Explanatory StatementIssued by authority of the Minister for Revenue and Assistant Treasurer
Income Tax Assessment Act 1997
The Simplified Superannuation reforms were announced in the 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 can be drawn down in retirement.
Subsection 909-1(1) of the Income Tax Assessment Act 1997 (1997 Tax Act) provides that the Governor-General may make regulations prescribing matters required or permitted by the 1997 Tax Act to be prescribed, or necessary or convenient to be prescribed, for carrying out or giving effect to the 1997 Tax Act.
The Income Tax Assessment Regulations 1997 (1997 Tax Regulations) prescribe the method for determining the 'value' of a superannuation interest, outline the circumstances under which a superannuation interest can be treated as multiple interests, set out how notional taxed contributions are calculated for a defined benefit interest and the conditions for allocating an amount to a complying superannuation fund.
The purpose of the Regulations is to clarify a number of the operating provisions supporting the Simplified Superannuation reforms. The regulations complement regulations previously registered on 13 April 2007 and 27 April 2007.
The Regulations clarify the calculation of notional taxed contributions. The Regulations also amend the treatment of multiple interests as set out in the 1997 Tax Regulations, so that every amount, benefit or entitlement within a single fund is treated as a separate interest. Multiple interests in a self managed superannuation fund are required to be combined as a single interest.
The Regulations ensure that existing practices can continue in regards to the valuing of a superannuation interest. The Regulations also clarify which amounts allocated by trustees should be included in the concessional contributions cap.
Details of the Regulations are set out in the Attachment.
The 1997 Tax Act specifies no conditions that need to be met before the power to make the Regulations may be exercised.
The Regulations are legislative instruments for the purposes of the Legislative Instruments Act 2003.
There was insufficient time to make the Regulations publicly available for consultation. Continuing discussions with interest groups and the Department of the Treasury have assisted in outlining the areas which required clarification. Targeted consultation has taken place during the development stage of the Regulations.
The Regulations commence on 1 July 2007.
Regulation 1 specifies the name of the Regulations as the Income Tax Assessment Amendment Regulations 2007 (No. 6).
Regulation 2 provides that the Regulations commence on 1 July 2007.
Regulation 3 provides that Schedule 1 amends the Income Tax Assessment Regulations 1997 (1997 Tax Regulations), as amended by the Income Tax Assessment Amendment Regulations 2007 (No.2) and the Income Tax Assessment Amendment Regulations 2007 (No.3).
Items 1, 2 and 3
The 1997 Tax Regulations as amended by the Income Tax Assessment Amendment Regulations 2007 (No.3) inadvertently eliminated a key test that applies to amounts allocated from reserves under subregulation 292-25.01(4) and could have allowed exemptions under subregulation 292-25.01(4) to apply to amounts covered by subregulation 292-25.01(2).
Items 1 to 3 amend subregulations 292-25.01(2), (4) and (5) so that the concessional contributions cap applies to all contributions required to be allocated by a trustee under Division 7.2 of the Superannuation Industry (Supervision) Regulations 1994, and all amounts allocated from reserves by a trustee (but which are not required to be allocated under Division 7.2 of the Superannuation Industry (Supervision) Regulations 1994) except those amounts that satisfy the exemption conditions outlined at paragraph 292-25.01(4)(a) or (b).
This reflects the Government's original policy intent.
Subsection 307-200(2) of the 1997 Tax Act provides that two or more superannuation interests are to be treated as a single interest in the way specified in the regulations. Item 1 amends the 1997 Tax Regulations as amended by the Income Tax Assessment Amendment Regulations 2007 (No.2) so that every amount, benefit or entitlement within a single fund is no longer explicitly aggregated to form a single interest. However, because of the close-held nature and small membership of self managed superannuation funds, each amount, benefit or entitlement within a self managed superannuation fund will continue to be treated as a combined single interest.
Item 5 replaces subregulations 307-200.03(4) and (5) with new subregulation 307-200.03(4).
Subregulations 307-200.03(4) and (5) provided that one superannuation interest within a public sector superannuation scheme is to be treated as more than one interest where different amounts are subject to different benefit payment rules and administrative rules prevent them being treated as a single interest. The change at item 4 means that every amount, benefit or entitlement within a public sector superannuation scheme is able to be treated as a separate interest. Consequently, there is no need to specifically identify situations where amounts will be treated as separate interests.
Subsection 307-200(1) of the 1997 Tax Act provides that a superannuation interest is to be treated as two or more superannuation interests in the way specified in the regulations. Regulation 307-200.03 specifies how a superannuation interest is to be treated as two or more superannuation interests within a public sector superannuation scheme. This specifies that an amount which is sourced from contributions or earnings into the scheme is to be treated as a separate interest.
