Income Tax Assessment Amendment Regulations 2007 (No. 3) (103 of 2007)
Schedule 1 Amendments
[8] After Schedule 1
insert
Schedule 1A Method of working out amount of notional taxed contributions
(subregulations 292-170.02 (2), 292-170.05 (2) and (3) and 292-170.06 (2) and (3))
Part 1 Preliminary
Meaning of accruing member
1.1 An accruing member in a financial year is a defined benefit member who is not a non-accruing member for at least some part of the financial year.
Meaning of benefit category
1.2 A benefit category is a category of membership of a defined benefit fund as certified by an actuary.
1.3 An actuary must not certify a category of membership to be a benefit category unless the actuary is satisfied that:
(a) each hypothetical new entrant to the benefit category with the same entry age would accrue retirement benefits on substantially the same basis; and
(b) if any 2 hypothetical new entrants to the benefit category accrued retirement benefits on a different basis, the new entrant rates for each member calculated under Parts 2 and 3 would be equal.
Example
A defined benefit fund provides a benefit accrual of 10% plus twice member contribution rate of final average salary for each year of membership. Members can contribute at either 4% or 6% of salary. Member A contributes at 4% and member B contributes at 6%. An actuary must not certify that A and B are in the same benefit category unless the new entrant rates, as calculated under this Schedule, for members who contribute at 4% and 6%, are equal.
Note A member would not be expected to move from one benefit category to another unless 1 of the following relevant external events occurs:
(a) the member ceases accruing benefits under one section of the fund rules but commences accruing benefits under another section of the fund rules as a result of a change in employment status, eg promotion;
(b) the member continues accruing benefits under one section of the fund rules and commences accruing benefits under another section of the fund rules as a result of a change in employment status, eg promotion;
(c) the member ceases accruing benefits under one section of the fund rules and commences or continues accruing benefits under another section of the fund rules as a result of reaching maximum accrual or a change in employment status, eg demotion;
(d) the exercise of a member option which results in a material change in the level of employer support;
(e) a change in fund rules which directly affected the member’s rate of accrual of retirement benefits in respect of future membership after 1 July 2007.
Example for paragraph (d)
If the new entrant rates calculated for members with different member contribution rates are not equal, and, as a result, there are a number of benefit categories corresponding to the different member contribution rates, then a change in contribution rate would result in a move between benefit categories
Accruing member must not belong to more than one benefit category at the same time unless certified by an actuary
1.4(1) An accruing member must not belong to more than one benefit category of the same defined benefit fund on the same day unless certified by an actuary.
(2) An actuary must not certify that a member belongs to more than one benefit category on the same day unless the actuary is satisfied that the amount of notional taxed contributions to be reported will not be materially different from the amount of notional taxed contributions that would have been reported had the member belonged to only one benefit category on each relevant day.
Note An accruing member would be ordinarily expected to belong to only one benefit category at a time. However, there might be circumstances in certain funds where it is materially more practical for the purpose of calculating the total amount of notional taxable contributions to deem that some members belong to more than one benefit category from time to time.
Meaning of fund benefit
1.5 That part of a defined benefit interest which is sourced from contributions made into a superannuation fund or earnings on such contributions is referred to as the fund benefit .
Note A superannuation benefit may be wholly sourced from contributions made into a superannuation fund or earnings on such contributions. A superannuation benefit paid from a public sector superannuation fund may be wholly or partly sourced, or not sourced to any extent, from contributions made into a superannuation fund or earnings on such contributions. If a superannuation benefit is not sourced to any extent from contributions made into a superannuation fund, or earnings on such contributions, the amount of the fund benefit is zero.
Standard method for working out amount of notional taxed contributions in respect of a benefit category for an accruing member of the benefit category if the fund benefit is wholly sourced from an accumulation of contributions made in respect of the member
1.6 If the fund benefit is wholly sourced from an accumulation of concessional contributions made to a superannuation fund in respect of a member or earnings on such contributions, or an accumulation of member contributions or earnings on such contributions, the amount of notional taxed contributions for an accruing member for a financial year is the amount of concessional contributions made to the superannuation fund in respect of the member during the financial year.
