LawyerLink.com.au

This bulletin outlines key developments in the taxation of superannuation contributions, superannuation benefits, and superannuation funds, the imposition of the superannuation guarantee charge and regulatory requirements relating to superannuation between 1 November 2006 and 31 January 2007 which may impact on your business.

 

REFORM

Draft amendments to the Superannuation Industry (Supervision) Regulations 1994 have been released for comment. These amendments introduce new standards for pensions and annuities and alter the payment rules for superannuation benefits by, among other changes, removing the requirement that people over the age of 65 must cash out their superannuation benefits.

It is intended that a single set of minimum standards will take the place of the current complex regulations for income streams beginning on or after 20 September 2007 and, while the rules for these income streams will entail a minimum yearly withdrawal, there will be no upper limit on withdrawals.

The calculation of the minimum payment amount will generally be according to the following formula: "account balance x percentage factor", and the "percentage factor" will vary from a low rate of 4% for people under 65 to a high rate of 14% for people over 95. To access the draft regulations and explanatory memorandum, click here.

In a joint press release of the Treasurer and the Minister for Revenue and Assistant Treasurer, the Government signalled that it is also considering proposing amendments to Pt IVA of the Income Tax Assessment Act 1936 to address the prospect of superannuation-related tax avoidance, with such measures to apply from 7 December 2006.

The Bills to implement the superannuation reforms announced in the 2006 - 07 Federal Budget were introduced in to Parliament on 7 December 2006, accompanied by an explanatory memorandum.

The Bills are as follows:and

• Tax Laws Amendment (Simplified Superannuation) Bill 2006,
• Superannuation (Excess Concessional Contributions Tax) Bill 2006,
• Superannuation (Excess Non-concessional Contributions Tax) Bill 2006,
• Superannuation (Excess Untaxed Roll-over Amounts Tax) Bill 2006,
• Superannuation (Departing Australia Superannuation Payments Tax) Bill 2006,
• Superannuation (Self-Managed Superannuation Funds) Supervisory Levy Amendment Bill 2006. 

If this package is passed substantially as drafted, from 1 July 2007 the main effects will be to:

• rewrite the tax laws for superannuation contributions, earnings and benefits as (new)Part 3-30 of the Income Tax Assessment Act 1997;

• exempt from tax all superannuation benefits paid to people over the age of 60 (other than those paid from an untaxed source), simplify the taxation of benefits paid to people under the age of 60, and abolish reasonable benefit limits;

• introduce an annual superannuation concessional contribution limit of $50,000 (subject to indexation) to replace the current age-based deduction limits (subject to atransitional period);

• place an annual limit of $150,000 on non-concessional (undeducted)contributions (with a transitional limit of $1 million on contributions made between 10 May 2006 and 30 June 2007) subject to limited exceptions (click here for information about retrieving or reallocating contributions made above the $1 million limit);

• simplify the tax treatment of "golden handshake" type payments and other employment termination payments and prevent such payments from being rolled over into superannuation;

• reduce the social security pension assets test taper rate, but remove the current 50% assets-test exemption for "complying" income streams purchased from 20 September 2007; and

• introduce a "no-TFN" tax of 46.5% on contributions in connection with whichno TFN has been quoted.

The proposed legislation will be debated when Parliament resumes in February. The Senate Economics Committee, due to report on the package of Bills by 6 February 2007, has released 21 submissions made by the public.

CONTRIBUTIONS

The ATO has released ATO ID 2006/303 Superannuation: deductions for contributions made for eligible employees which outlines the ATO's view that a director who holds a 50% interest in a company and is also an employee of the company, can claim deductions under section 82AAC of the Income Tax Assessment Act 1936 for superannuation contributions the director made out of their own funds for the other employees of the company.

However, no deduction can be claimed for contributions made for the director's own benefit under that provision.

Having regard to the ATO's position, a controlling director may wish to seek to deduct such a contribution under the personal deduction rules for superannuation contributions (if he or she is self-employed), or otherwise seek to have the company make the contribution on his or her behalf, for which the company may be entitled to a deduction (subject to the current age-based limits).

