Income Tax Assessment Amendment Regulations 2007 (No. 3)
Issued by authority of the Minister for Revenue and Assistant Treasurer
Income Tax Assessment Act 1997
Income Tax Assessment Amendment Regulations 2007 (No. 3)
The purpose of these regulations is to support the implementation of the Government's Simplified Superannuation reforms announced in the 5 September 2006 statement A Plan to Simplify and Streamline Superannuation - Outcomes of Consultation . These regulations complement other regulations supporting the reforms which were registered on 2 April 2007 and 13 April 2007.
The Tax Laws Amendment (Simplified Superannuation) Act 2007 and related Acts give effect to the Simplified Superannuation reforms, making superannuation easier to understand, improving incentives to work and save, and providing greater flexibility over how superannuation savings 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 Regulations prescribe when an allocation from a superannuation fund reserve is to be treated as a concessional contribution and set out how notional taxed contributions are calculated for a defined benefit interest.
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 commence on 1 July 2007.
The Regulations outlined above are legislative instruments for the purposes of the Legislative Instruments Act 2003 .
Details of the Income Tax Assessment Amendment Regulations 2007 (No. 3)
Regulation 1 specifies the name of the regulations as the Income Tax Assessment Amendment Regulation 2007 (No. 3 ).
Regulation 2 provides that the regulations commence on 1 July 2007.
Subregulation 3(1 ) 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 ).
Subregulation 3(2 ) provides that the amendments made by Schedule 1 apply in relation to an income year that starts on or after 1 July 2007.
Schedule 1 - Amendments commencing on 1 July 2007
Concessional contributions - allocations from reserves
Subsection 292-25(3) of the 1997 Tax Act provides that an amount that is allocated for a member in accordance with conditions specified in the regulations is a concessional contribution for a financial year. This applies to a benefit which is not a defined benefit interest.
New Subdivision 292-B of the 1997 Tax Regulations and regulation 292-25.01 will set out the conditions for the purpose of that subsection. In general, an amount that is allocated under Division 7.2 of the Superannuation Industry (Supervision) Regulations 1994 (SIS Regulations) that is assessable income under Subdivision 295-C of the 1997 Tax Act is covered by this regulation.
For example, a fund accepts all employer 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. The Regulation will ensure that concessional contributions made through this type of arrangement are counted against the concessional contributions cap.
This approach will not result in double counting against the concessional contributions cap as contributions that are allocated directly to a reserve when made will only be counted against the contributions cap when allocated to a member. When allocated to a reserve contributions have not been made in respect of a member.
Allocations not to be treated as a concessional contribution
Generally an amount that is allocated from a reserve will be a concessional contribution unless it meets the conditions outlined in subregulation 292-25.01(4).
The first condition is that the amount is allocated to all members of the fund, or class of members to which the reserve relates on a fair and reasonable basis. In determining what is fair and reasonable it is necessary to have regard to members' proportionate interests in the superannuation plan. It would ordinarily be expected that the allocation would be in proportion to the existing interests of the members, so that particular members are not favoured over others. Allocations for the financial year that are less than five per cent of the value of the member's interest in the superannuation plan at the time the allocation is made will not be included as a concessional contribution.
The five per cent exclusion does not apply to amounts which are required to be allocated under Division 7.2 of the SIS Regulations or where the allocation would be assessable income of the plan if it were made as a contribution (subsection 292-25.01(5)).
The second condition applies to allocations from a reserve used solely for the purpose of discharging superannuation income stream liabilities that are currently payable. For example, a fund is paying a lifetime income stream to a member and maintains a reserve to meet the payments in case the person lives longer than expected.
An amount allocated from such a reserve will not be included as a concessional contribution if it is used to pay an income stream liability during a financial year.
