Simplification of Superannuation Bills by Jenny Willcocks | January 2007
Once again the Federal Government has marked the festive season by presenting the superannuation industry with another substantial piece of legislation. The legislation introducing the Budget 2006 changes as part of the Government’s initiative to simplify Superannuation was introduced into Parliament on 7 December 2006. The legislation consists of a package of six separate Bills: 1.
Tax Laws Amendment (Simpliﬁed Superannuation) Bill 2006 (the Bill) – This is the main Bill and contains the main amendments including changes to contribution rules, contribution caps, tax on excess contributions, transitional arrangements, provision of tax ﬁle numbers, employment termination payments, taxation of beneﬁt payments for those over or under age 60 and the abolition of reasonable beneﬁt limits.
Superannuation (Excess Concessional Contributions Tax) Bill 2006 - imposes an excess concessional contributions tax of 31.5% on a person’s “excess concessional contributions”.
Superannuation (Excess Non-Concessional Contributions Tax) Bill 2006 - imposes an excess nonconcessional contributions tax of 46.5% on a person’s “excess non-concessional contributions”.
Superannuation (Departing Australia Superannuation Payments Tax) Bill 2006 - imposes tax on a departing Australia superannuation payment of 30% on the taxed element of the taxable component of the payment, and 40% on the element untaxed in the fund.
Superannuation (Excess Untaxed Roll-Over Amounts Tax) Bill 2006 - imposes tax on an excess untaxed rollover amount.
Superannuation (Self-Managed Superannuation Funds) Supervisory Levy Amendment Bill 2006 imposes the increased levy on self-managed superannuation funds.
The legislation has now been referred to the Senate Economics Committee. A Bill to deal with consequential amendments to legislation such as the Superannuation Industry (Supervision) Act 1993 (SIS) is still to come. Draft regulations providing new rules for annuities and pensions were released on 21 December 2006. The draft regulations amend the Superannuation Industry (Supervision) Regulations 1993 (SIS Regulations) by introducing: • • •
new minimum standard rules for pensions and annuities; removing compulsory cashing of superannuation beneﬁts for those over age 65; and revising payment of death beneﬁts.
Further regulations are anticipated in early 2007. The joint press release indicated that the legislation would be debated in the 2007 autumn sitting of Parliament. This will leave the industry with a very short period between the ﬁnal legislation being available and the due date for implementation on 1 July 2007.
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This TurkAlert provides an overview of the main provisions of the Bill. It does not address untaxed superannuation funds to which special rules apply.
Contribution Rules TYPES OF CONTRIBUTIONS The Bill refers to “concessional contributions” and “non-concessional contributions”. Concessional contributions are what we would refer to as deductible contributions or taxable contributions. Non-concessional contributions refer to what we would call undeducted contributions or after tax contributions. The introduction of these new terms only serves to complicate the Bill and it is not clear why this approach was adopted.
CONTRIBUTION CAPS The Bill imposes the following contribution caps: •
concessional contributions $50,000 per person per year commencing on 10 May 20061; and
non-concessional contributions $150,000 per person per year, with effect from 1 July 2007.
Contributions that exceed these caps will incur tax.
INDEXATION OF CONTRIBUTION CAPS The cap on concessional contributions will be indexed2 and the cap on non-concessional contributions will be equivalent to three times the cap on concessional contributions. The contribution caps are subject to transitional arrangements referred to below.
TAX ON EXCESS OF CONTRIBUTIONS Excess Concessional Contributions Incur an additional tax at the rate of 31.5%. The tax is imposed on the member but they may withdraw the amount of the tax from their superannuation account. This is an option and is not mandatory. Excess Non-concessional Contributions Incur an additional tax at the rate of 46.5%. Unlike concessional contributions members who exceed the cap on non-concessional contributions must pay the tax out of their superannuation account. The fact that the tax may be paid out of the member’s superannuation account (or in the case of excess nonconcessional contributions must be paid out of that account) means trustees must have in place a process for withdrawing this amount, paying it to the Australian Taxation Ofﬁce (ATO) and adjusting the member’s superannuation beneﬁt to take account of the withdrawal. See below for further details on this process.