In AAT Case [2007] AATA 1006, Re Wensemius & Anor and FCT, the Administrative Appeals Tribunal found that contributions made to a New Zealand superannuation fund were not deductible under section 82AAE of the Income Tax Assessment Act 1936 or section 8-1 of the Income Tax Assessment Act 1997, and (in any event) that Part IVA would have applied to the arrangement.

The taxpayer was a trust that purportedly made a $60,000 contribution to the fund for a trust employee. However, the Tribunal held that only $6000 had actually been contributed, with the balance conveyed through a "round robin" arrangement. The fund to which the contribution was made was not a superannuation fund for the purposes of deductibility under section 82AAE, because the trustee had sole discretion in relation to the provision of benefits to members.

Furthermore, the general deduction provision of section 8-1 did not apply because the expenditure was not incurred in the ordinary course of business and, in any event, was capital in nature. Finally, the Tribunal made the alternative finding that Part IVA applied.

BENEFITS

A new Tax Determination has been issued: TD 2006/72 Does the relevant number determined for the purposes of working out the deductible amount of a superannuation pension or annuity under subsection 27H(2) of the Income Tax Assessment Act 1936 take into account the life expectancy of a reversionary pensioner or annuitant? In this publication, the Commissioner contends that the determination of the relevant number for the purposes of working out the "deductible amount" of a superannuation pension or annuity under subsection 27H(2) of the Income Tax Assessment Act 1936 should take into account the life expectancy of a reversionary pensioner or annuitant.

 

The relevant number will be the greater of the life expectancies of the original and reversionary pensioners.

SUPERANNUATION GUARANTEE CHARGE

In the case Re "VCJ" and Commissioner of Taxation [2006] AATA 955, the AAT has upheld the Commissioner's decision not to remit any of the superannuation guarantee charge payable by an employer despite the fact that the relevant superannuation contributions were paid only 3 days late. The AAT held that the Commissioner did not have any discretion to remit the charge and noted the legislative inflexibility which can serve to unduly penalise employers for relatively minor administrative oversights.

Another interpretive decision released was ATOID 2006/321: Superannuation Guarantee Charge (SGC): 2 employment contracts. The ATO states in this decision that where two contracts of employment exist simultaneously between an employer and employee, the employer must make sufficient superannuation contributions under both, separate, contracts to avoid a liability to pay the superannuation guarantee charge.

ATOID 2007/8: Local government councillors and salary sacrifice arrangements states that a local government council which has not passed a unanimous resolution in accordance with section 446-5 of Schedule 1 of the Taxation Administration Act 1953 (subjecting itself to PAYG withholding) can not enter into an effective salary sacrifice arrangement with its councillors such that contributions to a complying superannuation fund made in lieu of remuneration are employer contributions for the purposes of the Superannuation Guarantee (Administration) Act 1992.

This is because the result of the failure to pass the necessary resolution is that the councillors are not "employees" for the purposes of the Superannuation Guarantee (Administration) Act 1992 . In such circumstances, any contributions made will be considered to be a redirection of income that is otherwise assessable to the individual councillors.

The issue of "double superannuation coverage", where the sending of an employee overseas on a temporary assignment potentially attracts superannuation contribution obligations in Australia and in the foreign country in respect of the same work, is addressed in bilateral agreements which are in schedules to the Social Security (International Agreements) Act 1999.

The Tax Office has recently released information about these agreements, of which Australia currently has 8. They are with the following countries: Norway, Ireland, Belgium, Croatia, Chile, the Netherlands, Portugal and the USA. The effect of these agreements is generally that an exemption from the obligation to make superannuation contributions will apply in the foreign country to which the employee has been temporarily sent. Some countries may require the provision of a Certificate of Compliance to show that superannuation contributions are being paid in Australia. These can be obtained from the Tax Office upon application.

ATOID 2006/336: Superannuation guarantee: USA agreement on social security - certificate of coverage - non-resident for income tax purposes has been released by the ATO.

