HOUSE OF REPRESENTATIVES

Taxation Laws Amendment (Superannuation) Bill 1992

Explanatory Memorandum

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

General Outline and Financial Impact

The Taxation Laws Amendment (Superannuation) Bill 1992 will amend various Acts (unless otherwise indicated all amendments refer to the Income Tax Assessment Act 1936) by making the following changes:

Limits on Deductions for Superannuation Contributions

·
Limits the amount of the deductions available to an employer or self employed person for contributions to a superannuation fund.

Date of effect: The 1994-95 year of income and subsequent years.

Proposal announced: Treasurer's 'Security in Retirement -Planning for Tomorrow Today' Statement of 30 June 1992.

Financial impact: This proposal combined with the measures relating to Reasonable Benefit Limits is expected to increase revenue by $20 million in 1995-96.

Deductions and rebates for personal superannuation contributions

·
Replaces the existing deduction and rebate arrangements for employees who have employer superannuation support with a new rebate.
·
Extends the concept of a substantially self-employed person.
·
Clarifies the circumstances in which a person is an eligible person and therefore entitled to a tax deduction for personal superannuation contributions.
·
Ensures that a payment of superannuation guarantee charge (SGC) counts as employer superannuation support in the year for which it is payable.

Date of effect: 1 July 1992.

Proposal announced: Treasurer's 'Security in Retirement-Planning for Tomorrow Today' Statement of 30 June 1992.

Financial impact: These measures are expected to increase revenue by $230 million in 1993-94.

Superannuation Pensions and Roll-over/Annuities

·
Introduces a new 15% rebate on superannuation pensions paid from taxed superannuation funds and on pensions paid from taxed superannuation funds and on annuities purchased wholly with rolled-over eligible termination payments (ETPs) to replace the existing rebate arrangements. The rebate will apply to all such superannuation pensions and roll-over annuities payable to taxpayers who are aged 55 or more, regardless of when the pension or annuity commenced to be payable.
·
Limits the undeducted purchase price (UPP) for rebatable superannuation pensions and rebatable ETP annuities to the post-June 1983 undeducted contributions.
·
Includes in the definition of an ETP the unused undeducted purchase-price (UUPP) of a commuted superannuation pension or roll-over annuity and of the residual capital value of a superannuation pension or roll-over annuity so that UUPP can be rolled-over.
·
Extends the meaning of pensions and annuities to ensure that appropriate tax treatment is given to allocated pensions and allocated annuities.

Date of effect: The amendments extending the meaning of pensions and annuities apply to pension payments made after the date of Royal Assent and to annuities purchased after that date. The other changes apply from 1 July 1994.

Proposal announced: Treasurer's 'Security in Retirement -Planning for Tomorrow Today' Statement of 30 June 1992.

Financial impact: The rebate proposal is likely to involve an indeterminate but not significant cost in the short-term. Longer term costs could be greater if the measure is successful in encouraging greater use of pensions and annuities, with this cost offset by lower age pension outlays. The UPP proposal will result in an indeterminate but not significant revenue gain. The UUPP proposal will have an indeterminate effect on the revenue. The change to the meaning of pension and annuity is not expected to have any revenue implications.

Rolling-over Eligible Termination Payments

Elections to Roll-over an Eligible Termination Payment

·
Removes the ability of taxpayers to choose which part of an eligible termination payment is rolled-over (except undeducted contributions and concessional component).

Date of effect: On or after 1 July 1992.

Proposal announced: The Treasurer's 'Security in Retirement - Planning for Tomorrow Today' Statement of 30 June 1992.

Financial impact: A small increase to tax revenue is expected.

The 90 day Roll-Over Period

·
Removes the current 90 day roll-over period so that eligible termination payments must be rolled-over directly from the source of the payment to a complying superannuation fund, a complying approved deposit fund, a deferred annuity or an immediate annuity.

Date of effect: From 1 July 1994.

Proposal announced: The Treasurer's 'Security in Retirement - Planning for Tomorrow Today' Statement of 30 June 1992.

Financial impact: Insignificant.

Taxation of redundancy, early retirement and invalidity payments

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Provides a limit on the concessionally taxed amount of bona fide redundancy payments and approved early retirement scheme payments.
·
Exempts amounts within that limit from tax.
·
Prevents bona fide redundancy payments and approved early retirement scheme payments being paid from a superannuation fund.
·
modifies the meaning of invalidity payment and requires verification of the recipient's disability by two legally qualified medical practitioners.
·
Creates a new ETP component comprising invalidity payments made On or after 1 July 1994 (the post-June 1994 invalidity component).
·
Exempts the post-June 1994 invalidity component from tax.

Date of effect: 1 July 1994

Proposal announced: Treasurer's 'Security in Retirement -Planning for Tomorrow Today' Statement of 30 June 1992.

Financial impact: The proposed limit on bona fide redundancy payments (BFRPs) and approved early retirement scheme payments (AERSPs) will generate an indeterminate but not significant revenue gain. The exemption from tax of the post-June 1994 invalidity ,component and amounts of BFRPs and AERSPs within the limit will cost $20 million in 1995-96.

Reasonable Benefit Limits

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Transfers administration of the reasonable benefit limits (RBLs) from the Insurance and Superannuation Commissioner to the Commissioner of Taxation.
·
Makes the RBLs a set dollar amount rather than a multiple of a person's highest average salary.
·
Makes other minor changes to simplify the treatment of the excessive amount of pensions and annuities for RBL purposes.

Date of effect: 1 July 1994.

Proposal announced: Treasurer's 'Security in Retirement -Planning for Tomorrow Today' Statement of 30 June 1992.

Financial impact: This proposal combined with the measures relating to limits on deductions for superannuation contributions is expected to increase revenue by $20 million in 1995-96.

Amendments of the Occupational Superannuation Standards Act 1987

·
Removes provisions relating to reasonable benefit limits
·
Allows superannuation funds to retain a member's benefit for up to 90 days while the member decides ' whether to rollover the benefit
·
Allows retired persons to transfer their benefits into Superannuation funds
·
Inserts definitions of pension and annuity

Date of effect: 1 July 1994 for first two amendments and date of Royal Assent for the remainder.

Proposal announced: Treasurer's 'Security in Retirement -Planning for Tomorrow Today' Statement of 30 June 1992

Financial impact: Insignificant.

Superannuation Guarantee Charge

The proposed amendments will amend the Superannuation Guarantee (Administration) Act 1992 ("the Act") to:

·
ensure that, if an employer's superannuation contribution under an industrial award in place prior to 21 August 1991 is based on the earnings of a standard employee, then the earnings of the standard employee can be the employee's "notional earnings base";
·
extend this measure to apply where superannuation contributions, based on the earnings of a standard employee, are made under a law in place prior to 21 August 1991. In that case the earnings of the standard employee can also be the employee's "notional earnings basel';
·
exclude payments of salary or wages which are prescribed in the Regulations from the calculation of the superannuation guarantee charge. A complementary Regulation will be made to prescribe certain payments of salary or wages which are alternatives to Social Security payments;
·
clarify that a superannuation guarantee obligation arises when salary or wages of $450 or more is paid to an employee in a month;
·
ensure that, in calculating the shortfall, the amount of the employee's salary or wages cannot exceed the maximum contribution base; extend the time for an employer to obtain a statement from a fund so that contributions to it are deemed to be made to a complying superannuation fund. The extended time will be 30 days after the date of introduction of this amendment; exclude any period of unpaid leave from the calculation of the reduced charge percentage in defined benefit scheme cases; and correct an error in the indexation calculations in section 15 by replacing the reference to the year '1992-93' with '1993-94'.

Date of effect: The amendments to the notional earnings base, excluded salary or wages and the $450 exemption threshold apply from 1 July 1992. The other amendments apply from the date of introduction of the amendments.

Financial impact: The amendments are not expected to have a significant financial impact.

Clauses involved in the proposed amendments

Clause 1: stipulates the title of the Act to be Taxation Laws Amendment (Superannuation) Act 1992.

Clause 2: sets out the commencement dates for the provision of the Bill

Clause 3: stipulates the "Principal Act" is the Income Tax Assessment Act 1936.

Limits on Deductions for Superannuation Contributions

Clause 4: Proposes to repeal existing subsections 82AAC(2) and (2A) and to insert new subsections 82AAC(2) to (2H) to limit the amount of the deductions for employer superannuation contributions for the 1994-95 year of income and all subsequent years.

Clause 5: Proposes to repeal existing subsection 82AAT(2) and to insert new subsections 82AAT(2) to (2C) to limit the amount of the deductions available to a self employed person for contributions to a superannuation fund for the 1994-95 year of income and all subsequent years.

Clause 6: Proposes that the amendments made by clauses 4 and 5 apply to assessments for the 1994-95 year of income and all subsequent years

Deductions and rebates for personal superannuation contributions

Subclause 7(1):

·
Omits various definitions from subsection 82AAS(1) which are no longer required in that subsection because of the proposed amendments.
·
Inserts a definition of eligible employment in subsection 82AAS(1) for the purposes of new subsection 82AAS(3).
·
Omits subsection 82AAS(2A) to prevent employees with employer superannuation support receiving a tax deduction for personal superannuation contributions.
·
Inserts new subsection 82AAS(3) to extend the concept of a substantially self-employed person by removing the requirement that the employer superannuation support be restricted to industrial award superannuation.

Subclause 7(2):

·
Amends paragraph 82AAS(2)(a) to clarify the operation of the 'reasonable to expect' test in determining whether a person is an eligible person.
·
Inserts new sub-subparagraph 82AAS(2)(b)(ii)(D) to allow former employees and employees who no longer have employer superannuation support to be eligible persons even if they have accrued superannuation benefits.
·
Inserts new subsections 82AAS(4)-(7) to ensure that a payment of superannuation guarantee charge (SGC) counts as employer superannuation support in the year for which it is payable.

Clause 8 Amends subsection 82AAT(2) to provide a single deduction limit for all eligible persons.

Clause 9: Replaces the current rebate for personal superannuation contributions with a new rebate. The clause also inserts definitions of 'complying superannuation fund', 'dependant' and 'eligible personal superannuation contributions'.

Clause 10: Amends section 177A to omit references to the current rebate.

Clause 11: Omits subsections 177B(5) and (6) which refer to the current rebate.

Clause 12: Amends section 177C to omit references to the current rebate.

Clause 13: Amends section 177F to omit references to the current rebate.

Clause 14: Amends section 221YAB to replace the reference to the current rebate with a reference to the new rebate.

Clause 15: Amends subsection 262A(4A) to ensure that the record-keeping requirements relating to the current rebate will still apply in cases where the rebate has been received in income years prior to 1 July 1992.

Clause 16: Inserts in subsection 267(1) the definitions omitted from subsection 82AAS(1) by subclause 10(1) which are relevant to Part IX of the Act.

Clause 17: Provides for the dates of application of the proposed amendments.

Clause 18: Ensures that regulation 12A of the Income Tax Regulations, which, for the purposes of subsection 82AAT(2), specifies a limit on deductions for personal superannuation contributions, also applies to the proposed amended subsection.

Superannuation Pensions and Roll-over Annuities

Clause 19: Omits from subsection 1595J(1) a number of definitions which are no longer necessary as a result of the simplified rebate arrangements and omits subsection 1595J(2). Inserts in subsection 1595J(1) new or amended definitions of death or disability benefit, first payment date, rebatable ETP annuity, rebatable proportion, rebatable superannuation pension, rebatable 27H amount and recipient.

Clause 20: Removes section 1595K.

Clause 21: Re-locates and reorders section 1595L so that it becomes section 275C. Transfers associated definitions from subsection 1595J(1) and section 1595K to the new section 275C.

Clause 22: Inserts a new subsection 1595M(1) to calculate the new rebate entitlement for a rebatable superannuation pension.

Clause 23: Removes sections 1595N to 1595R (inclusive) because they are no longer necessary under the new simplified rebate arrangements.

Clause 24: Amends section 1595L1 to calculate the new rebate entitlement for a rebatable ETP annuity.

Clause 25: Removes sections 1595V to 1595Y (inclusive) because they are no longer necessary under the new simplified rebate arrangements.

Clause 26: Transfers definitions which are no longer needed in subsection 1595J(1) to section 275B where those terms are still relevant.

Clause 27: Proposes that these amendments apply to payments of annuities or pensions made on or after 1 July 1994.

Clause 28: Replaces the current definition of UPP with a new definition of UPP so that, for rebatable superannuation pensions and rebatable ETP annuities, UPP consists only of undeducted contributions.

Clause 29: Makes a minor consequential technical amendment to subsection 275B(3).

Clause 30: Amends paragraphs (d), (da), (db), (e), (f), (g), (ga), (gb), (h) and (j) of the definition of an ETP in subsection 27A(1) to include UUPP as part of the ETP. Replaces the current definition of undeducted contributions with a new definition of undeducted contributions so that UUPP is treated as undeducted contributions and makes a minor consequential technical amendment to subsection 27A(7).

Clause 31: Amends paragraph 27AB(3)(b) to remove subparagraph (i) which has become redundant as a consequence of these amendments.

Clause 32: Amends paragraphs 27H(3A)(a) and 27H(3A)(b) relating to the matters the Commissioner will have regard to when reducing the deductible amount following the partial commutation of a superannuation pension or annuity.

Clause 33: Proposes that, apart from the amendments to section 27H(3A), the amendments apply to ETPs made on or after 1 July 1994. The amendments to subsection 27H(3A) applies to pensions and annuities which commence to be payable after 1 July 1994.

Clause 34: Inserts definitions of annuity and pension in subsection 27A(1) by reference to section 3 of the Occupational Superannuation Standards Act 1987 and amends the definition of eligible annuity in subsection 27A(1) to ensure that ETPs can be rolled-over to purchase annuities which meet the pension and annuity standards specified in the Income Tax Regulations.

Clause 35: Amends the definition of RA policy in subsection 110(1) so that annuities which meet the pension and annuity standards are taxed appropriately in the hands of life assurance companies and registered organisations

Clause 36: Inserts definitions of annuity and pension in subsection 221A(2) so that the PAYE provisions apply to annuities and pensions within the extended meaning.

Clause 37: Inserts definitions of annuity and pension in subsection 267(1) so that the extended meanings apply appropriately to pensions paid by complying superannuation funds.

Clause 38: Proposes that the amendments apply to annuities purchased after the date of Royal Assent and pension payments made after the date of Royal Assent.

Clause 39: Insert a transitional provision to ensure that Regulations made in accordance with the amended definition of eligible annuity in subsection 27A(1) may apply to annuities purchased during any period after the date of Royal Assent.

Rolling-Over Eligible Termination Payments

Clause 40: Removes subsection 27A(10) which contains provisions to truncate the eligible service period of an eligible termination payment (ETP).

Clause 41: Removes subsection 27AA(2) which contains the Commissioner's discretion to increase the pre-July 83 component of an ETP. This provision is now incorporated in new subsection 27AC.

Clause 42: Inserts subsection 27AC to calculate the components of the retained amount of the ETP (ie, the components of the ETP not rolled-over).

Clause 43: Amends section 27B to include the taxed and untaxed elements of the retained amount of the post-June 83 component of an ETP in a taxpayer's assessable income in the year the ETP is made.

Clause 44: Amends section 27C to include 5% of the retained amounts of the pre-July 83 and concessional components of an ETP in a taxpayer's assessable income in the year the ETP is made.

Clause 45: Inserts new subsections 27D(4), 27D(5), 27D(6) and 27D(7) to include the steps that must be used to calculate the amount of the pre-July 83 component and the taxed and untaxed elements of the post-June 83 component to be included in a taxpayer's election to roll-over an ETP.

Clause 46: Sets out the commencement date of the amendments made by Clauses 40 - 45.

Clause 47 and 48: Removes the definitions and references to roll-over period from Subdivision AA of Division 2 of Part III.

Clause 49: Provides that the amendments to abolish the 90 day roll-over period (ie, Clauses 47 and 48) apply in relation to amounts paid on or after 1 July 1994.

Taxation of redundancy, early retirement and invalidity payments

Clause 50:

·
Excludes from the definition of ETP the tax-free amount of a BFRP and an AERSP made on or after 1 July 1994.
·
Redefines the concessional component of an ETP so that it comprises BFRPs, AERSPs and invalidity payments which are made before 1 July 1994 only.
·
Inserts a definition of the post-June 1994 invalidity component in subsection 27A(1).
·
Inserts a definition of the tax-free amount of a BFRP and an AERSP in subsection 27A(1).
·
Inserts new subsections 27A(19)-(21) to specify the tax-free amount for the 1994/95 income year, and to index that amount to average weekly earnings for subsequent income years.

Clause 51: Amends subsection 27AA(1) by inserting references to the new post-June 1994 invalidity component to identify it as a separate component of an ETP, and to enable the calculation of the pre-July 1983 component of an ETP containing the post-June 1994 invalidity component.

Clause 52: Amends subsection 27AC by inserting references to the new post-June 1994 invalidity component to identify that component in the retained amount of an ETP, and to enable the calculation of the retained amount of the pre-July 1983 and post-June 1983 component of an ETP containing the post-June 1994 invalidity component. (Subsection 27AC is inserted by clause 42, explained in Chapter 4).

Clause 53:

·
Inserts new subsection 27CB(1) to exempt from income tax and capital gains tax the post-June 1994 invalidity component of an ETP and the tax-free amount of a BFRP and AERSP.
·
Inserts new subsection 27CB(2) to facilitate calculation of BFRPs and AERSPs made on or after 1 July 1994.

Clause 54:

·
Inserts new sub-subparagraph 27D(1)(b)(iii)(E) to enable the post-June 1994 invalidity component of an ETP to be rolled over.
·
Inserts new paragraph 27D(5)(aa) and amends paragraph 27D(5)(c) to enable calculation of the extent to which the rolled-over amount (called the applied amount) of an ETP containing the post-June 1994 invalidity component consists of that component and the pre-July 1983 and post-June 1983 components. (Subsection 27D(5) is inserted by clause 45, explained in Chapter 4).

Clause 55:

Inserts new paragraph 27E(4)(aa) to ensure that AERSPs made on or after 1 July 1994 cannot be paid from superannuation funds.
Inserts new subsection 27E(6) to facilitate calculation of
·
AERSPs made on or after 1 July 1994.

Clause 56:

·
Inserts new paragraph 27F(1)(aa) to ensure that BFRPs made on or after 1 July 1994 cannot be paid from superannuation funds.
·
Inserts new subsection 27F(3) to facilitate calculation of BFRPs made on or after i July 1994.

Clause 57: Replaces current subparagraph 27G(b)(i) with a new subparagraph to modify the meaning of invalidity payments made on or after 1 July 1994, and to require verification of the recipient's disability by two legally qualified medical practitioners.

Reasonable Benefit Limits

Clause 58: Proposes to amend section 27A of the Act to remove references to 'ISC-directed commutation payment' as a result of changes to simplify the treatment, for reasonable benefit limit (RBL) purposes, of the excessive amount of pensions and annuities.

Clause 59: Proposes to amend section 27AA of the Act, as a consequence of the Commissioner of Taxation taking responsibility for administration of the RBLs, to remove references to actions to be taken by the Insurance and Superannuation Commissioner.

Clause 60: Proposes to insert new Division 14 into the Act to allow the Commissioner of Taxation to takeover responsibility for the administration of the RBLs and to simplify the RBL rules.

Clause 61: Determines the application date for clauses 58 and 59.

Clause 62: Amendment of assessments.

Amendments Relating To Reasonable Benefit Limits

Clauses involved in the proposed amendments

Clause 63: Stipulates the "Principal Act" is the Occupational Superannuation Standards Act 1987.

Division 2 - Amendments relating to reasonable benefit limits (RBLs)

Clause 64: Amends section 3 by omitting paragraphs (aa) and (ab) of the definition of "reviewable decision" in subsection 3(1).

Clause 65: Repeals Part IIIA

Clause 66: Amends section 16 by omitting from subsection (1) "(ab)" and by omitting subsections (1A) and

Clause 67: Amends section 17 by omitting ",or a person" and "or the person" wherever occurring.

Clause 68: Amends section 22 by omitting paragraph (d).

Clause 69: The application provision repeals part IIIA from 1 July 1994 with appropriate qualification for benefits paid up to 30 June 1994 but processed after that date.

Division 3 -Amendments to allow superannuation funds to retain a member's benefits for up to 90 days while the member decides whether to roll-over the benefit

Clause 70: Inserts new subsection (6) in section 3 of the Occupational Superannuation Standards Act so that a fund would not fail to meet the definition of "superannuation fund" in subsection 3(1) notwithstanding that it delayed provision of the benefit at the member's request for up to 90 days. New subsection (7) clarifies that subsection (6) is not intended to otherwise interfere with the payments of benefits consistent with paragraph (b) of the "superannuation fund" definition.

