Senate

Taxation Laws Amendment Bill (No. 4) 1994

Income Tax (Former Complying Superannuation Funds) Bill 1994

Income Tax (Former Complying Superannuation Funds) Act 1994

Income Tax (Former Non-Resident Superannuation Funds) Bill 1994

Income Tax (Former Non-resident Superannuation Funds) Act 1994

Income Tax Rates Amendment Bill 1994

Income Tax (Deficit Deferral) Bill 1994

Income Tax (Deficit Deferral) Act 1994

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Ralph Willis, MP)
THIS MEMORANDUM TAKES ACCOUNT OF AMENDMENTS MADE BY THE HOUSE OF REPRESENTATIVES TO THE BILL AS INTRODUCED

Superannuation

Overview

7.1 The amendments contained in Schedule 3 of the Bill are primarily concerned with the tax treatment of dealings with non complying superannuation funds (particularly overseas superannuation funds).

7.2 This Chapter explains the amendments in the context of their impact on:

·
the taxation of eligible entities (i.e., superannuation funds, approved deposit funds (ADFs) and pooled superannuation trusts (PSTs)) - Section 1;
·
the taxation treatment of superannuation contributions - Section 2; and
·
the taxation treatment of amounts paid from superannuation funds, ADFs and certain payments made in consequence of termination of employment - Section 3.

Section 1 - Taxation of eligible entities

Summary of the amendments

Purpose of the amendments

7.3 The amendments will:

·
insert new residency tests for superannuation funds and ADFs;
·
ensure foreign superannuation funds do not lose their status because they pay pensions to Australian residents;
·
restrict complying status under the SISA to resident entities;
·
specify the circumstances in which a superannuation fund could lose its complying status under the SISA;
·
restrict contributions under the SGAA to complying superannuation funds (the new definition ensures the fund is a resident superannuation fund);
·
tax eligible entities (that is, complying or non complying superannuation funds, complying or non complying ADFs, or PSTs) that change residency or compliance status by reference to the market value of their assets at the time of change;
·
allow the capital gain reflected in the market value of assets used for determining the amount included in a fund's assessable income on changing status from a complying fund to a non complying fund or from a non resident to a resident to be taken into account when calculating any capital gain on the subsequent disposal of the asset;
·
subject to withholding tax dividend, interest and royalty income derived by non-resident entities that do not qualify as foreign superannuation funds; and
·
tax non resident entities on their assessable income (excluding dividend, interest and royalty income) at the tax rate applicable to non complying superannuation funds (presently, 47%).

Date of effect

7.4 Most of the amendments will apply to a fund for the 1994 95 and subsequent years of income.

7.5 The amendments to recoup tax concessions given to superannuation funds that change their status from complying to non complying and to impose tax on funds that change their status from non resident to resident will apply from the beginning of the 1995 96 year of income of the fund.

7.6 The amendments to remove the withholding tax exemptions for certain dividend, interest and royalty income of overseas superannuation funds apply in relation to income derived by a fund after the day on which the amendments receive Royal Assent.

Background to the legislation

What is an eligible entity?

7.7 An eligible entity is a complying or non complying superannuation fund, a complying or non complying ADF, or a PST.

What is the current tax treatment of an eligible entity?

7.8 The tax treatment of an eligible entity is governed by Part IX of the ITAA and the SISA. The tax treatment depends on whether the eligible entity is:

·
complying or non complying; and
·
resident or non resident.

7.9 An eligible entity is complying and taxed concessionally if it satisfies certain requirements specified in the SISA. Eligible entities that do not satisfy these requirements are non complying and taxed on a non concessional basis.

7.10 An eligible entity is taxed as a non resident if it is a foreign superannuation fund or a foreign ADF as defined in subsections 6(1) and 267(1) of the ITAA respectively. Essentially, an eligible entity will qualify as a foreign fund if it is established, maintained and applied for the sole purpose of providing superannuation benefits for persons other than persons who are, or would ordinarily be or become residents of Australia or a Territory.

7.11 Eligible entities that do not qualify as foreign superannuation funds or foreign ADFs are taxed in Australia on their assessable income (including dividend, interest and royalty income) under Part IX of the ITAA as if the trustee of the fund is a taxpayer and a resident (section 272).

7.12 Foreign superannuation funds are liable to tax in Australia as follows:

·
Dividend, interest and royalty income:

-
if the fund is exempt from income tax in its own country, dividend, interest and royalty income is exempt from tax in Australia; or
-
if the fund is subject to income tax in its own country, dividend, interest and royalty income is subject to withholding tax in Australia.

·
Other income:

-
the fund is assessable on other income in Australia under Part IX of the ITAA.

7.13 Foreign ADFs are liable to tax on their assessable income in Australia (including dividend, interest and royalty income) under Part IX of the ITAA.

7.14 However, the extent to which the assessable income of an eligible entity is taxed in Australia is subject to any relevant Double Tax Agreement.

Can both resident and non resident eligible entities be complying?

7.15 An eligible entity is complying and taxed concessionally if it satisfies certain requirements specified in the SISA. Currently there are no residency tests included in these requirements. Therefore, both resident and non resident eligible entities can be complying and receive concessional tax treatment.

For the purposes of the SGAA, can contributions (including the shortfall component) currently be paid to both resident and non resident superannuation funds?

7.16 For the purposes of the SGAA, contributions (including the shortfall component) must be paid to a complying superannuation fund or to a fund that is deemed to be a complying superannuation fund. A fund is deemed to be a complying superannuation fund if, when the contribution is made, the trustee has given a statement that the fund is a regulated superannuation fund that is not operating in breach of the SISA and its associated regulations.

7.17 Currently both resident and non resident superannuation funds can be regulated superannuation funds. As a consequence, these contributions can be paid to both resident and non resident superannuation funds.

What is the current tax treatment of an eligible entity that changes its residency or compliance status?

7.18 There are no special rules if an eligible entity changes its residency status. However, if a complying superannuation fund becomes a non complying superannuation fund part way through a year of income, the assessable income of the fund is calculated as if the superannuation fund has been non complying for the full year.

How do the current residency tests for eligible entities compare with other taxpayers?

7.19 Generally the ITAA provides a test to determine whether a taxpayer is an Australian resident. Taxpayers that do not satisfy the test are taxed as non-residents. However, in the case of eligible entities, the ITAA defines a foreign superannuation fund and a foreign ADF. Only those entities that satisfy these definitions are taxed as non-residents. The basic test of residence for eligible entities is more restrictive than that for other taxpayers. Under the existing provisions, a superannuation fund is treated as a non-resident if its only connection with Australia is to invest here.

Explanation of the amendments

What are the new residency tests for eligible entities?

7.20 Currently, an eligible entity is taxed as a non resident if it qualifies as a foreign superannuation fund or a foreign ADF. Eligible entities that do not qualify as foreign superannuation funds or foreign ADFs are taxed in Australia under Part IX of the ITAA as if the trustee is a taxpayer and a resident.

7.21 The Bill will insert definitions of a resident and a non resident superannuation fund into the ITAA [item 7] and residency tests for ADFs into the SISA [item 105] . It will also amend the definition of foreign superannuation fund to ensure a superannuation fund established entirely outside Australia will not lose its status because it pays pensions to residents of Australia [item 10 - new subsection 6(7A)]. 7.22 As a consequence of the amendments, an eligible entity will be taxed as a resident if it qualifies as:

·
a resident superannuation fund in relation to the year of income; or
·
an ADF; or
·
a PST.

7.23 An eligible entity will only be taxed as a non resident if it qualifies as a non resident superannuation fund in relation to the year of income. [Item 16]

When will an eligible entity qualify as a resident superannuation fund?

7.24 An eligible entity will qualify as a resident superannuation fund if it satisfies the appropriate definition in new section 6E [item 7] . The Bill will insert two definitions into the ITAA. One will define a resident superannuation fund at a particular time, the other will define a resident superannuation fund in relation to a year of income [item 11 - new subsections 6E(1) and 6E(3) respectively].

7.25 The 'at a particular time' definition is used to work out:

·
when dividend, interest or royalty income paid to a superannuation fund is subject to withholding tax;
·
when contributions paid to a fund are subject to tax under the Fringe Benefits Tax Act 1986 (FBTA); and
·
when a fund is a resident in relation to a year of income.

7.26 The 'in relation to a year of income' definition is used to determine if an eligible entity is taxed as a resident or a non resident.

7.27 Both tests are used to determine the tax treatment of certain amounts paid from a superannuation fund.

7.28 An eligible entity will qualify as a resident superannuation fund in relation to a year of income if the fund is a provident, benefit, superannuation or retirement fund at all times during the year of income when the fund is in existence and is a resident superannuation fund at any time during the year of income. [New subsection 6E(3)]

7.29 A fund will be a resident superannuation fund at a particular time only if all of the following conditions are met:

·
the fund is a provident, benefit, superannuation or retirement fund at the relevant time; and
·
either the fund was established in Australia or any asset of the fund at the relevant time is situated in Australia; and
·
at the relevant time, the central management and control of the fund is in Australia; and
·
if the fund has at least one active member , the total of accumulated entitlements of resident active members at the relevant time is 50% or more of the total of accumulated entitlements of all active members at the relevant time.
[New subsection 6E(1)]

When will an eligible entity qualify as a superannuation fund?

7.30 An eligible entity will be a superannuation fund if:

·
it is a resident or non resident scheme that pays superannuation benefits upon retirement or death; or
·
it qualifies as a superannuation fund under section 10 of the SISA.

[Item 9 - new definition of superannuation fund in subsection 6(1)]

When is a member an active member of a superannuation fund?

7.31 A member is an active member of a superannuation fund if:

·
he or she currently contributes to the fund; or
·
someone else contributes to the fund on his or her behalf (including where an employer is on a contributions holiday) and the amount contributed relates to the relevant year of income.

[Definition of active member in new subsection 6E(5)]

Why is the new residency test for superannuation funds based on active members?

7.32 The test for residency of superannuation funds is based on active members to allow the trustee of a fund to control its residency status. The trustee can ensure a fund remains a resident by refusing to accept contributions that relate to non resident members.

Can a fund be a resident superannuation fund at a particular time if it does not have an active member at the relevant time?

7.33 A fund that does not have an active member at the relevant time will be a resident superannuation fund at a particular time if it satisfies the first three conditions of that definition. That is, all of the following conditions are met:

·
the fund is a provident, benefit, superannuation or retirement fund at the relevant time; and
·
either the fund was established in Australia or any asset of the fund at the relevant time is situated in Australia; and
·
at the relevant time, the central management and control of the fund is in Australia.

When is a member a resident?

7.34 Generally a member will be a resident of Australia if he or she:

·
resides in Australia; or
·
has his or her domicile in Australia and the Commissioner is not satisfied that his or her usual place of abode is outside Australia; or
·
has been in Australia, continuously or intermittently, for more than half the year of income unless the Commissioner is satisfied that his or her permanent place of abode is outside Australia and he or she does not intend to take up residence in Australia; or
·
contributes to, or is the spouse or child under 16 of a person who contributes to, the superannuation fund for Commonwealth Government officers.

