1996

THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA

HOUSE OF REPRESENTATIVES

RETIREMENT SAVINGS ACCOUNTS (CONSEQUENTIAL AMENDMENTS) BILL 1996

SUPPLEMENTARY EXPLANATORY MEMORANDUM

Amendment to be moved on behalf of the Government

(Circulated by authority of the Assistant Treasurer, Senator the Hon Rod Kemp)

80621  Cat. No. 96 5912 9  ISBN )644 496940

AMENDMENTS TO RETIREMENT SAVINGS ACCOUNTS (CONSEQUENTIAL AMENDMENTS) BILL 1996

GENERAL OUTLINE OF THE AMENDMENTS

The amendments to the Retirement Savings Accounts (Consequential Amendments) Bill 1996 are intended to enhance the effectiveness and efficiency of the new regime for regulating retirement savings accounts (RSAs).  Various technical amendments are made in order to clarify the taxation treatment of RSAs, amend the requirements regarding constitution of the Superannuation Complaints Tribunal and ensure the wording of certain provisions achieves the effect intended.

In particular, the amendments will:

•	limit the scope of who may be regarded as a ‘representative of an RSA provider’ for the purposes of the Superannuation (Resolution of Complaints) Act 1993;
	
•	enable the Superannuation Complaints Tribunal to be constituted by any three Tribunal members;

•	modify the regime that applies to tax RSA providers to:
•	remove concerns that the provisions could result in the double taxation of amounts credited to RSAs;
•	ensure that the RSA component of an RSA provider’s taxable income is not reduced by tax paid in relation to an RSA that is withdrawn by the RSA provider from the RSA; and
•	ensure that RSA providers cannot offset losses against RSA income;

•	ensure that the intercorporate dividend rebate available under section 46 and 46A applies appropriately to life assurance company RSAs; and

•	insert a missing word and ensure that the tax file number provisions that apply to ordinary bank accounts do not apply to RSAs.

FINANCIAL IMPACT STATEMENT

There is no financial impact as a result of these amendments.

EXPLANATORY NOTES ON THE AMENDMENTS TO THE RETIREMENT SAVINGS ACCOUNTS (CONSEQUENTIAL AMENDMENTS) BILL 1996

Amendments to Schedule 2 of the Retirement Savings Accounts (Consequential Amendments) Bill 1996

Schedule 2 - Item 14

1.	Amendment (1) amends item 14 of Schedule 2 of the Retirement Savings Accounts (Consequential Amendments) Bill 1996 (RSA(CA) Bill) to narrow the scope of the definition of ‘representative of an RSA provider’ for the purposes of the Superannuation (Resolution of Complaints) Act 1993 (SRC Act).

2.	As a result of the amendment, a ‘representative of an RSA provider’ will be limited to only those agents, employees or officers of the RSA provider, or associate of the RSA provider, who engage in conduct in relation to RSAs.

3.	This will ensure that the RSA provider will not be made accountable before the SCT for the sales misconduct of persons who have no formal link to the provider.  At present the definition is too broad and could conceivably cover persons such as solicitors or accountants in respect of whose advice the RSA provider has no control.

Schedule 2 - Item 17

4.	Amendment (2) inserts new items 17A and 17B in Schedule 2 of the RSA(CA) Bill.  Items 17A and 17B will amend section 9 of the SRC Act so that any three members of the Superannuation Complaints Tribunal (SCT) can constitute a panel, as directed by the Chairperson.  One of these Tribunal members would be nominated by the Chairperson to preside at the meeting.

5.	The amendment will remove the requirement for the Chairperson or Deputy Chairperson to be present and preside at all review meetings.

6.	The amendment is intended to enable the SCT to hold a greater number of reviews.  This will assist the SCT in dealing with the increased number of complaints expected to be received as a result of the expansion of the SCT’s jurisdiction to also include complaints concerning RSAs.

Amendments to Schedule 13 of the Retirement Savings Accounts (Consequential Amendments) Bill 1996

Summary

7.	Schedule 13 of the Bill makes amendments to the Income Tax Assessment Act 1936 to implement appropriate income tax treatment in relation to Retirement Savings Accounts (RSAs). 

