Commonwealth Numbered Regulations - Explanatory Statements
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INCOME TAX ASSESSMENT AMENDMENT (SUPERANNUATION MEASURES NO. 1) REGULATION 2013 (SLI NO 103 OF 2013)
EXPLANATORY STATEMENT
Select Legislative Instrument 2013 No. 103
Issued by the authority of the Minister for Financial Services and Superannuation
Income Tax Assessment Act 1997
Income Tax Assessment Amendment (Superannuation Measures No. 1) Regulation 2013
Section 909-1 of the Income Tax Assessment Act 1997 (the Act) provides that the Governor-General may make regulations prescribing matters that the Act requires or permits to be prescribed or are necessary or convenient to be prescribed for carrying out or giving effect to the Act.
The purpose of the Regulation is to give effect to the Government's announced measure to provide tax certainty for deceased estates in situations where a person has died while in receipt of a superannuation income stream.
Among other things, the Act sets out the taxation arrangements applying to the income of superannuation funds. A feature of these arrangements is that, broadly, a superannuation fund that complies with the regulatory provisions in the superannuation supervision legislation is entitled to a tax exemption for income that supports liabilities of the fund in respect of superannuation income stream benefits that are currently payable (the earnings tax exemption). The term superannuation income stream benefit is defined with reference to the Income Tax Assessment Regulations 1997 (ITAR).
The Regulation expands the meaning of the term superannuation income stream benefit for the purposes of the earnings tax exemption. The expanded meaning of this term ensures that, where a complying superannuation fund member was receiving a superannuation income stream immediately before their death, the superannuation fund will continue to be entitled to the earnings tax exemption in the period from the member's death until their benefits are cashed by paying them out as a lump sum and/or by commencing a new superannuation income stream (subject to the benefits being cashed as soon as practicable). The level of the exemption would be no greater than it was before the member's death (allowing for investment earnings after the member's death).
Superannuation benefits can consist of a tax free component and a taxable component. The Act contains a general rule for how to calculate these tax components (known as the proportioning rule). The Act provides that the regulations may specify an alternative calculation method.
The Regulation creates an alternative method for calculating the tax free and taxable components of certain superannuation benefits paid after the death of a person who was receiving a superannuation income stream immediately before their death. In broad terms, the new method allows the tax free proportion of that superannuation income stream to be used in calculating the tax components of those benefits.
Details of the amendments are set out in the Attachment.
The Act specifies no conditions that need to be met before the power to make the Regulation may be exercised.
Consultation on an exposure draft of the Regulation was undertaken between 29 January and 14 February 2013.
As the effect of the amendments made by items 1 and 3 to 6 of Schedule 1 to the Regulation is to extend the scope of an existing tax exemption, their application to the 2012-13 income year will not disadvantage taxpayers.
The Regulation is a legislative instrument for the purposes of the Legislative Instruments Act 2003.
The Regulation commences on the day after registration.
Authority: Section 909-1 of the Income Tax Assessment Act 1997.
ATTACHMENT
Details of Income Tax Assessment Amendment (Superannuation Measures No. 1) Regulation 2013
Section 1 - Name of Regulation
This section specifies the name of the Regulation as the Income Tax Assessment Amendment (Superannuation Measures No. 1) Regulation 2013.
Section 2 - Commencement
This section provides that the Regulation commences on the day after registration.
Section 3 - Authority
This section provides that the Regulation is made under the Income Tax Assessment Act 1997 (the Act).
Section 4 - Schedule
This section provides that each instrument specified in the Schedule to the Regulation is amended or repealed as set out in the applicable items in the Schedule, and any other item in the Schedule to the Regulation has effect according to its terms.
Schedule 1 - Amendments
Income Tax Assessment Regulations 1997
Items 1 and 3
The effect of the amendment made by item 1 is explained on page 8 in the context of describing the amendments made by items 4 to 6.
Item 3 makes a consequential change to regulation 307-205.02.