[Definition of resident in subsection 6(1) of the ITAA]

What evidence does the trustee need to establish a member's residency status?

7.35 Generally the trustee of a superannuation fund can rely on a statement from the member as to the member's residency status.

How will the accumulated entitlements of an active member be calculated?

7.36 The Bill will insert two methods into the ITAA to calculate accumulated entitlements of active members at the relevant time [definition of accumulated entitlement in new paragraph 6E(1)(d)] . The first method is used for members that are active members without defined benefits . The second method is used for members that are active members with defined benefits.

7.37 A member will be an active member without defined benefits if, in relation to that member, the fund is not a defined benefit scheme . A member will be an active member with defined benefits if, in relation to that member, the fund is a defined benefit scheme . [Definitions of active member without defined benefits and active member with defined benefits in new subsection 6E(5)]

When will a fund be a defined benefit scheme?

7.38 A fund will be a defined benefit scheme if it qualifies as a defined benefit scheme under section 6A of the SGAA assuming that subsections 6A(2) to (4) of that Act had not been enacted [definition of defined benefit scheme in new subsection 6E(5)] . That is, if it is a superannuation scheme from which the member of the scheme is entitled upon retirement to be paid a benefit based on either a specified amount and/or based on the amount of the member's annual salary at a particular date. In addition, if the scheme is not a public sector scheme, some or all of the contributions to the scheme must not relate to any particular member, but be paid into and accumulated in the form of an aggregate amount.

How will accumulated entitlements of an active member without defined benefits be calculated?

7.39 The accumulated entitlements of an active member without defined benefits is the value of the funds assets that is attributable to:

(a)
all contributions made to the fund for that member; and
(b)
total earnings on those contributions.

[Item 11 - paragraph (a) of the definition of accumulated entitlement in new paragraph 6E(1)(d) of the ITAA]

How will accumulated entitlements of an active member with defined benefits be calculated?

7.40 The accumulated entitlements of an active member with defined benefits is the amount that would be payable at that time to or for that member if he or she voluntarily ceased to be a member.

[Item 11 - paragraph (b) of the definition of accumulated entitlement in new paragraph 6E(1)(d) of the ITAA]

What is the value of the funds assets and what contributions are included for the purposes of these calculations?

7.41 The value or amount of the fund's assets is the market value of the fund's assets. That is, the amount that a willing buyer could reasonably be expected to pay to acquire the assets from a willing seller if:

·
the sale is at arm's length;
·
the assets were properly marketed; and
·
both the buyer and seller acted with knowledge and prudence.

[Item 11 - definition of value in new subsection 6E(5)].

7.42 Contributions include payments of shortfall components within the meaning of the SGAA and eligible termination payments (ETPs) rolled over to the fund. [Item 11 - definition of contributions in new subsection 6E(5)].

When will an eligible entity qualify as a non resident superannuation fund?

7.43 An eligible entity will qualify as a non resident superannuation fund if it is a provident, benefit, superannuation or retirement fund that is not a resident superannuation fund. [New subsections 6E(2) and 6E(4)]

When will an eligible entity be complying?

7.44 The proposed amendments to the SISA restrict complying status to:

·
a PST;
·
an ADF that is a resident ADF at all times during the year of income when the fund is in existence [item 107]; and
·
a superannuation fund that is a resident regulated superannuation fund at all times during the year of income when the fund is in existence [item 106].

7.45 The amendments also specify the circumstances in which a superannuation fund could lose its status as a complying superannuation fund.

[Item 109]

When will an ADF qualify as a resident ADF at a particular time?

7.46 An ADF will be a resident ADF at a particular time if all of the following conditions are met:

·
either the fund was established in Australia or any asset of the fund is situated in Australia; and
·
the central management and control of the fund is in Australia; and
·
the accumulated entitlements of resident members is 50% or more of the total assets of the fund.

[Item 105 - definition of resident ADF in new subsection 20A(1) of the SISA]

7.47 The Bill will remove the definition of a foreign ADF from subsection 267(1) of the ITAA. [Item 15]

For the purposes of working out if an ADF is a resident ADF, how are accumulated entitlements of resident members and total assets of the fund calculated?

7.48 The accumulated entitlements of resident members is the value of the funds asset's that is attributable to:

(a)
all deposits made to the fund for members who are residents; and
(b)
total earnings on those deposits.

[Item 105 - definition of accumulated entitlements of resident members in new section 20A of the SISA]

7.49 The total assets of the fund is the value of the fund's assets at that time. [Item 105 - definition of total assets of the fund in new section 20A of the SISA]

7.50 A member includes a depositor and resident has the same meaning as in the ITAA. [Item 105 - definitions in new subsection 20A(2) of the SISA]

When will a superannuation fund be a resident regulated superannuation fund at a particular time?

7.51 A superannuation fund will be a resident regulated superannuation fund at a particular time if it is a regulated superannuation fund that is a resident superannuation fund at a particular time (as defined in new subsection 6E(1) of the ITAA). [Item 104]

When will a fund be complying for the purposes of the SGAA?

7.52 The Bill will amend the SGAA to ensure only funds that are resident at all times during the year of income when the fund is in existence can be complying or deemed to be complying superannuation funds. That is, a fund must be a resident regulated superannuation fund for the purposes of the SISA. [Items 119 124]

What are the circumstances in which a superannuation fund could lose its status as a complying superannuation fund?

7.53 A superannuation fund will automatically lose its complying status if the fund is not a resident regulated superannuation fund at a particular time.

7.54 A superannuation fund cannot be made non complying unless the trustee of the fund contravenes the SISA or regulations.

7.55 If the trustee of the fund did contravene the SISA or regulations the fund can only be made non complying if:

·
either:

-
all members of the fund were directly or indirectly knowingly concerned in, or party to, the contravention; or
-
some (but not all) members of the fund were directly or indirectly knowingly concerned in, or party to, the contravention and the remaining members would not suffer any substantial financial detriment if the fund became non complying; and

·
the Insurance and Superannuation Commissioner believes that the fund should be made non complying.

[Items 110 and 111]

7.56 In making the decision to make a fund non complying, the Insurance and Superannuation Commissioner is required to have regard to the taxation consequences of the fund being made non complying, the seriousness of the contravention and all other relevant circumstances. [Item 111]

7.57 Whether a person was in any way directly or indirectly knowingly concerned in, or party to, a particular contravention may be decided on the balance of probabilities. [Item 111]

What will happen if the equal representation rules in Part 9 of the SISA are contravened?

7.58 Part 9 of the SISA sets down rules relating to the representation of employers and members in relation to the management and control of standard employer-sponsored superannuation funds. Section 87 of that Act currently provides that it is not an offence to contravene Part 9 but that a contravention may result in a fund losing its status as a complying superannuation fund.

7.59 The Bill will amend the SISA to ensure a fund will not lose its complying status if it contravenes Part 9 of the Act. Instead, a contravention of Part 9 can result in the fund being directed under section 63 of the SISA not to accept any contributions made to the fund by an employer-sponsor. [Items 113 - 116]

What will happen if a complying superannuation fund becomes non complying?

7.60 If a complying superannuation fund becomes non complying before the 1995 96 year of income of the fund, the current treatment will apply. That is, the assessable income of the fund will be calculated as if the superannuation fund has been non complying for the full year and taxed at the rate of 47%.

7.61 However, if a superannuation fund changes from complying to non complying during or after the 1995 96 year of income of the fund, the trustee of the fund will be taxed on the fund's net previous income in respect of previous years of income in the year it changes its status. [Item 22 - new subsection 288A(1)]

7.62 This treatment applies if a fund is a non complying superannuation fund in relation to the current year of income and was a complying superannuation fund in relation to the immediately preceding year of income.

7.63 The fund's net previous income in respect of previous years of income is the amount worked out using the following formula:

Asset values - Undeducted contributions

where:

Asset values is the market value of the fund's assets immediately before the start of the current year of income; and
Undeducted contributions is the total amount of undeducted contributions (as defined in section 27A) in the fund immediately before the start of the current year of income that were made by current members of the fund.

[New subsection 288A(2)]

7.64 This amount will be included in the fund's assessable income for the current year and taxed at a rate of 47%. [New Income Tax (Former Complying Superannuation Funds) Bill 1994]

What will happen if a non resident superannuation fund becomes a resident superannuation fund?

7.65 If a non resident superannuation fund becomes a resident before the 1995 96 year of income of the fund, the current treatment will apply. That is, no special rules will apply.

7.66 However, if a superannuation fund changes from a non resident to a resident during or after the 1995 96 year of income of the fund, the trustee of the fund will be taxed on the fund's net previous income in respect of previous years of income in the year it changes its status. [Item 28 - new subsection 288B(1)]

7.67 This treatment applies if a fund is a resident superannuation fund in relation to the current year of income and was a non resident superannuation fund in relation to the immediately preceding year of income.

7.68 The fund's net previous income in respect of previous years of income is the amount worked out using the following formula:

Asset values - Member contributions

where:

Asset values is the sum of the market values of the fund's assets immediately before the start of the current year of income; and
Member contributions is the total amount of contributions in the fund immediately before the start of the current year of income that were made by current members of the fund.

[New subsection 288B(2)]

7.69 This amount will be included in the fund's assessable income for the current year. As a consequence, funds which change their status from a non resident superannuation fund to a resident non complying superannuation fund, will be taxed on this amount at a rate of 47%. Funds which change their status from a non resident superannuation fund to a resident complying superannuation fund will be taxed at a rate of 15%. [New Income Tax (Former Non Resident Superannuation Funds) Bill 1994]

What about credits for foreign tax paid on the amounts included in the fund's assessable income under new subsections 288A and 288B?

7.70 The amount included in the fund's assessable income under new sections 288A and 288B will be the after tax income of the fund. Therefore, any foreign tax paid immediately before the start of the current year will be reflected in the asset values. However, foreign tax paid in the current or later years of income on any amount included under new sections 288A and 288B will not be reflected.

7.71 It is proposed to allow a resident superannuation fund a credit for foreign tax paid on any part of the fund's net previous income referred to in new subsections 288A(2) and 288B(2) provided the foreign tax is paid by the trustee in the current year of income (as defined in those subsections) or any subsequent year of income [items 19, 20, 25 and 26] . A credit will be allowed for any foreign tax paid, up to the amount of Australian tax payable by the fund.

For CGT purposes, what will happen if an asset, included in the fund's assessable income under new subsections 288A and 288B, is disposed of?

7.72 If an amount would be assessable under the CGT provisions to a taxpayer that is the trustee of a superannuation fund as a result of the disposal of an asset (the notional capital gain ) and the market value of the asset was taken into account in determining the fund's net previous income in respect of previous years of income under new sections 288A or 288B , then to prevent double taxation the amount of the capital gain calculated may be reduced or extinguished.