8.	The amendments are explained in the following order:

	Amendments 19 to 25, which amend Schedule 13 to modify the regime that applies to tax RSA providers that are financial institutions to:

•	remove concerns that proposed paragraph 299B(b) could result in the double taxation of amounts credited to RSAs;
	
•	ensure that the RSA component of an RSA provider's taxable income is not reduced by tax paid in relation to an RSA that is withdrawn by the RSA provider from the RSA; and
	
•	ensure that RSA providers cannot offset losses against RSA income.

	Amendments 9 to 16, which amend Schedule 13 to modify the regime that applies to tax RSA providers that are life assurance companies in the same way.

	Amendments 3 to 8, which amend Schedule 13 to ensure that the intercorporate dividend rebate available under section 46 and 46A applies appropriately to life assurance company RSAs.

	Amendments 17 and 18, which amend Schedule 13 to insert a missing word and to ensure that the tax file number provisions that apply to ordinary bank accounts do not apply to RSAs.

Explanation of the amendments

Taxation of RSA providers that are financial institutions (Amendments 19 to 25)

9.	Items 125 inserts a regime to appropriately tax RSA providers that are financial institutions. Amendments 19 to 25 amend that regime to:

	remove concerns that proposed paragraph 299B(b) could result in the double taxation of amounts credited to RSAs;

	ensure that the RSA component of an RSA provider’s taxable income is not reduced by tax paid in relation to an RSA that is withdrawn by the RSA provider from the RSA; and

	ensure that RSA providers cannot offset losses against RSA income.

10.	Chart 1 illustrates the taxation treatment of an RSA provider that is a financial institution following the amendments. The Chart replaces Chart 1 in the Explanatory Memorandum to the Bill.

Taxable income of an RSA provider

11.	New section 299A provides that new Division 7A of Part IX sets out how to calculate the taxable income of an RSA provider that is a financial institution (that is, an RSA provider that is a bank, building society or credit union). [Amendment 20]

Taxable contributions included in taxable income

12.	New section 299B provides that the taxable income of an RSA provider includes all taxable contributions made during the year of income to RSAs provided by the RSA provider. [Amendment 21] Investment income derived by RSA providers is included in the RSA provider’s assessable income under the ordinary provisions of the income tax law.

Calculation of the RSA amount

13.	New section 299C is modified so that it now sets out how to calculate the RSA amount rather than the RSA component of taxable income. The RSA amount is the sum of:

	all taxable contributions made during the year of income to RSAs [new paragraph 299C(2)(a)]; 

	all amounts (other than contributions) credited during the year of income to RSAs reduced by amounts credited to RSAs that are paying out current pensions (see paragraphs 221 to 227 of the Explanatory Memorandum to the Bill) [new paragraph 299C(2)(b) and subsections 299C(3) ‑ (5)]; 

less any amounts paid or withdrawn from RSAs other than benefits paid to, or in respect of, the holders of RSAs [new subsection 299C(2)] or tax paid in respect of RSAs [new subsection 299C(2A)].

[Amendments 22 and 23]

Restricting losses to the standard component of taxable income

14.	New section 299CA operates to ensure that RSA providers cannot offset losses against RSA income. The new section applies if:

	the taxable income of the RSA provider is less than the RSA amount [new paragraph 299CA(a)]; or

	the RSA provider has no taxable income [new paragraph 299CA(b)].

15.	In these circumstances:

	the RSA provider is taken to have both a taxable income and a tax loss for the year of income [new paragraph 299CA(c)];

	the taxable income is equal to the RSA amount [new paragraph 299CA(d)]; and

	the tax loss is taken to be the amount that would have been the RSA provider’s tax loss if the RSA amount were not income derived [new paragraph 299CA(e)].

[Amendment 24]

Calculation of the components of taxable income

16.	New subsection 299D(1) divides the taxable income of an RSA provider that is a financial institution into the RSA component and the standard component.

17.	The RSA component of taxable income is the RSA amount worked out under new section 299C. [New subsection 299D(2)]

18.	The standard component of taxable income is any amount remaining after deducting the RSA component from taxable income. [New subsection 299D(3)]

[Amendments 19 and 25]

Example

19.	The Livingston Bank has taxable income of $100 000. It received taxable contributions in RSAs of $220 000 during the year of income. No earnings were credited to RSAs and no amounts were withdrawn, except to pay tax on taxable contributions. Therefore, the RSA amount calculated under new section 299C is $220 000.