Item 2
Section 307-125 of the Act contains a general rule for calculating the tax free and taxable components of a superannuation benefit. Subsection 307-125(2) provides that a superannuation benefit is taken to be paid in a way such that each of the tax free and taxable components of the benefit bears the same proportion to the amount of the benefit that the corresponding component of the superannuation interest from which the benefit is paid bears to the value of that interest. Subsection 307-125(3) specifies the point in time at which the value of the superannuation interest and the amount of each of the components of the interest are determined for this purpose. Paragraph 307-125(4)(a) provides that the regulations may specify an alternative method for determining the tax free and taxable components of a superannuation benefit.
Item 2 inserts new regulation 307-125.02 into the ITAR which specifies an alternative method for determining the tax free and taxable components of certain superannuation benefits. This new method applies where:
• a person (the deceased) was receiving a superannuation income stream (the original superannuation income stream) from a superannuation interest (the relevant superannuation interest) immediately before their death;
• the original superannuation income stream did not automatically revert to another person on the deceased's death;
• no amounts other than investment earnings or an amount to fund an anti-detriment increase (as defined) have been added to the relevant superannuation interest on or after the deceased's death; and
• after the deceased's death, a superannuation death benefit lump sum is paid, and/or a new superannuation income stream is commenced, using only an amount from the relevant superannuation interest.
Where:
• the superannuation death benefit lump sum mentioned in the previous paragraph; or
• a superannuation benefit paid from the new superannuation income stream mentioned in the previous paragraph;
is not to any extent attributable to an anti-detriment increase or an insurance-related amount paid or arising on or after the deceased's death, that benefit is taken to be paid in a way such that each of the tax free and taxable components of the benefit bears the same proportion to the amount of the benefit that the corresponding component of the relevant superannuation interest bore to the value of the relevant superannuation interest when the original superannuation income stream commenced. That is, the superannuation death benefit lump sum or new superannuation income stream benefit has the same proportions of tax free and taxable components as the superannuation income stream benefits that were paid to the deceased before their death.
Where the superannuation death benefit lump sum or new superannuation income stream benefit is to any extent attributable to an anti-detriment increase or an insurance-related amount paid or arising or on after the deceased's death, the general proportioning approach outlined in the previous paragraph applies to the amount of the benefit as reduced by the extent to which it is so attributable. The anti-detriment increase and the insurance-related amount are effectively included in the taxable component of the benefit.
For the purposes of the new regulation, 'investment earnings' includes an amount paid under a policy of insurance on the life of the deceased or an amount arising from self-insurance. An 'anti-detriment increase', in relation to a benefit, means any increase to the benefit which resulted in the fund that paid the benefit being entitled to a deduction under section 295-485 of the Act.
The effect of the new method is explained in the following examples.
Example 1
Harold was a member of a complying superannuation fund who was receiving a superannuation income stream immediately before his death on 1 February 2013. When the income stream commenced the value of the superannuation interest from which it was paid (the relevant interest) was $100,000, of which the tax free component was $20,000 (20 per cent of the value) and the taxable component was $80,000 (80 per cent of the value).
The income stream did not automatically revert to another person on Harold's death and no amounts were added to the relevant interest on or after his death.
The trustee of the fund determined that the entire value of the deceased member's benefits in the fund (being the value of the relevant interest) would be paid as a single lump sum to the deceased's adult child, Emma. The lump sum death benefit, in the amount of $75,000, was paid on 20 July 2013 using only an amount from the relevant interest. The fund did not increase the lump sum death benefit by an anti-detriment increase amount and the benefit was not to any extent attributable to an insurance-related amount paid or arising on or after the deceased's death.
The lump sum death benefit of $75,000 consists of a tax free component of $15,000 (20 per cent of the amount of the benefit) and a taxable component of $60,000 (the remainder of the benefit).
Example 2
If in Example 1 the trustee of the fund had added $10,000 to the relevant interest to fund an anti-detriment increase of that amount in the payment to Emma, the lump sum death benefit of $85,000 would consist of a tax free component of $15,000 (20 per cent of the amount of the benefit as reduced by the $10,000 anti-detriment increase) and a taxable component of $70,000 (the remainder of the benefit).
