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Treasury Laws Amendment (2017 Measures No. 2) Bill 2017

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2016-2017

 

THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA

 

 

 

HOUSE OF REPRESENTATIVES

 

 

 

Treasury Laws amendment (2017 measures no. 2) bill 2017

 

 

 

 

EXPLANATORY MEMORANDUM

 

 

 

(Circulated by authority of the Acting Minister for Revenue and Financial Services, Senator the Hon Mathias Cormann)

 



Table of contents

Glossary.............................................................................................................. 1

General outline and financial impact............................................................ 3

Chapter 1               Amendments relating to superannuation reform package  5

Chapter 2               Amendments relating to insolvency................................ 37

Index................................................................................................................. 43



The following abbreviations and acronyms are used throughout this explanatory memorandum.

Abbreviation

Definition

Amending Act

Treasury Laws Amendment (Fair and Sustainable Superannuation) Act 2016

ASIC

Australian Securities and Investments Commission

Bankruptcy Act

Bankruptcy Act 1966

Commissioner

Commissioner of Taxation

Corporations Act

Corporations Act 2001

IT(TP) Act 1997

Income Tax (Transitional Provisions) Act 1997

ITAA 1997

Income Tax Assessment Act 1997

LRBA

Limited recourse borrowing arrangement

PST

Pooled superannuation trust

Reform Act

Insolvency Law Reform Act 2016

RSAR 1997

Retirement Savings Accounts Regulations 1997

SISR 1994

Superannuation Industry (Supervision) Regulations 1994

SMSF

Self-managed superannuation fund

TAA 1953

Taxation Administration Act 1953

TRIS

Transition to retirement income stream

 



Amendments relating to superannuation reform package

The amendments in Schedule 1 make changes to measures enacted through the Treasury Laws Amendment (Fair and Sustainable Superannuation) Act 2016 to support the integrity of the measures and ensure the law operates as intended.

The amendments relate to the following measures that were included in that Act:

•        the transfer balance cap;

•        changes to the concessional contribution rules;

•        changes to the non-concessional contribution rules;

•        objective of superannuation;

•        changes to the transition to retirement income stream rules;

•        capital gains tax relief for superannuation funds; and

•        streamlining of administrative processes.

Date of effect Most of the amendments apply from the same time that the provisions that they are amending apply (predominantly 1 July 2017 or the 2017-18 income year).

However, the changes that facilitate the transfer of assets by life insurance companies bring forward the application of those provisions to the time that the Bill containing these amendments was introduced into the House of Representatives.

Proposal announced The Minister for Revenue and Financial Services advised stakeholders on 28 March 2017.  Draft legislation was released for public consultation on 12 and 27 April 2017.

Financial impact The measures will protect revenue raised from the Superannuation Reform Package.

Human rights implications :  Schedule 1 does not raise any human rights issue. See Statement of Compatibility with Human Rights — paragraphs 1.178 to 1.182.

Compliance cost impact The measures have varying compliance costs and some will reduce compliance cost for individuals and superannuation funds.

Amendments relating to insolvency

Schedule 2 to this bill amends the Bankruptcy Act 1966 and Corporations Act 2001 so that a single approval will cover a profit or advantage received by an external administrator or trustee even when the benefit is passed on to multiple related entities.

This Schedule will also amend the Corporations Act 2001 to ensure that annual and end-of-control returns by controllers are included on ASIC’s public register and make some minor technical corrections required as a result of amendments in the Insolvency Law Reform Act 2016

Date of effect :  The amendments take effect from Royal Assent.

Proposal announced :  The amendments have not been announced separately to the public consultation process which commenced on 3 May 2017.

Financial impact :  There are no financial impacts from the amendments.

Human rights implications :  This Schedule does not raise any human rights issue.

Compliance cost impact :  The amendments will lower compliance costs for insolvency practitioners.



Outline of chapter

1.1                   The amendments in Schedule 1 make changes to measures enacted through the Treasury Laws Amendment (Fair and Sustainable Superannuation) Act 2016 . These changes support the integrity of those measures and ensure the law operates as intended.

1.2                   These amendments relate to the transfer balance cap, the concessional contribution rules, the non-concessional contribution rules, the objective of superannuation, the transition to retirement income stream rules, the capital gains tax relief rules and administrative processes.

1.3                   All legislative references in this Chapter are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise stated.

Context of amendments

1.4                   The Treasury Laws Amendment (Fair and Sustainable Superannuation) Act 2016 (the Amending Act) legislated the Government’s superannuation reform package that was announced in the 2016-17 Budget.

1.5                   The Amending Act made the superannuation system fairer and more sustainable by ensuring superannuation tax concessions are well targeted and affordable. It also enabled more choice and flexibility to allow people to save for their retirement and improved the integrity of the superannuation system to ensure it is used to support retirement incomes and not for tax minimisation and estate planning purposes.

1.6                   The amendments contained in Schedule 1 relate to the following measures that were included in that package:

•        the transfer balance cap;

•        changes to the concessional contribution rules;

•        changes to the non-concessional contribution rules;

•        objective of superannuation;

•        changes to the transition to retirement income stream rules;

•        capital gains tax relief for superannuation funds; and

•        streamlining of administrative processes.

Transfer balance cap

1.7                   The transfer balance cap was enacted through Division 294 and limits the total value of capital that can be transferred into the tax exempt ‘retirement phase’ of superannuation in respect of an individual.

1.8                   An individual who has ‘excess transfer balance’ in their transfer balance account must commute one or more of their superannuation income streams (for excess transfer balance, see section 294-30). The transfer balance in an individual’s transfer balance account is determined by transfer balance credits and transfer balance debits.

1.9                   Such individuals are also liable to pay ‘excess transfer balance tax’ to neutralise the benefit that was obtained from having capital in excess of their transfer balance cap in the retirement phase (see Subdivision 294-F).

1.10                Special rules apply to certain defined benefit interests and defined benefit income streams to ensure that they are appropriately accounted for under the transfer balance cap (see sections 294-135 and 294-145).

Concessional contributions

1.11               Schedule 2 to the Amending Act reduced the concessional contributions cap to $25,000 per year (subject to indexation) from the 2017-2018 financial year (see Division 291).  

1.12               The amendments also modified how concessional contributions are determined to ensure contributions and certain other amounts related to constitutionally protected funds and unfunded defined benefit schemes count towards an individual’s concessional contributions cap. Although such contributions now count towards an individual’s concessional contributions cap, they cannot by themselves cause an individual to exceed their cap.

1.13               Schedule 6 to the Amending Act also introduced rules that permit individuals to increase their concessional contributions cap for a particular year by unused amounts of their concessional contributions caps from earlier years. These rules are generally referred to as the ‘unused concessional cap carry forward’ rules and will apply from the 2019-2020 financial year (taking into account unused cap space from the 2018-2019 financial year).

Non-concessional contributions

1.14               Schedule 3 to the Amending Act reduced the annual non-concessional contributions cap from $180,000 to $100,000 from the 2017-2018 financial year and introduced an eligibility condition about an individual’s total superannuation balance.

1.15               Schedule 3 also made changes to the review rights for non-concessional contributions and to allow a longer period to be determined by the Commissioner for the proceeds of a structured settlement to be contributed without being a non-concessional contribution.

1.16               Schedule 3 also introduced changes to prevent Government co-contributions from being made where an individual has breached the non-concessional contributions cap or where they have a total superannuation balance that equals or exceeds the general transfer balance cap.

Limited recourse borrowing arrangements

1.17               ‘Limited recourse borrowing arrangements’ (LRBAs) are an exception to the general prohibition on borrowing that applies to the trustees of regulated superannuation funds (see sections 67A and 67B of the Superannuation Industry (Supervision) Act 1993 (SIS Act)).

1.18               A LRBA allows an SMSF trustee to borrow funds if specific requirements are met. The trustee must use those funds to purchase a single asset (or collection of identical assets that have the same market value) to be held in a separate trust. Any investment returns earned from the asset go to the SMSF trustee. If the loan defaults, the lender’s rights are limited to the asset held in the separate trust. This means there is no recourse to other assets held in the SMSF.

Objective of superannuation

1.19               The Superannuation (Objective) Bill 2016 was introduced as part of the Superannuation Reform Package and sets out the objective of the superannuation system. This Bill is currently before the Parliament.

1.20               Part 5 of Schedule 10 to the Amending Act made changes to the Legislation Act 2003 to require that a statement of compatibility with the objective of superannuation be included in the explanatory statement for legislative instruments that relate to superannuation. This change was made in anticipation of the Superannuation (Objective) Bill 2016 being enacted at the same time as the Amending Act and began applying from 1 January 2017.

Transition to retirement income streams

1.21               The Superannuation Industry (Supervision) Regulations 1994 (SISR 1994) and the Retirement Savings Accounts Regulations 1997 (RSAR 1997) permit individuals who have reached preservation age to draw down on their superannuation interests before they retire from the workforce or turn 65.