7.73 If the notional capital gain of the asset exceeds the amount that would have been included in assessable income as a capital gain if the asset had been disposed of for its market value at the time of calculating the fund's net previous income in respect of previous years of income , then the excess is assessable under the CGT provisions.

7.74 If the notional capital gain of the asset does not exceed that amount, then no amount is included in assessable income under the CGT provisions.

[Items 21 and 27 - new subsections 160ZA(4AA) and 160ZA(4B)]

Example 1

7.75 Grierson superannuation fund sells an asset for $1,000. For CGT purposes, the indexed cost base is $800. The market value of the asset that was taken into account in determining the fund's assessable income under new section 288A was $600. The amount that would have been included in the fund's assessable income as a capital gain if it had disposed of the asset at that time is $250.

7.76 The notional capital gain will be calculated as follows:

Disposal proceeds 1000
less Indexed cost base 800
Notional capital gain $200

7.77 The notional capital gain does not exceed the amount that would have been included in the fund's assessable income as a capital gain if it had disposed of the asset at the time of calculating the fund's net previous income in respect of previous years of income under new section 288A. Therefore, no amount is assessable under the CGT provisions.

Example 2

7.78 If in example 1 the indexed cost base was $400, the notional capital gain will be calculated as follows:

Disposal proceeds 1000
less Indexed cost base 400
Notional capital gain $600

7.79 The notional capital gain exceeds the amount that would have been included in the fund's assessable income as a capital gain if it had disposed of the asset at the time of calculating the fund's net previous income in respect of previous years of income under new section 288A . Therefore the amount that is assessable under the CGT provisions is $350 (that is, $600 $250).

What rate of tax will apply to assessable income derived by non resident superannuation funds?

7.80 As a consequence of the amendments restricting complying status to resident superannuation funds, non-resident superannuation funds will be taxed on their assessable income (excluding dividend, interest and royalty income) at the rate of 47%, subject to the terms of any relevant double tax agreement.

How will non resident superannuation funds be taxed on dividend, interest and royalty income?

7.81 The existing exemption for superannuation funds that qualify as foreign superannuation funds will remain unchanged. However, other non resident superannuation funds will be subject to withholding tax in Australia on dividend, interest and royalty income they derive in the same way as other non resident taxpayers. That is, dividend withholding tax will be imposed on the gross amount of dividends paid. Withholding tax on unfranked dividends is generally imposed at a flat rate of 30%. However, if the fund is a resident of a country with which Australia has a double tax agreement the rate is 15%. A non-resident superannuation fund will be exempt from dividend withholding tax on franked dividends.

7.82 In relation to interest income, withholding tax will be imposed on the gross amount of interest received from Australian sources by non-resident superannuation funds generally at the flat rate of 10%. This rate is unaffected by Australia's double tax agreements.

7.83 Royalties will generally be subject to a final withholding tax of 30%, subject to any relevant double tax agreement.

7.84 Consequently, the Bill will remove the current withholding tax exemption for non resident superannuation funds (but not for foreign superannuation funds). [Item 32]

7.85 For the purposes of the dividend, interest and royalty withholding tax provisions, the trustee of a provident, benefit, superannuation or retirement fund will be a non resident if the fund is a non resident at that particular point in time. The trustee includes the person who manages the fund. [Items 31 and 33 - new subsections 128A(10), 128A(11), 221YK(4) and 221YK(5)]

Section 2 - Taxation treatment of superannuation contributions

Summary of the amendments

Purpose of the amendments

7.86 The amendments will:

·
restrict the existing deduction and rebate provisions for member contributions to amounts paid to a (resident) complying superannuation fund;
·
restrict the existing exemption under the FBTAA that applies to superannuation fund contributions to employer contributions paid to a (resident) complying superannuation fund and to employer contributions paid to a non resident superannuation fund in respect of an employee who has a temporary entry permit for a period of up to four years;
·
restrict the existing deduction provisions for employer superannuation contributions to amounts paid to a (resident) complying superannuation fund;
·
allow an employer a deduction for contributions to a non complying superannuation fund for the benefit of an employee (other than contributions paid to a non resident superannuation fund in respect of an employee who has a temporary entry permit for a period of up to four years);
·
include the following amounts in the assessable income of a superannuation fund as taxable contributions:

(a)
all contributions made to a resident superannuation fund other than personal contributions made by the member which do not qualify for a tax deduction and contributions made by the trustee of an exempt life assurance fund, a complying superannuation fund, a complying ADF or a PST; and
(b)
all contributions made to a non resident superannuation fund that relate to a period the member is or was a resident of Australia or a non resident deriving salary and wage income that is assessable in Australia other than personal contributions paid by the member and contributions paid by another person in respect of a member who has a temporary entry permit for a period of up to four years;

·
allow eligible entities to claim a deduction for the amount of taxable contributions included in assessable income that are fringe benefits;
·
allow ADFs and resident superannuation funds a deduction for the cost of collecting all contributions; and
·
allow non resident superannuation funds to claim a deduction for the cost of collecting contributions only if the contributions are taxable contributions.

Date of effect

7.87 The amendments to the FBTAA apply to benefits provided on or after 1 July 1994.

7.88 The amendments to deductions for employer superannuation contributions will apply to contributions made to a fund in the 1994 95 and subsequent years of income.

7.89 The other amendments apply to assessments made in respect of the 1994 95 and subsequent years of income.

Background to the legislation

When can taxpayers claim a deduction or a rebate for superannuation contributions?

7.90 Currently, members can claim a deduction or a rebate for personal superannuation contributions paid to a complying superannuation fund in limited circumstances.

7.91 An employer can only claim a deduction for superannuation contributions under Subdivision AA of Division 3 of Part III of the ITAA. To qualify for a deduction, the contributions must be paid to a complying or non-complying fund for the purposes of providing superannuation benefits for, or for dependants of, an eligible employee. Section 82AAC places a limit on the amount an employer can claim as a deduction.

Are deductions and rebates for superannuation contributions restricted to amounts paid to resident funds?

7.92 Under the existing law, a fund is a non resident if it qualifies as a foreign superannuation fund. A foreign superannuation fund cannot accept contributions in respect of a resident member or a from a resident employer.

7.93 Consequently, deductions and rebates for superannuation contributions are restricted to amounts paid to funds that are currently taxed as residents.

Are employer contributions currently subject to fringe benefits tax?

7.94 Contributions paid or set aside by an employer to a superannuation fund are specifically excluded from fringe benefits tax (FBT).

Are contributions currently included in the assessable income of an eligible entity?

7.95 Member contributions which have been claimed as a tax deduction and contributions paid by an employer are generally included in the assessable income of an eligible entity as taxable contributions. However, contributions paid by the trustees of an exempt life assurance fund, a complying superannuation fund, a complying ADF or a PST are not included.

How are member contributions treated if a deduction is not allowed?

7.96 Contributions made after 30 June 1983 for which no deduction is or has been allowed, other than contributions made by an employer, are treated under the ETP Subdivision as either undeducted contributions or undeducted purchase price. The contributions are treated as undeducted contributions if the benefit paid is a lump sum. Undeducted contributions are not included in assessable income. The contributions will be included in undeducted purchase price if the benefit paid is a pension or an annuity. Undeducted purchase price is excluded from assessable income over the term the pension or annuity is received.

What deductions can an eligible entity currently claim in respect of collecting contributions?

7.97 An eligible entity (other than a PST) can claim a deduction for the costs of collecting all contributions, even in respect of most contributions that are not taxable.

Explanation of the amendments

What are the new rules for taxpayers claiming a deduction or a rebate for personal superannuation contributions?

7.98 Currently, members can claim a deduction or a rebate for personal superannuation contributions paid to a complying superannuation fund in limited circumstances. The proposed amendments to the SISA will restrict deductions and rebates for these contributions to amounts paid to a resident superannuation fund.

What changes will be made to employer contributions?

7.99 Employers will continue to be entitled to deductions for superannuation contributions only under Subdivision AA of Division 3 of Part III of the ITAA [item 40] . However, the deduction limits in section 82AAC will be restricted to contributions paid to a complying superannuation fund [item 38] or to a non complying superannuation fund provided that the taxpayer making the contribution had reasonable grounds for believing that the fund was a complying fund [item 39 - new subsection 82AAD].

7.100 Any contributions paid by an employer to a non resident superannuation fund in relation to an eligible employee who is an exempt visitor for the purposes of section 517 of the ITAA will be not be allowable as a deduction [item 39 - new subsection 82AAE] . Such contributions will not be fringe benefits and therefore will not be subject to tax under the FBTAA [item 2 - new subparagraph (j)(ii) of the definition of fringe benefit in subsection 136(1) of the FBTAA] .

7.101 Any other contributions paid by an employer for eligible employees to a non complying superannuation fund will be deductible. The amount of the deduction will not be limited to the amounts specified in section 82AAC [item 39 - new subsection 82AAE] . However, these contributions will be fringe benefits and subject to tax under the FBTAA [item 2].

What are reasonable grounds for believing a fund is a complying superannuation fund?

7.102 The test to determine if a taxpayer has reasonable grounds for believing a fund is a complying superannuation fund will be the same as the test used in section 25(1) of the SGAA. That is, a taxpayer will have reasonable grounds for believing a fund is a complying superannuation fund if, at or before the time the contribution or payment is made, the taxpayer has obtained a written statement from the trustee of the fund stating that:

·
the fund is a resident regulated superannuation fund; and
·
the fund is not subject to a direction from the Insurance and Superannuation Commissioner that would prevent the trustee from accepting the contributions.

7.103 A fund is subject to a direction if it has contravened the requirements of the SISA and/or its associated regulations. However, a contravention of the SISA or regulations is to be ignored unless it is an offence or the contravention of a civil penalty provision.

7.104 A taxpayer cannot presume a fund is complying if he or she has reasonable grounds for believing the fund is not a resident regulated superannuation fund or is operating in breach of the SISA and/or its associated regulations.

[Items 4 and 39 - new sections 136AB of the FBTAA and 82AAD of the ITAA]

7.105 Section 25(1) of the SGAA will be amended to ensure an employer does not have to obtain a written statement from the trustee of a superannuation fund every time a contribution is made. Instead, the notice must be obtained at or before the time the contribution or payment is made. After receiving such a notice the employer can presume that the fund retains its complying status until he or she has reasonable grounds for believing otherwise. [Item 121]

When is an eligible employee an exempt visitor?

7.106 An eligible employee will be an exempt visitor if he or she is a resident of Australia for a year of income and all of the following conditions are satisfied:

·
the employee has a temporary entry permit granted under the Migration Act 1958 ; and
·
the period of time from the issue date of the current permit until its expiry date is four years or less or where the current permit was issued as an extension of an earlier permit the period of time from the issue date of the earliest permit is four years or less; and
·
the employee is not awaiting the outcome of an application for a permanent entry permit under the Migration Act 1958 .

7.107 For the purposes of the these tests, a new entry permit issued under the Migration Act 1958 as an extension of the original entry permit is considered to be an extension of the original permit.