An allocation from this reserve will also not be included as a concessional contribution if it results from the commutation of the pension where:
- the amount in the reserve is allocated to the primary beneficiary of the income stream and used to support another income stream for that person; or
- on the death of the primary beneficiary, the amount is allocated to a death benefits dependant to discharge liabilities in respect of a superannuation income stream benefit that is payable by the plan as a result of the death, or in any other case is paid as a superannuation lump sum as a superannuation death benefit.
Consistent with paragraph 292-25(2)(c) of the 1997 Tax Act, the following amounts allocated from a reserve are also not treated as a concessional contribution:
- an amount mentioned in subsection 295-200(2) of the 1997 Tax Act (which is the amount of a superannuation benefit transferred from a foreign superannuation fund to which an election under subsection 305-80(2) of the 1997 Tax Act. This component generally reflects investment earnings on overseas superannuation benefits while the individual was an Australian resident); or
- an amount mentioned in item 2 of the table in subsection 295-190(1) of the 1997 Tax Act (which is a roll-over superannuation benefit to the extent that it consists of an element untaxed in the fund of the taxable component in the transferring fund); or
- a contribution made to a constitutionally protected superannuation fund.
Allocations to be grossed up
A superannuation fund may allocate an amount from a reserve as a substitute for an actual contribution made on behalf of a member. In some cases the amount allocated is net of any tax that would be applied against a contribution. Where this occurs the amount must be multiplied by 1.176 to gross up the allocation to include the tax liability. This ensures that the allocated amount is treated consistently for the concessional contribution cap as a contribution made directly to the fund. An allocation does not have to be grossed up where the full nominal amount is allocated to a member's account and the trustee then deducts an allowance for tax (subsection 292-25.01(6)).
An employer has an obligation to make a $1,000 contribution. Instead of the employer making a contribution to the fund, the trustee allocates $850 to the member's account (which is an amount equivalent to the amount that would be credited to the account after tax was paid).
For paragraph 292 25.01(5)(b), the amount of $850 is to be multiplied by 1.176 to work out the amount that is taken to be allocated.
Modifications for defined benefit interests - Notional taxed contributions
Subdivision 292-D of the 1997 Tax Act modifies the amount of concessional contributions for the financial year worked out under section 292-25 where a person has a defined benefit interest. The definition of defined benefit interest is contained in section 292-175 of the 1997 Tax Act. Section 292-170 allows for regulations to be made to determine the amount of notional taxed contributions which are to be included as concessional contributions in a financial year.
The Regulations insert a corresponding new Subdivision 292-D into the 1997 TaxRegulations.
Regulation 292-170.01 will insert definitions for employer-sponsor, RSE licensee, sub-fund and superannuation fund for the purposes of Subdivision 292-D.
The definition of sub-fund and superannuation fund clarify that a superannuation fund includes a reference to a sub-fund which has defined benefit members. This is relevant where a trustee must determine the method used to calculate notional taxed contributions. For example, a sub-fund with five or more defined benefit members will generally calculate notional taxed contributions under regulation 292-170.02 while a sub-fund with fewer than five defined benefit members will generally calculate notional taxed contributions under regulation 292-170.03.
Notional taxed contributions for fund with five or more defined benefit members
Regulation 292-170.02 will explain the meaning of notional taxed contributions for the purposes of subsection 292-170(1) of the 1997 Tax Act in respect of the defined benefit interest of a member of a superannuation fund that has five or more defined benefit members.
The notional taxed contributions are the contributions that are determined by the trustee to be notional taxed contributions, using the method set out in Schedule 1A (subregulation 292-170.02(2)). A further explanation of Schedule 1A is included in the amendments made under item 4 of the regulations.
A superannuation fund must also use Schedule 1A to calculate notional taxed contributions if:
- it has five or more defined benefit members on 1 July 2007 and the number of defined benefit members becomes less than five after that date (subregulation 292-170.02(3)).
- the trustee is an RSE licensee and the fund has been in existence for five or more years and had five or more members at any time before 1 July 2007 and the employer-sponsor is dealing at arm's length to the defined benefit members (subregulation 292-170.02(4)).
