House of Representatives

TAXATION LAWS AMENDMENT (SUPERANNUATION) BILL 1993

Explanatory Memorandum

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

Chapter 4 Reasonable Benefit Limits

Summary of proposed amendments

Purpose of amendment: Assess lump sum superannuation benefits paid to a person, as the result of the death of another person, against the deceased's reasonable benefit limit (RBL).

Date of Effect: Applies to eligible termination payments (ETPs) made on or after 1 July 1994.

Background to the legislation

The purpose of the RBLs is to limit the amount of concessionally taxed superannuation benefits received by a person. The existing RBL rules are in the Occupational Superannuation Standards Act 1987 (OSS Act) and the Occupational Superannuation Standards Regulations (OSS Regulations). However, the Taxation Laws Amendment (Superannuation) Act 1992 (the 'Superannuation Act') inserted the RBL rules into the Income Tax Assessment Act 1936 (the Act). This will allow the Commissioner of Taxation to have responsibility for the administration of the RBLs from 1 July 1994.

Under the existing RBL rules in the OSS Act and OSS Regulations, lump sum death benefits paid in relation to a person are assessed against that person's RBL. An exception is if the benefit is paid to a spouse or child of the deceased in which case the benefits are exempt from income tax. Amendments in the Superannuation Act changed these rules so that most lump sum death benefits are excluded from the RBL provisions.

Explanation of proposed amendments

The 'relevant deceased person' is the 'recipient' of an ETP that is a 'death benefit ETP' covered by Item 1 or Item 3 in Table 1 in section 27AAA. It is now proposed that if an ETP is a death benefit ETP, and the person to whom the ETP is made is not the relevant deceased person (i.e. death benefit ETPs covered by Item 2 and Item 4 in the Table 1 in section 27AAA), then the ETP will be assessed against the relevant deceased person's RBL. This will be achieved by treating the ETP as though it had been made in relation to the relevant deceased person for the purposes of working out the extent to which the ETP has an excessive component (i.e., the amount by which the ETP exceeds the person's RBL). The ETP will also be treated as relating to the relevant deceased person for the purposes of working out the excessive component of any other ETP which is made in relation to the relevant deceased person (or any other person). That is, the ETP will be treated as a previously received benefit of the deceased person for RBL purposes.

A 'death benefit ETP' is an ETP that is treated as a death benefit under new section 27AAA of the Act (see explanation in Chapter 3). The 'relevant deceased person' is as follows:

in the case of a death benefit covered by Item 1 in Table 1 in section 27AAA - the taxpayer mentioned in the applicable definition of 'eligible termination payment' in section 27A;
in the case of a death benefit covered by Items 2 or 3 in Table 1 in section 27AAA - the deceased person mentioned in the applicable definition of 'eligible termination payment' in section 27A;
in the case of a death benefit in Item 4 of Table 1 in section 27AAA - the deceased person mentioned in paragraph 27AAA(6)(a) or (b). [Clause 21 - new section 140CA]

As mentioned above, the death benefit ETP is only treated as being received by the deceased for the purposes of working out the excessive component. Therefore, the provisions of Division 14 dealing with determinations, notices, objections and other administrative procedures will apply to the person who was the actual recipient of the ETP for RBL purposes. Also, as explained in Chapter 3, if the ETP has an excessive component it will be included in the assessable income of the actual recipient of the ETP.

In assessing a death benefit ETP against the deceased's RBL, the deceased's pension RBL is to be used rather than the deceased's lump sum RBL. This will override the general rule that a person must receive at least half of their superannuation benefits as a pension or annuity in order to be eligible for the higher pension RBL. [Clause 24 - new subsection 140ZF(5)]

Example A payer makes an ETP of $600 000 to a person during the 1994-95 year of income. The ETP is paid to the person as a result of the death of another person. The only superannuation benefits previously received by the deceased person was an ETP of $300 000. The deceased's pension RBL is $800 000.Even though the benefit is made in relation to the recipient, the benefit is to be assessed against the deceased's pension RBL. Therefore, the ETP gives rise to an excessive component of $100 000 (i.e., [$600 000 + $300 000] - $800 000). The excessive component will be included in the recipient's assessable income.

Under the RBL provisions in the Superannuation Act certain superannuation benefits are not counted towards a person's RBL. Included in those benefits are:

an ETP paid in relation to a person as a result of the death of that person; and
an ETP arising from the commutation of a superannuation pension or annuity payable as a result of the death of another person, and the payment is made to a spouse or child of the deceased within 6 months of the person's death or 3 months after the granting of probate of the will or letters of administration of the estate, whichever occurs later (paragraphs 140ZC(2)(f) and (i)).

As a consequence of assessing death benefit ETPs against the deceased's RBL, paragraphs 140ZC(2)(f) and (i) are to be removed. Therefore, the benefits mentioned above will count towards a person's RBL (i.e., the deceased's RBL). [Clause 23]

Under Division 14 of the Superannuation Act, the Commissioner must revise a final determination of whether a benefit exceeds a person's RBL if the determination relates to an ETP that is reduced under subsections 27A(4) or (4A) of the Act (see subsection 140S(2)). Under those subsections, the Commissioner can reduce an ETP made to the estate of a deceased taxpayer to the extent to which the dependants of the taxpayer will benefit from the estate.

The purpose of subsection 140S(2) in revising the determination is to take account of the distribution to the dependants and therefore, reduce the amount of the benefit which counted towards the deceased's RBL. As a death benefit ETP is to be assessed against the deceased's RBL regardless of who is the recipient of the ETP, there is no longer a need for a revision of the determination. Therefore, subsection 140S(2) is to be omitted. [Clause 22]

The above amendments apply to ETPs made on or after 1 July 1994. [Clause 25]


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