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TAX DEDUCTION FOR EMPLOYER CONTRIBUTIONS Employers will be entitled to a full deduction for all contributions to superannuation on behalf of employees, even if paid to dependants of the employee or their legal personal representative (LPR) after death. The existing age based deduction limits will be removed, and employers can claim a full tax deduction on contributions paid on behalf of employees under the age of 75.3 The deduction will only be available for superannuation contributions for employees aged 75 and over if they are made under an industrial award, determination or no-show agreement preserving State awards.
SELF EMPLOYED The self-employed may claim a tax deduction on contributions paid to superannuation even where they have received some income as an employee. The deduction must be for the income year in which the contributions were made. To qualify any activities resulting in the person being treated as an employee for the purpose of the Superannuation Guarantee (Administration) Act 1992 must not result in them earning more than 10% of their assessable income plus their reportable fringe beneﬁts, for the income year in relation to these activities. From 1 July 2007 a full deduction can be claimed by the self-employed for concessional contributions up to the contribution cap of $50,000. A notice to the trustee of the intention to claim a deduction is still required, but now must be given by the earlier of the time the person lodges their income tax return, or the end of the ﬁnancial year following the year the contribution was paid.
ALLOCATIONS BY TRUSTEE MAY BE TREATED AS “CONSESSIONAL CONTRIBUTIONS To ensure the integrity of the concessional contributions cap, regulations may contain rules specifying that additional amounts allocated to an individual by the superannuation provider can also be included. For example an allocation of reserves or distribution of surplus to a member may be included when determining if they have exceeded the concessional contributions cap. This will be the case if contributions made by or on behalf of the member and investment earnings on those contributions exceed the cap and is paid in an attempt to circumvent the cap. Details of the regulations are needed before we are able to fully assess this change. The challenge will be to ensure that the regulations do not inadvertently apply to genuine allocation of reserves or distributions of surplus from the fund, not intended to circumvent the cap on concessional contributions.
PERSONAL INJURY PAYMENTS AND PROCEEDS OF THE SALE OF A SMALL BUSINESS The non-concessional contributions cap commenced from 10 May 2006 and is subject to ongoing exemptions relating to: • •
payments for personal injuries resulting in permanent incapacity; and
amounts from the disposal of a qualifying small business asset.
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Contributions made from certain personal injury payments are exempt from the non-concessional contributions cap when paid to superannuation even though a tax deduction is claimed. The Personal injury payment must: •
be in the form a structured settlement, an order for personal injury payment or lump sum workers
compensation payment; two legally qualiﬁed medical practitioners must certify that the person to receive the payment is unlikely to ever be able to be gainfully employed in a capacity for which they are reasonably qualiﬁed as a result of the injury; and
the individual concerned must notify the superannuation entity that the contribution being made is made under this exemption before or when making the contribution, to ensure the superannuation entity:
is able to accept the contribution; and does not report against the non-concessional contributions cap.
The contribution must be paid to a superannuation fund within 90 days of the payment being received or the structured settlement or order coming into effect, whichever is the later. The exemption from the non-concessional contribution cap only applies to the extent that the payment received relates to an amount for personal injury. Consequently trustees will have to have a process in place to record such notiﬁcation from the member and to classify the contribution as coming within this particular exemption. It will also need to ensure that members are aware of this exemption and how to claim it.
Transitional Arrangements TRANSITIONAL ARRANGEMENTS FOR NON CONCESSIONAL CONTRIBUTIONS Transitional arrangements will apply to non-concessional contributions between 10 May 2006 and 30 June 2007. This includes a cap of $1 million for this period for anyone eligible to contribute (e.g. those aged 65 to 74 who satisfy the work test). Aged less than 65 years – “bring forward” option To allow those under the age of 65 to make larger contributions in a ﬁnancial year they will be permitted to “bring forward” future entitlements of two years worth of non-concessional contributions. Therefore a person under 65 may contribute non-concessional contributions totalling $450,000 over three ﬁnancial years without exceeding their non-concessional contribution cap. This “bring forward” is triggered automatically when excess non-concessional contributions are made in a ﬁnancial year by a person under age 65 in a year where a “bring forward” has not already commenced. Once triggered the two future years entitlements are not indexed. The explanatory memorandum states that in order to simplify the operation of the non-concessional contributions cap those aged 63 and 64 who take advantage of the “bring forward”, will not be required to meet the work test in either of the following two ﬁnancial years.
