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Superannuation tax reform

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This Statement is issued in response to enquiries received on certain technical matters relating to the superannuation tax reform announced in the Economic Statement of 25 May 1988.

Operating Standards

<-·· As announced in the Economic Statement, superannuation funds not currently subject to the reasonable benefit limits (ie funds previously exempt from tax under paragraph 23(j aa) of the Income Tax Assessment Act 1936) will not be required to

comply with the limits until 1 July 1990. The reasonable benefit limits form part of the operating standards, set out under the Occupational Superannuation Standards Act 1987 and associated regulations, which superannuation funds are

required to meet in order to qualify for the concessional taxation arrangements.

Consistent with that announcement, such superannuation funds not currently subject to the operating standards will not have to meet the standards until 1 July 1990. Similarly, such a fund which has a substituted accounting period will be

expected to comply with the standards from the commencement of its income year equivalent to that beginning on 1 July 1990. These arrangements will allow these funds sufficient time to make any necessary adjustments to their


Funding of Past Superannuation Obligations

In my Press Release of 20 June 1988 on Superannuation Tax Reform, I confirmed that, in the case of existing defined benefit schemes, employers were permitted to increase contribution rates prior to 1 July 1988 in order to discharge funding requirements in respect of benefits accrued in

relation to pre-1 July 1988 service.

As an extension of that arrangement, it is intended to permit after 30 June 1988, without liability to the tax on contributions, the funding of benefits accrued in relation to pre-1 July 1988 service subject to the following conditions:

(a) the option to be available only to funds or schemes existing at 30 June 1988;

(i) the difference between the contributions actually made by the sponsoring employer before 1 July 1988 and a specified rate or amount of contributions which the employer was legally required to have

made before that date under the terms of the trust deed, by a constituent document or by an industrial agreement or award executed before 1 July 1988; plus (ii) in the case of a defined benefit fund, the amount

of any additional outstanding past service liabilities at 30 June 1988 not provided for by the amount described in (i) and which is based on the assumptions and methods used in the last actuarial investigation before 1 July 1988.

For contributions to be exempt from tax, satisfactory evidence must be provided to the Insurance and Superannuation Commissioner. The evidence is to include a statement from the fund's auditor and, in the case of a defined benefit fund, a statement from the fund's actuary that the additional contributions are amounts calculated in accordance with

(b)(i) and (b)(ii). The evidence is to be provided in conjunction with the ISC's Annual Return for the first income year in which such contributions are made or, where an Annual Return is not currently made to the ISC, before the end of the .income year in which the contributions are made, In any case, evidence of outstanding liabilities must be provided no later than 31 December 1991.

The contributions described above may, where necessary, be made in addition to the permissible contribution levels specified in the revised ISC Information Circular No 7 of June 1988 .

Payment of Benefits through Superannuation Funds

In the case of some superannuation schemes, accruing liabilities are not required to be funded on an on-going basis, either fully or in part, while the payment of end-benefits to individual members is made wholly through a superannuation fund. That is, the whole or a part of an end-benefit paid by a superannuation fund is financed by a one-off contribution from the employer when the employment

ends .

(b) the amount of contributions to be:

In these cases, provided the superannuation fund is subject to the concessional taxation arrangements, an election will be available regarding the taxation treatment of such a payment in the hands of superannuation funds. In essence, a fund, in conjunction with the employer, will be able to elect either to have these payments:

. regarded as contributions and therefore liable to tax at 15 per cent, with end-benefits referable to such contributions taxed at the 0/15 per cent scale for retirement at age 55 or over (or transitional scale as appropriate); or


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. treated as tax-exempt contributions , with end --benefits referable to such payments taxed at the 15/30 per cent scale (for retirement at age 5 5 or oyer) .

This election will only apply in relation to payments received by a fund in consequence of the termination of employment of a member. The amount of payment that qualifies for this election option is the amount in excess of

contributions required to be made on an on-going basis (as determined by the terms of a trust deed, a constituent document, or by the terms of an award or industrial agreement).

Tax Liability of Eligible Termination Payments (ETPs) on Rollover

Enquiries have been received from trustees of approved deposit funds and other relieveretype institutions regarding the basis of determining whether ETPs rolled over after 30 June 1988 are liable to contributions tax at 15 per cent.

For the purpose of making this determination the following guidelines will apply:

. where ETPs are received direct from employers they are to be taken to be unfunded and the post-30 June 1983 assessable component will be subject to tax on rollover;

. where ETPs are received from private sector superannuation funds they are to be taken to be funded and no part of the payment is subject to tax on rollover; and

. where ETPs are received from public sector superannuation funds the post-30 June 1983 assessable component of the ETP will be subject to tax on rollover unless the Statement of Termination Payment is accompanied by, or incorporates, a statement from the trustee or manager of the fund that the payment is

referable to a taxable fund. Where such a statement is made, no part of an ETP attributable to the funded arrangement will be subject to tax on rollover.

CANBERRA 11 August 1988

Contact Officer (Treasury): Ms Peta Purnell Phone: (062) 63 3215 (w)