Standard method for working out amount of notional taxed contributions in respect of a benefit category for an accruing member of the benefit category if the fund benefit is not wholly sourced from an accumulation of contributions made in respect of the member
1.7 If section 1.6 does not apply, the standard method for working out the amount of notional taxed contributions for an accruing member of a benefit category of a defined benefit fund for a financial year is:
1.2 x (New entrant rate x S x (D / 365)) - M
where, for the financial year:
new entrant rate is the new entrant rate for the benefit category worked out by an actuary under Parts 2 and 3.
S is the member’s annual superannuation salary relevant to the benefit category on the first day of the financial year on which the member had a defined benefit interest in the scheme.
D is the number of days during the financial year that the member was an accruing member of the benefit category.
M is the amount of member contributions paid by or on behalf of the member in respect of the member’s defined benefit interest in the fund during that part of the financial year that the member was an accruing member of the benefit category, and which are not assessable income of the fund.
Standard method of working out total amount of notional taxed contributions for an accruing member of a defined benefit fund for a financial year
1.8 The standard method for working out the total amount of notional taxed contributions for an accruing member of a defined benefit fund for a financial year is:
T + (1.2 x (W + X + Y + Z))
where, for the financial year:
T is the sum of the amounts of notional taxed contributions for each benefit category that the member belongs to during the financial year calculated under sections 1.6 and 1.7.
W is an amount worked out on advice from an actuary under Part 4.
X is an amount worked out on advice from an actuary under Part 5.
Y is an amount worked out on advice from an actuary under Part 6.
Z is an amount worked out on advice from an actuary under Part 7.
Part 2 New entrant rate
Method of working out new entrant rate for a benefit category
2.1(1) The new entrant rate for a benefit category is the rate calculated under this Part and using the assumptions set out in Part 3.
(2) The new entrant rate for a benefit category is the rate that represents the long-term cost, expressed as a percentage of superannuation salary, of providing as much of the fund benefit as is payable on a voluntary exit to a hypothetical new entrant to the benefit category.
(3) The new entrant rate is calculated as the present value of the fund benefit payable on voluntary exit (resignation, early retirement, or retirement) under the rules of the defined benefit fund which are applicable to a new entrant to the benefit category divided by the present value of future superannuation salaries payable to the new entrant.
(4) To put the matter beyond doubt, the new entrant rate is calculated assuming that the fund benefit is to be wholly sourced from concessional contributions made into the fund at the new entrant rate and earnings on those contributions.
(5) The present value of the fund benefit is to be calculated having regard to the rules and practice of the defined benefit fund including benefit structure, caps, member options, reasonably expected discretions and member contributions, and using the economic, decrement and other assumptions set out in Part 3.
New entrant rate to be based on period of membership needed to reach maximum benefit accrual
2.2(1) If the rules of the defined benefit fund applicable to the benefit category provide for a maximum benefit accrual, the new entrant rate is to be calculated on the basis that the benefit is funded over the period to when maximum accrual is attained.
(2) For practical purposes this means that, for the purpose of calculating the present value of future salaries payable to the new entrant, the superannuation salary is to be assumed to be zero at those ages after reaching maximum benefit accrual.
Example
If maximum accrual is attained after 20 years of membership, the superannuation salary for a 30-year-old new entrant will be assumed to be zero at age 50 and above for the purpose of calculating the present value of future salaries payable to the new entrant.
New entrant rate to be rounded down
2.3 The new entrant rate is to be rounded down to the lower 1 percentage point.
Example
10.6% would be rounded down to 10%.
No allowance for administration expenses or income tax on assessable contributions
2.4 The new entrant rate is to be calculated ignoring:
(a) administration expenses; and
(b) income tax on assessable contributions.
Note These items are allowed for in the formula in section 1.7 by multiplying by 1.2.
Certain discretions to be allowed for
2.5(1) The new entrant rate is to be calculated assuming that certain discretions are always exercised.
(2) In particular, if a discretion exists in the fund rules to pay a higher benefit on voluntary exit, the actuary is to assume that the accrued retirement benefit is always paid on voluntary exit on or after age 55 whenever the accrued retirement benefit is higher than the standard benefit.
(3) If the actuary believes that there is a reasonable expectation that a higher benefit than either the standard benefit or the accrued retirement benefit will be paid, then the actuary should assume that the benefit paid on voluntary exit on or after age 55 is always equal to the benefit reasonably expected to be paid.