1.22               To do so, individuals can commence a transition to retirement income stream, a transition to retirement pension, a non-commutable allocated pension or non-commutable allocated annuity (TRIS) (although TRIS specifically refers to the first of these products, the term is commonly used to refer to them collectively).

1.23               The earnings tax exemptions that applied in respect of TRISs will no longer apply from 1 July 2017. This was achieved by preventing TRISs from being in the ‘retirement phase’, which is a new requirement for an entity to claim an earnings tax exemption in respect of income from an asset that supports a superannuation income stream (see subsection 307-80(3)).

Capital gains tax relief

1.24               In conjunction with the transfer balance cap rules and the changes for TRISs, ‘CGT relief’ was provided to superannuation funds with assets that supported superannuation income streams prior to those rules applying from 1 July 2017. The relief is available to any asset held throughout the pre-commencement period, which commenced on the date the Bill that became the Treasury Laws Amendment (Fair and Sustainable Superannuation) Act 2016 was introduced into the House of Representatives (9 November 2016).

1.25               These rules preserve the tax exempt status of any unrealised capital gains that the fund would have been eligible to receive had they disposed of the assets before 1 July 2017 (see sections 294-110 and 294-115 of the Income Tax (Transitional Provisions) Act 1997 ) (IT(TP) Act 1997).

Administrative streamlining

1.26               Part 1 of Schedule 10 to the Amending Act introduced amendments to simplify and consolidate the range of processes for the release of amounts from individual’s superannuation using a release authority.

1.27               Part 3 of Schedule 10 to the Amending Act clarified that the Commissioner can provide a single notice that includes two or more separate notices that are required to be provided.

Summary of new law

Transfer balance cap amendments

1.28               Schedule 1 makes a number of changes to the transfer balance cap provisions. These changes:

•        enable additional transfer balance credits and transfer balance debits to be prescribed;

•        clarify the matters covered by the assumption about compliance with pension or annuity rules and standards and for which the consequences of not complying with a commutation authority are disregarded;

•        enable the correct value for a debit that arises for failures to comply with rules and standards to be calculated for a failure that occurs part-way through an income year;

•        provide an alternative debit where the proceeds of structured settlements were contributed into superannuation prior to 1 July 2017;

•        provide a transfer balance credit where the repayment of an LRBA shifts value between accumulation phase interests and retirement phase interests;

•        amend the rules for the part-year defined benefit income cap so that they only apply where an individual is first entitled to concessional tax treatment in respect of defined benefit income; and

•        bring forward the application of the rules about the transfer of assets by life insurance companies to facilitate those companies accounting for and rebalancing their assets in anticipation of the transfer balance cap applying from 1 July 2017.

Concessional contributions amendments

1.29               Schedule 1 updates the Guide Material for the concessional contributions cap to ensure that it accurately describes the way that the unused concessional cap carry forward rules apply.

1.30               Minor amendments are also made to the IT(TP) Act 1997 and the Superannuation Guarantee (Administration) Act 1992 to ensure that references to the concessional contributions cap within those Acts continue to apply to the basic concessional contributions cap rather than the cap as modified by the unused concessional cap carry forward rules.

1.31               Schedule 1 also clarifies the effect of provisions that cap an individual’s concessional contributions where their defined benefit contributions exceed their notional taxed contributions.

Non-concessional contributions amendments

1.32               Schedule 1 amends the application rules in Schedule 3 to the Amending Act for the rules that enable the Commissioner to determine a longer period for the proceeds from a structured settlement to be contributed into a superannuation plan, and that limit Government co-contributions where an individual has breached their non-concessional contributions cap (or has a total superannuation balance that equals or exceeds the general transfer balance cap). These rules will now apply correctly to financial years starting on 1 July 2017 and later years, as originally intended.

1.33               Schedule 1 also makes a further change to the application rules in Schedule 3 to the Amending Act to ensure that the changes in respect of review rights for determinations can apply from the 2013-2014 financial year, consistent with the review rights for the equivalent discretions for concessional contributions.

Objective of superannuation amendments

1.34               Schedule 1 amends the Legislation Act 2003 to repeal the requirement to prepare a statement of compatibility with the Superannuation (Objective) Act 2016 . The requirement to prepare a statement of compatibility is also reinserted with application that is contingent on the Bill being enacted. These amendments recognise that the Superannuation (Objective) Act 2016 was not enacted in 2016.

Transition to retirement income stream amendments

1.35               The amendments in relation to the TRIS rules relax the existing prohibition on TRISs ever being in the retirement phase. As a result, a TRIS will now be in the retirement phase if the member has satisfied a condition of release with a nil cashing restriction.

Capital gains tax relief amendments

1.36               Schedule 1 modifies section 294-110 of the IT(TP) Act 1997 to ensure that a fund can apply CGT relief in respect of assets that cease to be segregated current pension assets when the broader TRIS changes come into effect.

1.37               The amendments also extend CGT relief to pooled superannuation trusts (PSTs) so that the tax exempt status of unrealised gains on assets that are held by such trusts is preserved where the underlying unit holders have rebalanced their asset holdings as a result of the transfer balance cap and TRIS changes.

Administrative streamlining amendments

1.38               Schedule 1 makes a technical correction to ensure that the amount of an administrative penalty can be correctly calculated under section 286-80 of Schedule 1 to the TAA 1953 for failures to provide an entity with a notice about releasing superannuation.

1.39               The amendments also remove a provision about the Commissioner combining notices that is redundant following the broader combined notices changes that were introduced through Schedule 10 to the Amending Act.

Detailed explanation of new law

Transfer balance cap amendments

Regulation making power for credits and debits

1.40               The tables in subsections 294-25(1) and 294-80(1) prescribe the circumstances in which transfer balance credits and transfer balance debits arise, the amount of the credit or debit, and the time at which they arise.

1.41               Schedule 1 inserts additional items in those tables to enable regulations to prescribe additional circumstances in which a transfer balance credit or transfer balance debit arises in an individual’s transfer balance account. As with the other items in the tables, any such regulation must identify the condition for the credit or debit arising, the amount of the credit or debit, and the time at which the credit or debit arises. [Schedule 1, items 3 and 8, item 5 in the table in subsection 294-25(1) and item 8 in the table in subsection 294-80(1)]

1.42               This regulation making power ensures that transfer balance credit and transfer balance debit rules can be updated to ensure that they continue to apply appropriately in respect of new superannuation income stream products or to address unforeseen issues that arise under the transfer balance cap.

1.43               An example of new superannuation income stream products that are likely to require special credit and debit rules are the ‘innovative income stream products’ that are currently being developed.

1.44               As well as enabling additional transfer balance credit and transfer balance debit categories to be prescribed, the amendments in Schedule 1 allow regulations to provide that particular items in the tables in subsections 294-25(1) and 294-80(1) do not apply to a class of superannuation income streams. [Schedule 1, items 4 and 9, subsection 294-25(3) and subsection 294-80(3)]

1.45               Excluding particular items in this way may be required to prevent a superannuation income stream from being covered by multiple transfer balance credit and transfer balance debit categories. If more than one item category were to apply at the same time, the individual would receive credits or debits under each category, resulting in inappropriate double counting.

1.46               These amendments apply from the same time as Division 294 generally applies (that is, on and after 1 July 2017). [Schedule 1, item 30, subsection 294-10(2) of the Income Tax (Transitional Provisions) Act 1997]

Assumption about compliance with rules and standards and disregarding failures to comply with a commutation authority

1.47               Schedule 1 amends the rules that provide an assumption that a superannuation income stream complies with the rules and standards under which it was provided and which disregard the consequences of a failure to comply with a commutation authority. These changes:

•        clarify that while the rules apply at a particular time before a failure occurs, they do apply from the time of the failure.

•        modify the matters to which the rules apply to ensure that they are only relevant to the transfer balance cap and can be applied in working out whether an individual gets a transfer balance debit.

 [Schedule 1, item 5, section 294-50]

1.48               The assumption about compliance with rules and standards was introduced as part of the transfer balance cap. The assumption ensures that a failure to comply with particular rules and standards does not affect the validity of a transfer balance credit that had arisen prior to the failure, or an assessment of whether an individual was the retirement phase recipient of a superannuation income stream that had occurred prior to the failure.

1.49               This assumption ensures that a breach of the pension or annuity standards set out in the SISR 1994 and RSAR 1997 does not re-characterise an interest that was treated as a superannuation income stream as never having been a superannuation income stream in the year in which the breach occurred. The requirement that an interest be a superannuation income stream is a necessary condition for the transfer balance credit and retirement phase recipient rules.

1.50               Similarly, if a superannuation income stream provider fails to comply with a commutation authority issued to them in relation to a superannuation income stream, the superannuation income stream ceases to be in the retirement phase. This treatment applies to the entire income year in which the end of the period that the provider had to comply occurred, and all later income years (see subsection 307-80(4)). Re-characterising a superannuation income stream in this way would also invalidate any transfer balance credits that applied in respect of it in that year, as well as other considerations that were based on the superannuation income stream being in the retirement phase. To prevent this from occurring, section 294-50 as it was originally enacted disregarded subsection 307-80(4) in working out whether an individual is the retirement phase recipient of a superannuation income stream, or whether they receive a transfer balance credit. These rules did not specify the time at which they apply.