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Those aged 65 to 74 will have a non-concessional contribution cap of $150,000 per year if they satisfy the work test in the SIS Regulations. Not permitting a person over 65 to take advantage of the “bring forward” option ensures they do not inadvertently breach the cap by failing to meet the work test in the following two ﬁnancial years.
TRANSITIONAL ARRANGEMENTS FOR CONCESSIONAL CONTRIBUTIONS A ﬁve year transitional period will apply to concessional contributions for those aged 50 and over to whom a cap of $100,000 per year will apply during this period. Therefore a contributions cap of $100,000 per person per year applies in the ﬁnancial years 2007 to 2008 to 2011 to 2012 for those aged 50 or over at any time in a transitional ﬁnancial year. This cap will not be indexed.
COMMISSIONER’S DISCRETION TO DISREGARD OR RE-ALLOCATE CONTRIBUTIONS The Bill permits a person to apply to the Commissioner for a determination that the excess contributions for a ﬁnancial year should be either disregarded or allocated to another ﬁnancial year. The request for the exercise of the discretion must be made within 60 days of the person receiving the excess contributions tax assessment, unless the Commissioner agrees to allow a longer period. This discretion can only be exercised where the Commissioner considers there are special circumstances and making the determination will be consistent with the object for Division 292.
PAYMENT OF TAX ON EXCESS CONTRIBUTIONS FROM SUPERANNUATION BENEFIT To allow a member to use part of their superannuation beneﬁt to meet the tax liability on excess contributions, restrictions imposed by the preservation rules under SIS must be addressed. The Commissioner of Taxation will provide persons liable for excess contributions tax with a release authority (i.e. a written notice authorising that person to withdraw money from their superannuation fund account) (Release Authority). The Release Authority is then given to the superannuation provider, except where a deﬁned beneﬁt interest is involved. The superannuation provider must release the nominated amount within 30 days. A member can direct the trustee to release the money under a Release Authority either directly to them or to the ATO. Payments made directly to the ATO by the trustee are taken to be made in satisfaction of the member’s excess contributions tax liability. A person who accesses more than the amount authorised by the Release Authority, will have the excess amount included in their assessable income, be subject to income tax at marginal rates and be liable for an administrative penalty. It is not clear how this could work in conjunction with the preservation rules. It is also unclear what happens if the amount is released directly to the person and they then do not subsequently pay the ATO the tax on their excess contribution, or what the trustee’s situation is in those circumstances. Trustees will need to have in place procedures to accept and act upon these authorities and ensure that payments are made within the 30 day time limit.
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EXCESS CONCESSIONAL CONTRIBUTIONS Members have a choice whether or not to withdraw tax on these contributions from their superannuation beneﬁt. A Release Authority obtained from the ATO expires after 90 days in order to protect the integrity of the Superannuation Preservation Rules. Presumably once the authority has lapsed it would be necessary for the individual to re-apply in the case of excess concessional contributions.
EXCESS NON-CONCESSIONAL CONTRIBUTIONS In the case of excess non-concessional contributions a person must withdraw the amount of tax payable from their superannuation account. Again this is achieved by providing the Release Authority from the ATO to the trustee within 21 days. If they fail to do this they will be liable for an administrative penalty. Where the member does not withdraw the amount owing to the ATO the Commissioner can present the Release Authority directly to the trustee on behalf of that person to effect payment. The trustee will need to have in place procedures to deal with both the situation where the Release Authority is referred to them by the member or where it is given directly to them by the ATO. The trustee will be liable for an administrative penalty of 20 penalty units if it fails to comply with the Release Authority within 30 days. It is therefore essential that the trustee’s procedures ensure that this timeframe is met.
Defined Benefits Separate arrangements will be made for calculating concessional contributions for deﬁned beneﬁt funds (DB Funds), as employer contributions to this type of fund are not always attributable to individual members. The concessional contributions amount for a deﬁned beneﬁt interest will be referred to as notional taxed contributions. The method for calculating notional tax contributions will be set out in regulations, which may allow for different methods and may specify circumstances where the notional taxed contributions amount for a ﬁnancial year is nil. Where only part of an interest is a deﬁned beneﬁt interest the concessional contributions cap includes notional taxed contributions concerning the deﬁned beneﬁt part of that interest and contributions covered under section 292 -25 concerning the rest of the interest. The Explanatory Memorandum to the Bill indicates that certain arrangements will be “grandfathered” given the difﬁculty for members to reduce their contributions or notional taxed contributions to these arrangements. This is to ensure that members are not unfairly taxed under the notional contributions cap. Special arrangements will apply to members with a deﬁned beneﬁt interest on 5 September 2006 with notional taxed contributions for that interest that exceed the concessional contributions cap. In these circumstances the notional taxed contributions for that interest will be taken to be at the maximum level of the cap. The arrangement ceases to apply if the scheme amends its rules to increase the member’s beneﬁts. Funds will therefore have to be extremely careful if they are subject to these grandfathering provisions to ensure that they do not inadvertently amend their rules in a way that jeopardises this protection.
