HOUSE OF REPRESENTATIVES

Explanatory Memorandum

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

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Superannuation Standards Act 1987 are being repealed.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be the responsibility of the Insurance and Superannuation Commissioner to administer after 30 June 1994 and will be repealed as of 1 July 1994 when the simplified RBL rules come into effect under the provisions of the Income Tax Assessment Act.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Part IlIA - Reasonable Benefit Limits which sets out the current administration of the RBL function is being repealed because that part will be unnecessary when the Insurance and Superannuation Commissioner ceases to have responsibility for the function. As a consequence, a number of other references in the Occupational Superannuation Standards Act are also being repealed as follows:

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References in the definition of "reviewable decision" to

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sections in Part IIIA [paragraphs 3(1)(aa) and (ab) of the definition of "reviewable decision "].

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References to the review of decisions concerning RBLs [Paragraph 16 (1) (ab) and subsections 16(1A) and (1B)I.

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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].

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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.