[Definition of Who is an exempt visitor in subsection 517(2) of the ITAA]

Will other changes be made as a consequence of allowing deductions for employer contributions?

7.108 As a consequence of allowing deductions for superannuation contributions made by employers under section 82AAC and new subsection 82AAE , the Bill will ensure contributions paid to non complying superannuation funds (other than contributions paid to a non resident superannuation fund in respect of an exempt visitor) continue to be taken into account in working out if a deduction is allowed for financing costs or calculating the amount included as expenditure on research and development activities. [Items 36 and 37 - amended section 67AAA and the definition of contributions to superannuation funds in subsection 73B(1)]

What changes will be made to contributions included in the assessable income of an eligible entity?

7.109 To ensure lower tax rates only apply to payments that have the relevant amount of tax brought forward, the taxable contributions of a fund that is a resident superannuation fund in relation to the year of income will include:

·
all contributions made to the fund by a person (regardless of whether a tax deduction is allowed) other than contributions paid by the member, or the trustee of an exempt life assurance fund, a complying superannuation fund, a complying ADF or a PST; and
·

the untaxed element of the post June 83 component of an ETP rolled over.

[Item 44 - new paragraph (a) of the definition of taxable contributions in subsection 274(1)]

7.110 The taxable contributions of a resident superannuation fund will also include certain amounts transferred from some non resident superannuation funds. The amount to be included is explained in paragraph 7.184.

7.111 The taxable contributions of a fund that is a non resident superannuation fund in relation to the year of income will include contributions paid by a person (other than personal contributions paid by the member and contributions paid by another person in respect of a member who is an exempt visitor) that relate to a period the member is or was:

·
a resident of Australia; or
·
a non-resident deriving salary and wage income that is assessable in Australia.

[Item 44 - new paragraph (aa) of the definition of taxable contributions in subsection 274(1)].

7.112 Taxable contributions include all employer contributions other than contributions paid to a non-resident superannuation fund in respect of an employee who is an exempt visitor. Therefore, employer contributions that are in excess of the maximum deduction limits and employer contributions that are fringe benefits are included in taxable contributions. In addition, deductible contributions made by members will continue to be taxable contributions.

7.113 As a consequence of these amendments, the Bill will omit redundant definitions. [Item 43]

What about contributions that are fringe benefits?

7.114 The Bill will include certain contributions, including those contributions that are fringe benefits and have been subject to tax under the FBTAA, in the assessable income of an eligible entity as taxable contributions. This will ensure these contributions are taxed in Australia and allow the fund a deduction for the costs incurred in collecting them. To prevent double taxation, eligible entities will be entitled to a deduction for the amount of taxable contributions included in assessable income that are fringe benefits. [Item 50 - new section 277A]

What deductions will an eligible entity be able to claim in respect of collecting contributions?

7.115 ADFs and resident superannuation funds will be entitled to a deduction for the cost of collecting all contributions. However, non resident superannuation funds will only be entitled to a deduction for the cost of collecting taxable contributions. [Item 53 - new section 277]

Section 3 - Tax treatment of payments from superannuation funds, ADFs and certain payments made in consequence of termination of employment

Summary of the amendments

Purpose of the amendments

7.116 The amendments will:

·
exempt certain payments made in consequence of the termination of overseas projects or overseas employment from tax;
·
exempt certain payments made from eligible resident non complying superannuation funds from tax;
·
introduce specific rules for taxing lump sum payments made from certain non resident superannuation funds;
·
include as a taxable contribution certain amounts transferred from some non resident superannuation funds to resident superannuation funds;
·
tax certain pensions and annuities paid from non resident superannuation funds under section 27H;
·
exempt certain pensions and annuities paid from resident non complying superannuation funds from tax;
·
allow ETPs to be rolled-over into an Australian source only; and
·

extend the current exemption for amounts that are taxed under the foreign investment fund measures to include amounts that are assessed under the ETP Subdivision.

Date of effect

7.117 The amendments to the foreign investment fund measures apply in relation to amounts paid on or after 1 January 1993.

7.118 The amendments to allow ETPs to be rolled-over into an Australian source only apply to amounts paid to a life insurance company on or after 1 July 1994.

7.119 The other amendments apply in relation to payments made on or after 1 July 1994 or to assessments made in respect of the 1994 95 and subsequent years of income.

Background to the legislation

When is a payment from a superannuation fund or ADF taxable in Australia?

7.120 Subject to the terms of any Double Tax Agreement, a payment from a superannuation fund or ADF is taxable in Australia if it is received by an Australian resident or paid from an Australian source.

How are payments from a superannuation fund or ADF taxed in Australia?

7.121 Generally a payment from a superannuation fund or ADF is taxed in Australia as either:

·
eligible foreign remuneration or foreign earnings under sections 23AF or 23AG respectively;
·
an ETP under Subdivision AA of Division 2 of Part III of the ITAA (the ETP Subdivision); or
·

an annuity under section 27H of the ITAA.

Are any other payments taxed in the same way as payments from a superannuation fund or ADF?

7.122 The tax treatment of payments (other than pensions or annuities) from a superannuation fund or ADF also applies to certain payments made in consequence of termination of employment.

When are these payments treated as eligible foreign remuneration or foreign earnings?

7.123 Broadly, these payments are treated as eligible foreign remuneration or foreign earnings if:

·
the payment is paid to a resident of Australia;
·
the payment is a lump sum termination payment (including a lump sum redundancy payment made because of early termination of an employment contract or a superannuation payment paid from a foreign based superannuation fund);
·
the payment accrued solely from service in a foreign country that:
·
- was for a continuous period of not less than 91 days; and
·
- during which the taxpayer was working on an approved project, the holder of an office or an employee;
·
the payment, generally speaking, was subject to foreign tax; and
·

the payment is not a pension or an annuity.

How is eligible foreign remuneration or foreign earnings taxed?

7.124 If the conditions in sections 23AF or 23AG are met, eligible foreign remuneration and foreign earnings are exempt from tax in Australia. In addition, a credit is not allowed for any foreign tax paid on the exempt amount. However, the exempt amount is taken into account in determining the rate of tax on other taxable income.

When are these payments ETPs under the current law?

7.125 Generally, the payment is an ETP if it is not a pension, annuity or an unauthorised benefit and the payment is made:

·
in consequence of termination of employment;
·
from a superannuation fund (as defined in subsection 27A(1));
·
from an ADF; or
·

in relation to the commutation or residual capital value of a superannuation pension or a qualifying annuity.

For the purposes of the ETP Subdivision, what is a superannuation fund?

7.126 For the purposes of the ETP Subdivision, a superannuation fund is a provident, benefit, superannuation or retirement fund that has at any time received concessional tax treatment in Australia. For example, a fund will qualify as a superannuation fund if paragraph 23(jb) applies or has applied in relation to any year of income.

7.127 An eligible entity will also qualify as a superannuation fund if it is a scheme for the payment of benefits upon retirement or death that is constituted by or under a law of the Commonwealth, State or Territory.

7.128 A fund that is and has always been taxed as a non complying superannuation fund is not a superannuation fund for the purposes of the ETP Subdivision. As a consequence, a lump sum payment from such a fund is not an ETP and not included in assessable income.

How is an ETP taxed?

7.129 An ETP is split into several components. The amount of each component that is not rolled over is included in a taxpayer's assessable income as follows:

·
undeducted contributions and post June 1994 invalidity component - not included in assessable income;
·
non-qualifying and excessive component - the full amount is included in assessable income;
·
pre-July 83 component 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 and taxed at special rates.

Can ETPs currently be rolled over to a non resident fund?

7.130 Taxpayer's can defer paying tax on a qualifying ETP by rolling over some or all of the payment to a complying superannuation fund, a complying ADF, or to a life assurance company or registered organisation to purchase an annuity (subsection 27A(12)). As a non resident fund can be a complying fund, payments can be rolled over out of Australia.

When will the payment be treated as an annuity under section 27H?

7.131 A payment is assessable under section 27H of the ITAA if it is an annuity or a supplement to an annuity. For the purposes of this section, an annuity includes pensions paid from a superannuation fund, but does not include an annuity that is a qualifying security for the purposes of Division 16E.

How is an annuity (included under section 27H) taxed?

7.132 Section 27H includes in assessable income the whole of any superannuation pension or annuity reduced by the deductible amount. The deductible amount is broadly the undeducted purchase price (UPP) divided by the term of the pension or annuity.

7.133 UPP (defined in subsection 27A(1)) is essentially the amount of contributions made by the member to the superannuation fund to obtain/purchase the pension or annuity that have not been claimed in Australia as a tax deduction or, if any contributions were paid before 1 July 1983, the taxpayer did not get a tax rebate.

7.134 The pension or annuity may also qualify for a rebate of tax if it is paid from a taxed superannuation fund. A taxed superannuation fund is a superannuation fund (for the purposes of the ETP Subdivision) that is not a constitutionally protected fund within the meaning of Part IX of the ITAA. A rebate is available only if the fund is a complying superannuation fund. Therefore, a pension or annuity paid from a fund that is and has always been taxed as a non complying superannuation fund does not qualify for a rebate.

What if the payment has been taxed overseas?

7.135 Resident taxpayers are generally entitled to claim a credit for foreign tax paid on foreign income. Foreign income is defined in subsection 6AB(1) of the ITAA as income derived from sources in a foreign country (including certain attributable income from a non resident trust estate and a controlled foreign company) but does not include income that is exempt from tax. For example, a credit is not allowed for foreign tax paid on income that is exempt from tax under section 23AF or section 23AG.

7.136 For the purposes of calculating the amount of credit to be allowed, three classes of foreign income are identified. These are:

(a)
(a) passive income (e.g., dividends, interest, annuities, rental income, royalties, an amount received as consideration for an assignment of property or a right, profits of a capital nature, certain commodity gains and certain attributable income from a non-resident trust estate and a controlled foreign company - section 160AEA);
(b)
(b) offshore banking income (ie, income derived from offshore banking transfers and dividends paid out of profits from the making of the off-shore banking transfer); and
(c)

(c) other income.

7.137 The amount of credit is calculated separately for each class of foreign income (subsection 160AF(7)). For each class, the credit is limited to the lesser of:

·
the amount of foreign tax paid on that class of foreign income; and
·

the amount of Australian tax payable in respect of that income.

7.138 If the foreign tax is not fully utilised, the excess may be carried forward for a maximum period of five years. This excess can only be offset against Australian tax payable on future foreign income.

7.139 A credit is generally allowed for foreign tax paid on payments that are taxed as ETPs.

What about the foreign investment fund (FIF) measures?

7.140 In addition to the tax treatment outlined above, a taxpayer may have been assessed on some or all of the payment under the FIF measures. Essentially, the FIF measures apply to income and gains accumulating in an eligible entity that is not a resident Part IX entity. However, the measures do not apply if:

·
the FIF is a foreign employer sponsored superannuation fund and the taxpayer is or was an employee of the employer or of a company associated with the employer (section 518);
·
the total value of a taxpayer's interests in foreign companies, trusts and foreign life policies is less than or equal to $50,000 at the end of the taxpayer's income year (section 514); or
·

the taxpayer is a visitor to Australia and holds a temporary entry permit granted under the Migration Act 1958, which allows no more than a 4 year stay and the taxpayer has not applied for, or been given, permanent residency in Australia (section 517).

