Explanatory Memorandum(Circulated by the authority of the Treasurer the Hon Ralph Willis, M.P.)
Chapter 17 - Constitutionally protected superannuation funds.
17.1 The amendment will exempt from tax all income derived by certain State public sector superannuation funds that are constitutionally protected from tax on any of their receipts [Clause 97].
Background to the legislation
17.2 The constitutional power of the Commonwealth to tax the South Australian Superannuation Fund Investment Trust (SASFIT) was considered by the High Court of Australia in The State of South Australia & Anor v The Commonwealth of Australia & Anor (1992) 105 ALR 171, 92 ATC 4066. The High Court found that:
- SASFIT is exempt from tax on capital gains under section 114 of the Constitution because tax on capital gains is a tax on property; and
- by majority, SASFIT is not exempt from tax on interest income.
17.3 As a result of the High Court's decision State superannuation funds that are constitutionally protected are exempt from tax on part of their income. However, any payment from such a fund is from an untaxed source. Consequently members of the fund will be subject to tax at the higher rates applying to eligible termination payments and superannuation pensions from an untaxed source, even though part of the income of the fund is taxed.
17.4 An additional complication arises because State superannuation funds which are constitutionally protected on part of their income have behaved differently. Some funds have always considered that they are exempt from tax on all of their income. Benefits paid from these funds have been treated as being from an untaxed source. Other funds have assumed that they are liable to tax on all their income and have paid benefits out on the presumption that they are from a taxed source.
17.5 A fund is a constitutionally protected superannuation fund if the assets of the fund belong to a State Government. That is, a State public sector superannuation fund is a constitutionally protected fund unless the assets of the fund are held in trust in the ordinary legal sense (see Superannuation Fund Investment Trust v Commissioner of Stamps (SA) (1979) 145 CLR 330; 79 ATC 4429). The current definition of constitutionally protected fund will be replaced. To remove any doubt about the matter, funds which qualify as a constitutionally protected fund will be listed in the Income Tax Regulations [Clause 100 and 101; New definition of constitutionally protected fund in subsection 267(1)].
17.6 Income derived by a constitutionally protected fund will be exempt from tax. [Clause 102; New section 271A]
17.7 If a constitutionally protected fund invests in a pooled superannuation trust (PST), the income derived by the PST that is attributable to that investment will be exempt from tax [Clause 103; New section 297C].
17.8 Similarly, if a constitutionally protected fund purchases a life assurance policy from a life assurance company or registered organisation, the assessable income of the life assurance company or registered organisation that is attributable to that policy will be exempt from tax. [Clauses 98 and 99; New section 110CA and section 116FC]
17.9 Benefits paid from a constitutionally protected fund are from an untaxed source and therefore taxed at a higher rate. Subsection 27AB(1) determines the taxed and untaxed elements of the post-June 1983 component of an eligible termination payment. A benefit is from a taxed source if it is paid from a taxed superannuation fund. A taxed superannuation fund is defined in subsection 27A(1) and specifically excludes a constitutionally protected fund. Similarly, any pension paid from a constitutionally protected fund will not qualify for a rebate because it is not paid from a taxed superannuation fund (subsection 159SM(2)).
17.10 Subsection 271(1) will be retained so that if a fund that is not listed as a constitutionally protected fund in the Regulations is, in fact, exempt from tax on property under section 114 of the Constitution, Part IX will not apply to tax the fund on its constitutionally protected receipts. Benefits paid from such a fund will, of course, be from an untaxed source.
17.11 The date of effect of the proposed amendments depends on the behaviour of the particular fund since 1 July 1988. The reason for having different application dates is to minimise the disruption to affected funds and the impact on members of constitutionally protected funds who received benefits between 1 July 1988 and 30 June 1993.
17.12 Generally the proposed amendments will apply to assessments made in respect of the 1993-94 and subsequent years of income. However, if a constitutionally protected fund has not paid income tax because it assumed that all of the income of the fund was exempt from tax, the proposed amendments will apply to assessments made in respect of the 1988-89 and subsequent years of income [Clause 104].
17.13 A constitutionally protected fund will be considered to have assumed that it was exempt from tax, and therefore be regarded as not having paid tax, if it paid benefits out as though they were wholly from an untaxed source.
17.14 The proposed amendments will apply to constitutionally protected funds that have paid income tax since 1 July 1988 with effect to assessments made in respect of the 1993-94 and subsequent years of income. Such funds are entitled to the benefit of constitutional protection on that part of their income which represents a tax on property in respect of assessments made in earlier years. Benefits paid to members by those funds were regarded as being from a taxed source whereas, in fact, they should have been treated as though they were from an untaxed source.
17.15 Therefore, to alleviate the need for such funds to revise benefits paid to members since 1 July 1988 and to ease the impact on members who have made investment decisions on the basis that the benefits they received were from a taxed source, the transitional provisions will ensure that benefits paid in a year of income between the 1988-89 to 1992-93 years of income by a constitutionally protected fund that paid income tax in respect of the relevant year of income will be treated as though they were from a taxed source [Clause 105].
17.16 A constitutionally protected fund will be considered to have paid income tax for these purposes even though it may not have actually paid income tax in respect of a particular year because of the impact of concessions such as pre-July 1988 funding credits, the exemption of income attributable to current pension liabilities and dividend imputation credits. The crucial test is that the fund behaved as a taxed superannuation fund in the relevant year and lodged income tax returns accordingly.
17.17 As a consequence of these transitional measures the post-June 1983 component of eligible termination payments made between 1 July 1988 and 30 June 1993 from constitutionally protected funds that paid income tax in the relevant year will be regarded as being from a taxed source.
17.18 Similarly, pensions paid between 1 July 1988 and 30 June 1993 from constitutionally protected funds that paid income tax in the relevant year will be regarded as being from a taxed source and therefore be rebatable superannuation pensions in the 1988-89 to 1992-93 years of income. Those pensions will no longer be rebatable from 1 July 1993.