETP and broken into its appropriate components. The concessional component and undeducted contributions will retain their identity in the roll-over fund. The pre-July 83 and post-June 83 components will be calculated under section 27AA. However, the Bill will remove the existing truncation provisions contained in subsection 27A(10). Consequently, the eligible service period will commence on the same day as that used to calculate the components of the original ETP, unless it is joined with another ETP that has a longer eligible service period. In that case the eligible service period will commence on the earliest date. The eligible service period will continue to end on the date the ETP is made.

The amount of an ETP to be included in assessable income

The amount of each component of an ETP included in a taxpayer's assessable income is currently calculated under sections 27B and 27C. Under these provisions, the amount of each component included is initially worked out by subtracting from each component of an ETP the amount of that component rolled-over. As a consequence of the amendments to section 27D outlined above, the existing subtraction method will not work in all cases. Therefore the Bill will:

·
insert new section 27AC to calculate the components of the ETP not rolled-over (referred to as 'the retained amount of the ETP') [Clause 42]; and
·
amend the method of calculating the amount of each component of the retained amount of the ETP to be included in a taxpayer's assessable income [Clauses 43 and 44].

Calculating the components of the retained amount

The components of the retained amount of an ETP will be calculated as follows (Note: If no amount of an ETP has been rolled-over, the components of the retained amount of an ETP will be the respective amounts included in the original ETP).

Step I--Calculate the retained amount of the ETP

The retained amount of the ETP will be the total amount of the ETP reduced by the total amount of the ETP rolled over [New paragraph 27A C(2)(a)].

Step 2--Components of the retained amount

The retained amount of an ETP will be broken up into the ETP components as follows:

(a)
retained amount of the concessional component and the retained amount of the undeducted contributions - this will be the respective amounts included in the ETP received reduced by the amount of these components rolled over [New paragraphs 27A C(2) (b) and 27A C(2) (c)];
(b)
retained amount of the pre-July 83 component - this will be the proportion of the retained amount that relates to the period before 1 July 1983. It will be calculated in the same way as it was calculated for the original ETP. That is, it will be the lesser of the amounts worked out using the following formulae [New paragraph 27A C(2)(d)].

Formula 1:

[ Retained amount of ETP - Retained amount of concessional component of ETP - NQ of ETP - EC of ETP ] * Pre-July 83 Total Period ]

OR

Formula 2:

[ Retained amount of ETP - Retained amount of concessional component of ETP - NQ of ETP - EC of ETP ] - Retained amount of the undeducted contributions Retained ]

Where:

NQ is the non-qualifying component of the ETP;

ECM is the excessive component of the ETP;

Pre-July 83 is the number of whole days (if any) in the eligible service period that occurred before 1 July 1983; and

Total period is the number of whole days in the eligible service period.

Note: the number of days included in 'Pre-July 83' and 'Total period' will always be the same as that used to calculate the components of the original ETP.

(c)
retained amount of the post-June 83 component - this will be the retained amount of the ETP reduced by the other components of the ETP retained (including the non-qualifying and excessive components of the ETP) [New paragraph 27A C(2)(e)].

Step 3--Increasing the retained amount of the pre-July 83 component

The Commissioner of Taxation has a discretion to increase the retained amount of the pre-July 83 component of an

ETP if the amount of that component calculated under the first formula is less than the amount the taxpayer could have expected to receive if they terminated their employment or fund membership on 30 June 1983 [New subsection 27AC(3)].

The new subsection 27AC(3) replaces subsection 27AA(2) [Clauses 41 and 42]. However, it is the same as the existing subsection and will continue to apply in the same way as former subsection 27B(2) applied up to

30 June 1983. The Commissioner will also take into account any previous applications of these subsections. The circumstances in which the Commissioner exercises this discretion are set out in Taxation Ruling IT 2168.

Step 4--Decreasing the retained amount of the post-June 83 component

If the Commissioner exercises the discretion under new subsection 27AC(3) to increase the retained amount of the pre-July 83 component, the retained amount of the post-June 83 component will be decreased. This is because the retained amount of the post-June 83 component will be recalculated using the increased retained amount of the pre-July 83 component.