20.	New section 299CA will apply so that the Livingston Bank will have both a taxable income and a tax loss for the year of income. The taxable income will be the RSA amount of $220 000. This amount will be allocated to the RSA component of the Livingston Bank’s taxable income and will be subject to tax at a rate of 15 per cent. The tax loss will be the amount that would have been the tax loss if no taxable contributions were derived ‑ that is, $120 000.

21.	If in this example the Livingston Bank had a tax loss of $50 000, new section 299CA would apply so that its taxable income would be $220 000 and its tax loss would be $270 000.

Taxation of RSA providers that are life assurance companies (Amendments 9 to 16)

22.	Item 71 inserts a regime to appropriately tax RSA providers that are life assurance companies. Amendments 9 to 16 amend that regime to:

	remove concerns that proposed paragraph 116DAB(b) could result in the double taxation of amounts credited to RSAs;

	ensure that the RSA component of an RSA provider’s taxable income is not reduced by tax paid in relation to an RSA that is withdrawn by the RSA provider from the RSA; and

	ensure that RSA providers cannot offset losses against RSA income.

23.	Chart 2 illustrates the taxation treatment of an RSA provider that is a life assurance company following the amendments. The Chart replaces Chart 2 in the Explanatory Memorandum to the Bill.

Taxable income of an RSA provider

24.	New section 116DAA provides that new Subdivision AA of Division 8 of Part III sets out how to calculate the taxable income of an RSA provider that is a life assurance company. [Amendment 11]

Taxable contributions included in taxable income

25.	New section 116DAB provides that the taxable income of an RSA provider that is a life assurance company includes all taxable contributions made during the year of income to RSAs provided by the RSA provider. [Amendment 12] Investment income derived by RSA providers is included in the RSA provider’s assessable income under the ordinary provisions of the income tax law.

Calculation of the RSA amount

26.	New section 116DAC is modified so that it now sets out how to calculate the RSA amount rather than the RSA component of taxable income. The RSA amount is the sum of:

	all taxable contributions made during the year of income to RSAs [new paragraph 116DAC(2)(a)]; 

	all amounts (other than contributions) credited during the year of income to RSAs reduced by amounts credited to RSAs that are paying out current pensions (see paragraphs 269 to 273 of the Explanatory Memorandum to the Bill) [new paragraph 116DAC(2)(b) and subsections 116DAC(3) ‑ (5)]; 

less any amounts paid or withdrawn from RSAs other than benefits paid to, or in respect of, the holders of RSAs [new subsection 116DAC(2)] or tax paid in respect of RSAs [new subsection 116DAC(2A)].

[Amendments 13 and 14]

27.	Amounts which are included in assessable income as part of the RSA amount, because they come within the scope of new paragraph 116DAC(2)(a) or (b), are allocated to the general fund component of assessable income under new paragraph 116CE(2)(ab). [Amendment 10]

Calculation of the components of taxable income

28.	New subsection 116DAD(1) divides the taxable income of an RSA provider that is a life assurance company into the RSA component and the standard component.

29.	The RSA component of taxable income is the RSA amount worked out under new section 116DAC. [New subsection 116DAD(2)]

30.	The standard component of taxable income is any amount remaining after deducting the RSA component from the general fund component of taxable income. [New subsection 116DAD(3)]

[Amendments 9 and 15]

Restricting losses to the standard component of taxable income

31.	Amendment 16 inserts new section 116DADA which operates to ensure that RSA providers cannot offset losses against RSA income. The new section applies if:

	the RSA provider has no taxable income [new paragraph 116DADA(1)(a)];

	the RSA provider has no general fund component of taxable income [new paragraph 116DADA(1)(b)]; or

	the general fund component of taxable income of an RSA provider is less than the RSA amount  [new paragraph 116DADA(1)(c)].

32.	In these circumstances, new subsection 116DADA(2) applies if:

	the RSA provider has no taxable income; or

	the taxable income of the RSA provider is less than the RSA amount.

33.	The consequences of new subsection 116DADA(2) applying are that:

	the RSA provider is taken to have both a taxable income and a tax loss for the year of income [new paragraph 116DADA(2)(a)];

	the taxable income is equal to the RSA amount [new paragraph 116DADA(2)(b)];

	the tax loss is taken to be the amount that would have been the RSA provider’s tax loss if the RSA amount were not income derived [new paragraph 116DADA(2)(c)];

	the general fund component of taxable income and the RSA component of the general fund component are equal to the RSA amount  [new paragraph 116DADA(2)(d)]; and

	all other components of taxable income are taken to be nil [new paragraph 116DADA(2)(e)].