Note In considering whether there is a reasonable expectation that a higher benefit will be paid, it would generally not be appropriate to assume payment unless such an assumption was adopted in the most recent actuarial review.
Method of working out new entrant rate for a member
2.6(1) If a member belongs to exactly one benefit category at a particular time, the new entrant rate for the member at that time is the new entrant rate for that benefit category.
(2) If a member belongs to more than one benefit category at a particular time, the new entrant rate for the member at that time is the sum of the new entrant rates for each benefit category to which the member belongs.
Note The new entrant rate for a member is relevant to regulations 292-170.05 and 292-170.06.
Part 3 Valuation parameters
Application of economic, decrement and other parameters
3.1 For the purpose of working out the new entrant rate for a benefit category mentioned in Part 1 or 2, the actuary is to apply the economic, decrement and other parameters set out in this Part.
Discount rate
3.2(1) The discount rate to be used to discount projected future benefits and salaries is 8% per year.
(2) The discount rate is not to be adjusted for investment expenses or investment-related taxation or for any other reason.
Fund earning rate and crediting rate
3.3(1) If necessary, the fund earning rate to be assumed is 8% per year.
(2) If necessary, the assumed crediting rate is to be based on the assumed fund earning rate.
Rate of future salary or wages growth
3.4(1) The rate of salary or wages growth to be applied is 4.5% per year.
(2) This rate is to be used:
(a) to project the value of future salary or wages; and
(b) to project benefits that increase in accordance with a general wage index (for example, average weekly earnings).
Rate of increase in price indices
3.5 If a benefit is linked to an increase in a price index (for example, the Consumer Price Index), the rate of increase in the price index to be applied is 2.5% per year.
New entrant age
3.6(1) The age of new entrants to be assumed is based on the average age of entry to the fund of the persons who were defined benefit members of the fund at 1 July 2007.
(2) The table sets out the age of new entrants that is to be assumed.
Average age last birthday at commencement in fund of defined benefit members of the fund at 1 July 2007 |
New entrant age to be assumed |
<30 |
25 |
30-34 |
30 |
35-39 |
35 |
40-44 |
40 |
45-49 |
45 |
50+ |
50 |
(3) If the actuary believes that there is insufficient information available to calculate the average age of entry, the actuary is to assume that the age of a new entrant is 40.
Exit rates
3.7(1) The table sets out the rates of voluntary exit from the fund that are to be assumed.
Age Band |
Exit rate |
<40 |
0.05 |
40-44 |
0.04 |
45-49 |
0.04 |
50-54 |
0.04 |
55-59 |
0.08 |
60 |
0.12 |
61-64 |
0.10 |
65 |
1.00 |
(2) The rate of involuntary exit (including by redundancy, death or invalidity) to be assumed is zero.
Pensions
3.8(1) If the fund benefit is a single life pension, the pension is to be valued using the assumptions set out in this Part.
(2) If the fund benefit is a reversionary pension, the value of the pension is to be taken as the value of the pension assuming it is a single life pension, increased by 10 %.
Mortality of pensioners
3.9 The table sets out the rates of pensioner mortality ( qx ) that are to be assumed.
Age |
qx |
35-49 |
0.003 |
50-54 |
0.004 |
55 |
0.005 |
56 |
0.006 |
57 |
0.006 |
58 |
0.007 |
59 |
0.008 |
60 |
0.008 |
61 |
0.009 |
62 |
0.010 |
63 |
0.012 |
64 |
0.013 |
65 |
0.014 |
66 |
0.016 |
67 |
0.017 |
68 |
0.019 |
69 |
0.021 |
70 |
0.023 |
71 |
0.026 |
72 |
0.029 |
73 |
0.032 |
74 |
0.035 |
75 |
0.039 |
76 |
0.043 |
77 |
0.048 |
78 |
0.053 |
79 |
0.059 |
80 |
0.064 |
81 |
0.070 |
82 |
0.077 |
83 |
0.085 |
84 |
0.095 |
85 |
0.106 |
86 |
0.116 |
87 |
0.128 |
88 |
0.139 |
89 |
0.149 |
90 |
0.159 |
91 |
0.168 |
92 |
0.176 |
93 |
0.184 |
94 |
0.193 |
95 |
0.202 |
96 |
0.211 |
97 |
0.219 |
98 |
0.228 |
99 |
0.236 |
100 |
1.000 |
Taxed and untaxed benefits
3.10 If the rules of the fund provide for benefits to be paid on either a taxed or an untaxed basis, the actuary is to assume that the employer component of the fund benefit is paid as a taxed benefit.