Clause 71: The clause provides that the amendment applies to benefits arising on or after 1 July 1994.

Division 4 -Amendments to allow retired persons to transfer their benefits into superannuation funds

Clause 72: Inserts new sub-paragraph (b) (iv) into the definition of "superannuation fund" in subsection 3(1), allowing the provision of pensions for a transferred retiree member of the fund. The clause also inserts the definition of a "transferred retiree member" into subsection 3(1) including a description of the permitted sources of transferred benefits which will be superannuation funds, approved deposit funds, life assurance companies, or registered organisations.

Clause 73: Sets the date of application of the amendment to date of assent of the legislation.

Division 5 -Amendments relating to minimum standards for pensions and annuities

Clause 74: Inserts into subsection 3(1) new definitions for "annuity" and "pension" in terms of regulations to be made under the Occupational Superannuation Standards Act.

Clause 75: Inserts into section 7 a new provision to clarify the role of the regulations in prescribing the form in which pensions are to be provided by a fund if it is to meet the definition set out in the regulations.

Clause 76: Provides for transitional arrangements in respect of the regulations.

Superannuation Guarantee Charge

Clause 77: Provides that the amendments apply to the Superannuation Guarantee (Administration) Act 1992.

Clause 78: Amends section 13 to ensure that, if an employer's superannuation contribution under an industrial award, or a law, in place prior to 21 August 1992 is based on a percentage of the earnings of a standard employee, then the earnings of the standard employee can be the employee's "notional earnings base".

Clause 79: Makes a consequential amendment to subsection 23(9) to include a reference to federal, state and territory laws.

Clause 80: Inserts new section 25A to apply if an employer's requisite superannuation contribution, under an award in place prior to 21 August 1991, is a fiat dollar superannuation contribution which is increased according to changes in the earnings of a standard employee. In that case the earnings of the standard employee can be the employee's "notional earnings base".

Clause 81: Sets out the application date for clauses 78, 79 and 80.

Clause 82: Corrects an error in the indexation calculations in section 15 by replacing the reference to the year '1992-93' with '1993-94'.

Clause 83: Ensures that, in calculating the shortfall, under section 18, the amount of the employee's salary or wages cannot exceed the maximum contribution base.

Clause 84: Ensures that, in calculating the shortfall, under section 19, the amount of the employee's salary or wages cannot exceed the maximum contribution base.

Clause 85: Excludes any period of unpaid leave from the calculation of the reduced charge percentage in defined benefit scheme cases.

Clause 86: Extends the time for an employer to obtain a statement from a fund so that contributions to it are deemed to be made to a complying superannuation fund. The extended time will be 30 days after the date of introduction of this amendment.

Clause 87: Excludes payments of salary or wages which are prescribed in the Regulations from the calculation of the superannuation guarantee charge. (A complementary Regulation will be made to prescribe certain payments of salary or wages which are alternatives to Social Security payments). The clause will also clarify that a superannuation guarantee obligation arises when salary or wages of $450 or more is paid to an employee in a month.

Clause 88: Sets out the application date for clause 87.

Chapter 1 - Limits on deductions for superannuation contributions

Limits on deductions for superannuation contributions

Summary of proposed amendments

Purpose of amendment: To limit the amount of the deductions available to an employer or serf employed person for contributions to a superannuation fund.

Date of Effect: 1994-95 year of income and all subsequent years.

Background to the legislation

The Income Tax Assessment Act 1936 (the Act) and the Occupational Superannuation Standards Act 1987 (the OSS Act) contain provisions which attempt to limit the funding of excessive superannuation benefits in superannuation funds. These provisions operate in conjunction with the reasonable benefit limit rules in the OSS Act to limit the amount of concessionally taxed superannuation benefits available to a person.

Under the OSS Act and its associated regulations, a superannuation fund cannot accept deductible superannuation contributions which exceed the amount necessary to fund superannuation benefits up to the person's reasonable benefit limit. The OSS Regulations contain complex formulas for determining the maximum deductible contributions which can be received by a superannuation fund.

Subsections 82AAC(2), (2A) and 82AAT(2) of the Act also limit the funding of excessive superannuation benefits in a superannuation fund. Under subsection 82AAC(2), an employer is not entitled to a deduction for superannuation contributions for the benefit of employees, if the employer contributes to more than two superannuation funds (known as the 'two fund rule'). An exception is where the employer contributes to three superannuation funds and one of those funds was established by a Commonwealth, State or

Territory law and was in existence before 1 July 1990 (subsection 82AAC(2A)).

Under subsection 82AAT(2), a self-employed person's deduction for superannuation contributions is limited to the lesser of:

·
$3,000 plus 75% of the amount of contributions exceeding $3,000; and
·
the person's maximum deductible contributions as determined under the Income Tax Regulations (ie., the amount necessary to fund superannuation benefits at the person's reasonable benefit limit as determined under the OSS Regulations).

Explanation of proposed amendments

The proposed amendments will replace the existing two fund rule for employers, with a set dollar limit on the amount of the deductible superannuation contributions an employer can make on behalf of employees. The maximum deductible contributions a self employed person can make will also be based on a set dollar limit.

As a consequence of these amendments, it is proposed that superannuation funds will no longer have an obligation to monitor the excessive funding of superannuation benefits. This change will require consequential amendments to OSS legislation to remove the existing complex benefit funding limits.

Employer Superannuation Contributions

Under the proposed amendments, an age based limit will be placed on the amount of deductible employer superannuation contributions made for the benefit of each employee during a year of income. However, in limited circumstances, an employer may elect to use a standard contribution limit [Clause 4].

Age based Limit on Employer Contributions

The total deductions allowable to an employer for superannuation contributions made for the benefit of an employee must not exceed the 'employee's deduction limit', unless the employer elects to use the standard contribution limit (see discussion below). The age based limits will also apply to the total deductions for superannuation contributions made by the employer and an associate of an employer for the benefit of the one employee [New subsection 82AAC(2)].

The 'employee's deduction limit', for the 1994-95 year of income is as follows:

Age in Years Deduction Limit
under 35 $9,000
35 to 49 $25,000
50 and over $62,000

For subsequent years the deduction limits will be indexed.

In determining which deduction limit applies, the age of the person is based on the following:

·
if only one contribution is made during the year of income by the employer or an associate of the employer for the benefit of the employee - the employee's age at the end of the day that the contribution is made; or
·
if more than one contribution is made during the year by the employer or an associate of the employer for the benefit of the employee - the employee's age at the end of the day on which the last contribution for the year is made [New subsection 82AA C(2A)].

Example

Assume an employer makes two superannuation contributions during the 1994-95 year for an employee on 31 December 1994 and 30 June 1995. If the employee turned 50 years of age on 30 March 1995, the employee's deduction limit for the sum of the two contributions during the year will be $62,000. This is because the employer was 50 years of age on the day the last contribution for the year was made.

For the 1995-96 year of income and subsequent years, the deduction limit will be calculated using the formula:

Indexation factor x Previous indexable amount

The 'indexation factor' is the indexation factor for the year calculated under section 159SG of the Act. That is, the movement in the estimate of the full time adult average weekly ordinary time earnings, as published by the Australian Statistician, from the middle month of the March quarter two years prior to the year of income to the middle month of the March quarter immediately prior to the year of income.

The 'previous indexable amount' is the deduction limit for the previous year. Therefore, for the 1995-96 year the previous indexable amount are the amounts specified in the above table [New subsections 82AAC(2B) and (2C)1.

These deduction limits apply to a particular employer irrespective of superannuation contributions made by another employer for the benefit of the same employee, except where the two employers are associates. Therefore, if an employee works for two employers, either at the same time or at different times during the year of income, both employers are entitled to deductions for superannuation contributions up to the age based limit for the employee.

An employer will also be entitled to a deduction for superannuation contributions up to the whole amount of the age based limit where the employee works for the employer for only part of the year of income. There is no pro-rating of the deduction limits for the period during the year when the employee is employed by the employer.

However, if employers enter into arrangements to deliberately exploit these provisions to increase the deductions for superannuation contributions, the anti-avoidance provisions in Part IVA of the Act may apply.

Example 1

An employer makes superannuation contributions once a year on 30 April for three employees as follows:

Employee Age at 30/4/95 Contribution 30/4/95 $ Contribution on 30/4/95 $
A 25 10,000 10,000
B 34 20,000 20,000
C 52 20,000 20,000

The employer will be entitled to the following deductions (ignoring indexation):

Employee Deduction for 1994/95 year $ Deduction for 1995/96 year $
A 9,000 9,000
B 9,000 20,000
C 20.000 2O.OOO
Total 38.000 49,000

Example 2

An employee, who is 30 years of age during the 1994-95 year of income, works 8 months for Employer X and 4 months for Employer Y. Employer X and Employer Y are not associates. Both Employer X and Employer Y are entitled to a maximum deduction of $9000 for superannuation contributions for the benefit of the employee. Therefore, the amount of the total deductible employer superannuation contributions made during the year for the benefit of the employee could be $18,000.

In the case of a defined benefit superannuation scheme (ie. a superannuation scheme which provides a defined benefit rather than a benefit based on accrued earnings on contributions) which uses the age based limit method, the Commissioner will accept that deductible contributions for a year of income may be allowed based on the sum of the deduction limits of each employee for whom the employer is contributing.

Example

An employer contributes $150,000 during the 1994-95 year of income to a defined benefit superannuation scheme for the benefit of 8 employees. Five employees are aged under 35 and three are aged between 35-49.

The total deduction limit in respect of these employees is the sum of:

·
5 x $9,000; and
·
3 x $25,000 ie. $120,000.

Therefore, of the $150,000 contributions made, the employer is entitled to a tax deduction of $120,000. The remaining $30,000 is not deductible.

Standard Contribution Limit

Instead of using the age based limits, an employer may elect to use a standard contribution limit for all employees. The purpose of the alternative is to reduce the administrative burden on employers who have a large number of employees. It may be difficult for these employers to identify the age based limit for each individual employee.

Under the standard contribution limit, the total deductions allowable to an employer for superannuation contributions for the benefit of all employees must not exceed that standard contribution limit. This limit will also apply to the total deductions for superannuation contributions made by the employer and an associate of the employer for the benefit of all of the employees.

An employer can only elect to use this limit if all of the following conditions are satisfied:

·
at all times during the year of income when the taxpayer was an employer, the employer fills ten or more employee positions (that is, employs ten or more employees continuously);
·
the employer, or an associate, makes superannuation contributions for employees who fill at least 10 of those positions during the year;
·
the taxpayer elects to adopt this method.

If the employer elects to adopt this method, the limit on deductions for employer superannuation contributions is calculated, for the 1994-95 year of income, as follows:

Full year employee positions * $25,000

'Full- year employee positions' are the number of employee positions which satisfy the following conditions:

·
they are filled by employees of the taxpayer at all times during the year of income; and
·
deductions are allowable to the employer, and/or associates of the employer, for contributions made during the year of income in respect of those employees.

An employee position may be a full-year employee position even if the position is vacant for a short time during the year. In this regard, if an employee ceases to fill a position and that position is filled by another employee within 3 months, the employee position is taken to have been filled by an employee during the vacant period [New subsection 82AA C(2H)].

The standard contribution limit does not limit the deductible superannuation contributions for a particular employee, but limits the total deductible superannuation contributions for all employees. Therefore, in the 1994-95 year an employer can contribute more than $25,000 for a particular employee so long as the total deductible superannuation contributions for all employees does not exceed the amount calculated under the above formula.

For the 1995-96 year of income and subsequent years, the deduction limit will be calculated using the formula:

Indexation factor * Previous indexable amount

The 'indexation factor' is the indexation factor for the year calculated under section 1595G of the Act. That is, the movement in the estimate of the full time adult average weekly ordinary time earnings, as published by the Australian Statistician, from the middle month of the March quarter two years prior to the year of income to the middle month of the March quarter immediately prior to the year of income.

The 'previous indexable amount' is the standard contribution limit for the previous year. Therefore, for the 1995-96 year the previous indexable amount is $25,000 [New subsections 82AAC(2D),(2E) and (2F)I.

If an employer elects to use the standard contribution limit, the election must be made before the date of lodgement of the taxpayer's income tax return for the year of income to which the election relates, or by a later date allowed by the Commissioner. Once an election is made it will apply to superannuation contributions made for all employees of the employer during the year of income. Therefore, an employer cannot use the age based limits for superannuation contributions on behalf of any employee during the year of income. However, as the election is an annual election, the employer may use the age based limits for the subsequent years of income [Subsection 82AAC(2G)].

Example 1

An employer employs 20 employees during a year, but the minimum number of employees at any one time during the year is 15. The employer makes superannuation contributions for all employees during the year which total $210,000. The employer chooses to use the $25,000 standard maximum contribution.

The employer will be entitled to a maximum deduction of $375,000 for total contributions for all employees (ie., $25,000 x 15). As the employer has only contributed $210,000 the entire amount will be deductible, irrespective of the amounts contributed for each individual employee.

Example 2

An employer employs a total of 25 employees during a year of income. However, the least number of employees at any one time during the year is 6 employees. The employer cannot elect to use the standard contribution limit because the employer did not have 10 employees at all times during the year of income. Therefore, the age based limits will apply.

Self-employed Superannuation Contributions

As mentioned earlier, under existing section 82AAT(2) of the Act, the deduction available to a self-employed person for contributions to a superannuation fund during a year of income is limited to the lesser of:

·
$3,000 plus 75% of the amount of the contributions exceeding $3,000; or
·
the taxpayer's maximum deductible contributions as determined under the Income Tax Regulations.

Under the proposed amendments, the deduction limit for a self employed person, from the 1994-95 year of income, will be the lesser of:

·
$3,000 plus 75% of the amount of the contributions exceeding $3,000; or
·
the taxpayer's age based limit on deductible superannuation contributions [New subsection 82AAT(2)].
·
The taxpayer's age based deduction limit, for the 1994-95 year of income, is as follows:

Age in years Deduction Limit
under 35 $9,000
35 to 49 $25,000
50 and over $62,000

For subsequent years the deduction limits will be indexed.

In determining which deduction limit applies, the age of the person is based on the following:

·
if only one contribution is made during the year by the taxpayer - the taxpayer's age at the end of the day that the contribution is made; or
·
if more than one contribution is made during the year by the taxpayer - the taxpayer's age at the end of the day on which the last contribution for the year is made {New subsection 82AA T(2A)].

For the 1995-96 year of income and subsequent years, the deduction limit will be calculated using the formula:

Indexation factor * Previous indexable amount

The 'indexation factor' is the indexation factor for the year calculated under section 1595G of the Act. That is, the movement in the estimate of the full time adult average weekly ordinary time earnings, as published by the Australian Statistician, from the middle month of the March quarter two years prior to the year of income to the middle month of the March quarter immediately prior to the year of income.

The 'previous indexable amount' is the deduction limit for the previous year. Therefore, for the 1995/96 year the previous indexable amount are the amounts specified in the table above [New subsections 82A4 T(2B) and (2C)].

Example

A 45 year old self employed person contributes $30,000 to a superannuation fund during the 1994-95 year. The taxpayer will be entitled to a deduction of $23,250. That is, the lesser of:

·
$23,250 [i.e., $3,000 + 75% of ($30,000 - 3000)]; and
·
$25,000.

Chapter 2 - Deductions and rebates for personal superannuation contributions

Deductions and rebates for personal superannuation contributions

Summary of proposed amendments

Purpose of amendment:

·
To replace the existing deduction and rebate
·
arrangements for employees who have employer
·
superannuation support with a new rebate.
·
To expand the concept of a substantially self-employed person so that people who are substantially self-employed do not lose access to tax deductions for their personal superannuation contributions because they perform small amounts of paid employment through which they receive employer superannuation support (whether under an industrial award or not).
·
To clarify the circumstances in which a person is an eligible person and therefore entitled to a tax deduction for personal superannuation contributions. The definition of eligible person will be modified so that it more effectively identifies people who have no employer superannuation support (including former employees and employees who have opted out of their employer superannuation schemes).
·
To ensure that a payment of superannuation guarantee charge (SGC) counts as employer superannuation support in the year for which it is payable.

Date of effect: Apart from the amendment described below, all the amendments proposed by the Bill are to apply to contributions made on or after I July 1992 [Subclause 17(1)].

The amendment to paragraph 221YAB(1)(a) applies to the calculation of provisional tax (including instalments) payable in respect of income of the 1993-94 income year and subsequent income years [Subclause 17(2)].

Background to the legislation

What are the current deduction arrangements for personal superannuation contributions?

Income tax deductions are available to eligible persons (defined in subsection 82AAS(2) of the Act for their personal superannuation contributions to complying superannuation funds.

An unsupported eligible person (defined in subsection 82AAS(1)) is:

·
a self-employed person or an employee without employer superannuation support, i.e. a person for whom there is no reasonable expectation that superannuation benefits would be provided by someone else (usually an employer) on retirement or for the person's dependants on death; or
·
a substantially self-employed person, i.e. a person who derives less than 10% of his or her assessable income during the year from employment providing industrial award superannuation, that being the person's only form of employer superannuation support.

A supported eligible person is:

·
a person for whom there is an expectation of superannuation benefits from someone else on retirement or death but where the expected superannuation benefits would be attributable solely to contributions made under an industrial award-based superannuation agreement.

What are the new deduction arrangements?

Under the Superannuation Guarantee (Administration) Act 1992 (the SGC Act) employees may receive increases in their minimum level of employer-financed superannuation that may or may not be incorporated into industrial awards. If no amendments were made to the current law, an employee's entitlement to tax concessions for personal superannuation contributions would depend on whether or

not the employer superannuation support is incorporated into an award, irrespective of the level of that support.

To prevent that anomaly, the proposed amendments abolish tax deductions currently available to supported eligible persons for their personal superannuation contributions.

Unsupported eligible persons will continue to be eligible for tax deductions. Low to middle income employees with employer superannuation support will be eligible to claim a rebate for their personal superannuation contributions.

What are the new rebate arrangements ?

The current rebate arrangements are complicated and place an administrative burden on superannuation funds. The proposed amendments replace those complex arrangements with a rebate available to all people earning under $31,000 a year who cannot claim a tax deduction for their superannuation contributions.

Replacing the existing rebate arrangements with a new rebate requires a number of consequential amendments to the Act (discussed below).

Expanding the concept of a substantially self-employed person

Since the introduction of the SGC Act, substantially self-employed people may receive employer superannuation support other than under an industrial award. Therefore the proposed amendments extend the concept of a substantially self-employed person by omitting the requirement that the employer support from the paid employment be restricted to industrial award superannuation.

Clarification of the eligible person definition

There has been some confusion as to the application of the eligible person test in subsection 82AAS(2). The amendments clarify the test by indicating that the test of what is reasonable to expect would happen on retirement or death does not require an evaluation of the likelihood of the relevant person's death or retirement during the particular year of income.

A further amendment is necessary because income and accretions on employer superannuation contributions already made are currently within the meaning of superannuation benefits. Therefore, former employees and employees who no longer receive employer superannuation support may not be eligible persons if they have accrued superannuation benefits attributable to previous employer contributions. The proposed amendments ensure that these people come within the definition of eligible person if they are genuinely unsupported.

SGC as employer superannuation support

SGC may be paid in respect of an employee in lieu of direct employer superannuation support. The proposed amendments ensure that payments of SGC will count as employer superannuation support in the year for which it is payable. Therefore, unless they qualify as substantially self-employed persons, employees for whom SGC is paid will not be eligible persons.

Explanation of proposed amendments

Removal of existing deduction arrangements for employees with employer superannuation support

An employee with only industrial award superannuation support is an eligible person because subsection 82AAS(2A) excludes benefits attributable to industrial award superannuation from the meaning of superannuation benefits in subsection 82AAS(2). The Bill proposes to omit subsection 82AAS(2A). The effect of that is all employees (apart from substantially self-employed people) with any form of employer superannuation support will be denied access to deductions for their personal superannuation contributions [Subclause 7(1)].

Amendments necessary because of removal of existing deduction arrangements for employees with employer superannuation support

Omission of subsection 82AAS(2A) means that a number of definitions in subsection 82AAS(1) of terms which appear in subsection 82AAS(2A) are no longer required. Therefore

the Bill proposes to omit those definitions from subsection 82AAS(1). However, because they are relevant to Part IX of the Act, the definitions are to be placed in subsection 267(1) [Subclause 7(1) and Clause 16].