Step 5---Calculating the taxed and untaxed elements of:

·
the applied amount; and
·
the retained amount of the post-June 83 component of the ETP

If an applied amount or the retained amount of the ETP includes a notional post-June 83 component or a retained amount of the post-June 83 component respectively, the component(s) must be broken further into taxed and untaxed elements.

Subject to the following conditions, the Bill will allow taxpayers to elect how these components will be broken up. The conditions are:

(1)
the total of the untaxed elements of both the post-June 83 components of the amounts rolled over and the retained amount of the ETP must equal the untaxed element of the post-June 83 component of the original ETP; and
(2)
the total of the taxed elements of both the post-June 83 component of the amounts rolled over and the retained amount of the ETP must equal:

·
the taxed element of the post-June 83 component of the original ETP; plus
·
the amount the total of the post-June 83 components of both the amounts rolled over and the retained amount of the ETP exceeds the post-June 83 component of the original ETP (if any).

This will ensure that roll-over funds will include no more than the untaxed element of the post-June 83 component of the original ETP as taxable contributions in their assessable income.

These conditions will be inserted by this Bill in the form of the following rules.

It is important to note that:

(a)
The full amount of the post-June 83 component(s) of both the applied and retained mounts of the ETP will be a taxed element if the post-June 83 component of the ETP received:

·
contains only a taxed element; or
·
is nil.

(b)
The full amount of the post-June 83 component(s) of both the applied and retained amounts of the ETP will be an untaxed element if:

·
the post-June 83 component of the ETP contains only an untaxed element; and
·
the sum of the post-June 83 components of both the applied and retained amounts equals the post-June 83 component of the ETP.

Rules to work out the amount of the taxed and untaxed elements of the post-June 83 component of the applied amount

Rule 1.

'the sum of the taxed and untaxed elements of the post-June 83 component included in an applied amount must equal the notional post-June 83 component of the applied amount. [New paragraph 27D(7)(a)]

Rule 2.

'the amount of the untaxed element of the post-June 83 component included in the applied amount must not exceed the untaxed element of the post-June 83 component of the ETP reduced by the sum of:

(i)
the amount (if any) of the untaxed element of the post-June 83 component of the ETP already included in other applied amounts; and
(ii)
the untaxed element of the retained amount of the post-June 83 component of the ETP.

[New paragraph 27D(7) (b)]

Rule 3:

the amount of the taxed element of the post-June 83 component included in an applied amount must not exceed the sum of:

(i)
the taxed element of the post-June 83 component of the ETP reduced by the amount of any) of the taxed element of the post-June 83 component of the ETP already included in other applied amounts; and
(ii)
if the sum of the notional post-June 83 components of all the applied amounts which relate to the ETP and the retained amount of the post-June 83 component of the ETP exceeds the post-June 83 component of the ETP -- the amount calculated using the formula:

Notional post-June 83 component of applied amount - [Limit calculated under Rule 2 + Amount calculated under (i) ]

[New paragraph 27D(7)(c)]

Rules to work out the amount of the taxed and untaxed elements of the retained amount of the post-June 83 component of the ETP:

Rule 1:

The taxed element of the retained amount of the post-June 83 component of the ETP will be the retained amount of the post-June 83 component of the ETP reduced by the untaxed element of the retained amount of the post-June 83 component

[New subsection 27AC(4)].

Rule 2:

The untaxed element of the retained amount of the post-June 83 component of the ETP will be the untaxed element of the post-June 83 component of the ETP reduced by the amount of that element rolled-over [New subsection 27AC(5)].

Step 6--Decreasing the untaxed element of the retained amount of the post-June 83 component of the ETP

If the Commissioner exercises the discretion under new subsection 27AC(3) to increase the retained amount of the pre-July 83 component, the amount of the untaxed element of the retained amount of the post-June 83 component calculated under Rule 2 will be further reduced as follows:

(a)
if the amount of the increase does not exceed the untaxed element of the retained amount of the post-June 83 component calculated under new sub-section 27AC(5) - by the amount of the increase; or
(b)
if the amount of the increase exceeds the amount calculated under sub-section 27AC(5) - to 0.