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The Explanatory Memorandum indicates that some changes to the rules of the superannuation fund may be permitted even if they increase members’ beneﬁts. The example given is the change to occur on 1 July 2008 for employers currently able to pay lower superannuation guarantee contributions for their employees due to the pre 21 August 1991 earnings base. When this arrangement ceases on 1 July 2008 and these employers must contribute on the basis of ordinary time earnings, members’ beneﬁts will increase but this will not result in the loss of the grandfathering arrangements. The Explanatory Memorandum also conﬁrms that the grandfathering arrangement will continue to apply in a successor fund that retains equivalent rights for members.
Taxation of Benefit Payments Schedule 1 to the Bill establishes a new simpliﬁed regime for taxing superannuation beneﬁts and removes the complexity from the taxation of end beneﬁts from 1 July 2007 as announced in the 2006 Budget. These changes include: •
Payment of beneﬁts to persons aged 60 and above on a tax free basis where the beneﬁt has already been subject to tax on contributions and earnings.
Tax on beneﬁts payable to those below age 60 is also simpliﬁed.
Reasonable beneﬁt limits are abolished.
A high rate of tax on transfers over $1 million from untaxed to taxed schemes is introduced separately under the Superannuation (Excess Untaxed Rollover Amounts Tax) Bill 2006 and the Superannuation (Departing Australia Superannuation Payments Tax) Bill 2006 will replace the Income Tax (Superannuation Payments Withholding Tax) Act 2002 to reﬂect the new components of superannuation beneﬁts while retaining the same rates of taxation.
Instead of the eight existing components of a superannuation beneﬁt a beneﬁt now may comprise of: •
a tax free component; and
a taxable component that will include an element taxed in the fund and/or an element untaxed in the fund.
The tax free component is generally made up of contributions paid from after tax income (i.e. personal contributions) and by amounts, which represent the portion of the superannuation beneﬁt that has accrued prior to 1 July 1983. This component is tax free. The taxable component is the superannuation beneﬁt less the tax free component and will normally consist of tax deductible contributions paid either by the member or his or her employer on behalf of the member, plus earnings on contributions.
DISABILITY BENEFIT An income stream paid to a person due to disability prior to attaining the preservation age is entitled to claim a 15% tax offset concerning the element taxed in the fund.
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DEATH BENEFITS Death beneﬁts will be taxed differently depending on whether the person receiving that beneﬁt was a dependant of the member or not. It will also differ depending on whether the beneﬁt is paid as a lump sum or as an income stream, and in the case of an income stream the age of the deceased member and the person receiving it will also be relevant.
NON-DEPENDANTS NOT ENTITLED TO INCOME STREAMS From 1 July 2007 a person who is not a dependant of the deceased member will not be able to receive a superannuation income stream under amendments that will be made to the SIS Regulations. Non-dependants receiving a death beneﬁt as an income stream which commenced prior to 1 July 2007 will be taxed in the same manner as dependants. Items 22 and 23 of the Draft Regulations make the ability to cash death beneﬁts in the form of an annuity or pension subject to new subregulations 6.21(2A) and (2B). Where a member dies on or after 1 July 2007 these new provisions will restrict the cashing of the member’s beneﬁts in the form of an annuity or pension to those not qualifying as dependants. The restrictions will also apply to transfers of annuities and pensions on or after 1 July 2007.4 A child will qualify if under age 18 or if ﬁnancially dependent on the member is under 25 or disabled in accordance with subsection 8(1) of the Disability Services Act 1986.5 Trust Deeds that provide for payment of an income stream for death beneﬁts to non-dependants, either as a deﬁned beneﬁt from the fund or under a group insurance arrangement, will need to be reviewed and may require amendment to comply with this change.6
PAYMENT TO THE LEGAL PERSONAL REPRESENTATIVE Payment to the legal personal representative (i.e. the executor or administrator of the deceased member’s estate) will be taxed according to the taxation requirements that would otherwise apply to the person or persons otherwise intended to beneﬁt from the estate. Therefore if a person beneﬁting from the estate is a dependant of the deceased member it will be taxed as if payable directly to a dependant.