This is intended to ensure that funded amounts within a public sector scheme are treated separately from unfunded amounts.
However, some schemes receive contributions which they elect to treat as untaxed under section 295-180 of the 1997 Tax Act. These amounts are received by the member as an element untaxed in the fund of the taxable component (section 307-285 of the 1997 Tax Act).
New subregulation 307-200.03(4) excludes amounts which are paid to a member as an element untaxed in the fund of the taxable component under section 307-285 of the 1997 Tax Act from being part of the superannuation interest which is sourced from contributions made into the fund, or earnings on those contributions.
Item 6 repeals regulation 307-200.04.
Subregulation 307-200.04 provided that one superannuation interest within a constitutionally protected fund would be treated as more than one interest where different amounts are subject to different benefit payment rules and administrative rules prevent them being treated as a single interest. The change at item 4 means that every amount, benefit or entitlement within a constitutionally protected fund is able to be treated as a separate interest. Consequently, there is no need to specifically identify situations where amounts will be treated as separate interests.
Item 7 amends regulation 307-205.02 to exclude purchased income streams from the valuation methodology.
The default definition of value in section 307-205 of the 1997 Tax Act is appropriate for many superannuation income streams which are purchased, 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. These income streams are referred to as purchased income streams
- A purchased income stream would include lifetime and life-expectancy pensions which are commenced by rolling over an identifiable lump sum to purchase the pension as these will typically be valued just before the superannuation income stream commences.
Regulation 307-205.02 is also amended to enable superannuation interests in public sector superannuation schemes to be valued if there was no practice for valuing them immediately prior to 28 June 2007.
Item 8 inserts new regulation 307-205.02A into the 1997 Tax Regulations. New regulation 307-205.02A provides that the value of an interest which supports a purchased pension as defined in subparagraph 307-205.02(1)(a)(ii) is the identifiable lump sum amount, or the amount available in the member's account.
Item 8 also inserts new regulation 307-205.02B. New regulation 307-205.02B provides that the value of an interest supporting a defined benefit pension in a public sector superannuation scheme is determined using the practice used by the fund immediately before 28 June 2007. This applies to pensions that commenced to be paid prior to 1 July 2007, and those that commence on or after 1 July 2007.
New paragraph 307-205.02B(a) also excludes 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.
Different schemes will have different practices for valuing pensions depending on the purpose for which the valuation is being done. The current practice that is intended to apply in this situation is the practice for the purpose which would most closely mirror the purpose of regulation 307-205.02A. That is, valuation for working out the income tax liability of the pensioner.
It is expected that in many circumstances, this would be the practice of the fund used in determining the rebate available to the pensioner under section 159SM of the Income Tax Assessment Act 1936 as in force just before 1 July 2007. However, it is not intended that the value of a pension would be determined using the practice used by schemes for splitting benefits under family law, or for calculating surcharge payments.
Where there is not a practice which could be described as the practice of the fund immediately before 28 June 2007, for example, because a fund does not currently value a pension for similar purposes, or for a new fund that comes into existence on or after 1 July 2007, the pension is to be valued using the valuation factors currently in the regulations, with the addition of factors specifically for unindexed pensions.
This item amends the formula in section 1.7 of Schedule 1A to the 1997 Tax Regulations as amended by Income Tax Assessment Amendment Regulations 2007 (No.3) to put M inside the brackets which gives effect to the original intent of the provision. M is the amount of member contributions paid by or on behalf of the member in respect of the member's defined benefit interest in the fund during that part of the financial year that the member was an accruing member of the benefit category, and which are not assessable income of the fund.
The formula in this section gives a measure of the level of employer support required to meet a particular level of benefit grossed up to take into account contributions tax and any expenses. The new entrant rate multiplied by salary pro-rated for the relevant portion of the year gives the amount of money necessary in net terms to fund the benefit. M is subtracted because it is meeting part of the cost. The result is then multiplied by 1.2 to give a measure of what the employer would have actually had to pay to meet the final benefit.
This item makes a minor amendment to paragraph 5.1(2)(b) in Schedule 1A to ensure consistency with other comparable provisions in the Schedule. It will give funds the option of doing the calculations themselves on the basis of advice from an actuary and not be forced to have an actuary do the actual calculation.
Items 12 and 13
Items 12 and 13 amend Tables 1 and 2 in Schedule 1B to include a set of factors for income streams which are not indexed.