1.51               For simplicity, the assumption about compliance with the pension or annuity standards and disregarding the consequences of failing to comply with a commutation authority are referred to collectively in the following paragraphs as ‘the assumptions’.

Assumptions apply at a time

1.52               The amendments reframe the assumptions so that they apply at a point in time. [Schedule 1, item 5, section 294-50]

1.53               The amendments modify the assumption about compliance with the pension or annuity rules and standards so that it specifically applies in working out whether an income stream is a superannuation income stream at a particular point in time. In making this assessment, the revised rules state where, based upon the facts and circumstances that exist at that time, it is not possible to determine if a requirement for a superannuation income stream to exist will be met, then the requirement is treated as having been met. [Schedule 1, item 5, subsection 294-50(2)]

1.54               The reframed assumption means that for the purposes of the transfer balance cap, requirements that apply in respect of a period are taken to be satisfied at an earlier time when the individual’s transfer balance is determined.

1.55               The revised approach also ensures that the assumption about meeting the requirements for being a superannuation income stream stop applying from the time a failure actually occurs. This is because based on the facts and circumstances that apply at the time of the failure, it can be determined that the failure actually occurred.

1.56               However, the assumption continues to be effective in relation to the times that occurred prior to the failure. This means that for the purposes of the matters to which the assumption applies, the failure to actually comply will not affect whether an individual has a transfer balance account or the transfer balance in that account that related to events that occurred prior to the failure

1.57               An example of a requirement that applies in relation to a period is the requirement to pay a minimum amount of superannuation income stream benefits from a superannuation income stream in a year. While a failure to meet the annual payment requirements would generally only occur at the end of a year, the consequence of that failure means that there is no superannuation income stream for the year.  

1.58               The revised rule about disregarding subsection 307-80(4) applies in relation to a superannuation income stream at a time if that time occurs before the end of the 60-day period in which a commutation authority issued in relation to the income stream had to be complied with. [Schedule 1, item 5, subsection 294-50(3)]

1.59               The requirement that the time occurred prior to the end of the 60-day period reflects the fact that a failure to comply with a commutation authority occurs at the end of the period.

1.60               This means that for the purposes of the transfer balance cap, the effect of subsection 307-80(4) can be disregarded in respect of any actions that were taken in relation to a superannuation income stream up to the point that subsection 307-80(4) applies. However, from that point the rule in subsection 294-50(3) will cease treating the superannuation income stream as being in the retirement phase.

Matters to which the assumptions apply

1.61               The amendments clarify that the assumptions apply in working out whether an individual has a transfer balance account and the transfer balance in a transfer balance account. [Schedule 1, item 5, subsection 294-50(1)]

1.62               This approach moves away from the general reference to ‘retirement phase recipient’ (which is a term used outside of the transfer balance cap rules in Division 294) and clarifies the extent to which the assumptions apply for transfer balance credits. It also ensures that the assumptions can be applied in working out whether an individual gets a transfer balance debit.

1.63               The question of whether an individual has a transfer balance account relies on an individual being the retirement phase recipient of a superannuation income stream. Ensuring that a transfer balance account was maintained after an individual first begins to have one was the primary reason that the assumptions were extended to retirement phase recipients. This revised scope of the matters better targets the assumptions and ensures that there are no unintended consequences from the assumptions applying more broadly in other provisions that relate to whether an individual is the retirement phase recipient of a superannuation income stream.

1.64               The more general approach to working out the transfer balance in an individual’s transfer balance account also ensures that there is no ambiguity about whether the assumptions apply to each of the elements of working out the transfer balance credit that an individual gets.

1.65               This approach also ensures that the assumptions apply in working out whether an individual gets a transfer balance debit, as well as the amount of the debit and the time at which it arises. There are a range of debits covered by the table in subsection 294-80(1) and not all of them would be affected by the matters to which the assumptions apply.

1.66               The debits for which the assumptions are relevant are those covered by items 1, 3, 4, and 6 in the table in subsection 294-80(1) because those items all involve questions about whether an individual is the retirement phase recipient of a superannuation income stream. Applying the assumptions in respect of those items means that a later failure to comply with a requirement or a commutation authority does not affect a debit that has already arisen because of an earlier commutation of a superannuation income stream, an earlier loss from fraud or dishonesty, or an earlier payment split.

1.67               In contrast, the debits that are covered by items 2, 5, and 7 in the table in subsection 294-80(1) are not affected by the assumptions because they can continue to apply irrespective of the assumptions.

1.68               In this respect, item 2 applies because of contributions that are made from structured settlements - it does not apply because of something happening in relation to a superannuation income stream. Similarly, item 7 is essentially a balancing adjustment that the Commissioner can make where an individual has an excess transfer balance but no longer has any superannuation income streams that can be commuted.

1.69               Although item 5 requires a superannuation income stream to stop being in the retirement phase because of subsection 307-80(4), the point in time approach to applying the assumptions means that subsection  07-80(4) stops being disregarded at the end of the 60-day period if a commutation authority is not complied with. Because of this timing, the requirement in item 5 about subsection 307-80(4) applying will be met at the end of 60-day period.

Application

1.70               These amendments apply from the same time as Division 294 generally applies (that is, on and after 1 July 2017). [Schedule 1, item 30, subsection 294-10(2) of the Income Tax (Transitional Provisions) Act 1997]

Transfer balance debit for failure to comply with rules and standards

1.71               Item 6 in the table in subsection 294-80(1) provides a debit when an individual stops being the retirement phase recipient of a superannuation income stream because of a failure to comply with the rules and standards under which the income stream was provided.

1.72               The amendments make changes to the time at which a debit under item 6 in the table in subsection 294-80(1) arises, as well as the time at which the value of the superannuation interests that supported the relevant superannuation income stream is relevant.

1.73               The time that such debits arise is the time at which the superannuation income stream stops being a superannuation income stream. The amount of the debit is the value, just before that time, of the superannuation interest that supported the income stream.  [Schedule 1, item 7, item 6 in the table in subsection 294-80(1)]

1.74               The amendments better target the way that transfer balance debit rules account for failures to comply with the pension or annuity standards that occur part-way through an income year. They achieve this by changing the point at which the superannuation interests that supported the income stream are valued from the end of the year to the time immediately before the income stream stops being a superannuation income stream (this is also the time that any assumptions stop applying).

1.75               An example of a failure that could occur part-way through an income year is where a superannuation income stream is fully commuted before the end of the year without the pro-rata annual payment requirements for the income stream having first been met. The failure to meet the payment requirements would occur immediately before the commutation takes place (being the time up until which the payments must be made). Because of this, the member would not receive a debit for the commutation under item 1 in the table in subsection 294-80(1). However, item 6 provides the member with a transfer balance debit equal to the value of the superannuation interest that supported their superannuation income stream immediately before the commutation.

1.76               Because the value that is identified for the purposes of this debit is the value of the superannuation interest that supported the income stream immediately before the failure, the assumptions continue to apply in identifying that value. This means that for the purposes of valuing the interest at the relevant time, it can still be assumed that it supported a superannuation income stream. This means, for example, that for the purposes of working out the amount of the debit, the rules in regulation 307-200.05 of the Income Tax Assessment Regulations 1997 would continue to treat the interest that supported the superannuation income stream as being separate from any other superannuation interests in the fund.

1.77               These amendments apply from the same time as Division 294 generally applies (that is, on and after 1 July 2017). [Schedule 1, item 30, subsection 294-10(2) of the Income Tax (Transitional Provisions) Act 1997]

Alternative transfer balance debit for contributions from structured settlements made before 1 July 2017

1.78                Schedule 1 provides an alternative transfer balance debit to the one generally available for structured settlements under item 2 of the table in subsection 294-80(1).

1.79               This transfer balance debit applies where an individual would have otherwise received a debit under item 2 of the table in subsection 294-80(1) for contributing the proceeds of a structured settlement into superannuation prior to 1 July 2017 but the amount of that debit would be less than the combined values of the retirement phase superannuation interests that they had at that time. In such cases, individuals receive a debit equal to the combined values of all transfer balance credits they receive for those retirement phase superannuation interests instead of a debit for the amount of the contributions. [Schedule 1, item 17, section 294-80 of the Income Tax (Transitional Provisions) Act 1997]

1.80               Providing a debit equal to the proceeds of a structured settlement that were contributed into superannuation assumed that superannuation income streams that commenced prior to 1 July 2017 would have been drawn down upon relatively heavily given the types of expenses that structured settlements are required to cover. Based on that, it was envisaged that the amount of the contribution that provided a transfer balance debit would generally be greater than the actual value of any superannuation interests that continued to support such income streams as at 1 July 2017.

1.81               However, feedback from industry received in consultation on these amendments indicated that in some circumstances, the current value of the superannuation interests supporting an individual’s superannuation income streams will be greater than the amount of the original structured settlement. As a result, the standard transfer balance debit for structured settlement contributions would not cover the transfer balance credits that arose in respect of the superannuation income streams associated with the structured settlement contribution.