TRANSITIONAL ARRANGEMENTS FOR INCOME STREAMS AS AT 1 JULY 2007 Those receiving superannuation income streams as at 1 July 2007 will retain the current “deductible amount” on their superannuation income stream unless a trigger event7 occurs. The deductible amount of a superannuation income stream is currently tax free. The amendments change the tax treatment of superannuation income stream beneﬁts from an annual basis to a per payment basis. Consequently the annual deductible amount needs to be converted into a per beneﬁt ﬁgure to maintain the existing tax treatment. This is done by apportioning the annual deductible amount across each superannuation income stream according to the value of each superannuation income stream beneﬁt received in the income year. The portion of the deductible amount applying to a particular superannuation income stream beneﬁt will be the tax free component for that superannuation income stream beneﬁt.
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Once a trigger event occurs the tax free amount is the sum of the unused undeducted purchase price and a pre-July 1983 amount (if relevant). The crystallisation of the pre-July 1983 component for most superannuation interests will be calculated as at 30 June 2007 using existing legislative formula. This amount becomes a ﬁxed amount and forms part of the tax free component. Trustees will have until 30 June 2008 to calculate the crystallised pre-July 1983 segment. Failure to do so will result in an administrative penalty being imposed on the trustee of ﬁve penalty units. As indicated above the tax free component of income streams existing at 1 July 2007 will be calculated based on the current deductible amount concept. No pre-July 1983 amount is calculated unless a trigger event occurs to move the superannuation income stream into the new arrangements. \FAMILY LAW SPLITS A proportioning rule8 will apply to Family Law superannuation payments to ensure that the various components of the beneﬁt are divided fairly between each spouse. These payments will be covered by the general proportioning rule. The proportioning rule will not affect superannuation guarantee payments and contribution splitting superannuation beneﬁts that will apply from 1 July 2007 because these payments only contain a taxable component. This is also the case with the co-contribution payments, which only contains a tax free component.
Taxation of Superannuation Entities Schedule 1 of the Bill includes the provisions of Part VII of the Income Tax Assessment Act 1936 (ITAA 1936), which deals with the taxation of superannuation entities, in the Income Tax Assessment Act 1997 (ITAA 1997). This rewrite does not change the law as it currently operates under Part VII of the ITAA 1936. However, the inclusion of this re-write in the Bill is unfortunate as it adds complexity and detracts from the changes being made. In addition Schedule 1 includes some new rules concerning taxation of superannuation entities forming part of the simpliﬁed superannuation reforms, including: •
The amendment of ITAA 1936 to ensure that when an individual makes a tax ﬁle number (TFN) declaration to their employer they also authorise their employer to provide their TFN to their superannuation fund.
Introduces a "No TFN Contributions Income" (i.e. income on contributions paid where no TFN has been provided). The ITAA 1997 and the Income Tax Rates Act 1986 are amended to impose income tax on these “No TFN Contributions Income” and a way to refund that tax if a TFN is later quoted within the required time period.
Amendments are made to SIS to shift the regulation of employers’ responsibilities to quote an employee’s TFN to the relevant superannuation fund or RSA, from APRA to the ATO. Although the Explanatory Memorandum conﬁrms the intention that the tax paid will be refunded when a TFN is later quoted this is subject to a time limit of four years.
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The liability to pay tax on “No TFN Contributions Income” is imposed on the trustee not the member. The income only becomes “No TFN contributions income” if by the end of the relevant income year the member has not quoted (for superannuation purposes) his or her TFN to the trustee. It appears that the monitoring of this situation will fall to the trustee and not the individual who has failed to quote the TFN. Trustees will need to be able to identify members who have not provided a TFN, the amount of the “No TFN Contributions Income” and pay tax accordingly. They will also have to monitor whether the four year timeframe has expired where the member subsequently provides the TFN.