Also, since the omission of subsection 82AAS(2A) removes the distinction between supported eligible persons and unsupported eligible persons, the Bill proposes to:

·
omit the definition of unsupported eligible person in subsection 82AAS(1) [Subclause 7(1)]; and
·
remove the deduction limit in subsection 82AAT(2) applicable to supported eligible persons so that, from 1 July 1992, all eligible persons will be entitled to a deduction up to the limit currently applying to unsupported eligible persons [Clause 8].

The deduction limit for eligible persons in subsection 82AAT(2) is determined by reference to regulation 12A of the Income Tax Regulations. The Regulations in force prior to these amendments are to continue to apply to subsection 82AAT(2) after its amendment so that the limit specified in regulation 12A applies to the amended subsection [Clause 29].

Replacing the current rebate with a new rebate

The Bill proposes to repeal the current rebate provisions and insert new section 1595Z providing a new rebate [Clause 9 - new section 1595Z].

Subsection 1595Z(1) allows a rebate for eligible personal superannuation contributions made by people who are not entitled to a tax deduction for their contributions. Eligible personal superannuation contributions are superannuation contributions made to a complying superannuation fund to obtain superannuation benefits for the person or, in the event of the death of the person, the dependants of the person.

The rebate is 10% of a person's eligible personal superannuation contributions, subject to a contributions limit of $1,000. That limit is reduced by 25 cents for each

dollar by which the person's assessable income for the year exceeds $27,000. Therefore the rebate is not available to people whose assessable income for the year is $31,000 or more.

Example

An employee earning $24,000 a year makes personal superannuation contributions to two complying superannuation funds as follows:

·
$700 to Fund A
·
$500 to Fund B

The rebate allowable for the contributions is 10% of the lesser of:

·
the total contributions to both funds ($1,200); and $1,000
·
Therefore the rebate is 10% of $1,000, i.e. $100.

Unlike deductible contributions made by eligible persons, rebatable contributions are not taxed in the superannuation fund. They also form part of the contributor's undeducted contributions, even though the contributor has received a tax concession for them.

Rebatable contributions, like undeducted contributions, will not be subject to preservation in the superannuation fund.

Amendments necessary because of changes to the rebate

The complexity of the current rebate provisions provided scope for tax avoidance. To prevent that, Part IVA of the Act specifically addressed schemes entered into with the sole or dominant purpose of obtaining the rebate.

The new rebate arrangements are simple and not open to abuse in the same way. Therefore it is unnecessary to provide references to the new rebate provision in Part IVA and the present references to the current rebate are to be omitted. [Clauses 10-13]

The Bill also proposes to amend paragraph 221YAB(1)(b). Section 221YAB specifies the conditions to be met for provisional tax to be raised on salary or wages. One of the conditions is that the amount calculated according to the formula

(Notional gross tax - Qualifying rebates) - PAYE deductions

is $3,000 or more. The new rebate is to be a qualifying rebate for these purposes. Therefore the Bill proposes to amend the qualifying rebates definition by inserting a reference to the new rebate provision. [Clause 14]

Finally, the record-keeping requirement provided in subsection 262A(4A) relating to elections made in respect of the current rebate is to continue to apply where that rebate has been claimed. Therefore the Bill proposes to amend that subsection to save the law relating to record-keeping as it applied immediately before these amendments. [Clause 15]

There is no record-keeping requirement in relation to the new rebate.

Expanding the concept of a substantially self-employed person

Currently, a substantially self-employed person who receives employer superannuation support from small amounts of paid employment is an eligible person only if the employer superannuation support is provided under an industrial award-based superannuation agreement.

The Bill removes the requirement that the person's employer superannuation support be restricted to industrial award superannuation. That is achieved by excluding certain superannuation benefits from subsection 82AAS(2). The superannuation benefits excluded are those attributable to eligible employment (continuous or periodic) undertaken by people whose assessable or exempt income from that employment is less than 10% of their assessable income for the year. [Subclause 7(1) - new subsection 82AAS(3)]

Eligible employment is to be defined in subsection 82AAS(1). It encompasses people who are within the extended definition of employees in section 12 of

the Superannuation Guarantee (Administration) Act 1992 (the SGC Act). It also covers people engaged in work of a domestic or private nature for 30 hours a week or less (who are not employees for the purposes of the SGC Act: subsection 12(11)). [Subclause 7(1) - new definition in subsection 82AAS(1)]

A person's income for the purposes of the substantially self-employed person test includes both assessable and exempt income. Assessable income is gross income before any deductions are claimed. It includes salary or wages and income from other sources (for example, interest income and gross rent). Exempt income is income not subject to taxation.

The concept of a substantially self-employed person also encompasses someone who, during the year of income, receives employer superannuation support but does not receive assessable income from the employment to which the support relates. That may happen if an employee resigns just before the end of an income year and the former employer makes a contribution to a superannuation fund in arrears in the following income year for the former employee's benefit.

Superannuation benefits attributable to a person's employment will be excluded from subsection 82AAS(2) in each year the person is a substantially self-employed person. If a person ceases to be substantially self-employed during a year (because income from employment rises, or because other income falls) the superannuation benefits attributable to the person's employment will be superannuation benefits for subsection 82AAS(2) purposes. That is the case even though the person may remain in the same employment and, in previous years when the person was substantially self-employed, superannuation benefits attributable to that employment may have been excluded from subsection 82AAS(2).

Example

Lucinda is a self-employed lawyer who is a part-time director of Small Pty Ltd (her directorship is eligible employment for the purposes of new subsection 82AAS(3)). Lucinda's assessable income for the year is $50,000 comprising:

·
$36,000 from her legal practice;
·
$10,000 rental income; and
·
$4,000 director fees.

She incurs deductible expenditure relating to her rental income so her taxable income for the year is less than her assessable income.

During the year Lucinda contributes $5,000 to a complying superannuation fund. Small contributes $2,000 to the fund for her benefit.

Lucinda's assessable income for the year from Small is less than 10% or her total income. Therefore she is a substantially self-employed person, i.e an eligible person. Note that Lucinda's taxable income is not relevant to determining her status as a substantially self-employed person.

As an eligible person, Lucinda is entitled under subsection 82AAT(2) to a tax deduction of the lesser of:

·
$3,000 plus 75% of the excess of her contributions over $3,000 (a total deduction of $4,500); and
·
the amount of contributions required to fund a benefit equal to her reasonable benefit limit.

If, in the following income year, Lucinda's director fees were $6,000 instead of $4,000, but the income she received from other sources was the same, she would not be a substantially self-employed person (because her employment income would be more than 10% of her assessable income for the year). In that case the superannuation benefits attributable to her employment would not be excluded from subsection 82AAS(2) and Small's superannuation contribution for her benefit would mean that she is not an eligible person and would not be entitled to a tax deduction for her own contribution.

Clarification of eligible person: 'reasonable to expect' test

The Bill proposes to amend paragraph 82AAS(2)(a) by replacing 'upon retirement' with 'in the event of the retirement of the relevant person'.

The purpose of this amendment is to indicate that, when considering whether in relation to a particular year of income it is reasonable to expect that superannuation benefits would be provided for a person on death or retirement, it is necessary to consider what is reasonable to expect would happen based on the premise that death or retirement has occurred. The test is an objective one which does not require an estimation of the likelihood that death or retirement would occur during the year (which was the test employed in FC of T v McCabe 90 ATC 4968). [Subclause 7(2)1

Clarification of eligible person: accrued superannuation benefits

Former employees and employees no longer receiving active employer superannuation support may be disentitled from eligible person status by income or accretions arising from previous employer superannuation contributions. That is because, although such income or accretions does not come within subparagraph 82AAS(2)(b)(i) as being benefits attributable to superannuation contributions, the income or accretions does come within the terms of subparagraph 82AAS(2)(b)(ii) (Case S72 85 ATC 523).

To prevent that, the Bill proposes to insert new sub-subparagraph 82AAS(2)(b)(ii)(D). This will ensure that, with one exception, benefits attributable to income or accretions on employer superannuation contributions made in previous years are not superannuation benefits for the purposes of subsection 82AAS(2). [Subclause 7(2) - new subsection 82AAS(2)(b)(ii)(D)]

The one exception is when, in relation to particular employment, there is a reasonable likelihood that further employer contributions will be made in subsequent years of income which will prevent the employee being an eligible person. In this context, there is a reasonable likelihood of something happening if it is more likely than not to happen.

The purpose of the exception is to ensure employees are correctly identified as having employer superannuation support in a particular year if the employer refrains from making a contribution in the year (i.e. takes a 'contributions holiday') because of adequate provisions made in previous years (to the extent that this is possible after the introduction of the SGC Act), or because the employee takes an extended period of leave without pay.

However, not all future superannuation support will bring an employee or former employee within the exception. For instance, an employee may become substantially self-employed but intend to undertake small amounts of paid employment with his or her previous employer through which superannuation benefits will be received. In such a case, income or accretions on accrued benefits will not prevent the person being an eligible person if there is no reasonable likelihood that the income attributable to the employment will be 10% or more of the person's annual assessable income.

The reason for that is because, if the income from the employment is less than 10% of total assessable income, the subsequent contributions by the employer will not themselves prevent the former employee being an eligible person (because of the substantially self-employed arrangements).

Example

Giant Co. has a superannuation scheme for its employees funded by annual contributions to a superannuation fund. During the 1991-92 income year it is calculated that the fund's assets exceed the present value of the members' entitlements. Therefore Giant does not make a contribution during that year for its employees.

(i)
Oscar, an employee, makes a contribution during the income year to a superannuation fund. Even though Giant does not make a contribution in that year, Oscar is not an eligible person if superannuation benefits have accrued during the year on contributions made by the company in previous years. That is because it is reasonably likely that the company will make contributions in later years.
(ii)
If Oscar resigns and sets up his own business in the 1991/92 income year, he will not be prevented from being an eligible person by the income earned on his accrued benefits. That is because it is reasonably likely that no further contributions will be made for his benefit by his former employer.

SGC as employer superannuation support

From the 1992-93 income year, an employer who does not provide sufficient superannuation support directly will be required to provide superannuation support by means of the SGC.

If an employer pays SGC, the shortfall component of the charge in respect of an employee (broadly, the amount by which the employer's actual superannuation support during the year is less than the required minimum support plus a nominal interest component) is applied by the Commissioner of Taxation according to one of the following provisions of the SGC Act:

·
section 65 (payment of the shortfall component to a complying superannuation fund nominated by the employee);
·
section 66 (payment direct to an employee who has retired due to illness); or
·
section 67 (payment to the personal representative of a deceased employee).

To ensure the SGC superannuation support will be treated in the same way as direct superannuation support, the SGC is deemed to be paid during the year for which it is payable under section 46 of the SGC Act (i.e. the year during which the employer's superannuation support was less than the minimum required). Therefore, subject to the substantially self-employed person exemption, the employee is not an eligible person during that year, even though the employer does not pay the SGC until the subsequent year. [Subclause 7(2) - new subsections 82AAS(4)-(6)]

If it is not reasonable to expect that the SGC will be paid (e.g. because the employer is insolvent), then the employee may be an eligible person under subsection 82AAS(2).

Chapter 3 - Superannuation pensions and roll-over annuities

Summary of proposed amendments

Purpose of amendment:

·
To introduce a new 15% rebate on superannuation pensions paid from taxed superannuation funds and on annuities purchased wholly with rolled-over eligible termination payments (ETPs) to replace the existing rebate arrangements. The rebate will apply to all such superannuation pensions and roll-over annuities payable to taxpayers who are aged 55 or more, regardless of when the pension or annuity commenced to be payable.
·
To limit the undeducted purchase price (UPP) for rebatable superannuation pensions and rebatable ETP annuities to the post-June 1983 undeducted contributions.
·
To include in the definition of an ETP the unused undeducted purchase price (UUPP) of a commuted superannuation pension or roll-over annuity and the UUPP of the residual capital value of a superannuation pension or roll-over annuity so that UUPP can be rolled-over.
·
To extend the meaning of pensions and annuities to ensure that appropriate tax treatment is given to allocated pensions and allocated annuities.

Date of Effect: The amendments extending the meaning of pensions and annuities apply to pension payments made after the date of Royal Assent and to annuities purchased after that date. The other changes apply from 1 July 1994.

Background to the legislation

Rebate on Superannuation Pensions and Roll-over Annuities

A rebate of tax is available under Subdivision AAB of Division 17 of Part III of the Income Tax Assessment Act 1936, comprising sections 159SJ to 159SY, in respect of superannuation pensions paid from taxed superannuation funds and annuities purchased wholly with rolled-over eligible termination payments (ETPs). The rebate applies to such pensions and annuities provided they first became payable after 1 July 1988 to a person aged 55 or more. The rebate is intended to be a quid pro quo for the fact that, from 1 July 1988, income tax is imposed on superannuation funds and on the superannuation business of life insurance companies and registered organisations.

The rebate applies to the post-June 1983 portion of the pension or annuity. The level of rebate depends on when the pension or annuity first becomes payable. If the pension or annuity is purchased with the roll-over of ETP moneys where the recipient had an option to take a pension or annuity at an earlier time, the level of rebate is based on the first payment date of the underlying pension or annuity. The rebate does not apply to that part of a superannuation pension covered by a section 159SS notice, which effectively allows a taxed superannuation fund to transfer tax on last minute contributions to the member, or to superannuation pensions paid from untaxed superannuation funds. The level of rebate for pensions and annuities which first commence to be payable after I July 1992 is 15% of the post-June 1983 proportion of the pension or annuity. These arrangements are very complex and in some cases produce anomalous results.

The Bill will repeal the existing rebate arrangements and replace them with a new simplified rebate. The rebate will apply to superannuation pensions paid from complying superannuation funds and to qualifying annuities (as defined in subsection 27A(1)) purchased wholly with rolled-over ETPs. The new rebate will apply to all pensions and annuities which:

·
are paid from a taxed source; either:

(a)
are received by taxpayers who are aged 55 or more, regardless of when the pension or annuity commenced to be payable; or
(b)
are death or disability benefits; and

·
are within the recipient's reasonable benefit limits (RBrs).

Therefore, if the pension or annuity commences to be paid before a taxpayer turns 55 years of age, the rebate will apply but only to pension and annuity payments made after the taxpayer turns 55. The rebate will also apply to pensions and annuities that commenced to be paid before 1 July 1988.

Pensions and annuities in excess of the RBLs can continue to be taken as non-rebatable pensions or annuities. Currently such amounts must be commuted and taken as a lump sum.

The level of rebate is 15% of the amount of the pension or annuity included in assessable income; that is, 15% of the pension received less the deductible amount. However, the rebate will not apply to superannuation pensions covered by a section 15955 notice (which has the effect of transferring the liability on taxable employer contributions from the superannuation fund to the member) or to superannuation pensions paid from an untaxed source.

Definition of Undeducted Purchase Price

Section 27H includes in assessable income the whole of any superannuation pension or annuity reduced by the deductible amount. The deductible amount is, broadly speaking, the undeducted purchase price (UPP) divided by the term of the pension or annuity. UPP is defined in subsection 27A(1) to mean the sum of:

·
so much of the purchase price of the pension or annuity made prior to 1 July 1983 for which the taxpayer did not get a tax deduction or a rebate; plus
·
so much of the purchase price of the pension or annuity made after 1 July 1983 for which the taxpayer did not get a tax deduction (ie, undeducted contributions). However, if the pension or annuity is purchased with a rolled-over ETP, the UPP does not include the post-June 1983 component of the rolled-over ETP.

Purchase price is defined in subsection 27A(1) to mean, in relation to a superannuation pension, contributions made to a superannuation fund to obtain the pension and, in relation to an annuity, amounts paid to purchase the annuity. However, superannuation contributions made by an employer, or by an another person under an agreement with the employer, are not included in the purchase price of a superannuation pension. Similarly, amounts paid by an employer, or by another person under an agreement with the employer, to purchase an annuity are not included in the purchase price of an annuity (subsection 27A(5C)).

A major problem resulting from the current definition of UPP is that, generally speaking, the definition results in a higher UPP for an immediate annuity purchased with a rolled-over ETP than for a superannuation pension of the same amount. Therefore, a person with a superannuation pension entitlement can often increase their UPP by commuting that entitlement and rolling-over the resulting ETP to purchase another superannuation pension or an immediate annuity.

It is proposed to amend the definition of UPP so that, for rebatable superannuation pensions and rebatable ETP annuities that first commence to be payable after July 1994, UPP will be contributions made after 30 June 1983 for which the taxpayer did not get an income tax deduction (ie, undeducted contributions). Therefore, the UPP for both rebatable superannuation pensions and rebatable ETP annuities will be limited to the undeducted contributions component of an ETP.

Unused Undeducted Purchase Price

Unused Undeducted Purchase Price (UUPP) is defined in subsection 27A(1) to mean essentially UPP reduced by any amount that has been used up as deductible amounts in respect of pension or annuity payments in terms of section 27H. An ETP received on commutation of a pension or annuity, or representing the residual capital value of a pension or annuity, is reduced by UUPP (see definition of ETP in subsection 27A(1)). However, unlike the undeducted contributions component of an ordinary ETP (which has essentially the same character as UUPP, being a return of capital which has not received any tax concession), UUPP cannot be rolled-over.

To remove the distinction between the treatment of undeducted contributions and UUPP it is proposed to amend the definition of an ETP in subsection 27A(1) so that UUPP is no longer excluded from an ETP received on the commutation, or as the residual capital value, of a pension or annuity. UUPP will be included in the definition of undeducted contributions and, consequently, can be rolled-over.

Definition of Pension and Annuity

In the Treasurer's 'Security in Retirement - Planning for Tomorrow Today' statement it was announced that minimum standards for pensions and annuities will be introduced. Those standards are included as part of the proposed amendments to the Occupational Superannuation Standards Act 1987 (OSS Act) outlined in Chapter 7.

One of the fundamental purposes of developing minimum standards for pensions and annuities is to provide guidelines for certain products on the market which are account based and provide variable income streams. These products are commonly referred to as allocated (or variable) annuities and allocated pensions. Allocated annuities are not annuities within the common law meaning of that term. Taxation Ruling IT2480 outlines the features of an annuity and indicates that allocated annuities are not acceptable for income tax purposes. In addition, it is questionable whether allocated pensions are pensions within the ordinary meaning of that term because they are account based and are not payable for life. All the risk with such products lies with the investor rather than with the pension provider.

Therefore, it is proposed to amend the Income Tax Assessment Act to ensure that allocated pensions and allocated annuities which satisfy the minimum standards for pensions and annuity:

·
are taxed as pensions and annuities in the recipient's hands;
·
qualify as rebatable ETP annuities or rebatable superannuation pensions; and
·
are appropriately taxed in the hands of the providers.

Explanation of proposed amendments

Rebate on Superannuation Pensions and Roll-over Annuities

A new rebate will apply to certain superannuation pensions and annuities. A rebatable superannuation pension will be a superannuation pension paid from fund which is a complying superannuation fund at the time the pension first became payable. The rebate will also apply to pensions which commenced to be paid before 1 July 1988 from funds which, at the time the pension first became payable, were the equivalent of a complying superannuation fund. In addition, the pension must not be first payable to the trustee, in their capacity as trustee, of the fund paying the pension. This condition is necessary because annuity policies vested in the trustee of a superannuation fund are included in the

definition of superannuation pension so that payments under such policies in respect of fund members are treated as pensions rather than annuities [Clause 19, subsection 159SJ(1)].

Superannuation pensions paid from untaxed superannuation funds are not rebatable (subsection 159SM(2)) Nor are superannuation pensions covered by a notice from the fund transferring the tax liability on last minute employer contributions from the fund to the member, ie section 159SS notices [Clause 22, new subsection 159SM(1)].

A rebatable ETP annuity is a qualifying annuity (as defined in subsection 27A(1)) purchased wholly with a rolled-over ETP. In addition, the annuity must not be a superannuation pension. This ensures that the definitions of rebatable superannuation pension and rebatable ETP annuity do not overlap in the case of those annuities which are vested in the trustee of a superannuation fund and which are deemed to be pensions [Clause 19, subsection 159SJ(1)].

The new rebate will apply to rebatable 27H amounts. A rebatable 27H amount is the amount of the pension or annuity which is included in the recipient's assessable income under section 27H where the recipient is aged 55 or more, regardless of when the pension or annuity commenced to be payable. If the recipient turns 55 years of age during the year of income, it is only that amount of the pension or annuity that is attributable to payments after the recipient's 55th birthday that qualifies for the rebate [Clause 19, subsection 159SJ(1)].

Example

Hugo retired from employment at age 50 and immediately became entitled to receive a pension from his employer's complying superannuation fund. Hugo turns 55 years of age on 15 August 1994. He received assessable pension payments of $3 500 in respect of the period from 1 July 1994 to 15 August 1994. Hugo's assessable pension for the 1994-95 year of income is $32 000. Therefore, $28 500 of the pension is attributable to payments after Hugo's 551h birthday and qualifies as a rebatable 27H amount.