1.82               Providing a debit for the amount of those credits addresses this issue. While this approach may mean that an individual may receive a debit for amounts that were not contributed from a structured settlement, it is specifically intended to prevent individuals or funds having to trace original amounts from a structured settlement contribution to particular superannuation income streams and apportion earnings between the structured settlement amounts and other amounts.

1.83               Where the alternative debit applies, individuals will generally have a transfer balance in their transfer balance account on 1 July 2017 equal to nil. This will allow them to commence new superannuation income streams with a total value up to the amount of the general transfer balance cap (being $1.6 million for the 2017-2018 financial year). This outcome is appropriate because the recipients of structured settlements are likely to have already converted all of their superannuation interests into superannuation income streams, and are less likely to make additional contributions into the superannuation system.

1.84               The alternative debit only applies where the sum of all transfer balance credits is greater than the structured settlement contribution. This ensures that individuals are not in a worse of position than they would have been under the existing rules (for example because the sum of their transfer balance credits are actually less than the structured settlement amount, or because they did not have a superannuation income stream on 1 July 2017).

Transfer balance credit for LRBA repayments

1.85               An individual will receive a transfer balance credit where a superannuation provider makes a payment in respect of an LRBA that increases the value of a superannuation interest supporting a retirement phase superannuation income stream. [Schedule 1, items 3 and 6, item 4 in the table in subsection 294-25(1) and subsection 294-55(1)]

1.86               This change ensures that the transfer balance cap captures the shift of value that occurs where liabilities arising from the LRBA are paid using accumulation phase assets. This is consistent with the way transfers from assets that do not support a superannuation income stream (accumulation phase assets) are treated when a superannuation income stream is commenced.

1.87               The changes only apply to borrowings arising under contracts entered into on or after 1 July 2017. They do not apply to the refinancing of the outstanding balance of borrowings arising under contracts entered into prior to 1 July 2017, or to contracts that were entered into prior to 1 July 2017 but that complete after that time. [Schedule 1, item 31]

1.88               The transfer balance credit arises at the time of the payment, and the amount of the credit is the amount by which the individual’s superannuation income stream increased in value because of the payment. [Schedule 1, items 3 and 6, item 4 in the table in subsection 294-25(1) and subsections 294-55(2) and (3)]

1.89               This means that the transfer balance credit can only arise where the payments in respect of an LRBA supporting a retirement phase superannuation income stream are sourced from assets that do not support the same income stream.

1.90               For example, where such a payment is sourced from assets supporting the retirement phase interest, the payment will not affect the value of the interest because the reduction in the LRBA liability is offset by a corresponding reduction in cash.

1.91               By contrast, where the payment is sourced from assets that support accumulation phase interests, the payment will increase the value of the individual’s retirement phase superannuation interest and trigger a transfer balance credit. That is because there will be no offsetting decrease in the value of the cash supporting that retirement phase interest.

1.92               To determine whether a transfer balance credit has arisen, trustees will need to identify the source of any payments in respect of an LRBA that is supporting a retirement phase superannuation income stream. To the extent that such payments are sourced from other assets, a transfer balance credit will arise.

1.93               It is not necessary to determine the total value of a particular superannuation interest supporting a superannuation income stream in order to calculate the amount of a transfer balance credit for the repayment of a related LRBA. All that is relevant is the amount of the increase in the value of the interest, which can be determined by reference to the amount of the payment that is sourced from assets supporting accumulation phase interests.

1.94               Increases in the value of superannuation interests that result from factors other than a payment in respect of an LRBA (such as capital appreciation or income generated by the asset) will not trigger a transfer balance credit. [Schedule 1, items 3 and 6, item 4 in the table in subsection 294-25(1) and subsection 294-55(1)]

Example 1.1 - no assets supporting accumulation interests

James is 65 and is the only member of his SMSF. His superannuation interests are valued at $1.6 million.

James’ SMSF acquires a $300,000 property. The property is purchased using $150,000 of the SMSF’s cash and $150,000 that it borrows through an LRBA.

James then commences a superannuation income stream, supported by his $1.6 million superannuation interest (which is backed, in part, by the property).

James’ SMSF uses rental income from the property and its other cash deposits to repay the LRBA over time.

As the repayments are sourced from assets that support James’ retirement phase interests, the repayments do not increase the value of James’ superannuation interest supporting his superannuation income stream and James does not receive a transfer balance credit.

While there may be increases in the value of James’ superannuation interest because of other events (such as from capital growth or income generated by the asset) those events do not trigger a credit.

Example 1.2 - repayment for assets solely supporting retirement interests

Bob is 65 and is the only member of his SMSF. Bob’s superannuation interests are valued at $3 million and are based on cash that the SMSF holds.

Bob’s SMSF acquires a $1.5 million property. This property is purchased after 1 July 2017 using $500,000 of the SMSF’s cash and an additional $1 million that it borrows through an LRBA.

Bob then commences an account-based superannuation income stream. The superannuation interest that supports this superannuation income stream is backed by the property, the net value of which is $500,000 (being $1.5 million less the $1 million liability under the LRBA). Bob therefore receives a transfer balance credit of $500,000.

Bob’s SMSF makes monthly repayments of $10,000. Half of each repayment is made using the rental income generated from the property. The other half of each repayment is made using cash that supports Bob’s other accumulation interests.

At the time of each repayment, Bob receives a transfer balance credit of $5,000, representing the increase in value of the superannuation interest that supports his superannuation income stream.

The repayments that are sourced from the rental income that the SMSF receives do not give rise to a transfer balance credit because they do not result in a net increase in the value of the superannuation interest that supports his superannuation income stream.

1.95               The new rule applies only where the superannuation interest is in a complying superannuation fund that is a self-managed superannuation fund or a superannuation fund that has less than five members. [Schedule 1, item 6, paragraph 294-55(1)(c) and subsection 294-55(4)].

1.96               This recognises that in larger superannuation funds there is unlikely to be a direct connection between a specific asset of the fund and the superannuation interests of an individual member.

1.97               A transfer balance credit arising from the repayment of an LRBA may result in an individual having an excess transfer balance. Where this occurs, an amount equal to the credit can be rolled-back through a commutation or partial commutation of the superannuation income stream. The commutation of the superannuation income stream will entitle the individual member to a transfer balance debit under item 1 in the table in subsection 294-80(1). The commutation of the superannuation income stream does not require any changes to the underlying assets in the fund, although the decrease in the current pension liabilities of the fund will appropriately affect the fund’s access to the various earnings tax exemptions.

1.98               The transfer balance credit for repayments will not apply to the extent that a repayment is made in respect of assets supporting a superannuation interest related to income streams that provide defined benefit income. This is because the right to payments that an individual has under such an income stream is unaffected by the assets or investments of a fund. As a result, the decrease in liabilities over an asset in the fund will not affect the value of the superannuation interest that supports the income stream.

Part-year defined benefit income cap

1.99               Schedule 1 amends the provisions related to the defined benefit income cap to ensure that an individual only receives a part-year cap when they first become entitled to concessional tax treatment in relation to defined benefit income part-way through a financial year. [Schedule 1, items 10 and 11, subsection 303-4(2)]

1.100           This amendment corrects the omission of references to ‘defined benefit income’ in subsection 303-4(2), and is consistent with the approach taken in subsection 303-4(3) (which refers to defined benefit income).

1.101           In the absence of this change, the part-year defined benefit income cap would technically apply from the time that section 301-10, 301-100, 302-65 or 302-85 first applied to an individual, including instances where those sections applied to benefits from other superannuation income streams. These amendments ensure that the part-year cap applies from the time an individual first receives defined benefit income that is subject to concessional tax treatment, as originally intended.

1.102           These amendments apply from the same time as the amendments that introduced the defined benefit income cap (that is, in relation to the financial year starting on 1 July 2017 and later financial years). [Schedule 1, subitem 32(2)]

Application date for the transfer of assets by life insurance companies

1.103           Schedule 1 also brings forward the application date for the rules that were introduced about the transfer of assets by life insurance companies. Those changes now apply from the time at which the Bill containing these amendments (the Treasury Laws Amendment (2017 Measures No. 2) Bill 2017) was introduced into the House of Representatives. [Schedule 1, item 28, item 28 of Schedule 8 to the Treasury Laws Amendment (Fair and Sustainable Superannuation) Act 2016]

1.104           Item 26 of Schedule 8 of the Amending Act inserted subsection 320-250(1A) into Division 320. The new provision allows life insurance companies to transfer assets from their segregated current exempt assets to their complying superannuation asset pool without triggering the various tax consequences that would otherwise apply to the transfer. The change was made in recognition of the fact that the transfer balance cap (and TRIS changes) would result in currently exempt life insurance policies being reclassified, and that such reclassification would require changes to a life insurance company’s asset allocations.

1.105           However the new provision for life insurance companies originally applied in relation to the 2017-18 income year. This start date does not assist life insurance companies that seek to account for and rebalance their asset pools during the period between the time that the Amending Act commenced and the start of the 2017-18 income year.