For the purposes of the FIF measures what is a resident Part IX entity?

7.141 For the purposes of the FIF measures, an eligible entity is a resident Part IX entity at a particular time if it:

·
was established in Australia; or
·

had its central management and control in Australia at any time during the past 12 months (section 477).

What if the payment includes amounts that have been taxed under the FIF measures?

7.142 Generally, that part of a payment received by a taxpayer which relates to amounts that have already been taxed under the FIF measures is exempt from Australian tax (section 23AK). However, this exemption does not apply to amounts that are assessed under the ETP Subdivision.

Explanation of the amendments

What are the new rules for taxing these payments?

7.143 Subject to the terms of any Double Tax Agreement, these payments will be taxed under the ETP Subdivision. The tax treatment that will apply to the payment will depend on whether the payment is:

·
an exempt resident foreign termination payment;
·
an exempt non resident foreign termination payment;
·
a payment from an eligible non resident non complying superannuation fund;
·
a payment from an eligible resident non complying superannuation fund;
·
an ETP; or
·

an annuity.

What changes will be made to ensure these payments are not treated as eligible foreign remuneration or foreign earnings?

7.144 The Bill will amend sections 23AF and 23AG to ensure the following amounts do not qualify as eligible foreign remuneration or foreign earnings:

·
payments/amounts that are included in assessable income under the ETP Subdivision (for example, ETPs and annuities); and
·
payments/amounts that are excluded from the definition of ETP because the payment is:
·
- the tax free amount of a bona fide redundancy payment, or of an approved retirement scheme payment, made on or after 1 July 1994 (paragraph (ja));
·
- a payment made by way of advance or loan (paragraph (k));
·
- an exempt resident foreign termination payment or an exempt non resident foreign termination payment (new paragraph (ka)),
·
- consideration of a capital nature for, or in respect of, a legally enforceable contract in restraint of trade by the taxpayer (paragraph (m));
·
- a lump sum payment from an eligible resident non complying superannuation fund or an eligible non resident non complying superannuation fund (new paragraph (ma));
·
- consideration of a capital nature for, or in respect of, personal injury to the taxpayer (paragraph (n)); or
·

- a transfer of an amount that is a taxable contribution under subsection 274(10) of the ITAA (paragraph (p)).

[Items 56 - 62]

What is an exempt resident foreign termination payment?

7.145 A payment will qualify as an exempt resident foreign termination payment if:

(a)
(a) the payment is made in consequence of the termination of the taxpayer's employment or qualifying service in relation to a project, the payment is not from a superannuation fund (as defined in subsection 6(1)) and the payment would have been an ETP if it was not excluded because of new paragraphs (ka) and (ma) of that definition; or
(b)
(b) the payment is made from an eligible non resident non complying superannuation fund within 6 months after the taxpayer terminated the employment or qualifying service in paragraph (a) and the payment would have been an ETP if:
·
the payment was not excluded because of new paragraphs (ka) or (ma) of the definition of ETP; and
·

the fund was a superannuation fund for the purposes of the ETP Subdivision.

7.146 The employment must be for service in a foreign country or the qualifying service in respect of an approved project for the purposes of section 23AF and the payment must not be exempt from tax under the law of the foreign country (that is, the payment must be taxed in the foreign country).

7.147 In addition, the taxpayer must be a resident of Australia throughout the period of the employment or qualifying service and the following conditions must be met:

·
apart from this payment, all the taxpayer's foreign earnings from that employment or eligible foreign remuneration derived by the taxpayer that was attributable to the qualifying service must be exempt from tax in Australia under section 23AG or section 23AF; and
·

the payment must relate solely to that period of employment or qualifying service.

[Item 64 - new definition of exempt resident foreign termination payment in subsection 27A(1)]

What is an eligible non resident non complying superannuation fund

7.148 An eligible non resident non complying superannuation fund is a non resident superannuation fund that:

·
is a continuously non complying superannuation fund; or
·
is a non complying superannuation fund that ceased to be a complying superannuation fund on or after 1 July 1995.

[Definition inserted by item 75]

How will an exempt resident foreign termination payment be taxed in Australia?

7.149 Exempt resident foreign termination payments will be exempt from tax in Australia [item 66 - new section 27CD] . However, these payments will be taken into account in determining the tax payable on other taxable income.

7.150 To ensure the payment is not assessable in Australia, the Bill will exclude the payment from:

·
the ETP definition [item 63 - new paragraph (ka) of the definition of ETP in subsection 27A(1)] ; and
·
the definition of fringe benefit [item 2 - new paragraph (ka) of the definition of fringe benefit in subsection 136(1) of the FBTAA] .

7.151 As the payment will not be an ETP it cannot be rolled over and will not count towards the recipient's reasonable benefit limit. Nor will it be subject to FBT.

7.152 CGT will not apply to any part of the payment because subsection 160ZA(7) specifically exempts from CGT an amount that would have been included in assessable income if a provision in the ITAA did not exempt it.

What if the taxpayer has paid tax overseas on the exempt resident foreign termination payment?

7.153 A credit is not allowed in Australia for foreign tax paid on income that is exempt from tax. As exempt resident foreign termination payments will be exempt from tax in Australia, no credit will be allowed for any foreign tax paid on these payments.

If a taxpayer receives an exempt resident foreign termination payment, how will the amount of tax payable on other income be calculated?

7.154 If a taxpayer receives an exempt resident foreign termination payment and other income that is not exempt from tax in Australia, then the amount of tax payable in respect of the other income is calculated as if the payment was exempt under sections 23AF or 23AG. The payment is treated as being exempt under section 23AF if it relates to the termination of qualifying service. If the payment relates to the termination of employment, then for the purposes of calculating the amount of tax payable the payment is treated as being exempt under section 23AG. [Items 59 and 61 - new subsections 23AF(17C) and 23AG(5)]

7.155 Irrespective of which section applies, the amount of tax payable in respect of the other income will be calculated using the formula in subsections 23AG(3) or 23AF(17A). That is:

Notional gross tax/Notional gross taxable income * Other taxable income

Where:

Notional gross taxable income is the amount that would have been the taxpayer's total taxable income if:

(a)
any eligible foreign remuneration or foreign earnings was not exempt under sections 23AF or 23AG; and
(b)
the gross amount of the exempt resident foreign termination payment reduced by the total amount of contributions made by the member was included in assessable income [items 58 and 60 - new paragraph (aa) of the definition of notional gross tax in subsections 23AF(17A) and 23AG(3)].

Notional gross tax is the tax (including medicare levy) that would be assessed on the notional gross taxable income. For the purposes of this calculation marginal tax rates will apply to the amount of the exempt resident foreign termination payment included in the notional gross taxable income. Rebates are not included in this calculation.

Other taxable income is the amount of non exempt assessable income reduced by:

-
any allowable deductions that solely relate to that income; and
-
the amount of apportionable deductions allowable.

7.156 The amount of apportionable deductions allowable is calculated using the following formula (see subsections 23AG(4) and 23AF(17B)):

(Apportionable deductions) * [Other taxable income without regard to apportionable deductions/(Apportionable deductions + Notional gross taxable income)]

Example 3

7.157 Sandy is a resident and has a total income of $50 000 for the taxation year ending 30 June 1995. This amount includes:

·
an exempt resident foreign termination payment of $6,000;
·
exempt foreign earnings (excluding the exempt resident foreign termination payment) of $32 000;
·
Australian interest of $4 000; and
·
Australian rental income of $8 000.

7.158 The exempt resident foreign termination payment includes contributions of $300 paid by Sandy.

7.159 In earning this income, Sandy incurred the following allowable expenses:

-
$1 700 in earning the exempt foreign earnings; and
-
$2 000 was a gift to an approved charity.

Step 1 - Calculate Sandy's notional gross taxable income

7.160 Sandy's notional gross taxable income will be calculated as follows:

Total income $50 000
Less Amount of contributions paid by Sandy 300
Allowable expenses 3 700 4 000
Notional gross taxable income $46 000

Step 2 - Calculate the notional gross tax

7.161 Notional gross tax (including medicare levy) on $46 000 is $13 026.00

Step 3 - Calculate the amount of apportionable deductions allowable

7.162 The amount of apportionable deductions allowable is calculated as follows:

$2000 * [(4 000 + 8 000)/(2 000 + 46 000)] = $500

Step 4 - Calculate other taxable income

7.163 Sandy's other taxable income is $11 500

(i.e., [(4 000 + 8 000) - 500])

.

Step 5 - Calculate the tax payable on other taxable income

7.164 The tax payable on Sandy's other taxable income is calculated using the formula:

(Notional gross tax/Notional gross taxable income) * Other taxable income = $13,026/$46,000 x $11,500 = $3256.50

7.165 Sandy would also have to pay provisional tax.

What is an exempt non resident foreign termination payment?

7.166 A payment will qualify as an exempt non resident foreign termination payment if the payment would have been an ETP (assuming that new paragraphs (ka) and (ma) of that definition were not inserted) and either:

(a)
the payment is made in consequence of the termination of the taxpayer's employment, the payment is not from a superannuation fund (as defined in subsection 6(1)) and the payment would have been an ETP if it was not excluded because of new paragraphs (ka) and (ma) of that definition; or
(b)
the payment is made from an eligible non resident non complying superannuation fund (explained in paragraph 7.148) within 6 months after the taxpayer became a resident of Australia and the payment would have been an ETP if:

·
the payment was not excluded because of new paragraphs (ka) or (ma) of the definition of ETP; and
·
the fund was a superannuation fund for the purposes of the ETP Subdivision.

7.167 In addition, if the payment is from an employer, the employment must be for service in a foreign country and the payment must relate solely to that period of employment.

7.168 If the payment is from an eligible non resident non complying superannuation fund , it must also satisfy the following conditions:

·
the amount paid must not exceed the amount that was properly payable out of the fund to the taxpayer at the time the payment was made. That is, the amount must not relate to future years; and
·
the period to which the payment relates must not include any period other than a period the taxpayer was a non resident or a period between the time the taxpayer became a resident and the time the taxpayer received the payment.

[Item 64 - new definition of exempt non resident foreign termination payment in subsection 27A(1)]

How will an exempt non resident foreign termination payment be taxed in Australia?

7.169 Exempt non resident foreign termination payments will be exempt from tax in Australia and will not be taken into account in determining the tax payable on other taxable income. [Item 66 - new section 27CD]

7.170 To ensure the payment is not assessable in Australia, the Bill will exclude the payment from:

·
the ETP definition [item 63 - new paragraph (ka) of the definition of ETP in subsection 27A(1)] ; and
·
the definition of fringe benefit [item 2 - new paragraph (ka) of the definition of fringe benefit in subsection 136(1) of the FBTAA].