A rebatable 27H amount also includes a death and disability benefit. It is proposed to change the definition of a death and disability benefit so that a person is considered to be disabled if 2 legally qualified medical practitioners certify that the disability is likely to result in the person being unable ever to be employed in a capacity for which they are reasonably qualified because of education, training or experience. This changes places the onus of establishing disability on to legally qualified medical practitioners rather than the fund trustee and is consistent with the definition of a disability superannuation pension in the RBL provisions (see section 140C) [Clause 19, subsection 1595J(1)].

The rebate of tax for rebatable superannuation pensions is worked out using the formula:

Reduced 27H amount * Rebatable proportion of pension * 15%

The reduced 27H amount is the rebatable 27H amount reduced by the amount of pension covered by section 15955 notices [Clause 22, new subsection 159SM(1)].

The rebate for rebatable ETP annuities is worked out using the formula:

Reduced 27H amount * Rebatable proportion of annuity * 15%

[Clause 24, new section 159SU]

The rebatable proportion of the pension or annuity is the factor worked out under new section 140ZQ, which is contained in the RBL provisions. The Commissioner of Taxation will determine the rebatable proportion of a pension or annuity when making an RBL determination in relation to the pension or annuity and will notify the recipient accordingly. [New subparagraphs 140R(1)(d)(ii) and 140 T(1) (d) ai)]

The rebatable proportion is 1 if the rebatable superannuation pension or rebatable ETP annuity:

·
does not count towards the recipient's RBL; or
·
is not an amount in excess of the recipient's RBL.

[New subsection 140ZQ(1)]

The rebatable proportion is 0 if: the payer has notified the Commissioner that the superannuation pension or annuity is payable and the Commissioner has not made a final RBL determination in relation to the pension or annuity;

·
the whole of the rebatable superannuation pension or rebatable ETP annuity is in excess of the recipients RBL; or
·
the recipient's tax file number is not notified to the Commissioner [New paragraph 140T(2)(b)].

[New subsections 140ZQ(2) and 140ZQ(3)1

If part of the rebatable superannuation pension or rebatable ETP annuity is excessive, the rebatable proportion is worked out using the formula:

(RBL amount- Excessive amount) / RBL amount

where:

·
the RBL amount is the amount worked out in new sections 140ZH to 140ZN; and
·
the excessive amount is that part of the RBL that the Commissioner has determined to be in excess of the RBLs.

[New Subsection 140ZQ(4)]

Example

Victor is entitled to an assessable superannuation pension of $85 000 per annum. No part of the pension is covered by a section 159SS notice. The capital value of that pension for RBL purposes is $1 000 000. The RBL amount is $800 000. Therefore the excessive amount is $200 000. The rebatable proportion of the pension will be:

($1 000 000 - $200 000) /$1 000 000 = 80%

Victor will be entitled to a rebate of tax of:

$85000 * 80% * 15% =$10200

The proposed amendments remove a significant number of complex provisions in the Subdivision which are no longer relevant for the purpose of working out the new rebate entitlements. However, some of these provisions are relevant to the pre-July 1988 funding credit provisions which apply to exempt superannuation funds from tax on certain superannuation contributions. The proposed amendments therefore re-locate and re-order the existing section 1595L, together with some associated definitions, to Part IX [New section 275C].

Definition of Undeducted Purchase Price

The proposed amendments will replace the definition of undeducted purchase price (UPP). The UPP will remain unchanged for:

·
superannuation pensions and annuities which do not qualify for the new rebate; and
·
superannuation pensions and annuities which are paid in respect of a period that commences before 1 July 1994.

In these circumstances UPP is the sum of:

·
so much of the purchase price of the pension or annuity that was paid before 1 July 1983 and did not receive a tax deduction or rebate; and
·
so much of the purchase price of the pension or annuity that was paid after 1 July 1983 and did not qualify for a deduction reduced, in the case of a pension or annuity purchased with a rolled-over ETP, by the post-June 83 component of the ETP.

The UPP for rebatable superannuation pensions and rebatable ETP annuities that are paid in respect of a period which commences after 1 July 1994 will be limited to so much of the purchase price of the pension or annuity that was paid after 30 June 1983 which did not qualify for a deduction reduced, in the case of a pension or annuity purchased with a rolled-over ETP, by all the components of the ETP other than the undeducted contributions

[Section 27A(1)].

Example

Harriet received an ETP of $500 000 on 1 August 1994. $50 000 of the ETP is undeducted contributions. Harriet rolls-over the whole of the ETP to purchase an annuity. UPP will be limited to the undeducted contributions of $50 000.

Unused Undeducted Purchase Price

The proposed amendments remove the exclusion of UUPP for ETPs representing the commutation or residual capital value of a pension or annuity. Consequently UUPP is part of the ETP and can be rolled-over.

The amendments also insert a new definition of undeducted contributions to include UUPP in the undeducted contributions component of an ETP [Section 27A(1)].

It is also proposed to amend subsection 27AB(3) which is used to determine the taxed element of the post-June 83 component of an ETP payable as the result of the death of a taxpayer. The proposed changes to include UUPP as part of the ETP mean that the existing subparagraph 27AB(3)(b)(i) is no longer necessary. The amendments therefore remove the existing subparagraph 27AB(3)(b)(i) [New paragraph 27AB(3)(b)I.

Definition of Pensions and Annuities

It is proposed to insert a definition of pension and annuity in relevant provisions of the Act to ensure that pensions and annuities which satisfy the minimum standards outlined in the OSS Act are recognised as pensions and annuities for income tax purposes.

To ensure that allocated annuities can only be purchased with ETP moneys, it will be necessary to introduce Income Tax Regulations to specify annuity standards which must be satisfied for annuities to qualify as eligible annuities for the purposes of subsection 27A(1). It is expected that the necessary Regulations will be introduced shortly after the Bill receives Royal Assent.

As a result of these changes allocated pensions and allocated annuities will be taxed as pensions or annuities in the hands of the recipient. That is, such products will be assessable as pensions and annuities under section 27H. The deductible amount for the purposes of section 27H of pensions and annuities which are not payable for a specified period will be based on the life expectancy of the recipient or, in the case of a reversionary pension or annuity, the life expectancy of the recipient or the reversionary recipient, whichever is longer. Allocated pensions and allocated annuities will also qualify as rebatable superannuation pensions or rebatable ETP annuities.

The changes to section 221A ensure that appropriate tax instalment deductions are made from allocated pensions and allocated annuities.

The amendments also ensure that the providers of allocated pensions and allocated annuities receive appropriate tax treatment.

Chapter 4 - Rolling-over eligible termination payments

Summary of proposed amendments

Elections to Roll Over an Eligible Termination Payment

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

It is proposed that the amendments will apply to:

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

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

Date of Effect: 1 July 1992.

The 90 Day Roll-Over Period

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

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

Date of Effect: 1 July 1994.

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

Background to the legislation

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

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

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

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

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

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

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

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

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

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

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

Example 1

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

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

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

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

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

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

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

The Bill will overcome this by mending:

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

Explanation of proposed amendments

Election to roll-over an ETP

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

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

[New subsection 27D(4)]

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

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

Step 1-Calculate the notional components of the applied amount

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

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

Formula 1:

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

or

Formula 2:

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

Where:

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

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

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

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

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

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

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

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

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

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

Payments from a roll-over fund

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

The amount of an ETP to be included in assessable income

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

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

Calculating the components of the retained amount

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

Step I--Calculate the retained amount of the ETP

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

Step 2--Components of the retained amount

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

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

Formula 1:

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

OR

Formula 2:

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

Where:

NQ is the non-qualifying component of the ETP;

ECM is the excessive component of the ETP;

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

It is important to note that:

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

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

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

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

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

Rule 1.

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

Rule 2.

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

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

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

Rule 3:

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

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

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

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

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

Rule 1:

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

[New subsection 27AC(4)].

Rule 2:

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

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

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

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

[New subsection 2 7A C(6)]

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

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

Amount of the ETP retained to be included in assessable income

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

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

Examples

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

Example 1

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

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

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

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

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

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

The components of the RA of the ETP will be:

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

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

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

Example 2

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

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

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

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

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

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

The components of the RA of the ETP will be:

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

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

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

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

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

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

Taxed element $10 000
Untaxed element $10 000

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

Example 3

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

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

Anne rolls over:

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

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

Applied Amount (1) = $40 000

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

Applied Amount (2) = $50 000

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

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

The components of the RA of the ETP will be:

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

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

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

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

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

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

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

Part B: The 90 Day Roll-Over Period

Background to the legislation

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

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

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

Explanation of proposed amendments

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

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

Chapter 5 - Taxation of redundancy, early retirement and invalidity payments

Summary of proposed amendments

Purpose of amendment:

To provide a limit on the concessionally taxed amount of bona fide redundancy payments and approved early retirement scheme payments.

To exempt amounts within that limit from tax.

·
To prevent bona fide redundancy payments and approved early retirement scheme payments being paid from a superannuation fund.
·
To modify the meaning of invalidity payment and to require verification of the recipient's disability by two legally qualified medical practitioners.
·
To create a new ETP component comprising invalidity payments made on or after 1 July 1994 (the post-June 1994 invalidity component).
·
To exempt the post-June 1994 invalidity component from tax.

Date of Effect:1 July 1994

Background to the legislation

What is a BFRP, AERSP and invalidity payment ?

An eligible termination payment (ETP) may comprise various components which are subject to different rates of tax. One such component is the concessional component, which consists of or is attributable to one or more of the following payments.

·
A bona fide redundancy payment(BFRP). This is a payment received on redundancy which exceeds the amount that could reasonably be expected to have been received if the employee had voluntarily retired at the same time.
·
An approved early retirement scheme payment (AERSP). An approved early retirement scheme is a scheme approved by the Commissioner of Taxation providing for early retirement of a specified class of employees with a view to rationalising or re-organising the operations of the employer. A payment made under such a scheme is an AERSP to the extent that it exceeds the amount that could reasonably be expected to have been received if the employee had voluntarily retired at the same time.
·
An invalidity payment. This is the future service component of an ETP (based on prospective service to usual retirement age) paid to an employee as a consequence of his or her physical or mental incapacity to engage in the particular employment. For payments made on or after 1 July 1994, the Bill proposes that the employee's incapacity must render the employee incapable of ever being employed in a capacity for which he or she is reasonably qualified.

BFRPs and AERSPs from superannuation funds

BFRPs and AERSPs are distinguishable from ordinary retirement payments from superannuation funds. In this regard, any part of an ETP made in lieu of superannuation benefits to which the employee may have become entitled at some later date is treated as an amount which an employee could reasonably be expected to receive on voluntary retirement at a particular time. It is rare, therefore, for any payment from a superannuation fund to contain a BFRP or an AERSP. However, in Case Y39 91 ATC 382 (AAT Case 7211 (1991) 22 ATR 3337) it was recognised that in some circumstances a payment from a superannuation fund does qualify as a BFRP or AERSP.

Calculation of superannuation benefits to which the employee may have become entitled at some later date may be complicated when the payment is from a superannuation fund. To simplify the distinction between BFRPs or AERSPs and ordinary retirement payments from superannuation funds, the Bill proposes to exclude superannuation fund payments from the definitions of AERSP and BFRP.

What is the current taxation treatment of BFRPs, AERSPs and invalidity payments ?

BFRPs, AERSPs and invalidity payments comprise the concessional component of an ETP, 5% of which is included in assessable income.

Taxation can be deferred by rolling over the concessional component into a roll-over fund (for instance, a deferred annuity or an approved deposit fund). The component retains its identity in the roll-over fund so that subsequent withdrawals may contain the concessional component.

The concessional component does not count against the recipient's reasonable benefit limit (RBL).

What limit is there on BFRPs and AERSPs?

Currently there is no limit on the amount of a BFRP or AERSP that can receive concessional tax treatment. This provides scope for abuse by people able to manufacture the necessary circumstances.

To counter that abuse, from 1 July 1994 there is to be a limit on the concessionally taxed amount of BFRPs and AERSPs. This limit is called the tax-free amount.

The limit will accommodate the majority of genuine payments while limiting the scope for abuse.

What are the new taxation arrangements for BFRPs, AERSPs and invalidity payments ?

The tax-free amount of a BFRP or AERSP will not form part of an ETP and is to be exempt from income tax and capital gains tax. Amounts in excess of the limit will be taxed as an ordinary (non-concessional) ETP from an employer.

The tax-free amount cannot be rolled over and does not count against the recipient's RBL. Roll-over relief is not required because, on re-employment, the tax-free amount can be made as a contribution to a superannuation fund and received free of tax as undeducted contributions on retirement (provided no tax deduction was claimed for the contribution).

The taxation of invalidity payments will also be simplified and made more beneficial for recipients by exempting them from income tax and capital gains tax. However, an invalidity payment remains part of an ETP and will constitute a separate ETP component (the post-June 1994 invalidity component).

The post-June 1994 invalidity component will not be assessable against the recipient's RBL. However, it will be able to be rolled over to enable the recipient to retain the benefit in a concessionally taxed environment (even if the recipient is unable to work again and contribute to a superannuation fund).

What is the new test for invalidity payments ?

Currently, in determining whether a payment is an invalidity payment, the employer is required to determine whether a person is physically or mentally incapable of engaging in the employment.

To clarify the test for incapacity and to place the onus of determining invalidity on legally qualified medical practitioners, from 1 July 1994 the incapacity of a person will have to be certified by two medical practitioners.

The relevant test is also to be modified so that the invalidity payment concession is extended only to people who are unable to undertake any form of employment for which they are reasonably qualified. A person who is unable to continue his or her current employment, but is able to undertake other appropriate employment, will not have access to the concession.

The proposed test is consistent with that used in the Occupational Superannuation Standards Regulations for RBL purposes, and is the same as the test proposed by clause 19 of the Bill for the definition of death or disability benefits in subsection 1595J(1).

Explanation of proposed amendments

Limit on the concessionally taxed amounts of BFRPs and AERSPs

The limit on the concessionally taxed amount of BFRPs and AERSPs proposed by the Bill is to be defined in new subsections 27A(19)-(21) as the sum of:

·
$4000 for the 1994/95 income year, indexed to rise in subsequent years in line with increases in average weekly ordinary-time earnings; and
·
$2000 for each whole year of completed service with the
·
employer concerned, also indexed to rise in years after 1994/95 in line with increases in average weekly ordinary-time earnings.

[Subclause 50(d) - new subsections 27A(19)-(21)]

The relevant period of completed service is the same as the period defined in paragraph (a) of the definition of eligible service period in subsection 27A(1). That is, the period, or aggregate of the periods, of the employment to which the payment relates. However, eligible service period is expressed in days, while the service period for subsection 27A(19) purposes is expressed in whole years.

The amount by which the limit increases each year due to indexation will be calculated and announced each year by the Commissioner of Taxation.

The Bill defines the amount of a BFRP or an AERSP within the limit as the tax-free amount. [Subclause 50(c) - new definition in subsection 27A(1)]

Taxation arrangements for the tax-free amount

The tax-free amount of a BFRP or AERSP is excluded from the ETP definition. Therefore it cannot be taxed as an ETP. [Subclause 50(a) - new paragraph (ja) in the ETP definition in subsection 27A(1)]

However, in some cases a BFRP or an AERSP might be income according to ordinary concepts, or constitute a net capital gain within the provisions of Part IIIA of the Act. To ensure that the tax-free amount is not assessable under any provision of the Act, the Bill proposes to exempt that amount from income and capital gains tax by:

·
excluding the tax-free amount from assessable income;
·
and requiring the tax-free amount to be ignored when calculating whether a capital gain accrues to a taxpayer.

[Clause 53 - new subsection 27CB(1)]

Fringe benefits tax will not apply to any part of a BFRP or AERSP because paragraph (f) of the definition of fringe benefit in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 specifically excludes salary or wages (which, for these purposes, includes payments made by way of superannuation, pension or retiring allowances).

Roll-overs and RBLs

Since the tax-free amount is excluded from the ETP definition, it cannot be rolled over and will not count towards the recipient's RBL.

Tax avoidance

Schemes entered into to split a BFRP or AERSP in an attempt to obtain two or more tax-free amounts when there would otherwise only be one tax-free amount will be subject to Part IVA of the Act.

Taxation of the excess

If the BFRP or AERSP paid on or after 1 July 1994 exceeds the tax-free amount, the excess will be treated as an ordinary ETP (i.e. the tax-free amount will be disregarded and the excess will be split into its components as an ETP without a concessional component).

Example

Bob commenced employment with Betty in July 1970. In August 1990 Bob took 2 years leave without pay. Bob recommenced employment in September 1992. He was made redundant in June 1995.

In view of his loyal service over the years, Betty paid him an ex-gratia payment of $50,000 in addition to his accrued superannuation benefits. The $50,000 is a BFRP.

The number of whole years of service to which the payment relates is:

·
20 years from July 1970 - August 1990; and
·
2 years from September 1992 to June 1995.

Therefore, the tax-free amount of the payment is:

$4,000 + [$2,000 x 22] = $48,000.

The remaining $2,000 will be split into the pre-July 1983 component and the post-June 1983 component based on Bob's eligible service period and taxed accordingly. Bob could elect to defer taxation on the $2,000 by rolling it over.

Preventing BFRPs and AERSPs being paid from superannuation funds

The Bill inserts new paragraphs into the definitions of AERSP and BFRP in sections 27E and 27F respectively. The new paragraphs indicate that, as from 1 July 1994, a payment from an eligible superannuation fund cannot be a BFRP or an AERSP. [Clauses 55 and 56 - new paragraphs 27E(4)(aa) and 27F(1)(aa)]

An eligible superannuation fund (defined in subsection 27A(1) by reference to its meaning in Part IX of the Act) is a complying or a non-complying superannuation fund.

A payment from an eligible superannuation fund includes a payment not actually made from a fund but which is, in effect, funded from an eligible superannuation fund (subsection 27A(17)). Therefore, if a superannuation fund payment is paid to an employee through the employer, then, as from 1 July 1994, the payment cannot be a BFRP or AERSP.

Modification of invalidity payment test

A payment made on or after 1 July 1994 will only be an invalidity payment if two legally qualified medical practitioners have certified that the disability of the employee is likely to result in the employee being unable ever to be employed in a capacity for which he or she is reasonably qualified by virtue of the employee's education, training or experience. [Clause 57 - new subparagraph 27G(b)(i)]

Creation of new post-June 1994 invalidity component

The proposed tax treatment of invalidity payments made on or after 1 July 1994 is different from the tax treatment of the concessional component of an ETP. Therefore the Bill proposes to create a new component, the post-June 1994 invalidity component.

The post-June 1994 invalidity component is to be defined in subsection 27A(1). It is so much of an ETP as consists of or is attributable to an invalidity payment, as defined in section 27G, made on or after 1 July 1994. [Subclause 50(c) - new definition in subsection 27A(1)]

Reference to the new component is to be inserted in subsection 27AA(1), which depicts the possible components of an ETP. This will indicate that an ETP paid on or after 1 July 1994 may contain the component. [Subclause 51(a) -new paragraph 2 7AA (1) (aa)]

Subsection 27AA(1) is also to be amended to provide for the calculation of the pre-July 1983 component of ETPs containing the post-June 1994 invalidity component. For these purposes, the post-June 1994 invalidity component will be treated in the same way as the concessional component, so that from 1 July 1994 the pre-July 1983 component is the lesser of the following amounts:

·
the amount of the ETP reduced by the concessional component, the post-June 1994 invalidity component, the non-qualifying component and the excessive component, multiplied by the proportion of pre-July 1983 service to total eligible service period; and
·
the amount of the ETP reduced by the concessional component, the post-June 1994 invalidity component, the non-qualifying component, the excessive component and the undeducted contributions.

[Subclauses 51 (b) and 51 (c) - amended paragraph 2 7AA (1) (d)]

The taxation of an ETP depends on which of its components have been retained (i.e. not rolled over). Section 27AC (to be inserted by clause 53, as explained in Chapter 4) identifies the components of an ETP which are retained. Section 27AC is to be amended to provide for the calculation of the retained components of an ETP containing the post-June 1994 invalidity component in the following way:

·
the retained amount of the post-June 1994 invalidity component is so much of that component as has not been rolled over; [Subclause 52(a) - new paragraph 27A C(2)(ba)]
·
corresponding to the calculation of the pre-July 1983 component of an ETP under subsection 27AA(1) (explained above), the retained amount of the pre-July 1983 component is to be calculated by treating the post-June 1994 invalidity component in the same way as the concessional component, so that the retained amount of the pre-July 1983 component is the lesser of the following amounts:

-
the retained amount of the ETP reduced by the retained amount of the concessional component, the post-June 1994 invalidity component, the non-qualifying component and the excessive component, multiplied by the proportion of pre-July 1983 service to total eligible service period; and
-
the retained amount of the ETP reduced by the retained amount of the concessional component, the post-June 1994 invalidity component, the non-qualifying component, the excessive component and the undeducted contributions; [Subclause 52(b) -amended paragraph 27A C(2)(d)]

·
the retained amount of the post-June 1983 component is to be calculated by excluding the retained amount of the other components, including the post-June 1994 invalidity component, from the total ETP retained.