- it meets the conditions in subregulation 292-170.02(3) or (4) and the defined benefit members are transferred to another fund, either directly or through a series of transfers, after 1 July 2007 whose trustee is an RSE licensee and the employer-sponsor is dealing at arm's length with the defined benefit members (subregulation 292-170.02(5)).
The employer-sponsor would be dealing at arm's length with the defined benefit members where, for example, the defined benefit interest is not materially different from what would be expected if the value of interest was determined on an arm's length basis.
If a superannuation fund has no defined benefit members on 30 June 2007 the schedule can not be used to calculate notional taxed contributions for new members unless there are at least 50 defined benefit members on or after 1 July 2007 and the employer-sponsor is dealing at arm's length with each defined benefit member (subregulation 292-170.02(6)).
Notional taxed contributions for fund which does not satisfy regulation 292-170.02
Regulation 292-170.03 explains the meaning of notional taxed contributions for a financial year in respect of the defined benefit interest of a member of a superannuation fund that does not satisfy the conditions specified in regulation 292-170.02.
The notional taxed contributions are the amount of the assessable contributions under Subdivision 295-C of the 1997 Tax Act which have been allocated to the member in the financial year (subregulation 292-170.03(4)).
The trustee must allocate contributions received in the financial year to members having regard to the present and prospective liabilities of the fund within 28 days after the end of the month in which they are received (or within a longer period that is reasonable in the circumstances) (subregulations 292-170.03(2) and (3)).
Circumstances where notional taxed contributions are nil
Subsection 292-170(4) of the 1997 Tax Act will provide that the regulations may specify circumstances in which the amount of notional taxed contributions for a financial year is nil. Regulation 292-170.04 will set out the circumstances in which a nil amount occurs.
The circumstances are:
- the defined benefit interest is held in a public sector superannuation scheme where none of the interest is sourced to any extent from contributions or earnings on these contributions (unless the interest is an element taxed in the fund that is attributable to one or more roll-over superannuation benefits) (subregulation 292-170.04(2)).
- subregulation 292-170.02 applies (that is, the fund has five or more defined benefit members) and the member is a non-accruing member in accordance with subregulations 292-170.04(4), (5) and (6).
- the member is a non-accruing member because they have commenced a superannuation pension where no employer contributions are received or the pension does not increase by more than what is prescribed in the rules when the pension commenced (subregulation 292-170.04(4)).
- the member is a non-accruing member because the defined benefit interest is no longer accruing employer-provided benefits and the level of increase in the interest does not breach the rules set out in paragraph 292-170.04(5)(b) (subregulation 292-170.04(5)).
A member will remain a non-accruing member where employer contributions are made to meet partially, or wholly, unfunded benefit liabilities (subregulation 292-170.04(6)).
Circumstances where notional taxed contributions are taken to be at the maximum level of the cap (grandfathered arrangements)
Paragraphs 292-170(6)(d) and 292-170(7)(e) of the 1997 Tax Act allow a trustee to report notional taxed contributions that exceed the concessional contributions cap as being at the maximum level of the cap. However, this will cease to apply if the conditions set out in the regulations are not met. Regulations 292-170.05 and 292-170.06 will set out these conditions.
These conditions are:
- the rules of the fund have not changed to improve a member's benefit and/or the member has not moved to a new benefit category between 5 September 2006 and the time the new entrant rate is worked out using Schedule 1A.
- the new entrant rate has not increased other than as a result of a change to a notional earnings base that is made to satisfy the requirements of the Superannuation Guarantee (Administration) Act 1992.
- the method of calculating superannuation salary has not increased since 5 September 2006 other that as a result of a change to a notional earnings base that is made to satisfy the requirements of the Superannuation Guarantee (Administration) Act 1992.
- the rate of superannuation salary has increased since 5 September 2006 by more than 50 per cent in one year or 75 per cent over three years and the employer-sponsor has advised the fund trustee that the salary increase was on an arm's length basis.