TAX OFFSET AVAILABLE WHEN TFN PROVIDED IN TIME If the TFN is provided within the four year timeframe, the trustee becomes entitled to a tax offset. It will be up to the trustee to claim the offset if it applies. The trustee cannot pay “No TFN Contributions Income” tax for a contribution and claim a tax offset for that same contribution in the same income year. The tax offset will only be available where the member quotes their TFN in the current year, and “No TFN contributions income” tax for that member’s contributions was payable in one of the three most recent income years. The example given in the Explanatory Memorandum is where a contribution is classiﬁed as “No TFN Contributions Income” for the 2007-08 income year the tax offset can only be claimed in the year the member ﬁrst quotes the TFN up until the end of the 2010-11 income year, after which the right to claim the offset is lost. Trustees will need a process in place to identify when a TFN is provided within the four year time frame, and a process to apply for the offset and adjust the member’s account balance when an offset is paid.
INTEREST PAID ONLY WHERE EMPLOYER FAILS TO PASS ON TFN TO TRUSTEE The amount of the offset will be the sum of the amount of tax paid on the “No TFN Contributions Income”. Under the Taxation (Interest on Overpayments and Early Payments) Act 1993 interest will be paid in the following circumstances: •
the member has quoted their TFN to their employer prior to the end of an income year;
the employer fails to meet its obligation to inform the relevant superannuation entity of that member's TFN before the end of the income year; and
as a consequence of that failure contributions paid to the superannuation entity form part of its “No TFN Contributions Income” and an offset is subsequently claimed.
The interest may not fully compensate the member for loss of earnings, which would have been generated, had the tax not been deducted. This is because the interest to be paid is the base interest rate in Section 8A (a)(d) of the Taxation Administration Act 1953. This part of the Bill presents a number of issues for trustees including: •
Whether they will actively communicate with their employer sponsors concerning the employer's obligation to pass on TFNs provided by employees, and the consequences of failing to do so.
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Whether they will report to the ATO any employer who has failed to do this so that the ATO may pursue the issue and impose the penalty on that employer.
Whether they will advise the member or members for whom no TFN has been given by the employer that they must provide their TFN directly to the trustee.
How they will communicate to their members the change in the law and the signiﬁcant consequences that will now ﬂow from failure to provide a TFN.
What warnings they will give over the four year period when the TFN can be quoted and the tax paid recovered. For example on the annual beneﬁt statement and prior to the four year period expiring.
It is also not clear whether an employee will have rights against an employer who fails its legal obligation to pass on the TFN to the superannuation entity and the employee subsequently incurs additional tax, which is not recoverable via the offset because the TFN was not provided within the four year timeframe. This area represents a signiﬁcant change and the limitation of a four year period in which to recover the tax penalises the member even in circumstances where their employer has failed in their legal obligations. The only winner here will be the Government but this will be at the expense of the member's retirement savings, which ultimately becomes the Government's problem.
EMPLOYER TERMINATION PAYMENTS As announced in the 2006 Budget, employer termination payments will have two components being tax free and taxable. The taxable component is taxed at no more than 15% for amounts up to $140,000. The excess up to $1 million is taxed at the top marginal rate (plus the Medicare levy). As a result of the simpliﬁed superannuation reforms beneﬁts payable to those over age 60 will be tax free and employment termination payments will no longer be able to be rolled over into a person’s superannuation account.
TRANSITIONAL PROVISIONS APPLYING TO EMPLOYER ETPs The person entitled as at 9 May 2006 to payment on termination of employment under a written contract, Australian or Foreign Law, legal instrument or Workplace Agreement made under the Workplace Relations Act 1996, will be subject to transitional arrangements provided the payment is made before 1 July 2012. The payment is referred to as a “Transitional Termination Payment” (TTP). A TTP is not taxed under the normal Employment Termination Payment provisions in the ITAA 1997. The transitional provisions are only available where the payment was able to be determined as at 9 May 2006. This will include where a contract refers to the amount payable by reference to a formula that can be objectively determined, or to payments made in kind (e.g. shares). The tax free component of a TTP made to a person who has not reached their preservation age will not be subject to tax. The taxable component (if any) will be included in assessable income and if it does not exceed the upper cap of $1 million will be taxed at no more than 30%. Amounts in excess of the upper cap will be taxed at the top marginal rate.
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The upper cap of $1 million relates to the amount on which concessions are received during the transitional period. Therefore the taxable components of all previous TTP reduce the upper cap amount. Those receiving a TTP who have attained their preservation age, or will by the end of the income year in which the payment is received, will not be taxed on the tax free component and the taxable component (if any) will be included in assessable income.