1.106           Bringing forward the application of subsection 320-250(1A) allows such life insurance companies to take action in anticipation of the transfer balance cap and TRIS changes applying. Applying the changes from the time the Bill containing these amendments was introduced into the House of Representatives recognises that life insurance companies are unlikely to be willing to take such action without being able to refer to the legislation that amends the application date. Although the application date will only be effective once the Bill commences, individuals will be able to initiate the action required to take advantage of the new application date in anticipation of the amendments being enacted.

Concessional contributions amendments

Guide Material

1.107           The Guide Material for the concessional contributions cap is amended so that it refers to an individual’s total superannuation balance that ‘equals or exceeds’ (rather than just ‘exceeds’) $500,000. [Schedule 1, item 1, section 291-1]

1.108           This change aligns the wording of the Guide with the condition about an individual’s total superannuation balance in paragraph 291-20(3)(b). That condition states that in order to use the unused concessional cap carry forward rules, an individual’s total superannuation balance must be ‘less than’ $500,000.

1.109           This amendment applies from the same time as the unused concessional cap carry forward rules (that is, the 2019-2020 financial year and later years). [Schedule 1, subitem 32(1)]

References to the concessional contributions cap

1.110           The amendments also clarify that existing references to the concessional contributions cap in the IT(TP) Act 1997 and the Superannuation Guarantee (Administration) Act 1992 continue to relate to the ‘basic’ concessional contributions cap, rather than an individual’s concessional contributions cap as modified by the unused concessional cap carry forward rules. [Schedule 1, items 16 and 22, section 291-170 of the Income Tax (Transitional Provisions) Act 1997 and subsection 15(5) (definition of concessional contributions cap) of the Superannuation Guarantee (Administration) Act 1992]

1.111           These amendments update existing references to the concessional contributions cap in other parts of the tax and superannuation law to clarify that the unmodified concessional contributions cap continues to be the only cap that is relevant for the purposes of those other provisions.

1.112            Prior to the introduction of the unused concessional cap carry forward rules, fixed concessional contributions caps applied to individuals each year. However, an individual’s concessional contributions cap for an income year can now be increased by unused amounts from previous years, provided that they have a total superannuation balance of less than $500,000 at the end of the previous year.

1.113           To facilitate this change, the amendments insert the definition of ‘basic concessional contributions cap’. This definition refers to the concessional contributions cap in subsection 291-20(2) but disregards any increases to that cap that can occur for an individual because of the unused concessional cap carry forward rules. [Schedule 1, item 15, subsection 995-1(1) (definition of basic concessional contributions cap)]

1.114           The updated references to the concessional contributions cap now refer to the ‘basic concessional contributions cap’.

1.115           These amendments apply from the same time as the unused concessional cap carry forward rules (that is, the 2019-2020 financial year and later years). [Schedule 1, subitem 32(1)]

Treatment of defined benefit contributions

1.116            The amendments clarify that any amounts in respect of notional taxed contributions that were covered by paragraph 291-370(1)(a) (because they were made to a constitutionally protected fund) are disregarded in working out whether an individual’s defined benefit contributions exceed their notional taxed contributions. [Schedule 1, item 2, paragraph 291-370(1)(c)]

1.117           This change addresses the potential asymmetry between defined benefit contributions made to constitutionally protected funds, and the notional taxed contributions against which they are compared to determine whether there is an excess. Restricting both to amounts that are not already covered by the rule for contributions to constitutionally protected funds ensures that the amount of notionally taxed contributions is not overstated relative to the amount of defined benefit contributions that is identified.

1.118           These amendments apply from the same times as the related changes to concessional contributions that were introduced by the Amending Act (that is, in relation to the financial year starting on 1 July 2017 and later financial years). [Schedule 1, subitem 32(2)]

Non-concessional contributions amendments

1.119           The application rule in Schedule 3 to the Amending Act is amended so that it applies correctly in respect of the provisions that enable the Commissioner to determine a longer period for the proceeds from a structured settlement to be contributed into a superannuation plan, and which modify the eligibility conditions for receiving the Government co-contribution. Those provisions will continue to apply from financial years that start on 1 July 2017, and later financial years. [Schedule 1, items 25 to 27, item 9 of Schedule 3 to the Treasury Laws Amendment (Fair and Sustainable Superannuation) Act 2016]

1.120           In its original form, the application rule in item 9 of Schedule 3 to the Amending Act relates to ‘working out your non-concessional contributions cap for the financial year starting on 1 July 2017 and later financial years’. However, the amendments contained at items 3, 4 and 7 in that Schedule do not relate to working out the non-concessional contributions cap (they instead relate to determinations and the Government co-contribution). These amendments ensure that those changes apply to financial years starting on 1 July 2017 and later financial years, as originally intended.

1.121           The application rule in Schedule 3 to the Amending Act is also amended so that changes about review rights for non-concessional contribution determinations apply in relation to determinations and decisions not to make determinations that relate to the 2013-2014 financial year and later years. [Schedule 1, items 25 to 27, item 9 of Schedule 3 to the Treasury Laws Amendment (Fair and Sustainable Superannuation) Act 2016]

1.122           This change aligns the application of the updated review rules with that for the review rights for the discretion for concessional contributions, which applies from the 2013-2014 financial year.

Objective of superannuation amendments

1.123           Schedule 1 repeals the existing requirement in the Legislation Act 2003 to prepare a statement of compatibility with the objective of superannuation, as set out in the Superannuation (Objective) Act 2016 . The requirement is reinserted with commencement that is contingent upon the Bill becoming an Act. [Schedule 1, items 20 and 21, paragraph 15J(2)(fa) of the Legislation Act 2003]

1.124           The Superannuation (Objective) Bill 2016, if enacted, will legislate the objective of the superannuation system. The Bill also sets out the requirement that any new bills relating to superannuation must be accompanied by a statement of compatibility with the stated objective. An equivalent requirement was introduced through the Amending Act in respect of regulations relating to superannuation. This requirement was contained paragraph 15J(2)(fa) of the Legislation Act 2003 and commenced on 1 January 2017. However, the requirement was inoperative because it refers to the Superannuation (Objective) Act 2016 .

1.125           Rather than maintain an inoperative provision, the amendment repeals the requirement with effect from the time it commenced (1 January 2017) and remakes it with commencement that is contingent upon the Superannuation (Objective) Bill 2016 being enacted. If the Superannuation (Objective) Bill 2016 is not ultimately enacted, the requirement in paragraph 15J(2)(fa) will not commence.

Transition to retirement income stream amendments

1.126           The amendments modify the rules that provide the circumstances in which a superannuation income stream is in the retirement phase.

1.127           These amendments enable TRISs (as well as the other superannuation income streams referred to in subsection 307-80(3)) to be in the retirement phase where the recipient of the superannuation income stream has satisfied a relevant condition of release with a nil cashing restriction. An individual must also notify their superannuation income stream provider that they have satisfied a condition of release with a nil cashing restriction, other than the condition related to attaining age 65. [Schedule 1, item 13, subsection 307-80(3)]

1.128           The conditions of release that are relevant in this context are retirement, terminal medical conditions, permanent incapacity and attaining age 65 (see paragraph 307-80(2)(c), which refers to items 101, 102A, 103 and 106 of the table in Schedule 1 to the SISR 1994).

1.129           As noted above, a TRIS is one form of superannuation income stream that is payable to a person before they retire from the workforce or attain age 65. Individuals can also commence a transition to retirement pension, a non-commutable allocated pension or non-commutable allocated annuity. While a ‘TRIS’ specifically refers to a transition to retirement income stream, the term is also commonly used to refer the various products collectively.

1.130           The Amending Act introduced the requirement that, from 1 July 2017, a superannuation income stream must be in the retirement phase in order for an entity to claim an earnings tax exemption in relation to income from the assets it uses to meet the liabilities it has in relation to the income stream. To implement the Government’s decision in the 2016-17 Budget, the rules about when a superannuation income stream is in the retirement phase specifically exclude TRISs (see subsection 307-80(3)).

1.131           As a superannuation income stream that is established as a TRIS will always retain its character as a TRIS, the restriction introduced as part of the Amending Act would always prevent TRISs from being in the retirement phase even after the holder later satisfies a condition of release with a nil cashing restriction. Because of this, an individual who has met a condition of release with a nil cashing restriction (including those who had met such a condition prior to 1 July 2017) and who wishes to take advantage of the earnings tax exemptions available in respect of superannuation income streams would need to commute and rollover their TRIS benefits to a replacement superannuation income stream (such as an account-based pension).

1.132           To avoid individuals having to restructure their interests in this way, the amendments enable a TRIS to enter the retirement phase once the holder has satisfied a condition of release with a nil cashing restriction. This will happen automatically when a member reaches age 65. It will also happen when the member notifies their superannuation income stream provider that they have satisfied a relevant condition of release with a nil cashing restriction. In these circumstances, the superannuation income stream provider becomes eligible for the earnings tax exemption at the time it is notified.