Items 4 to 6
Broadly, sections 295-385 and 295-390 of the Act provide an income tax exemption for so much of the income of a complying superannuation fund as is supporting its current liabilities in respect of superannuation income stream benefits payable by the fund at the particular time (the earnings tax exemption). Paragraph 320-37(1)(a) of the Act (in conjunction with sections 320-246 and 320-247) provides an equivalent exemption for life insurance companies. The Act defines superannuation income stream benefit with reference to the ITAR. The meaning of superannuation income stream benefit is set out in regulation 995-1.01.
Items 4 to 6 expand the meaning of superannuation income stream benefit for the purposes of sections 295-385, 295-390, 295-395, 320-246 and 320-247 of the Act (see new subregulations 995-1.01(2) to (5)).
The effect of the expanded meaning of this term is that where a complying superannuation fund member was receiving a superannuation income stream immediately before their death, and that income stream did not automatically revert to another person on the member's death, an amount that is either paid as a superannuation death benefit lump sum using only an amount from the superannuation interest that was supporting the deceased's income stream immediately before their death, or that is applied from that interest to commence a new superannuation income stream, is taken to be a superannuation income stream benefit payable by the fund for a specified period. The specified period is from the death of the member until as soon as it was practicable to pay the lump sum or commence the new superannuation income stream. This means that the superannuation fund will continue to be entitled to the earnings tax exemption in relation to such an amount during this period.
The amount that is taken to be a superannuation income stream benefit payable by the fund is reduced by the extent, if any, to which it is attributable to an amount or amounts, other than investment earnings, added to the superannuation interest on or after the deceased's death. For these purposes, 'investment earnings' does not include an amount paid under a policy of insurance on the life of the deceased or an amount arising from self-insurance. This is intended to ensure that the level of the exemption for the relevant period after the member's death is no greater than it was before their death (allowing for investment earnings after the member's death).
The effect of the amendments is explained in the following examples.
Example 3
Arthur was a member of a complying superannuation fund who was receiving a superannuation income stream immediately before his death on 1 September 2012. The income stream did not automatically revert to another person on Arthur's death and no amounts (other than investment earnings) were added on or after his death to the superannuation interest that was supporting the income stream.
After undertaking a claims staking process, the trustee of the fund determined that the entire value of the deceased member's benefits in the fund would be paid to the deceased's widow as a lump sum. On 20 December 2012, which was in the circumstances as soon as practicable after Arthur's death, a single lump sum of $100,000 was paid to the widow using only an amount from the relevant superannuation interest.
For the purposes of the earnings tax exemption, the $100,000 will be taken to be the amount of a superannuation income stream benefit that was payable from 1 September 2012 until 20 December 2012.
Example 4
Suppose in Example 3, the superannuation lump sum paid to Arthur's widow was $120,000 because the trustee of the fund added $20,000 to Arthur's superannuation interest to fund an anti-detriment increase of that amount. The amount of $100,000 will be taken to be the amount of a superannuation income stream benefit that was payable from 1 September 2012 until 20 December 2012 (as $20,000 of the superannuation lump sum is attributable to an amount other than investment earnings that was added to the relevant superannuation interest on or after Arthur's death).
Example 5
Bob was a member of a complying superannuation fund who was receiving a superannuation income stream immediately before his death on 1 November 2012. The income stream did not automatically revert to another person on Bob's death and no amounts (other than investment earnings) were added on or after his death to the superannuation interest that was supporting the income stream.
After undertaking a claims staking process to determine the appropriate beneficiaries, the trustee of the fund determined that the deceased member's benefits in the fund would be paid as equal single lump sums to the deceased's two adult children, David and Mary.
Using only an amount from the relevant superannuation interest, a lump sum of $100,000 was paid to David on 10 January 2013, which was in the circumstances as soon as practicable after Bob's death. Due to Mary living overseas, there was a delay in making contact with her. As a result, it was not until 1 February 2013, which was in the circumstances as soon as practicable after Bob's death, that a lump sum of $100,000 was paid to Mary using only an amount from the relevant superannuation interest.