[Subclause 52(c) - new subparagraph 27AC(2)(e)(ia)]

Taxation arrangements for the post-June 1994 invalidity component

To ensure the post-June 1994 invalidity component is not assessable under any provision of the Act, the Bill proposes to exempt the component in the same way it exempts the tax-free amount of BFRPs and AERSPs; namely by:

·
excluding the post-June 1994 invalidity component from assessable income; and
·
requiring the component to be ignored when calculating whether a capital gain accrues to a taxpayer.

[Clause 53 - new subsection 27CB(1)]

As with BFRPs and AERSPs, fringe benefits tax has no application to invalidity payments.

New sub-subparagraph 27D(1)(b)(iii)(E) will enable taxpayers to specify the extent to which they wish to roll over the post-June 1994 invalidity component [Subclause 54(a) - new sub-subparagraph 27D(l)(b)(iii)(E)].

The amount of post-June 1994 invalidity component specified by the taxpayer as forming part of the applied (rolled-over) amount of an ETP is called the notional post-June 1994 invalidity component [Subclause 54(b) - new paragraph 2 7D (5) (aa)].

The notional post-June 1994 component needs to be taken into account in calculating the notional pre-July 1983 component. As explained in Chapter ##, the notional pre-July 1983 component is calculated according to the formulae prescribed in paragraph 27D(5)(c). Those formulae provide calculations based on the applied amount of the ETP reduced by the notional concessional component. For these purposes, the post-June 1994 invalidity component is to be treated in the same way as the concessional component. Therefore the formulae in paragraph 27D(5)(c) are to be amended so that, in determining the notional pre-July 1983 component, the applied amount of the ETP is reduced by the notional post-June 1994 invalidity component as well as the notional concessional component. [Subclause 54(c) - amended paragraph 27D(5)(c)1

Saving of concessional component

Although original ETPs paid on or after 1 July 1994 will not include a concessional component, an ETP paid from a roll-over fund after that date may still include a concessional component. For instance, an ETP received before 1 July 1994 containing a concessional component may be rolled over and withdrawn from the roll-over fund after 1 July 1994. The concessional component will continue to be represented in the ETP withdrawn from the fund because the payment will be attributable to a BFRP, AERSP or invalidity payment made before 1 July 1994.

Therefore the current references to the concessional component in the Act are to remain.

However, it is necessary to distinguish payments made before and after I July 1994. Therefore the definition of concessional component in subsection 27A(1) is to be amended by inserting the requirement that the BFRP, AERSP or invalidity payment be made before 1 July 1994. [Subclause 50(b) - amended concessional component definition in subsection 27A(1)]

Chapter 6 - Reasonable benefit limits

Summary of proposed amendments

Purpose of amendment: Transfer administration of the reasonable benefit limits (RBLs) from the Insurance and Superannuation Commissioner to the Commissioner of Taxation.

Make the RBLs a set dollar amount rather than a multiple of a person's highest average salary.

Make other minor changes to simplify the treatment of the excessive amount of pensions and annuities for RBL purposes.

Date of effect: Applies to eligible termination payments (other than ISC-directed commutation payments) made on or after I July 1994 and to superannuation pensions and annuities which commence to be paid on or after that date.

Background to the legislation

The purpose of the RBLs is to limit the amount of concessionally taxed superannuation benefits received by a person. The existing RBL rules are in the Occupational Superannuation Standards Act 1987 (OSS Act) and the Occupational Superannuation Standards Regulations. Administration of the RBLs is the responsibility of the Insurance and Superannuation Commissioner.

Under the OSS Act a person's RBL is expressed as a multiple of the person's highest average salary in any three consecutive years. When a person is paid a superannuation benefit, that benefit together with any previous benefits, are measured against the person's RBL. If the total of those benefits exceeds the person's RBL, the excess is taxed at the person's marginal rate of income tax. In the case of a superannuation pension or annuity, the excess amount of the pension or annuity must be commuted so that the resulting eligible termination payment (ETP) is taxed at the person's marginal rate of income tax.

Explanation of proposed amendments

From 1 July 1994 the administration of the RBLs is to become the responsibility of the Commissioner of Taxation. Therefore, the proposed amendments will insert the RBL rules into the Income Tax Assessment Act 1936 (the Act). Consequential amendments to the OSS Act will be made to remove its RBL provisions.

The proposed amendments will also change the existing RBL rules to simplify their operation from I July 1994.

The following explanation of the proposed amendments begins with an overview of the RBL provisions, then looks at each of the steps in the RBL process, and concludes by discussing consequential amendments.

1. Overview

The proposed amendments will insert new Division 14 of Part III into the Act which deals with RBLs. [Clause 60]

The objects of the new Division are:

·
to provide for a system of RBLs for certain eligible termination payments (ETPs), superannuation pensions and annuities;
·
to require the payer of an ETP, pension or annuity to give to the Commissioner of Taxation (the Commissioner) information about the benefit;
·
to allow the Commissioner to determine the extent to which the ETP, pension or annuity exceeds a person's RBL;
·
if an ETP exceeds the RBL - to generate an excessive component which is included in the person's assessable income (under subsection 27B(3) of the Act) and is not subject to any concessional tax treatment; and
·
if a pension or annuity exceeds the RBL - to generate an excessive amount which will be used to work out the proportion of the pension or annuity which will not be rebatable (under Subdivision AAB of Division 17 of the Act). {Section 1401

There are a number of steps in the RBL process, namely:

·
the payer of a superannuation benefit is obliged to notify the Commissioner of the payment of the benefit, subject to certain exceptions [Subdivisions C and F];
·
once notified the Commissioner is required to determine whether the benefit is in excess of the person's RBL [Subdivision D];
·
in order to make that determination the Commissioner must ascertain the following:

-
the amount of the benefit which counts towards the RBI.s [Subdivision H and J];
-
- the amount of previous benefits which count towards the person's RBL [Section 140ZA];
-
whether the benefit is to be assessed against the person's lump sum RBL or pension RBL and the amount of the relevant RBL [Subdivision G];
-
if the benefit is in excess of the person's RBL and the amount of any excess [Subdivision E];

·
if the benefit is a superannuation pension or annuity, the Commissioner must also determine the rebatable proportion of that pension or annuity [Subdivision K]. [Section 140A]

Each of the above steps will be examined separately below. A simple example of the operation of the RBLs is set out in Division 14. [Section 140B]

Division 14 also contains a number of interpretation provisions [Subdivision B]. These provisions give meanings to terms used in the Division. For convenience, the terms are explained in the sections dealing with the provisions in which the terms are used. Also, at the end of this Chapter there is a glossary of commonly used terms.

The inclusion of Division 14 in the Act and the changes to simplify the treatment of the excessive amount of a superannuation pension or annuity gives rise to consequential amendments to other sections of the Act. These are also discussed below.

2. Notification Requirements

Payer Obligations

A 'payer' is a person or other entity (other than a continuously non-complying ADF - see section 27A of the Act) that makes, or is liable to make, a payment of a benefit. [Subsection 140C(1)]

If, on or after 1 July 1994, a payer makes an ETP in relation to a person or commences to pay (see comments below) a superannuation pension or an immediate annuity (i.e., an annuity that is presently payable) on or after that date, the payer must give the Commissioner a notice, subject to the exceptions outlined below. The information to be included in the notice will be specified in the regulations. The receipt of this notice by the Commissioner effectively triggers the process for determining whether the benefit exceeds the person's RBL. [Subsection 140M(1)]

A superannuation pension or annuity commences to be paid at the beginning of the commencement day of the pension or annuity. The 'commencement day' of a pension or annuity is the first day of the period to which the first payment of the pension or annuity relates. [Subsection 140C(1) and section 140J].

Exceptions

There are three circumstances where a payer does not have to notify the Commissioner.

Firstly, if the benefit is an ETP and all or part of the ETP is rolled over (as defined in section 27A of the Act), for these purposes. The amount of the ETP rolled over is taken to have never been paid. Although the amount of the ETP rolled over is not assessed against the person's RBL at that time, when the benefit is finally paid to the person from the rollover institution it will be assessed against the person's RBL. [Section 140D]

Secondly, a payer will not have to notify the Commissioner if the payer is an employer of the recipient of the benefit, or the trustee of a superannuation fund, and the benefit does not exceed $5,000. An ETP will be taken to be paid from a superannuation fund if the ETP is not paid by the superannuation fund, but is in effect funded from the superannuation fund (e.g., the Commonwealth Superannuation Scheme). [Sub subparagraph 140M(1)(a)(i)(B)and section 140E]

Thirdly, a payer will not have to notify the Commissioner if the ETP, superannuation pension or annuity does not count towards the person's RBL (these benefits are discussed later in the section on the 'Benefits to be Counted Towards a Person's RBL'). [Paragraph 140M(1)(b)]

Notice Requirements

The payer must give the Commissioner a notice containing information as required by the regulations. The information specified in the regulations must either concern the relevant ETP, pension or annuity or be necessary to enable the Commissioner to make a final determination in relation to the recipient's RBL. [Subsection 140M(2)]

The notice must be in a form approved in writing by the Commissioner. Such approval may require or permit a notice to be given in writing or in accordance with specified software requirements on a specified kind of data processing device. A 'data processing device' is any article or material (e.g., a disc) from which information is capable of being reproduced with or without the aid of any other article or device [Subsection 140C(1)].

The notice is to be given to the Commissioner by one of the following days:

·
if the payer is advised by the recipient, (on or before the 10th day of the month following the month in which the payment was made,) that the recipient has applied for a tax file number by the end of the 14th day of the second month after the month in which the payment was made;
or
·
in any other case - by the end of the 14th day of the month after the month in which the payment was made;

However, the Commissioner has a discretion to extend the time for giving notices [Subsections 140M(3) and (4)].

Example

A payer makes an ETP to a person on 30 November 1994. The recipient advises the payer on 2 December 1994 that an application for a tax file number has been made to the Commissioner and a response has not yet been received.

The payer must give the notice of payment of the ETP to the Commissioner by the end of 14 January 1995 unless the Commissioner allows otherwise.

If the recipient had provided the tax file number to the payer at the time the ETP was made, the payer would need to give the notice to the Commissioner by 14 December 1994 unless the Commissioner allows otherwise. The information required to be given in the notice will include the tax file number of the recipient of the benefit, if the number has been provided to the payer. In order to facilitate the quotation of the person's tax file number to the payer, the person may quote the tax file number to the payer when the ETP is made, or the first payment of the pension or annuity is made, by informing the payer in a manner approved by the Commissioner. The payer may be informed of the tax file number by the benefit recipient, or by another person acting for the recipient. [Section 14ON]

If a payer gives the Commissioner a notice concerning the payment of a benefit, the payer must at the same time give a copy of the notice to the recipient. [Section 140PJ

Payer Obligations on Rollover

Although a payer is not taken, for the purposes of the notification obligations, to have made an ETP where the ETP is rolled over, certain notification obligations may still be placed on payers on rollover of an ETP.

The payer of an ETP that is rolled over must notify the Commissioner of the rollover if each of the following are satisfied:

·
the person becomes entitled to receive an ETP; the entitlement arose on or after 1 July 1994;
·
the ETP arises from either:

-
the commutation of a superannuation pension or immediate annuity; or
-
the residual capital value of a superannuation pension or annuity; and

·
the person rolls over all or part of the ETP.

The information to be included in the notice will be specified in the regulations and must concern the ETP, pension or annuity. The purpose of this notice is to allow the Commissioner to take into account the ETP in determining the amount of the original pension or annuity to be counted towards the person's RBL. [Subsections 140Q(1) and (2)]

The notice must be in a form approved in writing by the Commissioner. Such approval may require or permit a notice to be given in writing or in accordance with specified software requirements on a specified kind of data processing device.

The notice is to be given to the Commissioner by the end of the 14th day of the month after the month in which the entitlement to the ETP arose or on such further day as the Commissioner allows. [Subsections 140Q(3) and (4)]

Failure to notify

If a payer fails to notify the Commissioner of the payment of a benefit or the rollover of an ETP as required, the payer will be in breach of section 8C of the Taxation Administration Act 1953. That section deals with the failure to comply with requirements under a taxation law. The penalty on conviction for a first offence is a fine of not more than $2,000.

3. Benefits to be Counted Towards a Person's RBL

Apart from the exceptions outlined below, each of the following benefits are to be counted towards a person's RBL:

·
an ETP made in relation to a person on or after 16 February 1990;
·
a superannuation pension which has a commencement day on or after 16 February 1990;
·
an annuity which has a commencement day on or after 16 February 1990. [Subsection 140ZC(1)]

The benefits which fall within the above three types of benefits but which are not to be counted against a person's RBL are as follows:

·
an ETP made before 1 July 1990 by the person's employer, where the person was not an associate (as defined in section 26AAB of the Act) of the employer at the time the ETP was made;
·
an ETP arising from the commutation of, or the residual capital value of, a superannuation pension or annuity which:

-
has a commencement day before I July 1990; or
-
did not meet the pension and annuity standards (as defined in Part IIIB of the OSS Act);

·
a residual pension or annuity which is payable on the partial commutation of another pension or annuity which:

-
has a commencement day before 1 July 1990; or
-
did not meet the pension and annuity standards;

·
a superannuation pension or annuity, or an ETP arising from the commutation of a superannuation pension or annuity, which is payable to a person as the result of the death of another person and is a reversion of another pension or annuity that was already payable to that other person;
·
an ETP paid in relation to the person as a result of the death of that person;
·
an ETP paid to a charitable or religious body;
·
a superannuation pension or annuity paid to a person under 18 years of age because of the death of another person, or a disability of another person where two legally qualified medical practitioners have certified that the disability is likely to prevent the person from ever being employed in a capacity for which the person is reasonably qualified by reason of education, training or experience;
·
an ETP arising from the commutation of a superannuation pension or annuity payable as a result of the death of another person, and the payment is made to a spouse or child of the deceased within 6 months of the person's death or 3 months after the granting of probate of the will or letters of administration of the estate, whichever occurs later. [Subsection 140ZC(2)]

4. Determination if Benefit is in Excess

Commissioner's determination

Once the Commissioner receives a notice of payment of a benefit from a payer, the Commissioner must (subject to the exception outlined below) determine whether the ETP, pension or annuity which was paid or commenced to be paid to the person is in excess of the person's RBL If the benefit is in excess of the person's RBL the Commissioner must also determine the amount of the excess and, in the case of a rebatable superannuation pension or rebatable ETP annuity (terms defined in section 159SJ of the Act), the rebatable proportion of the pension or annuity. Such a determination is known as a 'final determination'. The Commissioner must make the final determination within 60 days after receiving the notice. [Subsections 140R(1),C) and (3)]

The exception to the above, is where the payer fails to provide the recipient's tax file number to the Commissioner. In such circumstances, the Commissioner cannot make a final determination, although the Commissioner may make an interim determination (see discussion below). [Subsection 140R(4)]

Interim Determinations

The Commissioner must make an interim determination rather than a final determination if both of the following are satisfied:

·
the Commissioner has received a notice from a payer (and is therefore required to make a final determination) but the notice does not specify the person's tax file number; and
·
the Commissioner does not have sufficient information to make the determination, or the notice does not specify the benefit recipient's tax file number.

The interim determination must be whether the benefit paid to the person is in excess of the person's RBL. If the benefit is in excess of the person's RBL the Commissioner must also determine the amount of the excess and, in the case of a rebatable superannuation pension or rebatable ETP annuity, the rebatable proportion of the pension or annuity. The Commissioner must make the interim determination within 60 days after receiving the notice. [Subsection 140T(1)]

If the notice from the payer does not specify the recipient's tax file number, in spite of any other provisions the Commissioner's interim determination must be that the whole of the RBL amount of the ETP, superannuation pension or annuity is in excess of the recipient's RBL. In such cases, if the benefit is a rebatable superannuation pension or rebatable ETP annuity, the determination will also be that the rebatable proportion of the pension or annuity is zero. [Subsection 140T(2)]

If the interim determination is that the benefit is not in excess of the person's RBL, the interim determination will be treated as a final determination. [Subsection 140T(3)]

The Commissioner when making an interim determination, can make the following assumptions:

·
if the Commissioner does not know if a reversion applies to a superannuation pension, or the level of the reversion - assume that a reversion of 85% applies;
·
if the Commissioner does not know the indexation rate (if any) of a pension assume it is indexed at the 'standard indexation rate' (see comments below);
·
if the Commissioner does not know if a superannuation pension is a rebatable superannuation pension - assume it is;
·
if the Commissioner does not know if a benefit is paid as a result of the death of another person - assume it is not;
·
if the Commissioner does not know if a superannuation pension or annuity satisfies the pension or annuity standards - assume it does not;
·
if the Commissioner does not know if an ETP arises from the commutation, or residual capital value, of a superannuation pension or annuity that had commenced to be paid - assume it does not;
·
if the Commissioner does not know if a superannuation pension or annuity payable to a person, as the result of the death of another person, is payable as a reversion of another superannuation pension or annuity that was already payable to the other person - assume it is not;
·
if the Commissioner does not know if a superannuation pension is payable for life - assume it is.

[Section 140U]

The Commissioner may determine 'the standard indexation rate' before a financial year as being the standard indexation rate applicable to that particular year. [Section 140V]

Notification of determinations

If the Commissioner makes a final determination or interim determination that a benefit is in excess of the person's RBL, the Commissioner must give the person the following:

(a)
in the case of a final determination - a copy of the determination, and a written statement setting out the basis on which the determination was made;
(b)
in the case of an interim determination - as per paragraph (a) above together with a notice stating:

·
that the person may, within the specified time (see the next section on review of determinations), apply to the Commissioner for an amendment of the interim determination;
·
the additional information the Commissioner needs in order to make a final determination and the manner (as approved by the Commissioner) in which the person may provide the additional information;
·
if the additional information is, or includes, the person's tax file number - that because the Commissioner has not been notified of the person's tax file number, the interim determination is to the effect that the whole of the RBL amount of the benefit is in excess of the person's RBL, and if the benefit is a rebatable superannuation pension or rebatable ETP annuity, the rebatable proportion of the pension or annuity is zero. {Subsection 140W(1)]

The Commissioner may give the above documents to a person whose benefit is not in excess of their RBL if he thinks it is desirable to provide those documents. [Subsection 140 W(2)]

The Commissioner must also give a copy of a final determination or interim determination upon request in respect of an ETP made in relation to the person, or a superannuation pension or annuity paid to the person. Such a request must be accompanied by a fee (if any) as specified in the regulations. If the Commissioner receives such a request, he must give the person a copy of the determination together with a statement setting out the basis on which the determination was made. [Section 140Z]

Review of final determinations and interim determinations

There are certain circumstances where a final determination or interim determination can be reviewed.

The Commissioner can revise a final determination in three circumstances. Firstly, if the Commissioner has made a final determination in relation to the commencement of payment of a superannuation pension or annuity and the person commutes all or pan of the pension or annuity within 6 months of the commencement day of the pension or annuity. The Commissioner must revise the final determination, within 60 days after receiving the notice of the commutation, to take account of the ETP arising on commutation. [Subsection 140S(1)]

Secondly, the Commissioner must revise a final determination if he has made a determination in respect of an ETP and later reduces the amount of the ETP under subsections 27A(4) or (4A) of the Act. Under those subsections the Commissioner can reduce an ETP made to the estate of a deceased taxpayer to the extent to which the dependants of the taxpayer will benefit from the estate. The Commissioner must revise the final determination, within 60 days after the reduction of the ETP, to take account of the reduction. [Subsection 1405(2)]

Thirdly, the Commissioner may revise a final determination, at any time, by making any alterations that he thinks necessary in order to correct any error made by the Commissioner, or to take account of any further material or information that has become available since the determination was made. [Subsection 1405(3)]

A revised determination is taken to be a final determination. In revising the determination, the Commissioner's powers are not wider than the powers in making the original determination./Subsections 1405(4) and (5)]

The Commissioner can also amend an interim determination in any way he considers necessary if:

·
the person to whom the interim determination relates applies for an amendment, within a specified time period (see discussion below); and
·
the Commissioner obtains any additional information necessary for the making of a final determination.

