Explanatory StatementIssued by authority of the Minister for Revenue and Assistant Treasurer
Income Tax Assessment Act 1997
Income Tax Assessment Amendment Regulations 2007 (No. 2)
The Tax Laws Amendment (Simplified Superannuation) Act 2007 and related Acts give effect to the Simplified Superannuation reforms, announced in the Government's 5 September 2006 statement - A Plan to Simplify and Streamline Superannuation - Outcomes of Consultation. The reforms make superannuation easier to understand, improve incentives to work and save, and provide greater flexibility over how superannuation savings can be drawn down in retirement.
Subsection 909-1(1) of the ITAA 1997 provides, in part, that the Governor-General may make regulations prescribing matters required or permitted by the ITAA 1997 to be prescribed, or necessary or convenient to be prescribed, for carrying out or giving effect to the ITAA 1997.
The purpose of the Regulations is to insert supporting regulations into the Income Tax Assessment Regulations 1997 (the 1997 Regulations) as a consequence to the Simplified Superannuation reforms, under which superannuation taxation law was rewritten into the ITAA 1997.
The Regulations also insert into the 1997 Regulations definitions required to support the ITAA 1997, provide methods for determining the 'value' of a superannuation interest, and outline the circumstances under which a superannuation interest can be treated as multiple interests, including direction on how particular elements and components are to be allocated across multiple interests and ensure that the preservation rules relating to superannuation cannot be circumvented.
Details of these Regulations are set out in the Attachment A .
The ITAA 1997 specifies no conditions that need to be met before the power to make the Regulations may be exercised.
The Regulations have varying start dates. The regulations that commence the day after registration support the non-concessional contributions cap. The transitional cap applies from 10 May 2006.
The Regulations are a legislative instrument for the purposes of the Legislative Instruments Act 2003.
The draft regulations were made publicly available on the Simpler Super website.
Details of the Income Tax Assessment Amendment Regulations 2007 (No. 2)
Regulation 1 specifies the name of the Regulations as the Income Tax Assessment Amendment Regulations 2007 (No. 2).
Regulation 2 provides that regulations 1, 2 and 3 and Schedule 1 commence the day after registration. Regulations 4 and 5 and Schedules 2 and 3 would commence on 1 July 2007.
Regulation 3 provides that Schedule 1 amends the Income Tax Assessment Regulations 1997 (the 1997 Regulations).
Regulation 4 provides that Schedule 2 amends the 1997 Regulations.
Subregulation 5(1) provides that Schedule 3 amends the 1997 Regulations, as amended by Schedule 2.
Subregulation 5(2) provides that the amendments made by Schedule 2 apply in relation to an income year that starts on or after 1 July 2007.
Schedule 1 - Amendment commencing on day after registration
Excess non-concessional contributions
Paragraph 292-90(4)(a) of the ITAA 1997 provides that an amount that is allocated for a member in accordance with conditions specified in the regulations is a non-concessional contribution for a financial year.
Regulation 292-90.01 sets out the conditions for the purpose of that paragraph. In general, an amount that is allocated under Division 7.2 of the Superannuation Industry (Supervision) Regulations 1994 (SIS Regulations) that is not assessable income under Subdivision 295-C of the ITAA 1997 is covered by this regulation.
For example, a fund accepts all personal member contributions into a reserve. These amounts are then allocated to the member within 28 days of the end of the month in compliance with Division 7.2 of the SIS Regulations. This regulation ensures that non-concessional contributions made through this type of arrangement are counted against the non-concessional contributions cap.
Consistent with paragraph 292-90(2)(c) of the ITAA 1997, the following amounts are not included:
- a Government Co-contribution,
- a contribution covered under section 292-95 of the Act;
- a contribution covered under section 292-100 of the Act, to the extent that it does not exceed the CGT cap amount when it is made;
- a contribution made to a constitutionally protected fund (other than a contribution included in the contributions segment of the member's superannuation interest in the fund);
- a contribution not included in the assessable income of the superannuation provider in relation to the superannuation plan because of a choice made under section 295-180 of the Act;
- a contribution that is a roll-over superannuation benefit; and
- the tax free component of a directed termination payment (within meaning 82-10F of the Income Tax (Transitional Provisions) Act 1997) made in financial year on behalf of the member.