It addresses the situation of an Australian citizen employee who is no longer an Australian resident for income tax purposes but whose Australian employer has obtained a "Certificate of Coverage" from the ATO authorising it to continue making contributions under the Superannuation Guarantee (Administration) Act 1992, meaning that the employer will not be liable for superannuation (social security) obligations in the country to which the employee has been sent (in this case, the USA) under the Social Security (International Agreements) Act 1999 (see previous item).

The decision confirms that the employee is still an Australian resident for the purposes of the Social Security (International Agreements) Act 1999 as that Act imports the Social Security Act 1991 definition of "Australian resident", which includes Australian citizens.

COMPLIANCE

In a recent speech, the Deputy Commissioner of Taxation outlined a range of ATO initiatives to support the Government's superannuation simplification proposals, including an intended increase in the ATO's superannuation staff to 1500 employees. A new set of rulings for 2007 about how the Superannuation Industry (Supervision) Act 1994 (SIS Act) applies to self managed superannuation funds is also being prepared, on topics such as:

• prohibited financial assistance – the ruling will include examples of financial assistance in circumstances where it may be allowed and prohibited;
• sole purpose test - the ruling will clarify circumstances where incidental benefits from the conduct of the fund's investment activities will not constitute a breach of the sole purpose test;
• business real property – the ruling will provide guidance on each of the tests that must be met when determining whether or not the definition of "business real property" in s 66 SIS Act is satisfied (see also the Tax Office's Superannuation Circular No 2003/Draft (for comment)); and
• acquisitions from related parties – the ruling will consider and provide guidance on the general prohibition in s 66 of the SIS Act, as well as each of the exceptions.

The Commissioner has made a Legislative Instrument which sets out when superannuation providers need to lodge their member contributions statements for the 2005/06 year. Generally super funds were required to lodge their member contribution statements by 31 October 2006; however, self managed superannuation funds have until 31 March 2007 to lodge their statements.

The ATO has released the following practice statements in relation to Self Managed Superannuation Funds:

• PS LA 2006/17 outlines the circumstances in which the Commissioner will consider disqualifying an individual under section 120A of the Superannuation Industry (Supervision) Act 1993 (SIS Act) and thereby prohibit them from acting as a trustee of a self managed superannuation fund;
• PS LA 2006/18 outlines the factors the Commissioner will consider in deciding whether to accept an enforceable undertaking proposed by trustees to address contraventions of the SIS Act.
• PS LA 2006/19 outlines the factors the Commissioner will consider in deciding whether a notice of non-compliance should be given to a fund under subsection 40(1) of the SIS Act where the trustee has contravened one or more of the regulatory provisions.

REGULATION

The Minister for Revenue and Assistant Treasurer, The Honourable Peter Dutton MP, has announced the government's intention to introduce legislation to permit superannuation funds to invest in instalment warrants , thus legitimising a long-standing practice. Click here to see a copy of the media release.

The Exposure Draft Corporations Amendment (Insolvency) Bill 2007 has been released for public comment. The Draft Bill includes measures to improve protections for employee entitlements by according the Superannuation Guarantee Charge the same priority as other employee entitlements. Comments on the Draft Bill are due by 23 February 2007.

MISCELLANEOUS

The Superannuation Sub-Committee of the National Tax Liaison Group has released the minutes of its meeting on 4 December 2006. The minutes document the sub-committee's discussions and include the following topics:

• the extension of the superannuation co-contribution entitlement to the selfemployed;
• the resolution of particular outstanding issues relating to the implementation of the simplified superannuation regime, including the application of the no-TFN tax, the new pension standards and reporting requirements for member contributions statements;
• perceived inflexibility of the superannuation guarantee charge legislation (the ATO signalling that it will release a practice statement to address this problem by indicating the circumstances in which the Commissioner is likely to choose not to impose the charge); and
• the planned preparation by the ATO of a new Superannuation Regulator Determination on the valuation of units in a trust that is related to a self managed superannuation fund.

Source: Blake Dawson Waldron Media Release