The Commissioner may amend the interim determination within 60 days of receiving the application. The amended interim determination will have effect as a final determination. [Subsection 140X(1) and (6)]

The time limits for applying for an amendment of an interim determination are from the day on which a copy of the determination was given to the person and ending on:

·
if the Commissioner determined that the person's benefit was not in excess of their RBL - the end of the first financial year after the financial year in which the benefit was paid or commenced to be paid; or
·
in any other case - 60 days after a copy of the interim determination was given to the person;

However, the Commissioner has a discretion to extend the time for amending a determination

[Subsection 140X(2)]

An application for amendment of an interim determination must be in writing and in the form approved in writing by the Commissioner. [Subsection 140X(3)]

If the Commissioner makes an interim determination in relation to a person and the person fails to apply for an amendment within the specified time, or the Commissioner does not receive sufficient information to make a determination, the interim determination will have effect as a final determination. Sufficient information for this purpose is either the additional information requested in the notice of the interim determination or sufficient information to make a final determination as agreed by the Commissioner. The Commissioner cannot agree that sufficient information is available to make a final determination if the person's tax file number still has not been given to the Commissioner. [Subsections 140X(4) and (5)]

If an interim determination has effect as a final determination because the person has not applied for an amendment or sufficient information has not been provided, the Commissioner may amend that final determination in any way he considers necessary if:

·
the person applies in writing for an amendment of the final determination; and
·
the person was unable to apply for an interim determination within the specified time because of circumstances beyond the person's control; and
·
the person can provide relevant information that was not available to the Commissioner when the interim determination was made. [Subsection 140X(7)]

The amended final determination will have effect as a final determination. [Subsection 140X(9)]

If the Commissioner amends an interim determination and the resulting determination is that the benefit is in excess of the person's RBL, he must give the person a copy of the amended determination, and a written statement setting out the basis on which the determination was amended. The Commissioner may also give these documents to a person whose benefit is not in excess of their RBL, if he thinks it is desirable to provide the documents. [Subsection 140X(8)]

In amending an interim determination or final determination, the Commissioner's powers are not wider than the powers available in making the original determination. [Subsections 140X(10) and (11)]

A person who is dissatisfied with a final determination or interim determination may also object against that determination. The objection is to be in a manner set out in Part IVC of the Taxation Administration Act 1953. Therefore, the objection process will be similar to objections against other taxation decisions made by the Commissioner. In order to ensure a person can object against a final determination which is revised by the Commissioner, such a revision is taken to be an amendment of a final determination for the purposes of section 14ZV of the Taxation Administration Act 1953. [Subsection 1405(6) and section 140Y]

5. Determination Process

The Commissioner will go through the following process in determining if a benefit is excessive:

(a)
if the benefit is to be counted towards the person's RBL, ascertain the amount of the benefit which is to be counted;
(b)
calculate the person's lump sum RBL and pension RBL;
(c)
determine which of the lump sum RBL or pension RBL applies to the person;
(d)
determine if the amount of the benefit which is to be counted against the person's RBL is in excess of the relevant RBL and the amount of that excess (if any);
(e)
if the benefit is a superannuation pension or annuity -determine the rebatable proportion of the pension or annuity.

Each of these steps are discussed below.

A. How much of the benefit is counted towards the person's RBL?

Once it is ascertained that a benefit is to be counted towards a person's RBL it is necessary to determine how much of the benefit is to count towards the RBL. The amount of a benefit which counts towards the RBL is known as the 'RBL amount'. The calculation of the RBL amount will depend on whether the benefit is an ETP, superannuation pension or annuity.

ETPs

An ETP is usually paid by a superannuation fund, ADF, life assurance company, registered organisation or an employer. The calculation of the RBL amount of an ETP will depend on the payer who makes the ETP.

If an ETP that counts towards a person's RBL is paid by the trustees of a superannuation fund or ADF, the RBL amount of the ETP is the sum of:

·
100% of the retained amount of the pre-July 83 component of the ETP;
·
100% of the taxed element of the retained amount of the post-June 83 component of the ETP; and
·
85% of the untaxed element of the retained amount of the post June 83 component of the ETP. (The meanings of these components of an ETP are discussed below). [Section 140ZH]

Example

A person receives an ETP of $70,000 from a superannuation fund. The components of the ETP are as follows:

Retained amount of the pre-July 83 component $20,000
Taxed element of the retained amount of the post-June 83 component $30,000
Untaxed element of the retained amount of the post-June 83 component $10,000
Retained amount of the undeducted contributions $10.000
Total ETP $70,000

The RBL amount of the ETP is as follows:

Retained amount of the pre-July 83 component $20,000
Taxed element of the retained amount of the post-June 83 component $30,000
Untaxed element of the retained amount of the post-June 83 component $ 8.500
Total RBL amount 1558.500

if an ETP is paid by a life assurance company or registered organisation and the ETP arises as a result of the commutation of either the whole or part of an annuity that met the pension and annuity standards or a deferred annuity (i.e., an annuity that is not presently payable), the RBL amount of the ETP is the whole amount of the ETP less any part of the ETP that consists of the retained amount of the undeducted contributions, the retained amount of the

concessional component, the retained amount of the post-June 1994 invalidity component or the non-qualifying component. [Section 140ZI]

If an ETP is paid in relation to a person by the person's employer, the RBL amount of the ETP is:

·
if the employee is an associate (as defined in section 26AAB of the Act) of the employer - the sum of all of the retained amount of the pre-July 83 component of the ETP and 85% of the retained amount of the post-June 83 component; or
·
in any other case - 85% of the part of the retained amount of the post-June 83 component as per the following table:

Financial year in which ETP made Percentage of post-June 83 component
1990-91 20%
1991-92 40%
1992-93 60%
1993-94 80%
1994-95 and subsequent years 100%

An 'employee' for this purpose includes a director or other officer (however described) of a body corporate and a person engaged under a contract for services. An 'employer' has a corresponding meaning. [Section 140ZJ]

Example

An employee is paid an ETP of $20,000 by the employer in the 1994-95 year. The retained amount of the post-June 83 component of the ETP is $18,000 and the retained amount of the pre-July 83 component is $2,000. The employee is not an associate of the employer.

The RBL amount of the benefit is $15,300 (i.e., 100% of 85% of the post-June 83 componento.

Reference is made above to the retained amounts of certain components of an ETP. These terms will have the same meaning as in new section 27AC of the Act. For the purposes of the RBLs, those meanings will also apply to ETPs made before 1 July 1992. The meanings of these terms are discussed in the explanation of section 27AC (see Chapter 4). [Subsection 140C(1) and section 14OF]

In determining the retained amounts of the particular components of an ETP, paragraph 27AA(1)(ca) and subsection 27AA(3) of the Act should be ignored. This ensures that, in calculating the RBL amount of a benefit, the retained amount of the components of an ETP are the amount of those components before any excessive component is calculated. [Section 140G]

Superannuation pensions

If the benefit which counts towards a person's RBL is a superannuation pension (other than a disability superannuation pension - see discussion below), the RBL amount of the pension is:

·
if the pension is a rebatable superannuation pension (as defined in section 1595J of the Act) - the capital value of the pension (see discussion below);
·
in any other case - the amount worked out under the following formula:

Capital Value * (Pre-July 83 eligible + (0.8 * Post-June 83 eligible service period)/Total eligible service period)

where:

'Capital value' is the capital value of the pension (see discussion below);

'Pre-July 83 eligible service period' is the number of whole days in the eligible service period of the pension which occurred before 1 July 1983;

'Post-June 83 eligible service period' is the number of whole days in the eligible service period of the pension which occurred on or after 1 July 1983;

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

[Section 140ZK]

The 'eligible service period' of a superannuation pension is as follows:

(a)
unless all or part of the capital value of the pension relates to the roll over of an ETP - the period commencing on the earlier of the day the person joined the superannuation fund or the first day of employment to which the pension relates (including any qualifying period before the person could join the fund and any period the person was not a member of the fund) and ending at the end of the commencement day of the pension; or
(b)
if all or part of the capital value of the pension relates to the roll over of an ETP, and the eligible service period of the ETP begins earlier than the beginning of the period in (a) above - the period commencing on that earlier day and ending at the end of the commencement day of the pension.

The 'eligible service period' of an ETP is defined in section 27A of the Act. [Subsection 140C(1)]

Example

A taxpayer commences to receive a superannuation pension with a capital value of $200,000. The person has an eligible service period of 5475 days. The eligible service period prior to 1 July 1983 is 1095 days. Therefore, the eligible service period on or after i July 1983 is 4380 days. The pension is not a rebatable superannuation pension.

The RBL amount of the pension is calculated as follows:

$200,000 * (1095 + (0.8 * 4380))/5475 = $168,000

If the pension was a rebatable superannuation pension, the RBL amount of the pension would be $200,000.

The RBL amount for a disability superannuation pension is different to the RBL amount for a superannuation pension-A 'disability superannuation pension' is a superannuation pension payable to a person because of the disability of the person, where two legally qualified medical practitioners have certified that the disability is likely to result in the person being unable ever to work in a particular capacity for which the person is reasonably qualified because of education, experience or training [Subsection 140C(1)].

The RBL amount of a disability superannuation pension is:

8
if the pension is a rebatable superannuation pension - the accrued retirement benefit component of the pension (see discussion below); or
·
in any other case - the amount worked out under the following formula:

Accrued Pro-July 83 eligible * (Pre-July eligible service period + (0.8 * Post June 83 eligible service period))/Total eligible service period.

where:

'Accrued retirement benefit component' is the accrued retirement benefit component of the pension (see discussion below);

'Pre-July 83 eligible service period' is the number of whole days in the eligible service period of the pension which occurred before 1 July 1983;

'Post-June 83 eligible service period' is the number of whole days in the eligible service period of the pension which occurred on or after 1 July 1983;

'Total eligible service period' is the total number of whole days in the eligible service period of the pension. [Subsection 140ZL(1)]

The accrued retirement benefit component of a disability superannuation pension is calculated as follows:

Capital value -(Capital value * Pension days)/ Accrual days

where:

'Capital value' is the capital value of the pension at the commencement day of the pension;

'Pension days' is:

·
if the commencement day of the pension is before the person's 65th birthday - the number of whole days from the commencement day and ending at the end of the person's 651h birthday;
·
in any other case - zero.

'Accrual days' is the number of whole days from the first day of the eligible service period of the pension and ending at the end of the person's 651h birthday. [Subsection 140ZL(2)1

Example

A taxpayer commences to receive a disability superannuation pension with a capital value of $160,000. The number of days between the commencement day of the pension and the person's 651h birthday is 1460. The person's eligible service period is 7280 days of which 2550 occurred before 1 July 1983. Therefore, the eligible service period on or after 1 July 1983 is 4730 days. The pension is not a rebatable superannuation pension. The accrued retirement benefit component is calculated as follows:

$160,000 - ($160.000 x 1460)/(7280+1460) = $133,272

The RBL amount of the disability superannuation pension is calculated as follows:

133,272 * (2550 + (0.8x4730))/7280 = $115,954

If the disability superannuation pension was a rebatable superannuation pension, the RBL amount would be $133,272.

Capital value of a superannuation pension

It is necessary to know the capital value of a superannuation pension in order to ascertain the RBL amount of the pension. Subject to the exceptions discussed below, the capital value of a superannuation pension is calculated as follows:

[Annual value * Pension valuation factor -- Undeducted purchase price + Residual capital value

where:

'Annual value' is the annual value of the pension, which is the amount worked out by multiplying the amount of the first regular payment of the pension by the greatest number of payments of the pension that could be made in a 12 month period from the commencement day of the pension;

'Pension valuation factor' is the pension valuation factor of the pension as ascertained in accordance with the regulations;

'Undeducted purchase price' is the undeducted purchase price (as defined in section 27A of the Act) of the pension;

'Residual capital value' is the present value of the residual capital value, if any, of the pension. The present value of the residual capital value is to be worked out in accordance with a method determined in writing by the Commissioner. [Subsection 40ZO(1), (4), and (5)]

Example

A person commences to be paid a pension. Assume the following:

Monthly pension $1,000
Pension valuation factor 14
Undeducted purchase price $8,000
Present value of the residual capital value $15,000

The capital value of the pension is calculated as follows:

[($1,000 * 12) x 141- $8,000 + $15,000 = $175,000

There are two exceptions to the above. Firstly, if the superannuation pension is not payable for life, then the capital value is the amount calculated in accordance with a method determined by the Commissioner in writing. [Subsection 140Z0(2)]

Secondly, if the superannuation pension arises as a result of an arrangement under which the person ceases to be entitled to a superannuation pension (the 'old pension') from a superannuation fund and becomes entitled to a superannuation pension (the 'new pension') from another superannuation fund, the capital value is the amount worked out as follows:

[Excess annual value * Pension valuation factor] - Excess undeducted purchase price + Excess residual capital value

where:

'Excess annual value' is the amount by which the annual value of the' new pension exceeds the annual value of the old pension;

'Pension valuation factor' is the pension valuation factor for the pension as ascertained in accordance with the regulation

'undeducted purchase price' is the amount by which the undeducted purchase price of the new pension exceeds the undeducted purchase price of the old pension;

' Excess residual capital value' is the amount by which the residual capital value of the new pension exceeds the residual capital value of the old pension. [Subsection 140Z0(3)]

If a person rolls over an ETP arising from the commutation, or residual capital value, of all or part of a pension that has commenced to be paid, the amount of the capital value of the original pension is to be reduced. If the roll over occurred before 1 July 1992 the amount of the capital value of the pension is reduced by the amount of the ETP rolled over (other than the undeducted contributions and the concessional component. If the roll over occurs on or after 1 July 1992 the RBL amount of the pension is reduced by:

·
if the roll over is within 12 months of the commencement day of the pension - the amount rolled over (other than the undeducted contributions, the concessional component and the post-June 1994 invalidity component); or
·
in any other case - the amount worked out using the formula:

Amount rolled over * Index number for payment quarter /index number for second-last quarter

where:

'Amount rolled over ' is the amount rolled over (other than the undeducted contributions, the concessional component and the post-June 1994 invalidity component);

'Index number for payment quarter' is the index number for the quarter in which the commencement day of the pension occurs;

'Index number for second-last quarter' is the index number for the quarter two quarters before the quarter in which the roll over occurred. [Section 140ZP]

The 'index number' referred to above is the amount of the full time adult average weekly ordinary times earnings first published by the Australian Statistician for the middle month of the quarter. [Subsection 140C(1)]

Reference is made above, and also in the comments below on annuities, to the components of an ETP (other than the retained amounts of such components) where all or part of the ETP is rolled over. These references are to the amounts of the components of an ETP which the taxpayer has chosen to roll over under section 27D of the Act. For example, a reference to the undeducted contributions of an ETP rolled over to purchase an annuity means the amount of the undeducted contributions of the ETP which the taxpayer has chosen to rollover under section 27D. [Section 14OH]

Annuities

If the benefit which counts against a person's RBL is an annuity, the RBL amount of the annuity is as follows:

·
if the annuity did not commence to be paid because of the partial commutation of another annuity that met the pension and annuity standards - the sum of:

-
100% of the pre-July 83 component;
-
100% of the taxed element of the post-June 83 component; and
-
85% of the untaxed element of the post-June 83 component;

of the ETP rolled over to purchase the annuity;
·
if the annuity did commence to be paid because of the partial commutation of another annuity that met the pension and annuity standards - the sum of:

-
100% of the pre-July 83 component;
-
100% of the taxed element of the post-June 83 component; and
-
85% of the untaxed element of the post-June 83 component;

of the ETP rolled over to purchase the annuity reduced by the RBL amount of the ETP that arose as the result of that commutation. [Section 140ZM]

Example

A taxpayer purchases an annuity by rolling over an ETP of $60,000. The ETP was not a commutation of another annuity which met the pension and annuity standards. The components of the ETP are as follows:

Pre-July 83 component $10,000
Taxed element of post-June 83 component $35,000
Untaxed element of post-June 83 component $ 5,000
Undeducted contributions $10,000
Total ETP $60,000

The RBL amount of the annuity is as follows:

Pre-July 83 component $10,000
Taxed element of post-June 83 component $35,000
Untaxed element of post-June 83 component $ 4,250
Total RBL amount $49,250

If a person rolls over an ETP arising from the commutation, or residual capital value, of all or part of an annuity that has commenced to be paid, the amount of the ETP rolled over to purchase the original annuity is to be reduced. If the roll over occurred before 1 July 1992 the amount of the ETP rolled over to purchase the original annuity is reduced by the amount of the current ETP rolled over (other than the undeducted contributions and concessional component). If the rollover occurs on or after 1 July 1992 the RBL amount of the ETP rolled over to purchase the original annuity is reduced by:

·
if the roll over is within 12 months of the commencement day of the annuity - the amount rolled over (other than the undeducted contributions, concessional component and post-June 1994 invalidity component); or
·
in any other case - the amount worked out using the formula:

Amount rolled over *Index number for payment quarter/Index number for second-last quarter

where:

'Amount rolled over' is the amount rolled over (other than the undeducted contributions, concessional component and post-June 1994 invalidity component);

'Index number for payment quarter ' is the index number for the quarter in which the commencement day of the annuity occurs;

'Index number for second-last quarter ' is the index number for the quarter two quarters before the quarter in which the roll over occurred. [Sections 140ZN]

B. What is the value of the person's lump sum RBL and pension RBL?

The RBL amount of a benefit is to be assessed against a person's lump sum RBL or pension RBL. The amount of the lump sum RBL and pension RBL will depend on the age of the person when they received the benefit and the year of income in which the benefit is received. There will also be a transitional lump sum RBL and pension RBL.

Standard RBL

The lump sum RBL for the 1994-95 year of income is $400,000 unless the person is less than 55 years of age and the benefit is an ETP, or superannuation pension or annuity that does not meet the pension and annuity standards. If a person is less than 55 years of age and receives such a benefit, the $400,000 is discounted (on a simple discount basis) by 2.5% for each whole year from the person's birthday immediately before, or on, either the day the ETP is made or the commencement day of the pension or annuity and ending on the day before the person's 55th birthday. For years following the 1994-95 year, the amount of the lump sum RBL will be indexed. [Subsection 140ZD(1)]

The pension RBL for the 1994-95 year of income is $800,000. This is not reduced if the benefit is received before age 55. For subsequent years this amount will be indexed. [Subsection 140ZD(2)]

The amount of the lump sum RBL or pension RBL must be determined for each benefit received during a year of income. Therefore, if a person turns 55 years of age during a year of income and receives benefits both before and after his or her birthday during that year, the benefits received before the birthday will be assessed against the pre-55 RBLs, while the benefits received after the birthday will be assessed against the RBL for benefits received after age 55.

Example

A taxpayer receives an ETP of $200,000 at age 49. The person's lump sum RBL is $400,000 discounted at 2.5% for 6 years. Therefore, the lump sum RBL is $340,000 (i.e., $400,000 x (1 - 0.15)). The person's pension RBL is $800,000.

For the 1995-96 year of income and all subsequent years the amount of the lump sum RBL and pension RBL will be calculated using the following formula:

Indexation factor * Previous indexable amount

The 'indexation factor' is the indexation factor for the year calculated under section 1595G of the Act. That is, the movement in the estimate of the full time adult average weekly ordinary time earnings, as published by the Australian Statistician, from the middle month of the March quarter two years prior to the year of income to the middle month of the March quarter immediately prior to the year of income.

The 'previous indexable amount' is the amounts of the lump sum RBL or pension RBL for the previous year. Therefore, for the 1995-96 year the previous indexable amount is $400,000 or $800,000. [Subsection 140ZD(3) and (4)]

Transitional RBLs

If a person has a transitional lump sum RBL or a transitional pension RBL which is greater than the standard RBLs above, the person may use the transitional RBL. The method for calculating the transitional RBLs are to be set out in the regulations [Subsection 140ZD(5) and section 140ZE]

C. Does the lump sum RBL or pension RBL apply?

The pension RBL will apply unless the lump sum RBL applies. Only pension and annuities that meet the pension and annuity standards will qualify for the higher pension RBL. The pension and annuity standards will be set out in the Regulations. Allocated pensions and allocated annuities will not come within the scope of the pension and annuity standards.

Whether the lump sum RBL applies will depend on the type of benefit and whether certain conditions are met.