Schedule 2 - Amendments commencing on 1 July 2007
Item 1 inserts new regulations after Division 292 of the 1997 Regulations.
Division 306 - Roll-over etc.
306-10.01 Roll-over superannuation benefit
New regulation 306-10.01 specifies a type of benefit for the purpose of paragraph 306-10(b) of the ITAA 1997 which cannot be treated as a roll-over superannuation benefit. Commutations of a superannuation income stream that have reverted to another person on the death of the original beneficiary, cannot be rolled over within the superannuation system unless the reversionary beneficiary is the spouse of the deceased person.
Division 307 - Key concepts relating to superannuation benefits
New regulation 307-200.01 ensures that the rules regarding the situations in which a superannuation interest can be treated as multiple superannuation interests do not result in inappropriate outcomes when making concessional contribution calculations for defined benefit interests under Subdivision 292-D of the ITAA 1997.
New regulation 307-200.02 provides that, as a general rule, all amounts, benefits or entitlements held by a superannuation provider comprise one superannuation interest.
307-200.03 Meaning of superannuation interests - treating a superannuation interest as two or more superannuation interests (public sector superannuation schemes)
New subregulations 307-200.03(2) and (3) provides that, in accordance with new section 307-200 of the ITAA 1997, where a contributor has a superannuation interest that includes a tax free component and a taxable component that consists of an element taxed in the fund and an element untaxed in the fund, the tax free component and the element taxed in the fund is treated as one superannuation interest. The element untaxed in the fund is treated as a separate, second, superannuation interest.
Further superannuation interests could also be deemed to exist under this regulation under new subregulations 307-200.03(4) and (5) to address those circumstances where a person is a member of a public sector superannuation scheme that treats particular amounts as being subject to different benefit payment rules and administratively prevents these amounts from being dealt with as a single superannuation interest.
It would only be where the superannuation provider offers a superannuation income stream to its members and the rules governing the operation of the plan prevent certain lump sum amounts (such as an amount of a roll-over superannuation benefit rolled into the plan) from being applied towards the superannuation income stream that an additional superannuation interest or interests are created.
A limitation on this rule set out in the new subregulation 307-200.03(5) ensures that an additional superannuation interest is not created where the plan rules allowed for the transfer of amounts between those components that made up a part of an income stream and those amounts which could not form part of the income stream. Similarly, to the extent that the rules of the plan relating to the payment of benefits serve to align or consolidate such amounts and any other amount in the plan, the consolidated amount should be treated as a single interest.
It is possible that one superannuation plan could contain three or more superannuation interests.
The new regulation only applies in respect of public sector superannuation schemes as defined in section 10 of the Superannuation Industry Supervision Act 1993 in accordance with subregulation 307-200.03(1).
307-200.04 Meaning of superannuation interests - treating a superannuation interest as two or more superannuation interests (constitutionally protected funds)
Regulation 307-200.04 provides that, in accordance with section 307-200 of the ITAA 1997, there are some circumstances in which a single superannuation interest can be treated as more than one superannuation interest. The regulation only applies to a constitutionally protected fund (defined in accordance with subsection 995-1(1) of the ITAA 1997) in accordance with the new subregulation 307-200.04(1). Unlike in a public sector scheme, the benefits offered by a constitutionally protected superannuation fund will normally comprise a tax free component and a taxable component composed solely of an element untaxed in the fund. A general rule to split the element taxed in the fund and the element untaxed in the fund is therefore not required.
Subregulations 307-200.04(2) and (3) adopt the same approach as that set out in respect of the treatment of superannuation interests from a public sector superannuation scheme under subregulation 307-200.03(4) and (5) . That is, it provides for the special treatment of particular identifiable amounts in the fund which are paid or cashed under different rules from the rest of a member's benefits or entitlements.