1.133           Consistent with the original change in respect of TRISs that was introduced as part of the Amending Act, these amendments apply in the same way as any provision that refers to the retirement phase definition. [Schedule 1, subitem 32(3)]

Capital gains tax relief amendments

CGT relief for assets supporting TRISs

1.134           The period in which an asset supporting a TRIS can cease to be a segregated current pension asset of a fund and still qualify for ‘CGT relief’ under section 294-110 of the IT(TP) Act 1997 is extended to include the start of 1 July 2017. [Schedule 1, item 18, paragraph 294-110(1)(b) of the Income Tax (Transitional Provisions) Act 1997]

1.135           The change ensures that the CGT relief provisions apply as intended to segregated assets that support TRISs prior to the TRIS changes coming into effect. Extending the period in paragraph 294-110(1)(b) of the IT(TP) Act 1997 to the start of 1 July 2017 recognises that the change for TRISs will apply from 1 July 2017 without any action being taken by the holder of the TRIS or the entity that provides it.

1.136           Section 294-110 of the IT(TP) Act 1997 provides CGT relief to preserve the tax exempt status of unrealised capital gains on segregated current pension assets held by superannuation funds prior to the transfer balance cap and the TRIS changes applying. Transitional relief is also available to funds that use the ‘proportionate method’ in respect of non-segregated assets.

1.137           The CGT relief rules allow the trustee of a fund to reset the cost-base of assets that cease being segregated current pension assets (that is, assets solely used or set aside to meet current pension liabilities) during the ‘pre-commencement period’. It achieves this by deeming such assets to have been sold and reacquired for their market value. Because income from segregated current pension assets is exempt, a fund that elects to use this treatment does not have a CGT liability in respect of the deemed disposal.

1.138           In contrast to superannuation income streams that need to be actively commuted for an individual to prevent a breach of their transfer balance cap, it was not intended that individuals or funds would be required to proactively re-characterise TRISs or the assets that supported them in order to claim CGT relief. However in their original form the CGT relief rules for segregated assets required an asset to cease being a segregated asset during the ‘pre-commencement period’. The issue with this approach was that the last day of the pre-commencement period (being 30 June 2017) ceases immediately before the time that the TRIS changes apply (being 1 July 2017).

1.139           These amendments address this timing issue by making additional provision for assets supporting TRISs that cease to be segregated current pension assets at the start of 1 July 2017. The amendments do not alter the ‘pre-commencement period’ but instead expand the circumstances in which the CGT relief for segregated assets can apply.

1.140           The amendment also extends the concept of ‘cessation time’ to the start of 1 July 2017 in respect of assets supporting TRISs. The cessation time concept is relevant for determining the time over which a fund must be a complying superannuation fund, and for applying the assumptions about a fund selling and repurchasing the asset (see subsection 294-110(3) of the IT(TP) Act 1997).

1.141           There may be difficulties in determining the specific assets in a segregated asset pool that are used to support TRIS interests during the pre-commencement period. In this case, provided the assets are held throughout the pre-commencement period and the other requirements of Division 294 of the IT(TP) Act 1997 are satisfied, an approach that applies the CGT relief to that proportion of the segregated asset pool supporting TRIS interests is acceptable. Appropriate records must be kept of the cost base uplift for those assets as at 1 July 2017.

1.142           The original pre-commencement period condition can still be satisfied by assets that were supporting a TRIS that was commuted during the pre-commencement period (although in this case the TRIS specific condition would also be satisfied). Similarly, that condition would still be satisfied where an asset supported a TRIS and other superannuation income streams, and those other income streams were commuted during the pre-commencement period.

1.143           For the deemed sale of an asset covered by the new condition for TRISs, the time at which it is taken to be sold is the very end of 30 June 2017 (being the time immediately before the start of 1 July 2017). Because of this timing, any gain from the deemed sale will have been made from a segregated current pension asset and will therefore be exempt.

1.144           For the deemed repurchase of the asset, the time at which it is taken to be repurchased is the start of 1 July 2017.

Extending CGT relief to pooled superannuation trusts

1.145           Schedule 1 extends the CGT relief provisions that were inserted into Subdivision 294-B of the IT(TP) Act 1997 by Schedule 1 to the Amending Act. As a result of these changes, the trustee of a PST can claim ‘CGT relief’ that is consistent with the relief available to complying superannuation funds that use the proportionate method.

1.146           The two CGT relief provisions are broadly similar because the earnings tax exemption for PSTs in section 295-400 adopts a similar approach to the proportionate method in section 295-390. In this respect, section 295-400 allows a share of the income of the PST to be exempt from tax. This share relates to current pension liabilities, although in the case of PSTs it is the liabilities of the unitholder, rather than the trust itself.

1.147           There are two methods that can be used to work out this share - the first identifies the proportion of total units in the trust that are segregated current pension assets of its unitholders. An equivalent proportion of the income of the PST is then exempt (see subsection 295-400(1)). However, focussing solely on the segregated current pension assets of a unit holder means that the proportion calculated under subsection 294-400(1) does not take into account any exemption that a unitholder is entitled to because of the proportionate method in section 295-390.

1.148           To address this, the trustee of a PST can use the alternative exemption in subsections 295-400(3) and (4). These subsections allow the trustee to claim an exemption for the percentage of their income that would have been exempt if it had instead been derived by the unitholders in proportion to their holdings.

1.149           For CGT relief to apply to an asset of a PST, the proportion or percentage that is calculated under subsection 295-400(1) or subsection 295-400(3) (whichever is applicable), must be greater than nil. The PST must also hold the asset throughout the pre-commencement period, and the trustee of the PST must make a choice about the CGT relief rules applying to the asset. [Schedule 1, item 19, subsection 294-125(1) of the Income Tax (Transitional Provisions) Act 1997]

1.150           The choice that the trustee makes must be in the approved form and must be made on or before the day by which the trustee is required to lodge the PST’s income tax return for the 2016-17 income year. Once this choice has been made, it cannot be revoked. [Schedule 1, item 19, subsection 294-125(2) of the Income Tax (Transitional Provisions) Act 1997]

1.151           Where all of the above conditions have been satisfied in respect of an asset, the PST is taken to have sold the asset immediately before 1 July 2017 for consideration equal to its market value, and also to have re-acquired the asset for the same amount just after it was deemed to be sold.

1.152           This deemed sale and re-acquisition resets the cost base of the asset, and crystallises any capital gain or capital loss that has accrued in relation to it.

1.153           This deemed transaction triggers CGT event A1 under section 104-10. Unless the PST has a proportion equal to one or a percentage equal to 100 per cent, a part of any net capital gain made by the PST from those assets is taken into account in calculating taxable income for the 2016-17 income year. However, the trustee of the PST can also elect to defer the amount of the gain, consistent with the choice available in respect of complying superannuation funds that use the proportionate method.

Choice to defer capital gain arising from CGT relief

1.154           The trustee of a PST that elects to apply the CGT relief provided by these amendments can make an additional choice to defer a capital gain that arises from the CGT relief rules applying to an asset. The choice to defer does not arise in relation to a capital loss. [Schedule 1, item 19, subsection 294-130(1) of the Income Tax (Transitional Provisions) Act 1997]

1.155           The choice to defer a capital gain must be made at the same time and in the same manner as the choice to apply CGT relief to the asset. As with the original choice, the choice to defer cannot be revoked. [Schedule 1, item 19, subsection 294-130(2) of the Income Tax (Transitional Provisions) Act 1997]

1.156           The immediate consequence of the capital gain being deferred is that it is disregarded for the 2016-17 income year. [Schedule 1, item 19, subsection 294-130(3) of the Income Tax (Transitional Provisions) Act 1997]

Quantifying the deferred notional gain

1.157           The object of the deferral is to bring to account, in a future income year, the amount that would have been brought to account and subject to tax in the 2016-17 income year if the deferral did not occur.

1.158           Simply deferring the capital gain amount would fail to neutralise the effect of changes in the PSTs circumstances (for example, regarding the existence of capital losses and the change to the exempt proportion or percentage that the PST has).

1.159           To appropriately bring the amount of the deferral to account in a future income year, a number of adjustments are made when calculating the deferred notional gain in the 2016-17 income year and additional adjustments are made in the year in which the gain is brought to account.

1.160           The deferred notional gain is calculated by hypothesising the net capital gain of the PST for the 2016-17 income year as if the deferral did not occur and a capital gain arose from the fund’s choice to apply CGT relief. [Schedule 1, item 19, paragraph 294-130(4)(a) of the Income Tax (Transitional Provisions) Act 1997]

1.161           The deferred notional gain is calculated by reference to the net capital gain of the PST, rather than the capital gain on the relevant asset, to incorporate any CGT discount that applied to the gain (the CGT discount is applied as part of the net capital gain calculation in section 102-5). The CGT discount will apply to the capital gain if the PST acquired the asset on or before 30 June 2016, 12 months prior to the application of CGT relief.