General rules

An ETP paid to a person will be assessed against the person's lump sum RBL if the sum of the amount of the ETP (other than any part of the ETP consisting of the retained amount of the undeducted contributions, the retained amount of the concessional component, the retained amount of the post-June 1994 invalidity component or the non-qualifying component) and the qualifying portions (see discussion below) of any previous ETPs or superannuation pensions or annuities that did not meet the pension and annuity standards is greater than:

·
if the current ETP is made before the person turned 55 years of age - the lesser of:

-
50% of the sum of the amount of the current ETP (other than the excluded components mentioned above) and the qualifying portions of all previous benefits received by the person; or
-
the persons' lump sum RBL for the year of income; or

·
in any other case - 50% of the lesser of:

-
the sum of the amount of the current ETP (other than the excluded components mentioned above) and the qualifying portions of all previous benefits received by the person; or
-
the person's pension RBL for the year of income. [Subsection 140ZF(1)]

A superannuation pension or annuity which commences to be paid to a person and which meets the pension and annuity standards will be assessed against the person's lump sum RBL if the sum of the capital value of the pension or the amount of the ETP rolled over to purchase the annuity (other than any part consisting of the undeducted contributions, the concessional component or the post-June 1994 invalidity component) and the qualifying portions of any previous superannuation pensions or annuities that met the pension and annuity standards is less than:

·
if the current pension or annuity commenced to be paid before the person turned 55 years of age - the lesser of:

-
50% of the sum of the capital value of the current pension, or the amount of the ETP rolled over to acquire the current annuity (other than the excluded components mentioned above), and the qualifying portions of all previous benefits received by the person; or
-
the person's lump sum RBL for the year of income;

·
in any other case - 50% of the lesser of:

-
the sum of the capital value of the current pension, or the amount of the ETP rolled over to purchase the current annuity (other than the excluded components mentioned above) and the qualifying portions of all previous benefits received by the person; or
-
the person's pension RBL for the year of income. [Subsection 140ZF(2)]

A superannuation pension or annuity which commences to be paid to a person and which does not meet the pension and annuity standards will be assessed against the person's lump sum RBL if the sum of the capital value of the pension or the amount of the ETP rolled over to purchase the annuity (other than any part consisting of the undeducted contributions, the concessional component or the post-June 1994 invalidity component) and the qualifying portions of any previous ETPs or superannuation pensions or annuities that did not meet the pension and annuity standards is greater than:

·
if the current pension or annuity is made before the person's turned 55 years of age - the lesser of:

-
50% of the sum of the capital value of the current pension, or the amount of the ETP rolled over to acquire the current annuity (other than the excluded components mentioned above), and the qualifying portions of all previous benefits received by the person; or

·
the person's lump sum RBL for the year of income; or
·
in any other case - 50% of the lesser of:

-
the sum of the capital value of the current pension, or the amount of the ETP rolled over to acquire the current annuity (other than the excluded components mentioned above), and the qualifying portion of all previous benefits received by the person; or
-
the persons' pension RBL for the year of income. [Subsection 140ZF(3)]

Example

During the 1994-95 year a taxpayer aged 62 years is paid an ETP of $380,000. The ETP consists of two components:

Retained amount of undeducted contributions $70,000
Retained amount of the post-June 83 component $310,000

The taxpayer previously received an ETP and a superannuation pension which met the pension and annuity standards. The qualifying portion of the ETP was $260,000 while the qualifying portion of the pension was $300,000.

It follows that the sum of the amount of the current benefit ($310,000) and the qualifying portion of the previous ETP ($260,000) is $570,000. Therefore, the lump sum RBL will apply if that amount is greater than the lesser of:

$435,000 (i.e., 50% of $870,000 - i.e., the sum of all the benefits); or

$400,000 (i.e., 50% of $800,000 - i.e., the pension RBL).

As $570,000 exceeds $400,000 the lump sum RBL applies.

Exception

If a benefit paid to a person is to be assessed against the person's RBL because the above conditions are satisfied, the benefit will not be assessed against the lump sum RBL if:

the person has previously received one or more superannuation pensions or annuities which met the pension and annuity standards: and

the sum of the qualifying portions of those pensions and annuities is greater than 50% of the recipient's pension RBL for the year of income in which the current benefit is received. [Subsection 140ZF(4)]

Example

In the 1994-95 year a taxpayer is paid an ETP of $600,000. The ETP consists of two components:

Retained amount of undeducted contributions $100,000
Retained amount of the post-June 83 component $500,000

The taxpayer previously received an ETP and a superannuation pension which met the pension and annuity standards. The qualifying portion of the ETP was $350,000 while the qualifying portion of the pension was $420,000.

As the person has previously received a superannuation pension which met the pension and annuity standards and is greater than 50% of the person's pension RBL for the current year, the lump sum RBL will not apply. This is the case even though the lump sum RBL would apply using the general rules because the sum of the amount of the current ETP and the qualifying portion of the previous ETP is greater than 50% of the person's pension RBL.

Qualifying portion of benefits

The qualifying portion of a previous benefit is used for determining whether a current benefit should be assessed against the lump sum RBL or pension RBL. A person will be taken to have previously received a benefit if the benefit counts towards the person's RBL and:

·
if the benefit is an ETP - the benefit was previously made in relation to the person;
·
if the benefit is a superannuation pension or annuity - the benefit was payable to the person and the commencement day of the benefit occurred before the day the current benefit commences to be paid. [Section 140K]

The qualifying portion is not always equal to the RBL amount of the benefit. The qualifying portion of a benefit is worked out as follows:

Capital amount * Index number for second-last quarter/Index number for payment quarter

The 'capital amount' of a benefit is:

·
if the benefit is an ETP - the amount of the ETP (other than the retained amount of the undeducted contributions, the retained amount of the concessional component, the retained amount of the post-June 1994 invalidity component or the non-qualifying component and any excessive component);
·
if the benefit is a superannuation pension - the capital value of the pension reduced by any excessive amount;
·
if the benefit is an annuity - the amount of the ETP rolled over to purchase the annuity other than the undeducted contributions, the concessional component or the post-June 1994 invalidity component and any excessive amount.

The 'index number for second-last quarter' is the index number for the quarter two quarters before the quarter in which the current benefit was paid or in which the current benefit commenced to be paid;

The 'index number for payment quarter' is the index number for the quarter in which the previous benefit was paid or in which the commencement day of the previous benefit occurs. [Subsection 140ZG(1)]

No indexation will apply if the previous benefit was paid or commenced to be paid within 12 months of the current benefit. Therefore, both the above index numbers will be 1. [Subsection 140ZG(2)]

D. Does the benefit exceed the person' s RBL?

If the whole of a benefit does not count towards a person's RBL, then none of the benefit is in excess of the person's RBL. Also, a benefit is not in excess of the person's RBL if the benefit does count towards the person's RBL and the amount calculated under the formula outlined below is zero or less. The benefits which count towards a person's RBL are set out in the section on 'Benefits to be Counted Towards a Person's RBL'. [Subsection 140ZA(1)]

If the Commissioner is notified by a payer of the payment of a benefit to a person, and the amount calculated under formula outlined below in relation to the benefit is greater than zero, the benefit is in excess of the person's RBL. The amount of the excess benefit is equal to the amount calculated under the formula which exceeds zero. [Subsection 140ZA (2)]

The relevant formula is as follows:

RBL amount of + Sum of adjusted RBL amounts of previous benefits - Applicable RBL

where:

'RBL amount of current benefit' is the RBL amount of the current benefit (see the section on 'How much of the benefit is counted towards the person's RBL?'

'Applicable RBL' is:

·
if the benefit is to be assessed against the person's lump sum RBL - the lump sum RBL for the year of income in which the benefit is paid or commences to be paid; or
·
in any other case - the pension RBL for the year of income in which the benefit is paid or commences to be paid;

'Sum of adjusted RBL amounts of previous benefits' is the sum of the amounts worked out by applying, to each benefit that was previously paid or commenced to be paid to the person, the following formula:

RBL amount * Index number for second-last quarter/Index number for payment quarter

where:

'RBL amount' means the RBL amount of the previous benefit reduced by any excessive component or excessive amount.

'Index number for second-last quarter' is the index number for the quarter two quarters before the quarter in which the current benefit was paid or in which the commencement day of the current benefit occurred;

'Index number for payment quarter' is the index number for the quarter in which the previous benefit was paid or in which the commencement day of the previous benefit occurred. [Subsections 140ZA(2), (3) and (4)]

Indexation will not apply if the current benefit is paid or commences to be paid within 12 months of the previous benefit. [Subsection 140ZA(5)]

The Commissioner has a discretion to treat a benefit as not being excessive even though the benefit is excessive under the formula outlined above. This discretion may be used where the Commissioner is satisfied that, because of the special circumstances of. the case, all or part of the benefit should be treated as being within the person's RBL. The Commissioner may make a final determination or interim determination to that effect. [Section 140ZB]

E. What is the rebatable proportion of a superannuation pension or annuity?

If a benefit paid to a person is a superannuation pension or annuity, the Commissioner must also determine the rebatable proportion of the superannuation pension or annuity. The rebatable proportion is that part of the pension or annuity for which the recipient will receive an income tax rebate.

The rebatable proportion of a rebatable superannuation pension or rebatable ETP annuity (terms defined in section 159SJ of the Act) will equal one, if the pension or annuity does not count against the person's RBL or if none of the pension or annuity is in excess of the person's RBL. Therefore, the recipient will be entitled to a rebate for all of the superannuation pension or annuity. [Subsection 140ZQ(1)]

None of a rebatable superannuation pension or rebatable ETP annuity will be the rebatable proportion if all of the RBL amount of the pension or annuity is an excessive amount (i.e., it exceeds the person's RBL). The rebatable proportion will also be zero if the pension or annuity counts towards the person's RBL and the Commissioner does not make a determination in relation to the pension of annuity. [Subsections 140ZQ(2) and (3)1

In any other case, the rebatable proportion of a rebatable superannuation pension or rebatable ETP annuity will be calculated as follows:

(RBL amount - Excessive amount)/RBL amount

The 'RBL amount' is the RBL amount of the pension or annuity. The 'excessive amount' is the excessive amount of the pension or annuity. The RBL amount of the pension is set out in the section on 'Benefits to be Counted Towards a Person's RBU under the headings' Superannuation Pensions' and 'Annuities'. The 'excessive mount' is set out in the previous section titled 'Does the benefit exceed the person's RBL'.[Subsection 140ZQ(4)]

Example

A taxpayer commences to be paid a rebatable superannuation pension with an RBL amount of $300,000. Assume that the pension is in excess of the person's RBL by $100,000.

The rebatable proportion of the superannuation pension is calculated as follows:

$300,000 - $100,000 = 2/3

Therefore, two-thirds of each pension payment will be rebatable.

6. Consequential Amendments

Section 27A of the Act defines certain terms which are used in Subdivision AA of Division 2 of Part III of the Act which deals with the taxation treatment of ETPs, superannuation pensions and annuities.

The term 'ISC-directed commutation payment' is defined in section 27A to mean an ETP which arises because the Insurance and Superannuation Commissioner has directed that the excessive amount of a pension or annuity be commuted. The excessive amount of a pension or annuity is the amount by which the pension or annuity exceeds the person's RBL.

From 1 July 1994, if a pension or annuity is in excess of a person's RBL, the excessive amount will not have to be commuted. Instead, the recipient will not be entitled to a rebate for the excessive amount.

Therefore, the definition of 'ISC-directed commutation payment' in section 27A of the Act and the reference to such payments in the definition of 'excessive component' in section 27A will be deleted. Subsection 27A(12E) is also to be repealed. That subsection prevents an ISC-directed commutation payment from being rolled over. [Clause 58]

Subsections 27AA(3) and (6) of the Act treat the entire amount of an ETP as being in excess of a person's RBL (i.e., as an 'excessive component') if the Insurance and Superannuation Commissioner does not make a determination of whether a person's benefit exceeds their RBL. As the Commissioner of Taxation is taking over responsibility for administering the RBLs from 1 July 1994, paragraphs 27AA(3)(b) and (c) are to be amended and subsection 27AA(6) repealed to remove any reference to actions to be made by the Insurance and Superannuation

Commissioner in the RBL process. New paragraphs 27AA(3)(b) and (c) will treat the entire amount of an ETP as an 'excessive component' if the Commissioner of Taxation is notified of an ETP made to a person and the Commissioner does not make a determination in relation to the ETP. [Clause 59]

The amendments to sections 27A and 27AA of the Act apply to ETPs, other than ISC-directed commutation payments, made on or after 1 July 1994. [Clause 61]

Cross reference table

New provision (Clause # in Bill) Former provision (OSSA or OSSR)
140A -
140B -
140C 15E OSSA
4A OSSR
140D 15E(3) OSSA
140E -
140F -
140G -
140H -
140J -
140K -
140L -
140M(1) & (2) 15G1 OSSA
140M(1)(a)(i)(B) 15G(4) OSSA 4H OSSR
140M(3) 15G(3) & (13) OSSA
140M(4) 15G(1A) OSSA
140N 15H OSSA
140P 15G(3) OSSA
140Q(1) & (2) 15J(2) 0SSA
140Q(3) 4J4OSSR
140R(1) 15K(1) OSSA
140R(3) 4K(1) OSSA
140R(4) 15K(2) OSSA
140S(1) 15K(7) OSSA
140S(2) 15K(S) OSSA
140S(3) 15K(9) OSSA
140s(5) 15K(10) OSSA
140T(1) 15L(1) & (2) OSSA
140T(2) 15L(3) OSSA
140U 4M OSSR
140V 4DA OSSR
140W(1) 15M(1) OSSA
140W(2) 15M(4) OSSA
140X(1) 15N(1) OOSA & 4N(4) OSSR
140X(2) 4N(1) & (1A) OSSR
140X(3) 4N(2) OSSR
140X(4) 15N(2) OSSA
140X(5) 15N(3) OSSA
140X(7) 15N(4) OSSA 4N(5) OSSR
140X(8) 15N(5)(a) & (b) OSSA
140X(10) & (11) 15N(7) OSSA
140Y -
140Z(1) 15Q(1) OSSA
140Z(2) 15Q(2) OSSA
140Z(3) 4ZD OSSR
140ZA(2) & (3) 4W(1) OSSR
140ZA(4) 4P(5) OSSR
140ZA(5) 4P(7) OSSA
140ZB 15R OSSA
140ZC 40 OSSR 4P(1) & (2) OSSR
140ZD -
140ZE -
140ZF(1) & (2) 4X(1) & (2) OSSR
140ZF3 4X(1)(c) OSSR
140ZF(4) 4X(3) OSSR
140ZG(1) 4Y(1) OSSR
140ZG(2) 4Y(2) OSSR
140ZH 4Q OSSR
140ZI 48 OSSR
14OZJ 4U OSSA
140ZK 4R(1) OSSR
140ZL(1) 4R(2) OSSR
140ZL(2) 4A(1) ('accrued retirement benefit') OSSR
140ZM 4T OSSR
140ZN(1) 4P(4) OSSR
140ZN(2) 4P(4A) & (4B) OSSR
140Z0(1) & (4) 4D(1) OSSR
140Z0(2) 4D(2) OSSR
140Z0(3) 4D(3) OSSR
140ZO(5) 4D(1A) OSSR
140ZP(1) 4P(3) OSSR
140ZP(2) 4P(3A) & (3B) OSSR
140ZQ -

Chapter 7 - Amendments of the Occupational Superannuation Standards Act 1987

Amendments relating to reasonable benefit limits

Summary of the proposed amendments

Purpose of the amendments: to put into effect changes announced in the Treasurer's Statement of 30 June 1992, titled 'Security in Retirement: Planning for Tomorrow Today'. From 1 July 1994 the reasonable benefit limits (RBLs) function will be transferred from the Insurance and Superannuation Commission to the Australian Taxation Office. The applicable RBL provisions will be incorporated in the Income Tax Assessment Act 1936.

Accordingly, the relevant sections of the Occupational

Superannuation Standards Act 1987 are being repealed.

Date of effect: 1 July 1994.

Background to the legislation

RBL rules under Part IlIA of the Occupational Superannuation Standards Act will no longer be the responsibility of the Insurance and Superannuation Commissioner to administer after 30 June 1994 and will be repealed as of 1 July 1994 when the simplified RBL rules come into effect under the provisions of the Income Tax Assessment Act. The repeal of the RBL provisions is qualified to allow payments of benefits made up to 30 June 1994 to be processed after that date in accordance with the RBL provisions applicable up to 30 June 1994.

Explanation of the proposed amendments

Part IlIA - Reasonable Benefit Limits which sets out the current administration of the RBL function is being repealed because that part will be unnecessary when the Insurance and Superannuation Commissioner ceases to have responsibility for the function. As a consequence, a number of other references in the Occupational Superannuation Standards Act are also being repealed as follows:

·
References in the definition of "reviewable decision" to
·
sections in Part IIIA [paragraphs 3(1)(aa) and (ab) of the definition of "reviewable decision "].
·
References to the review of decisions concerning RBLs [Paragraph 16 (1) (ab) and subsections 16(1A) and (1B)I.
·
References to "person" in section 17 which provide for statements to accompany notification of reviewable decisions. References to "person" are no longer required because, in the absence of Part IIIA reviewable decisions will only be made in relation to trustees [Section 17 wherever occurring].
·
Reference providing for the Governor-General to make regulations under the Occupational Superannuation Standards Act 1987 in relation to RBLs [Paragraph 22 (d)].

Amendment to allow superannuation funds to retain a member's benefit for up to 90 days while the member decides whether to rollover the benefit

Summary of the proposed amendments

Purpose of amendment: The purposes of a superannuation fund as provided for in the definition of "superannuation fund" in subsection 3(1) of the Occupational Superannuation Standards Act 1987 are clarified to allow a fund, at the benefit recipient's request, to delay payment of the whole or part of a benefit from the fund to that person for up to 90 days.

Date of effect: 1 July 1994.

Background to the legislation

Under existing law, a person receiving a payment of an ETP has a period of 90 days to elect to defer payments of tax on the ETP by rolling over the payment. The RBL reporting requirements are somewhat cumbersome in that the ETP must be reported to the Insurance and Superannuation Commission when paid to the recipient and again if the benefit is subsequently rolled over within the 90 days so that it can be removed from the recipient's record of benefits received.

To simplify administration and to remove existing scope for tax abuse, it is intended that, whilst a person will still have 90 days to decide whether to rollover, the ETP must be rolled directly from the source to the destination fund.

Explanation of the proposed amendments

The current definition of "superannuation fund" means that a fund can only provide benefits to members and to dependants of members. Payment of a benefit is triggered by the occurrence of certain events, eg retirement of the member. The occurrence that triggers the payment

effectively terminates that person's membership of the fund. Strictly speaking then, a fund which retains a benefit for up to 90 days is providing a facility to a person who is no longer a member and fails the definition of "superannuation fund", thus losing its entitlement to tax concessions.

A new subsection (6) is being inserted at Section 3 to provide that the trustees of a fund may delay provision of part or all of a member's benefit, at that member's request, for up to 90 days without that fund failing the definition of "superannuation fund".

The proposed amendment is intended only to permit members who have a benefit come due and payable to them the period of 90 days to decide as to whether they wish to rollover their benefits. It is not intended in any way to interfere with arrangements funds may have to retain deferred benefits of a member, whether those deferred benefits are required to be preserved by law or otherwise until the member has retired from the workforce.

Subsection (7) is added to make it clear that the operation of subsection (6) does not limit the circumstances in which trustee may delay the provision of benefits in circumstances consistent with paragraph (b) of the "superannuation fund" definition. Examples could be delays occasioned by disputes over the benefit, resolution of unclaimed benefits or delays experienced by trustees in realising the proceeds of a life insurance policy.

Amendments To Allow Retired Persons To Transfer Their Benefits Into Superannuation Funds

Summary of the proposed amendments

Purpose of amendment: The definition of "superannuation fund" is being amended to allow more flexibility into the retirement income arena by permitting retired people to transfer their pensions from one provider to another.

Date of effect: The date of Royal Assent of the legislation.

Background to the legislation

Subsection 3(1) of the Occupational Superannuation Standards Act 1987 defines "superannuation fund". A fund as defined must meet operating standards set down in the Occupational Superannuation Standards Act to be a complying fund and thus receive tax concessional treatment. Under the definition, a "superannuation fund" is an indefinitely continuing fund and is maintained solely for the provision of pensions and annuities for members or their dependants or for such ancillary purposes as the Insurance and Superannuation Commissioner approves in writing.

The definition would appear to preclude a person already retired transferring a benefit into a superannuation fund. The definition essentially envisages that members are persons in employment and for whom retirement is a future event. Furthermore, it would seem unlikely that providing such a facility could be regarded as an ancillary purpose in terms of the primary purposes of the definition as it stands.