Where an amount that does not include any element untaxed in the fund is rolled-over into a constitutionally protected fund, earnings on the tax free and taxable components of this amount are not subject to tax in the fund (as a constitutionally protected fund does not pay tax). These earnings therefore form part of the superannuation interest that is made up of the element untaxed in the fund.
307-200.05 Meaning of superannuation interests - treating a superannuation interest as 2 or more superannuation interests (superannuation income streams)
Under new regulation 307-200.05 , a limited exception to the general rule set out under regulation 307-200.02 applies where, upon the commencement of a superannuation income stream, an amount that is held within the superannuation fund supports a superannuation income stream. The amount supporting the superannuation income stream is treated as a separate superannuation interest. Any other amounts, benefits or entitlements that are held in the superannuation plan on behalf of the same contributor which do not support a superannuation income stream are treated as another superannuation interest.
307-205.01 Value of superannuation interests for calculating pre-July 1983 amount for members in the contributions and investment phase
Subregulation 307-205.01(1) specifies the method for determining the value of a superannuation interest. This method applies for the purposes of calculating the pre-July 1983 amount of the crystallised segment of a tax free component under section 307-225 of the ITAA 1997. This provision applies to calculate the tax free component of interest not supporting a superannuation income stream in payment as at 1 July 2007.
The tax free component of a superannuation interest supporting a superannuation income stream in payment as at 1 July 2007 is set out in section 307-125 of the Income Tax (Transitional Provisions) Act 1997 (the Transitional Act).
Defined benefit interest
Subregulation 307-205.01(2) prescribes a method to be used to calculate the value of the pre-July 1983 amount for a defined benefit. Defined benefit interests are those in which members are entitled to a benefit determined by reference to a particular matter, generally the person's salary. Valuing defined benefit interests is more complex due to the wide variety of scheme rules. The method assigns a value to a member's superannuation interest based on the retirement benefit that would have been payable had the member been eligible to retire immediately before 1 July 2007 and had elected to do so.
In cases where a member has left the employment which gave rise to the superannuation interest but preserved the interest, retirement is taken to be the point in time at which the benefit becomes payable to the member without penalty.
The method specifies that the following assumptions are to be adopted in determining the retirement benefit:
- the member's service is his or her actual service immediately before 1 July 2007;
- if the calculation of the benefit depends upon the age of the member and the member has not yet attained the age at which he or she can retire without the employer's consent, the member is taken to have attained that age. Where the member has already exceeded that age, actual age is to be used.
- the member's salary is his or her salary for superannuation purposes;
- if the amount of the benefit that would be payable depends upon the employer's consent to the retirement, the member's employer has so consented;
- the member chooses to take the maximum amount payable as a superannuation income stream (rather than a lump sum) where the option of receiving a superannuation income stream from the fund is provided.
The method focuses on the retirement benefit that would be payable under normal retirement provisions. In particular, the possibility of an ill-health or disability pension benefit becoming payable at an earlier age than that at which a normal retirement benefit can be paid is not relevant to the calculation.
The value of the defined benefit superannuation interest for the purposes of calculating the pre-July 1983 amount is the value of the superannuation income stream payable (if any) plus the nominal amount of the lump sum payable (if any) using the assumptions outlined above. The value of the superannuation income stream is calculated using the factors in Schedule 1B (discussed in further detail below).
Steps 2 and 3 ensure that if the lump sum benefit of a member on resignation or withdrawal as at 1 July 2007 is higher than the value of the retirement benefit of the member as calculated under Step 1, the pre-July 1983 amount will be calculated using the higher value.
Interest other than defined benefit interest
Accumulation superannuation interests are those in which members have individual accounts into which contributions are made and investment earnings accrue. The default definition of value (that is, when the rules providing for the income stream are based on an identifiable lump sum amount or the amount available in the member's account) is appropriate for calculating the pre-July 1983 amount for the vast majority of accumulation superannuation interests.
Subregulation 307-205.01(3) sets out the method for calculating the value of accumulation interests for the purposes of calculating the pre-July 1983 amount.