PAYMENT OF A TTP Members entitled to a TTP must receive a pre-payment statement from their employer outlining the components of the proposed payment and requesting the employee to make a choice between receiving the payment himself or herself, or a “Directed Termination Payment” (DTP). A DTP applies where the employee directs the employer to make the payment to a complying superannuation plan or to purchase a superannuation annuity. Those who wish to make a choice must advise their employer in the approved form within 30 days of receipt of a pre-payment statement. If no decision is made the employer must make the payment directly to the individual. An employer must comply with a direction to pay the termination payment to a superannuation plan. The Taxation Administration Act 1953 will be amended to impose penalties where the payment is not made as directed.
INCORRECT QUOTATION OF A TFN Where the Commissioner of Taxation can identify a beneﬁciary’s TFN, even though it has been incorrectly quoted, the Commissioner may give notice of the TFN to the superannuation entity. If the Commissioner elects to do so the beneﬁciary is deemed to have quoted their TFN to the superannuation entity. Where a TFN has been recorded by the superannuation entity but the Commissioner determines that it has either been cancelled, withdrawn or is wrong, and is not satisﬁed that the beneﬁciary has a TFN, the Commissioner may issue a notice to the superannuation entity identifying the beneﬁciary and stating that the Commissioner is not satisﬁed that the beneﬁciary has a TFN. A copy of the notice is also issued to the beneﬁciary. In these circumstances the beneﬁciary is deemed not to have quoted their TFN.
DEATH BENEFITS PAYABLE TO THE TRUSTEE OF A DECEASED ESTATE The death beneﬁt paid to the legal personal representative (LPR) of a deceased members’ estate will be taxed in the hands of the LPR in the same way as it would be taxed if paid directly to a beneﬁciary. Therefore a payment that “has or will” beneﬁt the dependants of a deceased member will be subject to tax as if the LPR of the deceased member’s estate was a dependant. Alternatively if the payment “has or will” beneﬁt a non-dependant it will be taxed as if the LPR is a non-dependant. Whether a payment goes to a dependant or non-dependant via the estate will depend on the terms of the deceased member’s Will or if there is no valid Will, according to the laws of intestacy in each State. Presumably this means the tax can only be paid by the LPR once it is determined who will beneﬁt. It may not be possible for
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the superannuation entity to determine with any certainty to whom the LPR will pay the beneﬁt or if they are dependants or non-dependants. In these circumstances the beneﬁt would have to be paid to the LPR on the basis that the LPR assumes the obligation to pay the tax if relevant, or alternatively the trustee will have to rely on the advice of the LPR as to whom the beneﬁt will ultimately be paid to determine if tax is payable.
Social Security Arrangements Schedules 8 and 9 of the Bill amend the Social Security Act 1991 and Veterans Entitlements Act 1986 to implement changes to the asset test to: •
halve the pension asset test taper rate from $3.00 to $1.50 per fortnight for every $1,000 of assets over the free area, with effect from 20 September 2007; and
remove the 50% asset test exemption for complying income streams purchased on or after 20 September 2007.
Both Schedules 8 and 9 contain transitional rules allowing backdating of pension claims made in the three months after the implementation of the assets test changes on 20 September 2007. These claims can be granted from 20 September 2007 if all eligibility conditions were met from that date. This will allow those newly eligible for a pension a period of grace in which to make their claim and still be able to be paid from 20 September 2007.
Self Managed Superannuation Funds Schedule 5 of the Bill amends SIS and other Acts to enhance regulation of self managed superannuation funds (SMSFs) and to ensure that these funds comply with their legislative obligations. These changes include: •
streamlined reporting arrangements and the application of administrative penalties for late returns and false or misleading statements;
clariﬁcation of trustee and auditor requirements; and
other changes to the regulation of SMSFs.
Schedule 5 also amends the Fringe Beneﬁts Tax Assessment Act 1986 to remove fringe beneﬁts tax from in specie employer contributions to superannuation funds.
OTHER CHANGES Schedules 3, 4, 6 and 7 of the Bill contain administrative arrangements and key elements of a simpliﬁed superannuation, which are not directly related to income tax. In summary:
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Schedule 3 - sets out indexation provisions for certain thresholds applicable to superannuation and
Schedule 4 - streamlines superannuation fund reporting arrangements.