- the trustee or employer-sponsor of the fund has not exercised a discretion to pay a benefit greater than the benefit that was assumed for the purpose of calculating the new entrant rate.
The trustee must inform the Commissioner of Taxation of an increase in superannuation salary of more than 50 per cent in one year or 75 per cent over three years (subregulations 292-170.05(7) and 292-170.06(7)).
Item 3 inserts a heading 'Part 3 Superannuation benefits paid from complying plans etc' before Division 301 of the 1997 Tax Regulations.
Item 4 inserts a revised subregulation 301-225.01(2) into the 1997 Tax Regulations. This allows a Retirement Savings Account holder's benefit released under item 111 of Schedule 2 of the Retirement Savings Accounts Regulations 1997 , to be received tax free under section 301-225 of the 1997 Tax Act.
This condition of release relates to lost RSA holders who are subsequently found. Item 4 ensures that RSA holders are unable to receive multiple $200 payments tax free, except in circumstances where the RSAs were lost.
Item 4 also updates a reference to the SIS Regulations.
Definitions to be included in regulation 995-1.01
Items 5 and 7
Items 5 and 7 insert definitions of a defined benefit member, new entrant rate and superannuation salary into regulation 995-1.01 of the 1997 Tax Regulations which are necessary to support the regulations in new Subdivision 292-D.
Item 6 updates a reference in the definition of a 'superannuation income stream benefit'.
Schedule 1A - Method of working out amount of notional taxed contributions
Item 8 will outline the rules for an actuary to use when calculating notional taxed contributions for the purposes of regulation 292-170.02.
In most cases, superannuation benefits are sourced wholly from contributions made into a superannuation fund or earnings on those contributions. However, some public sector funds pay benefits which are not sourced from contributions made into a superannuation fund or from earnings on those contributions. Some public sector funds pay benefits which are partly sourced from contributions made into a superannuation fund or from earnings on those contributions.
For the purpose of Schedule 1A, the fund benefit refers to that part of a member's defined benefit interest which is sourced from contributions made into a superannuation fund or from earnings on those contributions.
In some cases, members pay contributions but these contributions are not paid into a superannuation fund. Typically, these member contributions might be paid into consolidated revenue. If no contributions are paid into a superannuation fund then the amount of the fund benefit is zero.
In a small number of cases, either the trustee or the member decides whether the benefit is to be paid on a taxed or untaxed basis. In these cases, the benefit is generally sourced from a last-minute contribution to the superannuation fund. In these cases, therefore, the fund benefit is the whole amount of the defined benefit interest.
In a defined benefit fund, employer contributions are typically not allocated to individual members. Rather, contributions are made in aggregate to a defined benefit fund, based on actuarial advice, so as to ensure that there is enough money in the fund to pay benefits as members leave and benefit payments fall due.
It is therefore necessary to develop a system of calculating notional taxed contributions. Schedule 1A will set out the method to be used to calculate a member's notional taxed contributions for funds with five or more defined benefit members (or funds which had five or more defined benefit members in the past).
A member's notional taxed contributions in a year are an estimate, using prescribed assumptions, of the amount of concessional contributions that would have been paid into the fund in respect of the member in that year if that part of the member's defined benefit interest which comprises the fund benefit were being funded systematically over the period of their membership of the fund. Thus a member's notional taxed contributions relate only to a member's defined benefit interest in a fund. This applies even if a member has both a defined benefit interest and an accumulation interest in the same fund. Moreover, a member's notional taxed contributions relate only to that part of the member's defined benefit interest which is sourced from contributions paid into a superannuation fund or earnings on those contributions.
In some public sector funds where defined benefits are partly sourced from contributions made into a superannuation fund or from earnings on those contributions, the contributions which are paid into the superannuation fund are allocated to individual members. For example, part of a member's defined benefit may be sourced from productivity contributions made to a superannuation fund. In these cases, the amount of notional taxed contributions for a member for a financial year equals the amount of concessional contributions paid into the superannuation fund in respect of the member in the financial year.