[New subsection 2 7A C(6)]

Step 7--Retained amount where subsection 27AA(3) applies

If subsection 27AA(3) applies to treat the sum of the pre-July 83 and post-June 83 components as an excessive component, the retained amounts of the pre-July 83 and post-June 83 components will be reduced to nil [New subsection 27AC(7)].

Amount of the ETP retained to be included in assessable income

The amount of each component of the ETP retained will be included in the taxpayer's assessable income as follows:

·
undeducted contributions - not included in assessable income;
·
non-qualifying and excessive components - the full amount will continue to be included in assessable income (subsections 27B(2) and 27B(3));
·
the retained amounts of the pre-July 83 and concessional components of the ETP - 5% of these amounts will be included in assessable income [New subsections 27C(1) and 27C(2)]; and
·
taxed and untaxed elements of the retained amount of the post-June 83 component of the ETP - the full amount will be included in assessable income[New subsection 27B(1)].

Examples

The following examples illustrate the practical application of the new provisions.

Example 1

Assume Rosina (whose eligible service period is 20 years, 4 of which occurred prior to 1 July 1983) is entitled to the following ETP:

Concessional component 10 000
Pre-July 83 component 20 000
Post-June 83 component
- taxed element 50 000
- untaxed element 0
Undeducted contributions 30 000
--------
$110 000
--------

Rosina rolls over $40 000 including $5 000 of her concessional component and $10 000 of her undeducted contributions.

The notional components of the applied amount (ie, $40 000) will be:

Notional concessional component 5 000
Notional pre-July 83 component
[(40 000- 5 000) x 4/20] 7 000
Notional post-June 83 component
(40 000- 5 000-10 000- 7 000) 18 000
Notional undeducted contributions 10 000
--------
Applied amount $40 000
--------

The retained amount (RA) of the ETP is $70 000 (ie, $110 000 - $40 000)

The components of the RA of the ETP will be:

RA of the concessional component
(10 000- 5 000) 5 000
RA of the pre-July 83 component
[(70 000- 5 000) x 4/20] 13 000
RA of the post-June 83 component
(70 000- 5 000- 20 000-13 000) 32 000
RA of the undeducted contributions
(30 000-10 000) 20 000
--------
$70 000
--------

The post-June 83 components of the applied amount and the retained amount of the ETP will be broken further into taxed and untaxed elements. The original ETP did not contain an untaxed element. Consequently the full amount of the post-June 83 component of both the applied amount and the retained amount of the ETP will be taxed elements.

The amount of the ETP Rosina will have to include in her assessable income will be $32 900 (ie, [(5% x (5 000 + 13 000)) + 32 000]).

Example 2

Assume Doug (whose eligible service period is 40 years, 30 of which occurred prior to 1 July 1983) is entitled to the following ETP:

Pre-July 83 component 90 000
Post-June 83 component
-taxed element 0
-untaxed element 10 000
Undeducted contributions 20 000
--------
$120 000
--------

Doug rolls over $80 000 (not including any of his undeducted contributions).

The notional components of the applied amount (ie, $80 000) will be:

Notional pre-July 83 component
(80 000 x 30/40) 60 000
Notional post-June 83 component
(80 000- 60 000) 20 000
Notional undeducted contributions 0
--------
Applied amount $80 000
--------

The retained amount (RA) of the ETP will be $40 000 (ie, $120 000 - 80 000).

The components of the RA of the ETP will be:

RA of the pro-July 83 component 20 000
RA of the post-June 83 component 0
RA of the undeducted contributions 20 000
--------
$40 000
--------

The post-June 83 components of the applied amount and the retained mount of the ETP will be broken further into taxed and untaxed elements. Since the retained amount of the ETP did not have a post-June 83 component it is only necessary to break the post-June 83 component of the applied amount into these elements. This will be done using the following rules:

Rule 1 - the sum of the taxed and untaxed elements must equal $20 000;

Rule 2 - the untaxed element must not exceed $10 000 (ie, $10 000- (0 + 0))

Rule 3 - the taxed element must not exceed $10 000 (ie, {(0- 0) + [$20 000- ($10 000 + 0)]}).

Therefore, the post-June 83 component of the applied amount will be broken up as follows:

Taxed element $10 000
Untaxed element $10 000

The amount of the ETP Doug will have to include in his assessable income will be $1 000 (ie, [(5% x 20 000)). The roll-over fund will include the amount of the untaxed element of the post-June 83 component of the applied amount (ie, $10 000) in its assessable income as taxable contributions.