Step 2 of this method ensures that any amounts that are notionally allocated to the member are included in the value. For example, for partially vested accumulation interests the amount that a member is entitled to receive may vary depending on their length of service with a particular employer. In such cases it is assumed that the interest is fully vested in the member.
307-205.02 Value of superannuation interest
Regulation 307-205.02 specifies the method for determining the value of a superannuation interest at a particular time. This method allows interests which support an income stream to be valued for the purposes of the proportioning rule set out in sections 307-125 of both the ITA Act 1997 and the Transitional Act.
Subregulation 307-205.02(1) has the effect of excluding certain income streams from the valuation methodology. These are income streams where the benefits are directly related on an ongoing basis to an ascertainable amount in the member's account. They include an allocated pension, a market linked pension and an account-based pension within the meaning of the Superannuation Industry (Supervision) Regulations 1994.
Subregulation 307-205.02(2) provides that the value of the superannuation income stream to which this regulation applies is calculated using the factors in Schedule 1B (discussed in further detail below).
Where a future lump sum is also payable as part of the income stream, the value of the superannuation interest will be increased by the value of that lump sum and the tax free component will be divided between the income stream and the lump sum in the same proportion as their value. The future lump sum (if any) will be discounted using the factors set out in Schedule 1B.
Future lump sums which are paid as a result of commutation of part of the income stream being valued are specifically excluded for the calculation of the value of the interest.
Items 2 and 3
Items 2 and 3 inserts definitions of 'RSA Act', 'RSA Regulations', 'SIS Act', 'SIS Regulations', 'superannuation annuity', 'superannuation income stream', 'superannuation income stream benefit' and 'constitutionally protected funds' into the 1997 Regulations.
A definition of 'RSA Act' (being the Retirement Savings Account Act 1997) is inserted into regulation 995-1.01 of the 1997 Regulations.
A definition of 'RSA Regulations' (being the Retirement Savings Account Regulations 1997) is inserted into regulation 995-1.01 of the 1997 Regulations.
A definition of 'SIS Act' (being the Superannuation Industry (Supervision) Act 1993) is inserted into regulation 995-1.01 of the 1997 Regulations.
A definition of 'SIS Regulations' (being the Superannuation Industry (Supervision) Regulations 1994) is inserted into regulation 995-1.01 of the 1997 Regulations.
'Superannuation annuity' replaces what is currently known as an 'ETP annuity', that is, an income stream purchased from a life insurance company or registered organisation with the whole or part of a rolled over amount, roll-over superannuation benefit or directed termination payment.
A superannuation annuity is a payment which is a 'superannuation benefit' and is thus entitled to access the taxation concessions available to such benefits. A 'superannuation annuity' needs to meet the annuity payment standards set out in subregulation 1.05(1) of the Superannuation Industry (Supervision) Regulations 1994 (SIS Regulations).
It also covers income streams provided by a life insurance company or registered organisation which began to be paid before 20 September 2007 and which meet the definition of 'annuity' in subsection 10(1) of the Superannuation Industry (Supervision) Act 1993 (SIS Act) or subregulation 1.07(1A) of the Retirement Savings Accounts Regulations 1997 as at 20 September 2007.
Superannuation income stream
'Superannuation income stream' captures all income stream payments from superannuation vehicles that are made in line with new payment standards (which are set out in the SIS Regulations). It also captures income streams which began to be paid before 20 September 2007 and which met the definitions of 'pension' or 'annuity' in section 10 of the SIS Act at that time.
Superannuation income stream benefit
The definition of a 'superannuation income stream benefit' is inserted by item 3 as new regulation 995-1.03 . A 'superannuation income stream benefit' is any payment from an interest supporting a superannuation income stream unless the taxpayer elects, before a particular payment is made, that the amount is not a superannuation income stream benefit. Such an election can only be made if the superannuation income stream product allows for variation in the size of the payments of a benefit in a year. This provides more flexibility for taxpayers to determine what amounts they need in a particular year. An amount which a person elects to take as a lump-sum does not count against the minimum draw down requirements.