Schedule 6 - extends access to the Government co-contribution to the self employed.
Schedule 7 - makes minor amendments to the deﬁnition of “unclaimed money” and provides for a
employer termination payments.
consistent legislation basis concerning portability requirements for superannuation funds and Retirement Savings Account providers.
Unclaimed Money Under the existing deﬁnition of unclaimed money the beneﬁts of an inactive member over the age of 65 who could not be contacted by the fund became unclaimed money. This was prior to the removal of compulsory cashing on 10 May 2006. Consequently under the law superannuation funds were required to cash the beneﬁts of members over age 65 if they were unable to determine if that member satisﬁed the work test. Since the removal of compulsory cashing of beneﬁts of inactive members who attain age 65 and cannot be contacted, these beneﬁts are no longer “immediately payable” under the law, although they may still be under the rules of the superannuation fund. These beneﬁts therefore no longer become unclaimed money except where the rules of a particular superannuation fund require that a beneﬁt is immediately payable to a member. The amendments in the Bill change the deﬁnition of “unclaimed money” in Section 12(1) of the Superannuation (Unclaimed Money and Lost Members) Act 1999 (SUMLMA) by removing the requirement for a beneﬁt to be “immediately payable” in respect of a member. The following si the new amended version of the deﬁnition of “unclaimed money” in Section 12(1) of the SUMLMA: “unclaimed money” if: (a)
the member has reached the eligibility age; and
repealed – previously provided that beneﬁt must be immediately payable
the superannuation provider has not received an amount in respect of the member (and in the case of a deﬁned beneﬁts superannuation scheme, no beneﬁt has accrued in respect of the member) for at least 2 years; and
after the end of a period of 5 years since the superannuation provider last had contact with the member, the provider has been unable to contact the member again after making reasonable efforts. (part (d) replaced)”
The new part (d) of the above deﬁnition is more prescriptive, requiring a speciﬁed period of 5 years to have elapsed since the date of last contact with the member, compared to a “reasonable period” as currently provided. The requirement that the trustee must have made “reasonable efforts” to contact the member remains. However, Section 13(1) of the SUMLMA has been amended to require the trustee to make “reasonable efforts” to contact the member if parts (a) and (c) of the above deﬁnition are satisﬁed and 5 years have passed since last contact was made.
T U R KSLEGAL
Trustees will have to change their process for identifying unclaimed money within the fund by applying the 5 year requirement and removing the requirement that the beneﬁt be immediately payable.
Portability The portability requirements of RSA providers will be removed from the Retirement Savings Account 1997 and be inserted in the Retirement Savings Account Regulations 1997. This is to make the portability requirements of superannuation funds and RSA providers consistent. Currently portability requirements for superannuation funds are speciﬁed in the SIS Regulations, while the requirements for RSA’s are in the Retirement Savings Accounts Act 1997. The penalties that apply are also inconsistent.
Conclusion While the amendments introduced by the Bill have been universally supported by the superannuation industry they will present trustees with a number of challenges that will need to be addressed in a very short period of time. These changes may require amendments to trust deeds in some cases and changes to systems and processes in all cases. Trustees will need to commence their projects to address these changes immediately subject to the Bill and the Draft Regulations being ﬁnalised and further regulations being released. The area of most concern is the effect of failure to quote a TFN that can lead to the beneﬁts of members being signiﬁcantly depleted. This is likely to impact low income earners and those who work part time or on a casual basis. Unless this issue is resolved in amendments to the Bill or through regulations, the burden will fall on trustees to fund an awareness campaign with members who have not as yet quoted their TFN.
Subject to transitional provisions
Section 960-M refers to the annual method of indexation which may not result in an increase in the cap (see
Section 9060-285) 3 4
This is increased from the current cut off at age 70. New subregulations 1.05(11B) and 1.06(9B).
The Explanatory Memorandum contains a table setting out the taxation to apply to death beneďŹ ts. The taxation
arrangements to apply to payment of superannuation death beneďŹ ts are contained in Division 302 of the Bill. 7
See Schedule 1, Part 3 Main transitional amendments, Part 3-30 Superannuation, Division 307, Section 307-125(3)
of the Bill 8
Proportioning rule contained in Section 307-125 of the Bill
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Once again the Federal Government has marked the festive season by presenting the superannuation industry with another substantial piece of...