1.162           In calculating the hypothetical net capital gain of the PST, other capital gains and losses that arose during the income year, and prior year unapplied net capital losses, are disregarded. The purpose of this exclusion is to isolate the impact of the hypothesised gain. Capital losses are not taken into account in calculating the deferred notional gain but may be applied against that amount when it is brought to account in a later income year. [Schedule 1, item 19, paragraphs 294-130(4)(b), (c) and (d) of the Income Tax (Transitional Provisions) Act 1997]

1.163           Once the hypothetical net capital gain amount is calculated, the deferred notional gain can be calculated as the non-exempt proportion of the gain. The non-exempt proportion is the amount of the net capital gain that would have been subject to tax if the deferral did not occur. The non-exempt proportion is worked out as the proportion of the PST’s assets that supported superannuation benefit liabilities of a unit holder (other than superannuation income stream benefit liabilities) throughout the 2016-17 income year.

1.164           For PSTs that used the proportion in subsection 295-400(1), non-exempt proportion is calculated by subtracting the proportion in subsection 295-400(1) (essentially, the exempt proportion) from one. For PSTs that instead used the percentage in subsection 295-400(4), the proportion is calculated by subtracting that percentage from 100 per cent. [Schedule 1, item 19, definition of ‘2016-17 non-exempt proportion’ in subsection 294-130(7) of the Income Tax (Transitional Provisions) Act 1997]

Bringing the deferred notional gain to account

1.165           If the CGT asset is sold or otherwise realised (that is, there is a realisation event) on or after 1 July 2017, the deferred notional gain is brought to account in the income year in which the realisation event happens. [Schedule 1, item 19, subsection 294-130(5) of the Income Tax (Transitional Provisions) Act 1997]

1.166           When the deferred notional gain is brought to account, it is brought to account as a deemed capital gain. Consistent with the object of bringing to account the amount of the gain that would be subject to tax in the 2016-17 income year, a number of modifications are made to prevent additional adjustments from applying based on the circumstances in the income year the realisation event happens. [Schedule 1, item 19, paragraph 294-130(5)(a) of the Income Tax (Transitional Provisions) Act 1997]

1.167           The capital gain is not associated with any particular CGT event. For the purposes of bringing the deferred notional gain to account, section 102-20 is disregarded. This is necessary because that section specifies that a capital gain can only arise where a CGT event has happened. [Schedule 1, item 19, paragraph 294-130(5)(b) of the Income Tax (Transitional Provisions) Act 1997]

1.168           The deemed capital gain is treated as not being a discount capital gain. This reflects that the CGT discount (if any) that applied to the asset on its deemed sale on 30 June 2017 was already taken into account in calculating the deferred notional gain. This provision does not affect the CGT discount that may be available in respect of the realisation of assets the PST is deemed to have required on 30 June 2017. [Schedule 1, item 19, paragraph 294-130(5)(c) of the Income Tax (Transitional Provisions) Act 1997]

1.169           A final modification is made to ensure a proportion of the deferred notional gain is not exempt under section 295-400. This is because only the 2016-17 non-exempt proportion of the net capital gain is included in the calculation of the deferred notional gain. It is therefore not necessary to apply to proportion or percentage that applies to the PST the gain year. [Schedule 1, item 19, subsection 294-130(6) of the Income Tax (Transitional Provisions) Act 1997]

1.170           Section 121-20 provides that records must be kept for every act, transaction, event or circumstance that can reasonably be expected to be relevant in working out whether a capital gain or loss arises from a CGT event. Records are required to be kept whether the CGT event has already happened or will happen in the future.

1.171           Where a PST has elected to defer a capital gain that arises from the PST choosing to apply CGT relief, the trustee of the fund will be aware that a CGT event will happen in the future to bring the deferred notional gain to account when the asset is sold or otherwise realised.

1.172           Therefore, the PST must, at a minimum, keep records of the assets to which CGT relief was applied and the 2016-17 non-exempt proportion of the deferred notional gains for these assets so that when capital gains or losses on those assets are later realised the deferred notional gain can be brought to account in that future income year.

Administrative streamlining amendments

1.173           Schedule 1 amends the rules for determining penalty amounts for failures to provide a return, notice or other documents. These amendments ensure that the base penalty amount applies to failures to provide an entity with a notice to release amounts from superannuation that is required to be provided under section 96-42 of Schedule 1 to the TAA 1953. [Schedule 1, item 23, paragraph 286-80(2)(a) of Schedule 1 to the Taxation Administration Act 1953]

1.174           This amendment ensures that an individual who fails to provide an entity with such a notice has a base penalty amount of one penalty unit for each 28 day period that they fail to provide the notice, up to a maximum of five penalty units.

1.175           The change to the base penalty amount applies in relation to notices that are required to be given on or after the time that the amendments receive the Royal Assent. [Schedule 1, subitem 32(4)]

1.176           Schedule 1 also removes a provision stating that the Commissioner can provide a notice about an entity’s liability to pay a liability ‘in any other notice’ that is given to the entity. [Schedule 1, item 24, section 298-10 of Schedule 1 to the Taxation Administration Act 1953]

1.177           This specific provision is no longer required as their effect is achieved through the broader provisions about combining notices that were introduced in Schedule 10 to the Amending Act.

Statement of Compatibility with Human Rights

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Schedule 1 - Amendments relating to superannuation reform package

1.178                          Schedule 1 is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 .

Overview

1.179                          The amendments in Schedule 1 make changes to measures enacted through the Treasury Laws Amendment (Fair and Sustainable Superannuation) Act 2016 to support the integrity of the measures and ensure the law operates as intended.

1.180                          The amendments relate to the following measures that were included in that Act:

•        the transfer balance cap;

•        changes to the concessional contribution rules;

•        changes to the non-concessional contribution rules;

•        objective of superannuation;

•        changes to the transition to retirement income stream rules;

•        capital gains tax relief for superannuation funds; and

•        streamlining of administrative processes.

Human rights implications

1.181                          The amendments in Schedule 1 do not engage any of the applicable rights or freedoms.

Conclusion

1.182                          Schedule 1 is compatible with human rights as it does not raise any human rights issues.



Chapter 2          

Amendments relating to insolvency

Outline of chapter

2.1                    Schedule 2 to this Bill amends the insolvency law provisions in the Bankruptcy Act 1966 and Corporations Act 2001 .

Context of amendments

2.2                    The Insolvency Law Reform Act 2016 (Reform Act) amended the Bankruptcy Act 1966 (Bankruptcy Act) and Corporations Act 2001 (Corporations Act) to create common rules that would:

•        remove unnecessary costs and increase efficiency in insolvency administrations;

•        align registration and disciplinary frameworks that apply to registered liquidators and registered trustees;

•        enhance communication and transparency between stakeholders; and

•        improve overall confidence in the professionalism and competence of insolvency practitioners.

2.3                    The Reform Act commenced on 1 March 2017. However, some of the provisions have a delayed commencement date of 1 September 2017 as a result of transitional arrangements in regulations (for example item 5 of schedule 13 of the Corporations Regulations 2001 ).

2.4                    The Reform Act created prohibitions on external administrators and trustees of debtors’ estates deriving profits or advantages except as allowed under the Bankruptcy Act and Corporations Act (following the amendments in the Reform Act).

2.5                    Under the current provisions, a single profit or advantage received by an external administrator or trustee would need multiple creditor approvals if the benefit is received by multiple related entities. This will create unintended and unnecessarily high compliance costs for insolvency practitioners using common business structures.

2.6                    For example, this results in the perverse outcome where an insolvency practitioner would be unable to pay employees in the usual course of their employment without first obtaining a separate creditor approval.

2.7                    To address this, the Bankruptcy Act and Corporations Act will be amended to:

•        remove the requirement for creditors to approve the payment of a profit or advantage to a related entity of the external administrator or trustee where the particular profit or advantage is already approved or permitted; and

•        extend creditor’s ability to approve profits or advantages derived by related entities of the external administrator or trustee to include the ability to approve both directly-derived and indirectly-derived profits or advantages.

2.8                    The Reform Act also removed the requirement for annual and end-of-control returns by controllers to be included on ASIC’s public register (although they are still required to be lodged with ASIC). The unintended consequence of this would be to delay aspects of the Fair Entitlement Guarantee Recovery program as it relies on access to controller returns to determine whether controllers have complied with their statutory obligations. Therefore, amendments to the Corporations Act are needed to reinstate the requirement for annual and end-of-control returns by controllers to be included on ASIC’s public register.

2.9                    There are also three technical errors in the Corporations Act following the amendments in the Reform Act which need to be corrected.

Summary of new law

2.10                The new law will amend the Bankruptcy Act and the Corporations Act to:

•        remove the requirement for creditors to approve the payment of a profit or advantage to a related entity of the external administrator or trustee where the particular profit or advantage is already approved or permitted; and

•        extend creditor’s ability to approve profits or advantages derived by related entities of the external administrator or trustee to include the ability to approve both directly-derived and indirectly-derived profits or advantages.