Note This situation applies to a small number of funds where the employer component of the fund benefit is generally met by a last minute contribution to the superannuation fund.
Other assumptions to be set by the actuary
3.11(1) Any other assumptions which may be necessary are to be set by the actuary responsible for calculating the new entrant rate.
(2) The assumptions are to be based on the assumptions used in the most recent actuarial valuation of the fund, unless the actuary believes, having regard to the expected future experience of the fund, that they are no longer appropriate.
(3) If the actuary believes that the assumptions used in the most recent actuarial valuation are no longer appropriate, the assumptions should be set on a best estimate basis.
Part 4 Exercise of discretion to pay a benefit greater than the benefit assumed in calculating the new entrant rate
Method of working out W in the formula in section 1.8
4.1(1) If a discretion is exercised to pay a benefit upon:
(a) voluntary exit; or
(b) redundancy that is not bona fide;
which is greater than the benefit assumed in calculating the new entrant rate, the excess of the actual benefit paid over the amount of the assumed benefit at the time the actual benefit is paid ( W ) forms part of the amount of notional taxed contributions for the member for the financial year in which the benefit is paid.
(2) For the formula in section 1.8:
(a) in a financial year in which the trustee does not exercise a discretion to pay a benefit to the member which is greater than the assumed benefit, W equals zero; and
(b) in any other financial year, W equals an amount worked out on advice from an actuary that represents the excess of the actual benefit paid to the member over the amount of the assumed benefit at the time the actual benefit is paid.
Note If the trustee decides to pay an untaxed benefit rather than a taxed benefit, any excess of the amount of the untaxed benefit over the amount of the taxed benefit that would otherwise have been payable is not to be included in W .
Part 5 Member has changed benefit category
Method of working out X in the formula in section 1.8
5.1(1) If a member’s accrued retirement benefit increases during a financial year as a result of a change of benefit category or as a result of an exercise of discretion, an additional amount ( X ) may need to be included in the amount of notional taxed contributions for the financial year.
(2) For the formula in section 1.8:
(a) in a financial year in which the member’s accrued retirement benefit does not increase as a result of a change in benefit category or as a result of an exercise of discretion, X equals zero; and
(b) in any other financial year, X equals an amount worked out by an actuary that represents the increase in the value of the accrued retirement benefit, if any, that accrued to the member as a result of the change in benefit category or as a result of the exercise of the discretion.
5.2 The economic and other assumptions to be used are set out in Part 3.
Part 6 Governing rules have changed
Method of working out Y in the formula in section 1.8
6.1(1) If:
(a) the governing rules of the defined benefit fund are amended in a way that may result in an increase in a member’s benefit; and
(b) the amendment is made for a reason other than to satisfy a legislative requirement;
an additional amount ( Y ) may need to be included in the amount of notional taxed contributions for the financial year.
(2) For the formula in section 1.8:
(a) in a financial year in which the fund rules are not changed in a way that may result in an increase in a member’s benefit, Y equals zero; and
(b) in any other financial year:
(i) if the reason for the change in fund rules is to satisfy a legislative requirement, Y equals zero; and
(ii) if the change is for any other reason, Y equals an amount worked out on advice from an actuary that represents the increase in the value of the accrued retirement benefit, if any, that accrued to the member as a result of the change in fund rules.
6.2 The economic and other assumptions to be used are set out in Part 3.
Part 7 Non-arm’s length increase in superannuation salary
Method of working out Z in the formula in section 1.8
7.1(1) If a member’s superannuation salary is increased in a non-arm’s length way with the primary purpose being to achieve an increase in superannuation benefit, an additional amount ( Z ) may need to be included in the amount of notional taxed contributions for the financial year.
(2) For the formula in section 1.8:
(a) in a financial year where the member’s superannuation salary is not increased in a non-arm’s length way, Z equals zero; and
(b) in any other financial year, Z equals an amount worked out on advice from an actuary that represents the increase in the value of the accrued retirement benefit, if any, that accrued to the member as a result of the change in superannuation salary.
7.2 The economic and other assumptions to be used are set out in Part 3.