Supplementary Explanatory Memorandum
This supplementary memorandum explains an amendment being proposed to the Taxation Laws Amendment (Superannuation) Bill 1989 (referred to in this memorandum as "the Bill") as introduced into the Senate. The amendment will exempt from tax a portion of the investment income of complying approved deposit funds (ADFs) that receive most of their income as interest. The income to be exempt is, broadly, the part of the ADF's normal assessable income (that is, income other than taxable contributions and certain non-arm's length income that is taxable at the top personal marginal rate) attributable to amounts held on deposit, including accumulated earnings, at 25 May 1988 for certain eligible depositors. Eligible depositors are:
- depositors aged 55 or more at 25 May 1988; and
- those depositors aged 50 or more at 25 May 1988 who, on or before that date, rolled over to the ADF all or part of an ETP which had a concessional component (i.e., an approved early retirement scheme payment, a bona fide redundancy payment or an invalidity payment), regardless of whether any part of the concessional component was rolled over.
The tests of exemption are in two stages. First, an ADF will have to satisfy the following conditions in respect of the year for which exemption is sought :
- the fund is a complying ADF;
- at no time during the year do the fund's assets include either units in a pooled superannuation trust or life assurance policies;
- at least 90 per cent of the fund's normal investment income consists of interest, payments in the nature of interest or amounts included in assessable income in respect of long term discounted securities.
Second, an ADF that satisfies those conditions (a fixed interest complying ADF) in a year of income must have met the conditions at all times from the year of income in which 1 July 1988 occurred until the year when the exemption is sought. This test will only become relevant in years of income after the year in which 1 July 1988 occurred.
The purpose of the amendment is to relieve eligible depositors from the impact of the tax otherwise payable by an ADF on income attributable to those depositors' investments in the ADF at 25 May 1988. It is to be a pre- condition of the exemption that ADFs pass on the benefit of the exemption to eligible depositors.
NOTES ON AMENDMENT
The amendment proposes to insert clause 56A in the Bill. The new clause proposes the insertion of section 290A in the Principal Act to exempt from tax certain income of a continuously complying fixed interest ADF (see the note on the definition of that term) that would otherwise be normal assessable income of the fund. The exemption will not extend to assessable income of the ADF that consists of :
- rolled-over untaxed elements of the post-June 83 components of eligible termination payments (e.g., "golden handshakes"); or
- certain private company dividends and other non-arm's length income that are taxed at the top marginal rate of personal tax.
By subsection 290A(1) the exemption applies to the proportion of the ADF's normal assessable income determined under the formula in proposed subsection 290A(2). The proportion is:
(Aggregate of current 25 May balances)/(Aggregate current balance)
The terms used in the formula are defined in subsection 290A(2) :
- "Aggregate of current 25 May balances" is defined as the part of the total amount on deposit with the ADF at 25 May 1988 for eligible depositors (see the introductory note) that, on the relevant day when the proportion is calculated (see the note on the definition of reckoning time), has not been withdrawn from the ADF or, if withdrawn, has been returned before 1 July 1989.
- "Aggregate current balance" is simply the total amount standing to the credit of all depositors with the ADF on the day when the proportion is being determined.
Subsection (3) allows the trustee of a continuously complying fixed interest ADF to choose, by election, the time in the year of income at which the proportion is calculated under subsection (2). The election is to be in writing (paragraph (a)) and lodged with the Commissioner, ordinarily with the fund's tax return (paragraph (b)). The effect of the election is to enable the trustee to select the optimum basis for determining the exempt proportion of income.
New subsection 290A(4) contains definitions of terms used in proposed section 290A:
- "continuously complying fixed interest ADF" sets down the second of the tests for exemption of the relevant part of an ADF's normal assessable income as described in the introductory note.
- "CS policy" has the same meaning as in the provisions of the Principal Act dealing with the assessment of life assurance companies. The definition facilitates the prescription of the condition (see the introductory note), contained in the definition of "fixed interest complying ADF", that the exemption being proposed by clause 56A is not to be available to an ADF that owns life assurance policies.
- "current 25 May balance" is the balance on deposit from time to time that is attributable to the original 25 May balance (a defined term) of an eligible depositor. The balance is a running balance arrived at by starting with the original 25 May balance and varying it by adjusting the previous balance downwards (but not below zero) for each withdrawal by the depositor and upwards (but not above the original 25 May balance) for each deposit. Deposits after 30 June 1989 are ignored. The sum of these balances at the time during the year of income chosen by the trustee is used to determine the proportion of the ADF's income of the year that is exempt from tax under the section.
- The effect of the definition is that any part of the original 25 May balance that has been withdrawn and returned to the fund by the depositor before 1 July 1989 and before the time at which subsection (2) is being applied will count towards the fund's exemption.
- An example of the way the definition will work is :
- An eligible depositor had an amount of $25,000 on deposit with a continuously complying fixed interest ADF on 25 May 1988.
- The person conducts the following transactions with the ADF:
- 29 June 1988 - $1,000 withdrawal;
- 30 September 1988 - $5,000 withdrawal;
- 25 June 1989 - $8,000 deposit;
- 30 June 1989 - $2,000 withdrawal;
- 30 September 1989 - $24,000 withdrawal;
- 1 December 1989 - $2,000 deposit.
- The original 25 May balance is $25,000. The current 25 May balance in respect of the depositor, determined on the following dates, is:
- at 1 July 1988 -
$(25,000 - 1,000) = $24,000
- at 25 June 1989 -
$(24,000 - 5,000 + 6,000) = $25,000
- at 30 June 1989 -
$(25,000 - 2,000) = $23,000
- at 30 September 1989 -
$(23,000 - 23,000) = NIL
- at 1 December 1989 - NIL, i.e., deposits made after 30 June 1989 are not included in the current 25 May balance.
- "eligible depositor" describes those persons who are to benefit from the proposed amendment, i.e., the people mentioned in the first two dot points in the introductory note.
- "fixed interest complying ADF" sets out the conditions that must be met in relation to a year of income by an ADF that seeks exemption from tax under proposed section 290A. Those conditions are explained in the introductory note to this memorandum.
- "original 25 May balance" is the amount held on deposit for an eligible depositor at 25 May 1988. So much of that amount as remains on deposit from time to time (described in the definition 'current 25 May balance') is used in the formula in subsection (2) to determine the fund's exemption from tax.
- "reckoning time" is any time in the year of income the trustee chooses. ADF trustees are to be free to choose the time which produces the optimum exemption proportion under subsection (2). In years after 1988-89 it would be unusual for the time to be other than the beginning of the year of income.
Subsection 290A(5) denies the exemption unless the Commissioner is satisfied that the fund has passed, or will pass, to eligible depositors the benefit of the reduction in tax the exemption provides.