7.171 As the payment will not be an ETP it cannot be rolled over and will not count towards the recipient's reasonable benefit limit. Nor will it be subject to FBT.

7.172 CGT will not apply to any part of the payment because subsection 160ZA(7) specifically exempts from CGT an amount that would have been included in assessable income if a provision in the ITAA did not exempt it.

What if the taxpayer has paid tax overseas on the exempt non resident foreign termination payment?

7.173 A credit is not allowed in Australia for foreign tax paid on income that is exempt from tax. As exempt non resident foreign termination payments will be exempt from tax in Australia, no credit will be allowed for any foreign tax paid on these payments.

How will lump sum payments from eligible non resident non complying superannuation funds be taxed if they are not exempt under new section 27CD?

7.174 The tax treatment of a lump sum payment (other than an exempt resident foreign termination payment and an exempt non resident foreign termination payment) from an eligible non resident non complying superannuation fund (explained in paragraph 7.148) depends on whether the payment would have been an ETP if:

·
the payment was not excluded because of new paragraph (ma) of the definition of ETP; and
·
the fund was a superannuation fund for the purposes of the ETP Subdivision.

7.175 If the payment would have been an ETP, then the following amount is included in the taxpayer's assessable income:

Gross amount - (Accumulated entitlement + Additional contributions)

Where:

Gross amount is the full amount of the payment that was properly payable from the fund on the day the payment was made before any foreign taxes or other amounts were deducted;
Accumulated entitlement is the amount properly payable to the taxpayer on the day before the relevant day;
Additional contributions is the amount of contributions included in the gross amount that were paid on or after the relevant day by the taxpayer and the employer of the taxpayer; and
Relevant day is either the day the taxpayer became a member of the fund or the first day during the period to which the payment relates that the taxpayer became a resident of Australia, whichever is later.

[Item 76 - new section 27CAA]

7.176 To ensure this payment is not assessable in Australia under other provisions of the ITAA or taxed as a fringe benefit, the Bill will exclude it from the ETP definition and the definition of fringe benefit. [Item 70 and item 2 - new paragraph (ma) of the definition of ETP in subsection 27A(1) and new paragraph (kb) of the definition of fringe benefit in subsection 136(1) of the FBTAA]

7.177 The Bill will also exclude eligible non resident non complying superannuation funds from the definition of superannuation fund in the ETP Subdivision. [Item 82]

7.178 As a consequence of these amendments the payment will not be an ETP. Therefore, it cannot be rolled over or counted towards the recipient's reasonable benefit limit. It will not be subject to FBT.

7.179 A payment from an eligible non resident non complying superannuation fund to a member of the fund will also be exempt from CGT (section 160ZZJ).

How will a pension or annuity from an eligible non resident non complying superannuation fund be taxed?

7.180 A pension or annuity from an eligible non resident non complying superannuation fund (that is not a qualifying security for the purposes of Division 16E), is taxed under section 27H [item 89 - paragraph (b) of the new definition of annuity in subsection 27H(4)]. The whole of any superannuation pension or annuity paid from an eligible non resident non complying superannuation fund reduced by the deductible amount is included in the taxpayer's assessable income.

7.181 Rebates on pensions and annuities taxed under section 27H are restricted to payments from resident superannuation funds [item 83 - new paragraph (c) of the definition of taxed superannuation fund in subsection 27A(1)]. Consequently, a rebate is not allowed on any pension or annuity paid from an eligible non resident non complying superannuation fund.

What if the trustee of an eligible non resident non complying superannuation fund transfers an amount for a member of the fund to a resident superannuation fund?

7.182 The tax treatment of an amount transferred by the trustee of an eligible non resident non complying superannuation fund for a member of the fund to a resident superannuation fund will depend on the amount transferred.

7.183 The member will be assessed on the amount that he or she would be entitled to receive on the day the transfer took place (that is, the amount properly payable to the member on that day) under new sections 27CD or 27CAA. Consequently this amount will be member undeducted contributions in the hands of the trustee of the resident superannuation fund. Therefore it will not be included in the assessable income of the resident superannuation fund and the period of membership in the eligible non resident non complying superannuation fund will not be part of the eligible service period of any future payment from the resident fund.

7.184 All other amounts transferred from the eligible non resident non complying superannuation fund to the resident superannuation fund (including the amount that exceeds the amount the member would be entitled to receive on the day the transfer took place), will be included in the assessable income of the resident superannuation fund as a taxable contribution. [Item 79 - new paragraph (c) of subsection 274(10)]

7.185 When an amount is ultimately paid by the resident superannuation fund to the member, the amount will be an ETP and split into the various components based on the member's period of membership in the resident fund only.

What if the taxpayer has paid tax overseas on the amount paid from an eligible non resident non complying superannuation fund?

7.186 A resident taxpayer is generally entitled to claim a credit for foreign tax paid on any foreign income that is included in the taxpayer's assessable income.

7.187 Consequently, if some or all of a payment from an eligible non resident non complying superannuation fund is included in the taxpayer's assessable income (other than a payment included under new section 27CAA) , a credit will be allowed for foreign tax paid on the same basis as other foreign income.

7.188 If some or all of the payment is included in the taxpayer's assessable income under new section 27CAA a credit will also be allowed for foreign tax paid. However, the amount of credit is limited to the lesser of the following amounts:

·
the amount calculated using the following formula [item 77 - new subsection 160AF(6)]:

Actual foreign tax * (Assessable component/Gross amount of payment)

Where:

Actual foreign tax is the amount of foreign tax actually paid by the taxpayer in respect of this payment;
Assessable component is the amount of the payment included in the taxpayer's assessable income under new section 27CAA (the assessable component); and
Gross amount of payment is the gross amount of the payment. That is, the full amount of the payment due before any foreign taxes or other amounts were deducted from the payment; and

·
the amount of Australian tax payable on the assessable component (that is, the amount ascertained by applying the average rate of Australian tax of the taxpayer of the year of income to the assessable component).

7.189 To ensure the amount included under new section 27CAA qualifies as foreign income, the Bill will amend the definition of foreign income in subsection 6AB(1). [Item 74]

7.190 In addition, to prevent any excess credit for foreign tax paid on the amount being offset against other foreign income, this amount will be treated as a separate class of income [item 78 - new paragraph 160AF(7)(ba)] . If the foreign tax is not fully utilised, the excess may be carried forward for a maximum period of five years. This excess can only be offset against Australian tax payable on future foreign income included under, new section 27CAA.

What is an eligible resident non complying superannuation fund?

7.191 A fund is an eligible resident non complying superannuation fund if:

·
the fund is either a continuously non complying superannuation fund or a non complying superannuation fund that last ceased to be a complying superannuation fund on or after 1 July 1995;
·
the fund is or has been a resident superannuation fund at any point of time during the current year of income up to the time the payment is made; and
·
in relation to previous years of income the fund has always been a resident superannuation fund or last ceased to be a non resident superannuation fund on or after 1 July 1995.

[Definition inserted by item 69]

How will lump sum payments from an eligible resident non complying superannuation fund be taxed in Australia?

7.192 As a consequence of the proposal to tax the trustee of a superannuation fund that changes from a complying fund to a non complying fund on the fund's net previous income in respect of previous years of income, the Bill will specifically exempt from tax in Australia certain lump sum payments made from eligible resident non complying superannuation funds. In addition, if the payment is exempt from tax in Australia, it is not taken into account in determining the tax payable on other taxable income.

7.193 The payment will be exempt if, at the time the payment is made, the fund is an eligible resident non complying superannuation fund and the payment would have been an ETP if:

·
the payment was not excluded because of new paragraph (ma) of the definition of ETP; and
·
the fund was a superannuation fund for the purposes of the ETP Subdivision.

[Item 71 - new section 27CE]

7.194 To ensure this payment is not assessable in Australia, the Bill will exclude it from the ETP definition and the definition of fringe benefit. [Item 70 and item 2 - new paragraph (ma) of the definition of ETP in subsection 27A(1) and new paragraph (kb) of the definition of fringe benefit in subsection 136(1) of the FBTAA]

7.195 The Bill will also exclude eligible resident non complying superannuation funds from the definition of superannuation fund in the ETP Subdivision. [Item 82]

7.196 As the payment will not be an ETP, it cannot be rolled over and will not be counted towards the recipient's reasonable benefit limit. In addition, the payment will not be subject to FBT.

7.197 A payment from an eligible resident non complying superannuation fund to a member of the fund will also be exempt from CGT (section 160ZZJ).

How will a pension or annuity from an eligible resident non complying superannuation fund be taxed?

7.198 A pension or annuity from an eligible resident non complying superannuation fund (that is not a qualifying security for the purposes of Division 16E), will be exempt from tax in Australia. [Item 88 - new subsection 27H(1A)]

What if the taxpayer has paid tax overseas on the amount paid from an eligible resident non complying superannuation fund?

7.199 Resident taxpayers are generally entitled to claim a credit for foreign tax paid on foreign income that is included in the taxpayer's assessable income. Consequently, a credit is not allowed for foreign tax paid on a payment from an eligible resident non complying superannuation fund if it is exempt under new subsections 27CE(1) or 27H(1A).

How will a payment from a superannuation fund that is not an eligible resident non complying superannuation fund or an eligible non resident non complying superannuation fund be taxed?

7.200 Generally, a payment from a superannuation fund (other than an exempt foreign termination payment , or a payment from either an eligible resident non complying superannuation fund or an eligible non resident non complying superannuation fund) will be taxed in Australia under the ETP Subdivision as either an ETP or an annuity.

7.201 To be taxed as an ETP, the fund must be a superannuation fund as defined in subsection 27A(1). To ensure payments from a non resident superannuation fund are taxed in the same way as payments from a resident superannuation fund, the Bill will amend the definition of superannuation fund to include a fund that is or has been a non resident superannuation fund in relation to any year of income. This will replace the existing reference to a foreign superannuation fund. [Item 82 - new subparagraph (a)(ia) of the definition of superannuation fund in subsection 27A(1)]

7.202 Rebates on pension and annuities will be restricted to payments from resident superannuation funds. [Item 83 - new paragraph (c) of the definition of taxed superannuation fund in subsection 27A(1)]

What if an ETP or an annuity has been taxed overseas?

7.203 Under ordinary concepts, ETPs are not usually regarded as income. To clarify that a credit is allowed for foreign tax paid on amounts that are taxed in Australia as ETPs, the Bill will amend the definition of foreign income in subsection 6AB(1) to specifically include ETPs. [Item 74]

Will taxpayers be able to roll over payments that qualify as ETPs out of Australia?

7.204 The Bill will allow taxpayers to roll over a qualifying ETP if:

·
it is paid by an employer, a resident superannuation fund or an ADF; and
·
the roll over fund is a resident of Australia or the annuity purchased from a life assurance company is an Australian policy.