Constitutionally protected funds
Prior to 1 July 2007, the definition of a 'constitutionally protected fund' is provided in section 267 of the ITAA 1936 and supported by regulation 177 of the 1936 Regulations. The Simplified Superannuation reforms insert a definition of a 'constitutionally protected fund' into the ITAA 1997. Item 3 inserts new regulation 995-1.04 and Schedule 4 (dealt with below) into the 1997 Regulations to list those funds which are prescribed as 'constitutionally protected fund'. The new regulation and Schedule are essentially the same as regulation 177 and Schedule 14 of the 1936 Regulations.
Item 4 inserts Schedule 1B - Valuation factors
Separate income stream valuation factors are set out for superannuation income streams payable for the life of the member and superannuation income streams payable for a fixed term. The valuation factors are based on the following assumptions:
- mortality rates of 80 per cent of those set out in the 2000-02 Australian Life Tables;
- indexation of the income stream at a rate of 2.5 per cent per annum;
- a discount rate of 6.5 per cent per annum; and
- for lifetime pensions, a reversion of 60 per cent of the original benefit being payable. The probability of a reversionary payment being made is determined using relevant marriage rates.
For simplicity, the valuation factors are the same, regardless of whether the actual pension includes provision for a reversion or not and regardless of the actual rate of indexation.
Lump sum valuation factors for the purposes of discounting future lump sum payments from an income stream (other than commutations) are also set out in Schedule 1B. For example, these factors are used to value any lump sum payable from a superannuation income stream. It is assumed that the lump sum is paid at the first point at which it can be paid without penalty. This is referred to as the minimum deferral period. The factors assume that the lump sum is immediately payable on death and, for this purpose, it has been assumed that the member is aged 55 at the time the lump sum is being valued and mortality rates are 80 per cent of those set out in the 2000-02 Australian Life Tables.
Separate discount factors are provided for lump sums which are not indexed, CPI indexed and wage indexed. If an alternative adjustment mechanism is used the factor is 1.
Item 5 inserts Schedule 4 into the 1997 Regulations. This schedule prescribes those funds which are prescribed as 'constitutionally protected fund'. At the request of the South Australian Government funds established under Schedule 3 to the South Australian Superannuation Act 1988 are no longer constitutionally protected funds.
At the request of the Victorian Government, the Victorian Magistrates Court Act 1989 is prescribed as a constitutionally protected fund.
Schedule 3 - Further amendments commencing 1 July 2007
Item 1 inserts Division 26, in Part 2 before Division 28.
Division 26 Some amounts you cannot deduct, or cannot deduct in full.
26.85.01 Borrowing costs on loans to pay life insurance premiums - term insurance policy
Item 1 inserts new regulation 26-85.01 which specifies the meaning of a 'risk component' for the purpose of section 26-85 of the ITAA 1997. This section provides when borrowing costs on loans to pay life insurance premiums may be deductible. Section 26-85 of the ITAA 1997 is inserted by the Simplified Superannuation reforms, and reflects section 67AAA of the ITAA 1936, which is repealed for the 2007-08 income year and later years.
Item 2 would insert new Division 290, after Division 70 in Part 2.
Division 290 Contributions to superannuation funds
Subdivision 290-C Deducting personal contributions
290-170.01 Notice of intent to deduct contributions - contributions-splitting applications .
New regulation 290-170.01 specifies what is a 'contributions-splitting application' for the purposes of subparagraph 290-170(2)(d)(i) of the ITAA 1997.
The new regulation at item 2 , reflects regulation 98D of the 1936 Regulations which supports section 82AAT of the ITAA 1936. The Superannuation Legislation Amendment (simplification) Act 2007 repeals section 82AAT for the 2007-08 income year and later income years. Regulation 98D of the 1936 Regulations is also omitted for the 2007-08 income year and later income years.
Item 3 would insert Division 295, after Division 292 in Part 2.
Subdivision 295-D Contributions excluded
295-265.01 Application of pre-1 July 88 funding credits - limit on choice
From 1 July 2007 the provisions relating to the application of pre-1 July 1988 funding credits in sections 275A and 275B of the ITAA 1936 will be repealed. These sections are supported by regulation 170A of the 1936 Regulations.