34.	If the circumstances in new subsection 116DADA(1) apply and the taxable income of the RSA provider is equal to or greater than the RSA amount, then new subsection 116DADA(3) provides that:

	the general fund component of taxable income and the RSA component of the general fund component are taken to be equal to the RSA amount [new paragraph 116DADA(3)(a)]; and

	the difference between the RSA amount and the amount that would, but for new subsection 116DADA(3), have been the general fund component is applied to reduce the other components of taxable income in the following order:

	if the RSA provider is an ordinary life assurance company ‑ AD/RLA;

	CS/RA;

	NCS [new paragraph 116DADA(3)(b)].

Example

35.	The Isis Life Company has taxable income of $50 000. It received taxable contributions in RSAs of $140 000 during the year of income. No earnings were credited to RSAs and no amounts were withdrawn, except to pay tax on taxable contributions. Therefore, the RSA amount calculated under new section 116DAC is $140 000. New section 116DAB and new paragraph 116CE(2)(ab) will operate to allocate the whole of Isis Life's taxable income to the general fund component (because it effectively represents taxable contributions). 

36.	New section 116DADA will apply to Isis Life because its general fund component of taxable income ($50 000) is less than the RSA amount ($140 000) - new paragraph 116DADA(1)(c). As Isis Life’s taxable income is less than the RSA amount, new subsection 116DADA(2) will apply so that Isis Life will have both a taxable income and a tax loss for the year of income. The taxable income will be the RSA amount of $140 000. This amount will be allocated to the RSA component of the general fund component of Isis Life’s taxable income and will be subject to tax at a rate of 15 per cent. The tax loss will be the amount that would have been the tax loss if no taxable contributions were derived ‑ that is, $90 000.

37.	New subsection 116DADA(3) would apply if in this example Isis Life had taxable income of $530 000 which, applying section 116CJ of the Income Tax Assessment Act 1936, consists of:

	general fund component of $50 000

	AD/RLA component of $190 000; and

	CS/RA component of $290 000.

38.	In these circumstances new section 116DADA will apply to Isis Life because its general fund component of taxable income ($50 000) is less than the RSA amount ($140 000) - new paragraph 116DADA(1)(c). As Isis Life’s taxable income ($530 000) is greater than the RSA amount, new subsection 116DADA(3) will apply so that the general fund component of Isis Life’s taxable income will be the RSA amount of $140 000. This amount will be allocated to the RSA component of the general fund component of Isis Life’s taxable income and will be subject to tax at a rate of 15 per cent. The difference between the RSA amount ($140 000) and the general fund component of taxable income worked out under section 116CJ ($50 000) of $90 000 will be applied to reduce the AD/RLA component of Isis Life’s taxable income to $100 000.

Intercorporate dividend rebate (Amendments 3 to 8)

39.	Amendments 3 to 8 ensure that the intercorporate dividend rate applies appropriately to life assurance companies that offer RSAs.

40.	Items 17 to 24 of Schedule 13 of the Bill amend section 46 and section 46A to replace references to the non‑fund component of assessable income of a life assurance company with references to the standard component of assessable income of a life assurance company.

41.	However, under the new arrangements there are two rates of tax applicable to the general fund component (the standard component rate and the 15 per cent RSA component rate).

42.	Amendments 3 to 8 ensure that the intercorporate dividend rebate provisions appropriately refer to the tax rate on the standard component of the general fund component of assessable income of a life assurance company.

Tax file numbers (Amendments 17 and 18)

43.	Amendments 17 and 18 relate to the application of TFNs

44.	Item 107 of Schedule 13 of the Bill inserts new paragraph 202(k) into the Income Tax Assessment Act 1936. Amendment 17 amends Item 107 to insert a missing word in new subparagraph 202(k)(ii).

45.	Amendment 18 ensures that RSA providers that qualify as financial institutions under section 202A of the Income Tax Assessment Act 1936 will not be subject to the TFN rules that apply to interest bearing accounts or interest bearing deposits in relation to RSAs. The effect of the amendment is to ensure that RSA providers are only required to comply with the superannuation TFN provisions in relation to RSAs. [New Items 107A and 107B]