7.205 Consequently, payments from a non resident superannuation fund will not be qualifying ETPs [item 84 - new subsection 27A(12BA)]. In addition, an amount can only be rolled over to a life assurance company to purchase an annuity that is an Australian policy. An Australian policy is a life assurance policy registered by the company liable under the policy in a register kept at a registry in a State or a Territory of Australia [item 93 - new subparagraph 27A(12)(c)(iii)].

7.206 The amendments to restrict complying status to resident funds will ensure payments are rolled over to a fund that is a resident of Australia.

What if a payment includes amounts that have been taxed under the FIF measures?

7.207 The Bill will extend the current exemption for amounts that are taxed under the FIF measures to include amounts that are assessed under the ETP Subdivision. As a consequence, the amount of a payment that is assessed under the ETP Subdivision will be reduced by the amount of the payment that is taxed under the FIF measures. [Items 96, 97 and 98]

Will the definition of resident Part IX entity in the FIF measures change?

7.208 The Bill will amend the definition of a resident Part IX entity in section 477 so that, for the purposes of the FIF measures, a trust will qualify as a resident Part IX entity at a particular time if, at that time, the trust is:

·
a resident superannuation fund; or
·
a complying ADF; or
·
a PST.

[Item 12 - new section 477]

Examples illustrating how the new measures will apply

Example 4

7.209 This example concerns a payment to George from an eligible non resident non complying superannuation fund (the Lee & Co Superannuation Fund). The payment was the amount accrued in the fund at the time of the payment. It shows the tax treatment of the payment where:

1.
George is and has always been a resident of Australia;
2.
George first became a permanent resident of Australia the day after he ceased employment with Lee & Co; and
3.
George first became a permanent resident of Australia while still working for Lee & Co.

7.210 An eligible non resident non complying superannuation fund is not a superannuation fund for the purposes of the ETP Subdivision. Therefore, the payment is not an ETP.

7.211 Consequently, it cannot be rolled over into a resident superannuation fund and will not be counted towards George's reasonable benefit limit. If the payment is paid into a resident superannuation fund by George, it will be treated as undeducted contributions and the eligible service period of any future payment from the resident fund will not include the service in the non resident fund.

7.212 The payment would have been an ETP if the payment was not excluded because of new paragraphs (ka) or (ma) of the ETP definition and the Lee & Co Superannuation Fund was a superannuation fund for the purposes of the ETP Subdivision. Therefore, depending on George's circumstances, the payment will qualify as either:

·
an exempt resident foreign termination payment; or
·
an exempt non resident foreign termination payment; or
·
an amount that is taxed under new section 27CAA.

General facts

7.213 George began working in the United States of America for Lee & Co on 27 November 1991. On that day he also became a member of the Lee & Co Superannuation Fund (an eligible non resident non complying superannuation fund).

7.214 On 19 January 1994 George ceased employment with Lee & Co. On that day, the amount he was entitled to receive from the Lee & Co Superannuation Fund was $2,500.

7.215 On 19 July 1995, George received $3,000 (before tax) from the Lee & Co Superannuation Fund. This was the amount accrued in the fund on that day. He paid tax of $300 on this amount in the United States of America.

7.216 The payment included:

·
contributions paid by George of $400;
·
contributions paid by Lee & Co of $1,600.

7.217 All contributions were paid to the fund when George was employed by Lee & Co.

7.218 His average rate of Australian tax payable for the 1995 96 year of income is 20%.

Scenario 1: George is and has always been a resident of Australia.

7.219 George worked overseas for the full period and arrived back in Australia on 20 January 1994 (the day after he ceased employment with Lee & Co). His earnings from Lee & Co were exempt from tax in Australia under section 23AG.

What amount is included in George's assessable income?

7.220 The payment from the superannuation fund will not be an exempt resident foreign termination payment because it was paid two and a half years after George ceased employment with Lee & Co. It will not be an exempt non resident foreign termination payment because George was a resident of Australia when he worked for Lee & Co. Rather, the payment will be taxed in Australia under new section 27CAA.

7.221 George's accumulated entitlement for the purposes of the formula in new subsection 27CAA(1) is nil (because George was a resident on the day he joined the superannuation fund). His additional contributions are $2,000 (that is, the $400 contributions paid by George while he was a resident of Australia and the $1,600 contributions paid by Lee & Co while George was a resident of Australia).

7.222 Therefore, the following amount is included in George's assessable income and taxed at marginal rates of tax:

Gross amount - (Accumulated entitlement + Additional contributions) = $3,000 (0 + $2,000) = $1,000

Is George entitled to a foreign tax credit?

7.223 As some of the payment is included in George's assessable income under new section 27CAA, a credit will also be allowed for the foreign tax he paid. However, the amount of credit will be limited to the lesser of the following amounts:

(a)
the amount calculated using the following formula:

Actual foreign tax * (Assessable component/Gross amount of payment) =$300*($1,000/3,000)=$100;and

(b)
Assessable component * Average rate of Australian tax for 1995 96

=$1,000*20%=$200

7.224 Therefore, George will be allowed a foreign tax credit of $100. The excess credit of $200 (ie, $300 $100) for foreign tax paid by George on this payment can only be offset against Australian tax payable on future foreign income included under new section 27CAA. This excess may be carried forward for a maximum period of five years.

Scenario 2: George first became a permanent resident of Australia on 20 January 1994 (the day after he ceased employment with Lee & Co).

7.225 As George was not a resident of Australia when he worked for Lee & Co, his earnings from Lee & Co would have been exempt from tax in Australia under subsection 23(r).

What amount is included in George's assessable income?

7.226 The payment will not be an exempt resident foreign termination payment because George was not a resident of Australia when he worked for Lee & Co. It will not be an exempt non resident foreign termination payment because it was paid two and a half years after George became a resident of Australia. Rather, the payment will be taxed under new section 27CAA.

7.227 George's accumulated entitlement for the purposes of the formula in new subsection 27CAA(1) is $2,500 (that is, the amount he was entitled to the day before he became a resident of Australia). His additional contributions are nil because all of the contributions were paid to the fund before he became a resident of Australia.

7.228 The amount that will be included in George's assessable income and taxed in Australia at marginal rates of tax is $500 (i.e., $3,000 ($2,500 + 0)).

Is George entitled to a foreign tax credit?

7.229 As some of the payment is included in George's assessable income under new section 27CAA, a credit will also be allowed for the foreign tax he paid. However, the amount of credit will be limited to the lesser of the following amounts:

·

$300*($500/$3,000)=$50;

and
·

$500*20%=$100

7.230 Therefore, George will be allowed a foreign tax credit of $50. The excess credit of $250 (i.e., $300 $50) for foreign tax paid by George on this payment can only be offset against Australian tax payable on future foreign income included under new section 27CAA. This excess may be carried forward for a maximum period of five years.

Scenario 3: George first became a permanent resident of Australia on 4 March 1992 while still working for Lee & Co.

7.231 During the period George was not a resident of Australia, his earnings from Lee & Co would have been exempt from tax in Australia under subsection 23(r). After he became a resident of Australia his earnings from Lee & Co would have been taxable in Australia. However, section 23AG may have applied depending on the facts of the case.

7.232 Other facts relevant to this scenario are:

·
contributions paid by George after he became a resident of Australia were $200;
·
contributions paid by Lee & Co after George became a resident of Australia were $800;
·
the amount George was entitled to on the day before he became a resident of Australia was $1,200.

What amount is included in George's assessable income?

7.233 The payment will not be an exempt resident foreign termination payment because George was not a resident of Australia for all of the period he worked for Lee & Co. It will not be an exempt non resident foreign termination payment because it was paid over 3 years after George became a resident of Australia. Rather, the payment will be taxed in Australia under new section 27CAA.

7.234 George's accumulated entitlement for the purposes of the formula in new subsection 27CAA(1) is $1,200 (that is, the amount he was entitled to the day before he became a resident of Australia). His additional contributions are $1,000 (that is, the $200 contributions paid by George after he became a resident of Australia and the $800 contributions paid by Lee & Co after George became a resident of Australia).

7.235 Therefore, the amount included in George's assessable income and taxed in Australia at marginal rates of tax is $800 (i.e., $3,000 ($1,200 + $1,000)).

Is George entitled to a foreign tax credit?

7.236 As some of the payment is included in George's assessable income under new section 27CAA, a credit will also be allowed for the foreign tax he paid. However, the amount of credit will be limited to the lesser of the following amounts:

·

$300*($800/3,000)=$80;

and
·

$800*20%=$160

7.237 Therefore, George will be allowed a foreign tax credit of $80. The excess credit of $220 (ie, $300 $80) for foreign tax paid by George on this payment can only be offset against Australian tax payable on future foreign income included under new section 27CAA. This excess may be carried forward for a maximum period of five years.

Example 5

7.238 This example concerns an eligible non resident non complying superannuation fund (the Baker Pty Ltd Superannuation Fund) transferring an amount to a resident superannuation fund within 6 months of Jean terminating her employment with Baker Pty Ltd. The amount transferred was Jean's accrued entitlement. It shows the tax treatment of the transfer where:

(1)
Jean is and has always been a resident of Australia;
(2)
Jean first became a permanent resident of Australia the day after she ceased employment with Baker Pty Ltd; and
(3)
Jean first became a permanent resident of Australia while still working for Baker Pty Ltd.

7.239 The amount transferred to the resident superannuation fund is the amount Jean would be entitled to receive on the day the transfer took place. Consequently, Jean will be assessed on this amount in the same way as if she had received the payment.

7.240 The amount Jean would be entitled to receive on the day the transfer took place would have been an ETP if the payment was not excluded because of new paragraphs (ka) or (ma) of the ETP definition and the fund was a superannuation fund for the purposes of the ETP Subdivision. Therefore, depending on Jean's circumstances, Jean will be assessed on this amount under new sections 27CD or 27CAA in the same way as if she had received this amount and paid it into the resident fund. That is, this amount will be taxable in Australia as either:

·
an exempt resident foreign termination payment; or
·
an exempt non resident foreign termination payment; or
·
an amount that is taxed under new section 27CAA.

7.241 As a consequence, this amount will represent undeducted contributions in the hands of the trustee of the resident superannuation fund. The eligible service period of any future payment from the resident fund will not include the service in the non resident fund.

General facts

7.242 Jean began working in England for Baker Pty Ltd on 24 April 1990. On that day she also became a member of the Baker Pty Ltd Superannuation Fund (an eligible non resident non complying superannuation fund).

7.243 On 4 March 1995 Jean ceased employment with Baker Pty Ltd. On that day, the amount she was entitled to receive from the Baker Pty Ltd Superannuation Fund was $19,000.

7.244 On 3 August 1995, the Baker Pty Ltd Superannuation Fund transferred $20,000 to a resident superannuation fund for Jean's benefit. This was the amount Jean was entitled to receive from the fund on that day. Jean did not have to pay any tax in England on the amount transferred. Therefore she is not entitled to a foreign tax credit.

7.245 The payment included:

·
contributions paid by Jean of $5,000; and
·
contributions paid by Baker Pty Ltd of $10,000.