For the purposes of the earnings tax exemption, $100,000 will be taken be the amount of a superannuation income stream benefit payable from 1 November 2012 until 10 January 2013 (when David was paid), and $100,000 will be taken to be such an amount payable from 1 November 2012 until 1 February 2013 (when Mary was paid).
Example 6
Doris was a member of a complying superannuation fund who was receiving a superannuation income stream immediately before her death on 25 January 2013. The income stream did not automatically revert to another person on Doris's death and no amounts (other than investment earnings) were added on or after her death to the superannuation interest that was supporting the income stream.
After undertaking a claims staking process to determine the appropriate beneficiaries, the trustee of the fund determined that the deceased member's benefits in the fund of $200,000 would be paid equally between the deceased's two children - Grace (age 14) and Max (age 22).
Using only an amount from the relevant superannuation interest, Max was paid a lump sum of $100,000 on 3 April 2013, which was in the circumstances as soon as practicable after Doris's death. As Grace was a minor, advice was sought as to whether to pay her share of the deceased member's benefits as an income stream or a lump sum. As a result, it was not until 6 May 2013, which was in the circumstances as soon as practicable after Doris's death, that a new superannuation income stream for Grace was commenced using $100,000 applied from the relevant superannuation interest.
For the purposes of the earnings tax exemption, $100,000 will be taken be the amount of a superannuation income stream benefit payable from 25 January 2013 until 3 April 2013 (when Max was paid), and $100,000 will be taken to be such an amount payable from 25 January 2013 until 6 May 2013 (when the new income stream for Grace was commenced).
Example 7
Elliot was a member of a complying superannuation fund who was receiving a superannuation income stream immediately before his death on 1 September 2012. The income stream did not automatically revert to another person on Elliot's death.
Elliot was covered by a life insurance policy held by the fund. The fund was paid $200,000 in respect of Elliot's death and this amount was added to the superannuation interest that had supported Elliot's income stream until his death.
After undertaking a claims staking process, the trustee of the fund determined that the entire value of the deceased member's benefits in the fund - $500,000 - would be paid to Elliot's widow as a lump sum. On 20 December 2012, which was in the circumstances as soon as practicable after Elliot's death, a single lump sum of $500,000 was paid to the widow using only an amount from the relevant superannuation interest.
For the purposes of the earnings tax exemption, $300,000 will be taken to be the amount of a superannuation income stream benefit payable from 1 September 2012 until 20 December 2012 (as $200,000 of the superannuation lump sum is attributable to an amount other than investment earnings that was added to the relevant superannuation interest on or after Elliot's death).
Example 8
If in Example 7 the trustee of the fund had determined that the entire value of the deceased member's benefits in the fund would be paid as single lump sums of $400,000 to Elliot's widow and $100,000 to Elliot's 26 year old child, each of those two lump sums would to an extent be attributable to the insurance proceeds (which represented two fifths of the deceased member's benefits in the fund).
For the purposes of the earnings tax exemption, $240,000 ($400,000 reduced by 2/5) and $60,000 ($100,000 reduced by 2/5) would each be taken to be the amount of a superannuation income stream benefit payable from 1 September 2012 until as soon as it was practicable to pay the particular superannuation lump sum.
New subregulation 295-385.01 (substituted by item 1) ensures that the amount that is taken to be a superannuation income stream benefit under new subregulation 995-1.01(3) or (4) satisfies the requirement in subsections 295-385(4), (5) and (6) of the Act that the benefit is prescribed by the ITAR for the purposes of section 295-385, where the superannuation income stream payable to the deceased immediately before their death was of a type prescribed for those purposes.
Item 7
This item inserts new Division 910 into the ITAR which contains transitional and application provisions. New regulation 910-1.01 provides that:
• the amendments made by items 1 and 3 to 6 of Schedule 1 to this Regulation apply in relation to the 2012-13 income year and later income years; and
• the amendment made by item 2 of Schedule 1 to this Regulation applies to a superannuation benefit to which subregulation 307-125.02(2) applies that is paid on or after the commencement of this Regulation.
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