2.11                The new law will also amend the Corporations Act to:

•        reinstate the requirement for annual and end-of-control returns by controllers to be included on ASIC’s public register; and

•        make minor technical fixes to the Reform Act amendments.

Comparison of key features of new law and current law

New law

Current law

A single approval will cover a profit or advantage received by an external administrator or trustee even when received by multiple related entities

A single profit or advantage received by an external administrator or trustee would need multiple creditor approvals if the benefit is received by multiple related entities

Annual and end-of-control returns by controllers will continue to be included on ASIC’s public register

Annual and end-of-control returns by controllers will not be included on ASIC’s public register after 1 September 2017

Detailed explanation of new law

2.12                The Bankruptcy Act and the Corporations Act are amended to:

•        remove the requirement for creditors to approve the payment of a profit or advantage to a related entity of the external administrator or trustee where the particular profit or advantage is already approved or permitted; and

•        extend creditor’s ability to approve profits or advantages derived by related entities of the external administrator or trustee to include the ability to approve both directly-derived and indirectly-derived profits or advantages.

[Schedule 2, item 1 paragraphs 60-20(4)(a) to (c) of Schedule 2 to the Bankruptcy Act; item 2 subsection 60-20(4A) of Schedule 2 to the Bankruptcy Act; item 6, paragraphs 60-20(4)(a) to (c) of Schedule 2 to the Corporations Act; and item 7, subsection 60-20(4A) of Schedule 2 to the Corporations Act]

2.13                This amendment will remove the unintended and unnecessarily high compliance costs for insolvency practitioners using business structures common in the industry as they will not be required to get multiple approvals for a single profit or advantage where that benefit is also received by related entities.

2.14                The provision removing the requirement for annual and end-of-control returns by controllers to be from ASIC’s public register is repealed. [Schedule 2, item 4 subparagraph 1274(2)(a)(iab) of the Corporations Act]

2.15                This will ensure that the Fair Entitlement Guarantee Recovery program continues to operate as it currently does.

Technical corrections

2.16                Section 411(9) of the Corporations Act provides that certain prescribed provisions of the Corporations Act should apply to a person appointed to administer a scheme of arrangement as if they were a receiver. One of the prescribed provisions is section 432 which deals with the requirement to lodge controller accounts.

2.17                Under the Reform Act the requirements in section 432 were extended into section 422A and 422B. The consequential amendment to section 411(9) was not however made and this section still only refers to section 432.

2.18                Section 411(9) is therefore being corrected so that it refers to sections 422A and 422B as well as to section 432. [Schedule 2, item 3 paragraph 411(9)(a) of the Corporations Act]

2.19                Section 40-110 of Schedule 2 to the Corporations Act has an error as it provides that the Insolvency Practice Rules may prescribe industry bodies for this section. This is being corrected so that it provides that industry bodies can be prescribed for the Subdivision. [Schedule 2, item 5 section 40-110 of Schedule 2 of the Corporations Act]

2.20                Similarly, subsection 70-6(4) of Schedule 2 to the Corporations Act has an error in cross referencing subsections within the subsection. This is being corrected so that the subsection refers to subsection (5), which is the correct subsection, rather than subsection (6). [Schedule 2, item 8 subsection 70-6(4) of Schedule 2 of the Corporations Act]

Application and transitional provisions

2.21                The amendments take effect from the day of Royal Assent.

Statement of Compatibility with Human Rights

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Amendments relating to insolvency

2.22                Schedule 2 to this Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 .

Overview

2.23                This Schedule amends to the Bankruptcy Act 1966 and Corporations Act 2001 to:

•        remove the requirement for creditors to approve the payment of a profit or advantage to a related entity of the external administrator or trustee where the particular profit or advantage is already approved or permitted; and

•        extend creditor’s ability to approve profits or advantages derived by related entities of the external administrator or trustee to include the ability to approve both directly-derived and indirectly-derived profits or advantages.

2.24                The Schedule will also amend the Corporations Act to:

•        reinstate the requirement for annual and end-of control returns by controllers to be included on ASIC’s public register; and

•        make minor technical fixes to the Reform Act amendments.

Human rights implications

2.25                This Schedule does not engage any of the applicable rights or freedoms.

Conclusion

2.26                This Schedule is compatible with human rights as it does not



 

Schedule 1:  Superannuation reform package amending provisions

Bill reference

Paragraph number

Item 1, section 291-1

1.107

Item 2, paragraph 291-370(1)(c)

1.116

Items 3 and 6, item 4 in the table in subsection 294-25(1) and subsections 294-55(2) and (3)

1.88

Items 3 and 6, item 4 in the table in subsection 294-25(1) and subsection 294-55(1)

1.94

Items 3 and 8, item 5 in the table in subsection 294-25(1) and item 8 in the table in subsection 294-80(1)

1.41

Items 3 and 6, item 4 in the table in subsection 294-25(1) and subsection 294-55(1)

1.85

Items 4 and 9, subsection 294-25(3) and subsection 294-80(3)

1.44

Item 5, subsection 294-50(2)

1.53

Item 5, subsection 294-50(3)

1.58

Item 5, subsection 294-50(1)

1.61

Item 5, section 294-50

1.47, 1.52

Item 6, paragraph 294-55(1)(c) and subsection 294-55(4)

1.95

Item 7, item 6 in the table in subsection 294-80(1)

1.73

Items 10 and 11, subsection 303-4(2)

1.99

Item 13, subsection 307-80(3)

1.127

Item 15, subsection 995-1(1) (definition of basic concessional contributions cap)

1.113

Items 16 and 22, section 291-170 of the Income Tax (Transitional Provisions) Act 1997 and subsection 15(5) (definition of concessional contributions cap) of the Superannuation Guarantee (Administration) Act 1992

1.110

Item 17, section 294-80 of the Income Tax (Transitional Provisions) Act 1997

1.79

Item 18, paragraph 294-110(1)(b) of the Income Tax (Transitional Provisions) Act 1997

1.134

Item 19, subsection 294-125(1) of the Income Tax (Transitional Provisions) Act 1997

1.149

Item 19, subsection 294-125(2) of the Income Tax (Transitional Provisions) Act 1997

1.150

Item 19, subsection 294-130(1) of the Income Tax (Transitional Provisions) Act 1997

1.154

Item 19, subsection 294-130(2) of the Income Tax (Transitional Provisions) Act 1997

1.155

Item 19, subsection 294-130(3) of the Income Tax (Transitional Provisions) Act 1997

1.156

Item 19, paragraph 294-130(4)(a) of the Income Tax (Transitional Provisions) Act 1997

1.160

Item 19, paragraphs 294-130(4)(b), (c) and (d) of the Income Tax (Transitional Provisions) Act 1997

1.162

Item 19, definition of ‘2016-17 non-exempt proportion’ in subsection 294-130(7) of the Income Tax (Transitional Provisions) Act 1997

1.164

Item 19, subsection 294-130(5) of the Income Tax (Transitional Provisions) Act 1997

1.165

Item 19, paragraph 294-130(5)(a) of the Income Tax (Transitional Provisions) Act 1997

1.166

Item 19, paragraph 294-130(5)(b) of the Income Tax (Transitional Provisions) Act 1997

1.167

Item 19, paragraph 294-130(5)(c) of the Income Tax (Transitional Provisions) Act 1997

1.168

Item 19, subsection 294-130(6) of the Income Tax (Transitional Provisions) Act 1997

1.169

Items 20 and 21, paragraph 15J(2)(fa) of the Legislation Act 2003

1.123

Item 23, paragraph 286-80(2)(a) of Schedule 1 to the Taxation Administration Act 1953

1.173

Item 24, section 298-10 of Schedule 1 to the Taxation Administration Act 1953

1.176

Items 25 to 27, item 9 of Schedule 3 to the Treasury Laws Amendment (Fair and Sustainable Superannuation) Act 2016

1.119, 1.121

Item 28, item 28 of Schedule 8 to the Treasury Laws Amendment (Fair and Sustainable Superannuation) Act 2016

1.103

Item 30, subsection 294-10(2) of the Income Tax (Transitional Provisions) Act 1997

1.46, 1.70, 1.77

Item 31

1.87

Subitem 32(1)

1.109, 1.115

Subitem 32(3)

1.133

Subitem 32(4)

1.175

Subitem 32(2)

1.102, 1.118

Schedule 2:  Insolvency laws amendment

Bill reference

Paragraph number

Item 1 paragraphs 60-20(4)(a) to (c) of Schedule 2 to the Bankruptcy Act; item 2 subsection 60-20(4A) of Schedule 2 to the Bankruptcy Act; item 6, paragraphs 60-20(4)(a) to (c) of Schedule 2 to the Corporations Act; and item 7, subsection 60-20(4A) of Schedule 2 to the Corporations Act

2.12

Item 3 paragraph 411(9)(a) of the Corporations Act

2.18

Item 4 subparagraph 1274(2)(a)(iab) of the Corporations Act

2.14

Item 5 section 40-110 of Schedule 2 of the Corporations Act

2.19

Item 8 subsection 70-6(4) of Schedule 2 of the Corporations Act

2.20