The intention is to provide recipients of superannuation pensions or rollover annuities greater flexibility to choose their pension provider. To do this, recipients require the ability to move their pensions or rollover annuities from one provider to another after they have retired. The Income Tax Assessment Act 1936 does not prevent the transfer of a rollover annuity from one provider to another but it is

necessary to amend the Occupational Superannuation Standards Act to allow superannuation funds to broaden the categories of persons who may be members to allow them to accept the transferred benefits of persons who have retired. The amendment, which allows flexibility in the choice of product provider, complements the proposed regulations for defining "pension" and "annuity" which will result in greater flexibility in the design of products provided.

Explanation of the proposed amendments

The definition of "superannuation fund" is being amended to create a new category of membership. A new definition of "transferred retiree member" is being introduced. This definition will also define the sources of benefits able to be transferred to a fund, so that in practice these benefits will be benefits accrued in relation to occupational superannuation, including benefits accrued in approved deposit and deferred annuity funds. The benefits transferred directly from fund to fund in this way will be by rollover of eligible termination payments.

Amendments relating to definitions of pensions and annuities

Summary of the proposed amendments

Purpose of amendment: The Treasurer's Statement of 30 June 1992, "Security in Retirement: Planning for Tomorrow Today" announced new rules to provide minimum standards which superannuation pensions and rollover annuities must satisfy in order to receive concessional tax treatment.

To give effect to this the Occupational Superannuation Standards Act 1987 is to provide that definitions of pensions and annuities may be prescribed by regulations made under the Act. There will be a provision clarifying that provision of benefits by a superannuation fund only in the form set out in the regulations may be made a condition of superannuation fund compliance under Part II of the Occupational Superannuation Standards Act.

Date of effect: The date of Royal Assent. The annuity and pension definitions regulations will apply to allocated annuities purchased on and from that date and, also from that date, to payments of allocated pensions, even where the allocated pension was purchased before that date. Regulations will apply the pension and annuity definitions to other types of pensions and annuities from 1 July 1994.

Background to the legislation

Under existing law a concessionally taxed superannuation pension or rollover annuity is a benefit paid by a life assurance company, a registered organisation or a superannuation fund. The rules for the taxation of benefits provided by these institutions form part of income tax legislation administered by the Commissioner of Taxation. The maximum amount of tax concessions available to retirement benefits paid to individual benefit recipients is controlled by the reasonable benefit limit rules set down in the Occupational Superannuation Standards Act currently administered by the Insurance and Superannuation Commission. The RBL function is being transferred to the Australian Tax Office by 1 July 1994.

Neither the Occupational Superannuation Standards Act nor the Income Tax Assessment Act 1936 adequately defines the characteristics income streams must have to qualify as rollover annuities or superannuation pensions for tax concessional purposes.

The Income Tax Assessment Act, which provides for the tax assessment of pensions and annuities, does not define exactly what they are, although the Commissioner of Taxation, relying on judicial interpretations, has issued tax rulings IT 2480 and IT 2492 to provide guidance as to the characteristics of an annuity.

No rulings complementary to those for annuities exist to define pensions. Regulation 4ZC under the Occupational Superannuation Standards Act (which also applies to annuities) sets down the characteristics of pensions which are eligible for the higher level of tax concessions. There are no rules, however, to determine whether a series of payments from a superannuation fund is a pension if the value of the benefit is within the "lump sum RBL". The question can only be settled by reference to the traditional meaning of pension, not by reference to legislation. This absence of a definition raises difficulties at a time of innovation in pension provision: for example, allocated pensions claim to be pensions but do not possess the traditional complement of characteristics. The latter operate as investment accounts where the recipients retain significant control of their capital, as opposed to a traditional pension provided simply as a promise of payments under a trust deed.

Under the proposed amendments the minimum standards announced by the Treasurer on 30 June 1992, which would provide a comprehensive set of criteria to define tax concessional retirement incomes, will be able to be prescribed by regulations made under the Occupational Superannuation Standards Act which clarify and extend the meaning of "pension" and "annuity". These definitions, which may be made a compliance condition for funds wishing to have tax concessional status, will effectively identify which income payments are to be treated as tax concessional retirement income for the purpose of the Income Tax Assessment Act.

Explanation of the proposed amendments

The Occupational Superannuation Standards Act will contain new definitions of "annuity" and "pension" in subsection 3(1). The definitions will be based on the minimum standards announced by the Treasurer on 30 June 1992 as prescribed by the Regulations. The definitions will be cross referenced in the Income Tax Assessment Act for the purpose of assuring that only payments meeting acceptable standards will be taxed at concessional rates.

Regulations to prescribe the pension and annuity definitions will be made as soon as is practicable from the date of assent of the legislation. This is consistent with the transitional provisions which provide that regulations may be expressed to apply from the date of commencement of the section.

The addition of new subparagraph (da) in subsection 7(2) will make specific reference to the form in which funds provide benefits. This will enable funds enjoying tax concessional status by virtue of complying with the operating standards prescribed by the Act to be prevented from providing benefits other than in a form consistent with the pension and ,annuity definitions.

Transitional arrangements will provide that regulations may be made so that the definition of annuity will apply to annuities purchased after commencement of the section if an allocated annuity, or 1 July 1994 if not. The regulations will also provide that the definitions of "pensions" will apply to payments of allocated pensions from the commencement of the section, even where the pensions were purchased before that date, and to other types of pensions from 1 July 1994.

Chapter 8 - Superannuation guarantee charge

Notional Earnings Base

Summary of proposed amendments: The proposed amendments will address cases where an employer's requisite superannuation contribution under an industrial award in place prior to 21 August 1991 is based on the earnings of a standard employee. In such cases, the employee's "notional earnings base" will be the earnings of the standard employee on which that contribution is based. (This amendment will accommodate flat dollar award contributions which are linked to the earnings of a standard employee.)

The proposed amendments will also apply to superannuation contributions made under a federal, state or territory law in place prior to 21 August 1991, where those contributions are also based on the earnings of a standard employee.

Date of Effect: 1 July 1992

Background to the legislation

Section 13 (and section 14) of the Act set out the meaning of "notional earnings base". Essentially, for an employee to have an earnings base other than ordinary time earnings, the requisite employer contribution currently must be determined under an award, arrangement or superannuation scheme and must be based on the earnings of that employee.

Explanation of proposed amendments

Subsection 13(1) of the Act will be amended so that contributions made under a federal, state or territory law in place prior to 21 August 1991 will have an earnings base comparable to that which would have applied had the contributions been made under an award, agreement or superannuation scheme in place prior to that date. [Subclause 78(a): Paragraph 13(1)(ab)]

Subsection 13(2) will then be amended, and subsection 13(5) added, to remove the requirement that a notional earnings base be related only to the earnings of the employee in question. An earnings base under awards, or laws, in place prior to 21 August 1991 will also be acceptable if related to the earnings of a member of a class of employees (the 'standard employee'), even if the employee in question was not in that class. [Subclause 78(b) and 78(d): Subsections 13(2) and 13(5)]

For example, an award which required a contribution for all drivers of an amount equal to 4% of the earnings of a Grade 1 driver, would have an earnings base for all drivers (including those who weren't Grade 1 drivers).

A new section 25A will apply where:

·
an industrial award in place prior to 21 August 1991 required a flat dollar superannuation contribution to be made for an employee; [Paragraph 25A(1)(a)] and
·
that flat dollar contribution was required to be increased automatically as the earnings of a member of a class of employees (the 'standard employee') increased. [Paragraph 25A(1)(b)]

In such cases, the notional earnings base for the particular employee will be the earnings of the standard employee. [Clause 80: Subsections 25A(2), (3) and (4)]

For example, if an award required a contribution of $15 per week, indexed by reference to movements in the wage of a Class B administrative officer, the notional earnings base would be the earnings of the Class B administrative officer.

The amendment also provides for flat dollar superannuation contributions to be converted to a percentage, for the purposes of paragraph 23(2)(b), when calculating the reduction in the charge percentage under subsection 23(2). The percentage will equal the fiat dollar contribution divided by the notional earnings base. [Clause 80: Paragraph 25A(2)(b)]

Consequential amendments

Consequential amendments will be made to subsections 13(4) and 23(9) to include a reference to a federal, state and territory law. The consequential amendments are necessary because of new paragraph 13(1)(ab) which will allow contributions made under a federal, state or territory law in place prior to 21 August 1991 to have an earnings base comparable to that which would have applied had the contributions been made under an award, agreement or superannuation scheme in place prior to that date. [Subclause 78(c) and 79].

Excluded Salary or Wages

Summary of proposed amendment

The proposed amendment will exclude payments of salary or wages from the calculation of the superannuation guarantee charge, where those payments are prescribed in the Regulations. This amendment, together with a proposed Regulation, will ensure that certain payments of salary or wages which are alternatives to Social Security payments will be excluded from the calculation of the charge.

Date of Effect: 1 July 1992

Explanation of proposed amendments

The proposed amendment will exclude from calculation of the superannuation guarantee charge any payment which is prescribed in the Regulations.

A payment prescribed in the Regulations will include certain payments of salary or wages, paid under a Commonwealth Government Employment Programme, which are alternatives to Social Security payments. An example is the salary or wages paid under Community Development Employment Programme schemes (funded through the Aboriginal and Torres Strait Islander Commission).

The amendment will ensure that employers do not have to provide superannuation support on payments which are alternatives to Social Security payments. [Subclause 87(a)]

The $450 exemption threshold

Summary of proposed amendment

The proposed amendment will clarify the test for determining whether an employee has exceeded the $450 monthly exemption threshold. It will expressly state that the exemption operates according to the amount of salary or wages paid to the employee in the month;

Date of Effect: 1 July 1992

Background to the legislation

Subsection 27(2) provides that if an employee receives less than $450 in salary or wages in respect of a month, the salary and wages are not taken into account in calculating any superannuation guarantee charge.

This subsection has confused many taxpayers. In particular, they are confused about whether the provision operates on an "accruals" basis (i.e. salary or wages earned for the month but not necessarily paid then) or whether it operates on a "paid" basis (i.e. salary or wages actually paid in a month).

The provision was intended to operate on a paid basis. Therefore, employers would be able to judge whether an employee had exceeded the $450 threshold by looking at the

actual salary or wages paid to that employee in the month. They would not have to calculate how much of the salary and wages paid to an employee was for work done in the month.

Explanation of proposed amendments

The proposed amendment will make it clear that, if less than $450 of salary or wages is paid to an employee in a month, it is not to be taken into account in calculating any superannuation guarantee charge. [Subclause 87(b)]

Deemed complying funds

Summary of proposed amendments

The proposed amendment will extend the time for an employer to obtain a statement from a fund so that benefit certificates in relation to it are deemed to relate to a complying superannuation scheme. The extended time will be 30 days after the date of introduction of this amendment.

Date of effect: Date of introduction of the amendments

Background to the legislation

Existing paragraph 24(1)(a) gives an employer 30 days from the start of the contribution period to obtain a written statement from the trustee of a superannuation scheme. This statement must state that the superannuation scheme has been operating in accordance with the Occupational Superannuation Standards Act 1987 from the start of the contribution period.

If an employer hasn't obtained this statement and the scheme proves not to be a complying superannuation scheme, then the employer could be liable for the superannuation guarantee Charge.

The contribution period for the 1992 - 1993 year starts on 1 July 1992. However, because the Act did not receive royal assent until 21 August 1992, many employers were unaware of these provisions within the 30 days. Therefore, they did not seek to obtain the relevant statement.

Explanation of proposed amendments

To ensure that employers are not disadvantaged in the first contribution period in 1992 - 1993, paragraph 24(1)(a) will be amended to enable an employer to satisfy the paragraph if the employer obtains the relevant statement before the end of 30 days after the date of introduction of the amendment. [Clause 86]

Calculating superannuation guarantee shortfalls

Summary of proposed amendment

The proposed amendment will ensure that the amount of the employee's salary or wages used in calculating the shortfall cannot exceed the maximum contribution base.

Date of Effect: Date of introduction of the amendment

Background to the legislation

The Act incorporates a "maximum' contribution base" to limit the level of superannuation support an employer must provide for employees on high incomes. This maximum is $40,000 for the half yearly contribution periods in the 1992-93 year and $20,000 (indexed) for the quarterly contribution periods in later years.

The effect is to limit the maximum superannuation contributions necessary to avoid the charge, to the charge percentage (e.g.3% or 4%) times the maximum contribution base.

However, an employer may not make those contributions for an employee earning more than the maximum contribution base. Under sections 18 or 19 of the Act as currently drafted, the charge would be calculated on the basis of the employees actual salary and wages, not on the maximum contribution base.

Explanation of proposed amendment

The proposes amendment will amend sections 18 and 19 so that the amount of the employee's salary and wages used in calculating the charge cannot exceed the maximum contribution base. [Clauses 83 and 84]

Indexation

Summary of proposed amendment

The proposed amendment will correct an error in the indexation calculation in section 15 which refers to '1992-93' instead of '1993-94'.

Date of effect: Date of introduction of the amendments

Background to the legislation

Subsection 15(2) provides that the maximum contribution base for a contribution period in the 1993-94 year is calculated as:

($40.000 * indexation factor for the 1992-93 year) / 2

The indexation factor for the 1992-93 year is the Adult Weekly Ordinary Times Earnings ("AWOTE") amount for the March '92 quarter divided by the AWOTE amount for the March '91 quarter (section 9).

The result is incorrect. The indexation factor for subsection 15(2) should be the March '93 quarter AWOTE figure divided by the March '92 quarter figure (i.e. the indexation factor for the 1993-94 year).

Explanation of proposed amendments

The proposed amendment will replace "indexation factor for the 1992-93 year" in the subsection 15(2) equation with "indexation factor for the 1993-94 year". [Clause 82]

Charge percentage in defined benefit superannuation schemes

Summary of proposed amendment

The proposed amendment will exclude, from the calculation of the reduced charge percentage for defined benefit superannuation schemes, any period when the employee was on leave without pay.

Date of Effect: Date of introduction of the amendment

Background to the legislation

Section 22 calculates the reduced superannuation guarantee charge percentage if an employer provides superannuation support via a defined benefit superannuation scheme. The reduction is based on the notional employer contribution rate specified on a benefit certificate. This is adjusted to reflect any period in the contribution period when the employee was employed but was not a member of a superannuation scheme or was not covered by the benefit certificate.

The adjustment produces an inappropriate result where an employee is on leave without pay. During this period, the employee remains an employee for superannuation guarantee purposes but is usually not entitled to superannuation support from the employer. However, under the Act, if no superannuation support is provided during a contribution period in respect of an employee, the employer would not be allowed a reduction in the charge percentage for that period (even though the employee is on leave without pay).

Explanation of proposed amendments

To overcome this problem, the proposed amendment to section 22 will ensure that any period of time when an employee is on leave without pay will not be taken into account for superannuation guarantee purposes. [Clause 85]

Glossary of commonly used terms

Term Definition
ADF Approved deposit fund.
AERSP Approved early retirement scheme payment.
Annuity Is an annuity (as defined in section 3 of the OSS Act) purchased wholly or partly with rolled-over amounts.
Applied amount The 'amount of an ETP a taxpayer wants to roll-over into a particular roll-over fund.
Approved early retirement scheme An approved early retirement scheme payment is a scheme approved by the Commissioner of Taxation providing for early retirement of a specified class of employees with a view to rationalising or re-organising the operations of the employer. A payment made under such a scheme is an AERSP to the extent that it exceeds the amount that could reasonably be expected to have been received if the employee had voluntarily retired at the same time.
Benefit In relation to person, is: a superannuation pension payable to the person; an annuity payable to the person; an ETP made in relation to the person.
BFR Bona fide redundancy payment.
Bona fide redundancy payment A payment received on redundancy which exceeds the amount that could reasonably be expected to have been received if the employee had voluntarily retired at the same time.
Commencement day Is the first day of the period of which the first payment of a superannuation pension or annuity relates.
Complying superannuation fund A superannuation fund accepted by the Insurance and Superannuation Commission as having satisfied the superannuation fund conditions.
Deductible amount The amount excluded from assessable income in relation to a pension or annuity because it represents a return of capital. The deductible amount is calculated by dividing the UPP by the number of years that the pension or annuity is expected to be paid.
Eligible person A person entitled to a tax deduction for personal superannuation contributions.
Eligible personal superannuation Personal superannuation contribution contribution paid to a complying superannuation fund.
Eligible service period in relation to a pension See the comments on 'Superannuation pensions' in the section on 'How much of the benefit is counted towards the person's RBL?'.
Eligible termination payment Broadly speaking, a payment made in consequence of termination of employment. It also includes lump sum payments from superannuation funds and roll-over funds.
Employer superannuation support A person receives employer superannuation support in a year of income if it would be reasonable to expect that superannuation benefits received on retirement or death would be attributable to that year of and that the benefits would not be wholly attributable to the person's own superannuation contributions. In practice it is usually the employer who provides superannuation support, but the term 'employer superannuation support' encompasses superannuation support from any person.
ETP Eligible termination payment
Excessive amount Is the amount of a superannuation pension or annuity that the Commissioner has determined exceeds the person's RBL.
Excessive component Is the amount of an ETP that the Commissioner has determined exceeds the person's RBL.
Index number Is the amount of the full time adult average weekly ordinary times earnings first published by the Australian Statistician for the middle month of the quarter.
Invalidity payment The future serice component of an ETP (based on prospective service to usual retirement age) paid to an employee as a consequence of his or her physical or mental incapacity to engage in the particular employment. For payments made on or after 1 July 1994, the employee's incapacity must be certified by two medical practitioners as rendering the employee incapable of ever being employed in a capacity for which he or she is reasonably qualified.
ISC Insurance and Superannuation Commission.
ISC determination The ISC work out if an ETP is within a taxpayers RBL. If it is over the taxpayers RBL, the ISC will work out the excessive amount and will adjust the other components of the ETP. The ISC will send the taxpayer a determination (referred to as an 'ISC determination') which shows the excessive amount and the adjusted components.
Life assurance company A company registered under section 19 of the Life Insurance Act 1945 or an SGIO.
Notional components The components of an applied amount.
OSS Act Occupational Superannuation Standards Act 1987.
Payer Is a person or other entity (other than a continuously non-complying ADF) that makes, or is liable to make, a payment of a benefit.
Pension and annuity standards Are the standards set out in the regulations.
Pension Is a pension as defined in section 3 ofthe OSS Act.
Personal superannuation A contribution paid to a contribution superannuation fund to obtain superannuation benefits for the person or, in the event of the death of the person, the dependants of the person.
RBL Reasonable benefit limit.
RBL determination The measurement by the Commissioner of Taxation (after 1 July 1994) of an ETP, or the capital value of a pension or annuity, against the recipient's RBL. The RBL determination will show the amount by which an ETP exceeds the RBL and the rebatable proportion of a pension or annuity.
Reasonable benefit limit The limit placed on the amount of concessionally taxed retirement income a person can receive in a life time.
Recipient If the benefit is an ETP it is the person in relation to whom the ETP is paid. If the benefit is a superannuation pension or annuity it is the person to whom the pension or annuity is payable.
Registered organisation A trade union, friendly society or an association of employees within the meaning of the Industrial Relations Act 1988.
Retained amount of the ETP The amount of an ETP that has not been rolled-over.
Roll-over Taxation of an ETP may be deferred by rolling it over into a concessionally taxed roll-over fund (i.e. a deferred annuity or approved deposit fund).
Roll-over fund A complying superannuation fund, a complying ADF or an eligible annuity.
Rolled-over Where some or all of an ETP is paid into a roll-over fund.
Section 159SS notice A notice which, in conjunction with a subsection 274(7) notice, allows a superannuation fund to transfer the tax on last minute employer contributions to the member.
SGC Superannuation guarantee charge.
Substantially self-employed person A person whose assessable or exempt income for the year from employment providing employer superannuation support is less than 10% of his or her assessable income.
Superannuation guarantee charge The charge levied on employers in accordance with the Superannuation Guarantee (Administration) Act 1992
Superannuation pension: A pension payable from a superannuation fund.
Tax file number Has the same meaning as in Part VA of the Act.
Tax-free amount The tax exempt amount of a BFRP or AERSP which is within the limit prescribed by new subsection 27A(19).
Taxed element That pan of the post-June 83 component of the ETP that has come from a taxed source. A taxed source is a fund subject to the 15% taxing arrangements. In most cases the post-June 83 component of a payment from a superannuation fund, approved deposit fund or a roll-over annuity will have a taxed element.
Trustee Includes a trustee for the purposes of Part IX of the Act.
Untaxed element That part of the post-June 83 component of the ETP that has not come from a taxed source. The post-June 83 component of most payments made directly by an employer will have an untaxed element. These payments are often called 'golden handshakes.'
UPP Undeducted purchase price.
UUPP Unused undeducted purchase price.


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