Example 3

Assume Anne (whose eligible service period is 20 years, 10 of which occurred prior to 1 July 1983) is entitled to the following ETP:

Pro-July 83 component 50 000
Post-June 83 component
- taxed element 5 000
- untaxed element 15 000
Undeducted contributions 30 000
--------
$1 00 000
--------

Anne rolls over:

(1)
$40 000 to fund A including $30 000 of her undeducted contributions; and
(2)
$50 000 to fund B (not including any of her undeducted contributions).

The notional components of the amounts rolled-over will be:

Applied Amount (1) = $40 000

Notional pre-July 83 component
(40 000- 30 000) 10 000
Notional post-June 83 component 0
Notional undeducted contributions 30 000
--------
$ 40 000
--------

Applied Amount (2) = $50 000

Notional pre-July 83 component
(50 000 x 10/20) 25 000
Notional post-June 83 component
(50 000- 25 000) 25 000
Notional undeducted contributions 0
--------
$50 000
--------

The retained amount (RA) of the F, TP will be $'10 000 (ie, $100 000- (40 000 + 50 000)).

The components of the RA of the ETP will be:

RA of the pre-July 83 component 5 000
RA of the post-June 83 component 5 000
--------
RA of the undeducted contributions 0
--------

The post-June 83 components of the applied amounts and the retained amount of the ETP will be broken further into taxed and untaxed elements as follows:

(1)
the untaxed element of the post-June 83 component of the ETP was $15 000. Therefore, the total of the untaxed elements of the post-June 83 components of the applied amounts and the retained amount of the ETP must equal $15 000;
(2)
the taxed element of the ETP was $5 000. The total of the post-June 83 components of the applied amounts and the retained amount of the ETP (ie, $30 000) exceeds the post-June 83 component of the ETP (ie, $20 000) by $10 000. Therefore, the total of the taxed elements of the post-June 83 components of the applied amounts and the retained amount of the ETP must equal $15 000 (ie, $5 000 + $10 000).

If Anne decides to roll-over as much of the untaxed element as is possible (in this case the full $15 000), then:

(a)
the notional post-June 83 component of applied amount (2) will be broken up as follows:
Taxed element 10 000
Untaxed element 15 000
--------
$25 000
--------
(b)
the retained amount of the post-June 83 component of the ETP will be broken up as follows:
Taxed element 5 000
Untaxed element 0
--------
$5 000
--------

However, if Anne decides to retain as much of the untaxed element possible (in this case $5 000 - being the amount of the retained amount of the post-June 83 component), then:

(a)
the notional post-June 83 component of applied amount (2) will be broken up as follows:
Taxed element 15 000
Untaxed element 10 000
--------
$25 000
--------
(b)
the retained amount of the post-June 83 component of the ETP will be broken up as follows:
Taxed element 0
Untaxed element 5 000
--------
$5 000
--------

Part B: The 90 Day Roll-Over Period

Background to the legislation

Under the current law, a roll-over must normally be made within the roll-over period, that is, within 90 days of receiving the ETP (subsection 27A(1)). This period can be extended in special circumstances by the Commissioner of Taxation.

The current law relating to rolling-over ETPs gives rise to the following problems:

(a)
benefits rolled-over are currently reported twice - once when the ETP is paid and again when rolled-over; and
(b)
the current 90 day roll-over period allows scope for abuse. Taxpayers invest their ETP during the 90 day roll-over period without paying tax on their ETP, then roll the benefit into a roll-over fund for a short period. They then withdraw the payment from the roll-over fund, pay no tax on the ETP, and invest it for another 90 days.

Explanation of proposed amendments

The term 'roll-over period' is defined in subsections 27A(1) and 27A(6) of the Act. The Bill proposes to remove these two subsections with effect from 1 July 1994 so that benefits must be rolled-over directly from the source to the destination fund. Consequential amendments remove the references to this term.

The Occupational Superannuation Standards Act 1987 will be amended to allow superannuation funds to retain benefits for 90 days after the member becomes entitled to them so that taxpayers will still have 90 days to decide what to do with their ETP.


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