7.246 All contributions were paid to the fund when Jean was employed by Baker Pty Ltd.

Scenario 1: Jean is and has always been a resident of Australia.

7.247 Jean worked overseas for the full period and arrived back in Australia on 5 March 1995 (the day after she ceased employment with Baker Pty Ltd). Her earnings from Baker Pty Ltd were exempt from tax in Australia under section 23AG.

What amount is included in Jean's assessable income?

7.248 The amount transferred from the Baker Pty Ltd Superannuation Fund will not be an exempt resident foreign termination payment because it did not relate solely to the period of employment and Jean did not pay tax on this amount in England. It will not be an exempt non resident foreign termination payment because Jean was a resident of Australia when she worked for Baker Pty Ltd. Rather, the amount transferred will be taxed in Australia under new section 27CAA.

7.249 Jean's accumulated entitlement for the purposes of the formula in new subsection 27CAA(1) is nil (because Jean was a resident on the day she joined the superannuation fund). Her additional contributions are $15,000 (that is, the $5,000 contributions paid by Jean after she became a resident of Australia and the $10,000 contributions paid by Lee & Co after Jean became a resident of Australia).

7.250 Therefore, the following amount is included in Jean's assessable income and taxed at marginal rates of tax:

Gross amount - (Accumulated entitlement + Additional contributions)
= $20,000 (0 + $15,000) = $5,000

Scenario 2: Jean first became a permanent resident of Australia on 5 March 1995 (the day after she ceased employment with Baker Pty Ltd).

7.251 As Jean was not a resident of Australia when she worked for Baker Pty Ltd, her earnings from Baker Pty Ltd would have been exempt from tax in Australia under subsection 23(r).

What amount is included in Jean's assessable income?

7.252 The amount transferred will be an exempt non resident foreign termination payment. Therefore, the whole amount will be exempt from tax.

Scenario 3: Jean first became a permanent resident of Australia on 13 April 1992 while working for Baker Pty Ltd.

7.253 During the period Jean was not a resident of Australia, her earnings from Baker Pty Ltd would have been exempt from tax in Australia under subsection 23(r). After she became a resident of Australia her earnings from Baker Pty Ltd would have been taxable in Australia. However, section 23AG may have applied depending on the facts of the case.

7.254 Other facts relevant to this scenario are:

·
contributions paid by Jean after she became a resident of Australia were $2,000;
·
contributions paid by Baker Pty Ltd after Jean became a resident of Australia were $5,000;
·
the amount Jean was entitled to receive from the fund on the day before she became a resident of Australia was $11,000.

What amount is included in Jean's assessable income?

7.255 The amount transferred from the Baker Pty Ltd Superannuation Fund will not be taxed as an exempt resident foreign termination payment because Jean was not a resident of Australia for all of the period she worked for Baker Pty Ltd. It will not be an exempt non resident foreign termination payment because Jean was a resident of Australia for more than 6 months. Rather, the amount transferred will be taxed in Australia under new section 27CAA.

7.256 Jean's accumulated entitlement for the purposes of the formula in new subsection 27CAA(1) is $11,000 (that is, the amount she was entitled to receive the day before she became a resident of Australia). Her additional contributions are $7,000 (that is, the $2,000 contributions paid by Jean after she became a resident of Australia and the $5,000 contributions paid by Baker Pty Ltd after Jean became a resident of Australia).

7.257 Therefore, the amount included in Jean's assessable income and taxed in Australia at marginal rates of tax is $2,000 (i.e., $20,000 ($11,000 + $7,000)).

Example 6

7.258 This example concerns an eligible non resident non complying superannuation fund (the Thompson Ltd Superannuation Fund) transferring an amount to a resident superannuation fund within 6 months of Jose terminating her employment with Thompson Ltd. The amount transferred exceeded Jose's accrued entitlement at the time of the transfer. It shows the tax treatment of the transfer where:

(1)
Jose is and has always been a resident of Australia;
(2)
Jose first became a permanent resident of Australia the day after she ceased employment with Thompson Ltd; and
(3)
Jose first became a permanent resident of Australia while still working for Thompson Ltd.

7.259 The tax treatment of the amount transferred from the eligible non resident non complying superannuation fund will also depend on the amount transferred.

7.260 The amount Jose would be entitled to receive on the day the transfer took place would have been an ETP if the payment was not excluded because of new paragraphs (ka) or (ma) of the ETP definition and the fund was a superannuation fund for the purposes of the ETP Subdivision. Therefore, depending on Jose's circumstances, Jose will be assessed on this amount under new sections 27CD or 27CAA in the same way as if she had received this amount and paid it into the resident fund. That is, this amount will be taxable in Australia as either:

·
an exempt resident foreign termination payment; or
·
an exempt non resident foreign termination payment; or
·
an amount that is taxed under new section 27CAA.

7.261 As a consequence, this amount will be undeducted contributions in the hands of the trustee of the resident superannuation fund. In addition, the eligible service period of any future payment from the resident fund will not include the service in the non resident fund.

7.262 The amount Jose is not entitled to receive on the day the transfer took place will be included in the assessable income of the resident superannuation fund as a taxable contribution.

General facts

7.263 Jose began working in Canada for Thompson Ltd on 15 October 1992. On that day she also became a member of the Thompson Ltd Superannuation Fund (an eligible non resident non complying superannuation fund).

7.264 On 25 February 1995 Jose ceased employment with Thompson Ltd. On that day, the amount she was entitled to receive from the Thompson Ltd Superannuation Fund was $6,500.

7.265 On 20 July 1995, the Thompson Ltd Superannuation Fund transferred $10,000 to a resident superannuation fund. Jose's accrued entitlement at the time of the transfer was only $7,000.

7.266 Jose did not have to pay any tax in Canada on the amount transferred therefore she is not entitled to a foreign tax credit.

7.267 The payment included:

·
contributions paid by Jose of $2,000;
·
contributions paid by Thompson Ltd of $3,000.

7.268 All contributions were paid to the fund when Jose was employed by Thompson Ltd.

Scenario 1: Jose is and has always been a resident of Australia.

7.269 Jose worked overseas for the full period and arrived back in Australia on 26 February 1995 (the day after she ceased employment with Thompson Ltd). Her earnings from Thompson Ltd were exempt from tax in Australia under section 23AG.

What amount is included in Jose's assessable income?

7.270 The amount that Jose would be entitled to receive on the day the transfer took place will not be taxed as an exempt resident foreign termination payment because it did not relate solely to the period of employment and Jose did not pay tax on this amount in Canada. It will not be an exempt non resident foreign termination payment because Jose was a resident of Australia when she worked for Thompson Ltd. Rather, Jose will be taxed on this amount under new section 27CAA.

7.271 Jose's accumulated entitlement for the purposes of the formula in new subsection 27CAA(1) is nil (because Jose was a resident on the day she joined the superannuation fund). Her gross amount is $7,000 (that is, the amount that is properly payable from the fund on the day of the transfer). Her additional contributions are $5,000 (that is, the $2,000 contributions paid by Jose while she was a resident of Australia and the $3,000 contributions paid by Thompson Ltd while Jose was a resident of Australia).

7.272 Therefore, the following amount is included in Jose's assessable income and taxed at marginal rates of tax:

Gross amount - (Accumulated entitlement + Additional contributions)
= $7,000 - (0 + $5,000) = $2,000

What amount is included in the assessable income of the resident superannuation fund?

7.273 The amount transferred exceeded Jose's accrued entitlement at the time of the transfer by $3,000. Therefore, this amount is included in the assessable income of the resident superannuation fund as taxable contributions.

Scenario 2: Jose first became a permanent resident of Australia on 26 February 1995 (the day after she ceased employment with Thompson Ltd).

7.274 As Jose was not a resident of Australia when she worked for Thompson Ltd, her earnings from Thompson Ltd would have been exempt from tax in Australia under subsection 23(r).

What amount is included in Jose's assessable income?

7.275 The amount that Jose would be entitled to receive on the day the transfer took place will not be taxed as an exempt resident foreign termination payment because Jose was not a resident of Australia when she worked for Lee & Co. It will not be an exempt non resident foreign termination payment because the amount transferred exceeded the amount that Jose was entitled to receive from Thompson Ltd Superannuation Fund on 20 July 1995. Rather, Jose will be taxed on this amount under new section 27CAA.

7.276 Jose's accumulated entitlement for the purposes of the formula in new subsection 27CAA(1) is $6,500 (that is, the amount she was entitled to the day before she became a resident of Australia). Her additional contributions are nil because all of the contributions were paid to the fund before she became a resident of Australia. Her gross amount is $7,000 (that is, the amount that is properly payable from the fund on the day of the transfer).

7.277 The amount that will be included in Jose's assessable income and taxed in Australia at marginal rates of tax is $500 (i.e., $7,000 ($6,500 + 0)).

What amount is included in the assessable income of the resident superannuation fund?

7.278 The amount transferred exceeded Jose's accrued entitlement at the time of the transfer by $3,000. Therefore, this amount is included in the assessable income of the resident superannuation fund as a taxable contribution.

Scenario 3: Jose first became a permanent resident of Australia on 13 September 1993 while working for Thompson Ltd.

7.279 During the period Jose was not a resident of Australia, her earnings from Thompson Ltd would have been exempt from tax in Australia under subsection 23(r). After she became a resident of Australia her earnings from Thompson Ltd would have been taxable in Australia. However, section 23AG may have applied depending on the facts of the case.

7.280 Other facts relevant to this scenario are:

·
contributions paid by Jose after she became a resident of Australia were $2,000;
·
contributions paid by Thompson Ltd after Jose became a resident of Australia were $1,500;
·
the amount Jose was entitled to on the day before she became a resident of Australia was $2,500.

What amount is included in Jose's assessable income?

7.281 The amount that Jose would be entitled to receive on the day the transfer took place will not be taxed as an exempt resident foreign termination payment because Jose was not a resident of Australia for all of the period she worked for Thompson Ltd. It will not be an exempt non resident foreign termination payment because Jose was a resident of Australia for more than 6 months. Rather, Jose will be taxed on this amount under new section 27CAA.

7.282 Jose's accumulated entitlement for the purposes of the formula in new subsection 27CAA(1) is $2,500 (that is, the amount she was entitled to receive the day before she became a resident of Australia). Her additional contributions are $3,500 (that is, the $2,000 contributions paid by Jose after she became a resident of Australia and the $1,500 contributions paid by Thompson Ltd after Jose became a resident of Australia). Her gross amount is $7,000 (that is, the amount that is properly payable from the fund on the day of the transfer).

7.283 Therefore, the amount included in Jose's assessable income and taxed in Australia at marginal rates of tax is $1,000 (i.e., $7,000 - ($2,500 + $3,500)).

What amount is included in the assessable income of the resident superannuation fund?

7.284 The amount transferred exceeded Jose's accrued entitlement at the time of the transfer by $3,000. Therefore, this amount is included in the assessable income of the resident superannuation fund as a taxable contribution.


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