From 1 July 2007, section 295-265 of the ITAA 1997 will provide that regulations may be made in relation to the use of pre-1 July 1988 funding credits.
Item 3 inserts new regulation 295-265.01 into the 1997 Regulations to provide guidance to a superannuation provider about the amount of pre-1 July 1988 funding credits that a superannuation provider can choose to apply to reduce the assessable income of a fund for an income year.
Item 3 also inserts a new subregulation 295-265.01(4) so that when an actuary is determining the amount of pre-1 July 1988 funding credits that a superannuation provider can choose to apply to reduce the assessable income for an income year, the actuary will need to take into account any pre-1 July 1988 funding credits or pre-1 July 1988 liabilities that have been transferred into or out of the superannuation fund.
Subdivision 295-F Exempt Income
295-385.01 Segregated current pension assets - prescribed superannuation income stream benefits
Item 3 also inserts new regulation 295-385.01 into the 1997 Regulations which lists the types of superannuation income stream benefits that are prescribed for section 295-385 of the ITAA 1997. Funds paying superannuation income stream benefits that are prescribed in this regulation will not need an actuary certificate for the assets supporting the payment of current pension liabilities to be considered 'segregated current pension assets' under section 295-385 of the ITAA 1997, and therefore entitled to concessional tax treatment. The regulation is essentially a rewrite of regulation 170 in Part 9A of the 1936 Regulations, and is a consequential amendment resulting from the rewrite of Part IX of the ITAA 1936 into Division 295 of the ITAA 1997 that occurred as part of the Simplified Superannuation reforms.
Division 301 Superannuation member benefits paid from complying plans etc .
Subdivision 301-D Departing Australia superannuation payments
301-170.01 Departing Australia superannuation payments
Item 3 would also insert new regulation 301-170.01 into the 1997 Regulations.
Currently, the definition of a 'departing Australia superannuation payment' is provided in subsection 27A(1) of the ITAA 1936 and supported by regulation 178 of the 1936 Regulations. From 1 July 2007, section 27A(1) will be repealed and section 995-1(1) of the ITAA 1997 will define a 'departing Australia superannuation payment'.
New regulation 301-170.01 prescribes that the conditions that must be met to allow temporary residents to receive their superannuation when departing Australia are set out in regulations 6.20A, 6.20B and 6.24A of the Superannuation Industry (Supervision) Regulations 1994; and regulation 4.23A of the Retirement Savings Accounts Regulations 1997.
Subdivision 301-E Superannuation lump sum member benefits less than $200
301-225.01 Superannuation lump sum member benefits less than $200 are tax free
Paragraph 301-225(d) of the ITAA 1997 provides that a superannuation benefit is not assessable income, and is not exempt income where the benefit is a lump sum, the amount is less than $200 and represents the entirety of the superannuation interest and any requirements specified in the regulations are met.
Item 3 inserts new regulation 301-225.01 which specifies that the member's benefit must be released under items 104 or 109B of Part 1 of Schedule 1, or item 211 of Schedule 2, to the Superannuation Industry (Supervision) Regulations 1994.
These conditions of release relate to lost members who are subsequently found, and termination of employment with a standard employer sponsor where the member's preserved benefit at time of termination is less than $200.
New regulation 301-225.01 ensures that members are unable to receive multiple $200 payments tax free, except in circumstances where the accounts either were lost, or at risk of becoming lost.
Division 302 Superannuation death benefits paid from complying plans etc .
Subdivision 302-D Definitions relating to dependents
302-200.01 What is an interdependency relationship - matters to be taken into account
The Simplified Superannuation reforms insert a definition of interdependent relationship into the ITAA 1997 from 1 July 2007. The definition in section 27AAB of the ITAA 1936 will be repealed from 1 July 2007. Item 3 also inserts a new regulation 302-200.01 into the 1997 Regulations which outlines the circumstances where an interdependent relationship exists.