Income Tax Amendment Regulations 2006 (No. 5) (Cth)

Income Tax Amendment Regulations 2006 (No. 5)¹

Select Legislative Instrument 2006 No. 366

I, PHILIP MICHAEL JEFFERY, Governor‑General of the Commonwealth of Australia, acting with the advice of the Federal Executive Council, make the following Regulations under the Income Tax Assessment Act 1936.

Dated 13 December 2006

P. M. JEFFERY

Governor‑General

By His Excellency’s Command

PETER CRAIG DUTTON

Minister for Revenue and Assistant Treasurer

Name of Regulations

These Regulations are the Income Tax Amendment Regulations 2006 (No. 5).

Commencement

These Regulations commence on the day after they are registered.

Amendment of Income Tax Regulations 1936

Schedule 1 amends the Income Tax Regulations 1936.

Schedule 1 Amendment

(regulation 3)

[1] After regulation 170

insert in Part 9A

170APre‑1 July 88 funding credits — working out amounts applicable in particular years of income

(1)For paragraph 275B (3) (a) of the Act, this regulation prescribes the manner in which a trustee of a superannuation fund is to work out the amount applicable to the fund, under paragraph 275B (2) (b) of the Act, for a year of income for which the trustee elects, after 9 May 2006, to specify an amount for the purposes of subsection 275B (1) of the Act.

Method 1 — Funding credit valuation process

(2)Method 1 must be used for a year of income, unless:

(a)the conditions mentioned in subregulation (6) for the use of method 2 are met; and

(b)the actuary decides that the use of method 2 is appropriate.

(3)The amount applicable to the fund for a year of income is the least of the following amounts:

(a)the remaining unused funding credit balance, worked out in accordance with section 275A of the Act, that is available at the beginning of the last day of the year of income;

(b)the value of unfunded pre‑1 July 1988 liabilities at the first day of the year of income, determined by an actuary in accordance with step 3 of method 1 or method 2;

(c)the pre‑1 July 1988 taxable contributions for the year of income, worked out in accordance with step 4 of method 1 or method 2;

(d)for a year of income that ended before 9 May 2006 — the amount that the trustee could specify under subsection 275B (1) under the legislation that applied to the year of income.

(4)The procedure in method 1 for finding an amount applicable to a fund is referred to in this regulation as a funding credit valuation process.

(5)The amounts mentioned in paragraphs (3) (a), (b), (c) and (d) must be certified by an actuary.

(6)The actuary may use method 2 for a year of income if:

(a)the actuary can identify, at the start of the year of income, that the value of unfunded pre‑1 July 1988 liabilities exceeds the amount that the trustee wishes to specify for subsection 275B (1) of the Act; and

(b)the year of income is the first year after, or the second year after, a year of income for which method 1 was used to calculate the amount applicable to the fund.

(7)The procedure in method 2 for calculating an amount applicable to a fund is referred to in this regulation as a notionally updated funding credit valuation process.

Method 1 — Funding credit valuation process

Step 1 (value liabilities)	1.1 For any year of income in which funding credits are claimed, calculate the discounted present value of liabilities as at the first day of that year of income that relates to membership completed.
1.2 The basis for the calculations in item 1.1 must be the actuarial valuation basis relevant to the year of income in question which the superannuation fund’s actuary would consider appropriate for a valuation under Part 9 of the Superannuation Industry (Supervision) Regulations 1994.
1.3 In making the calculation in item 1.1 exclude the following liabilities that are not provided from taxable contributions: (a) liabilities representing benefits financed by undeducted contributions; (b) liabilities representing benefits or components that are expected to be treated as paid from an untaxed source; Example Pensions provided on an emerging cost or pay as you go basis, with corresponding elections being made under subsection 274 (7) of the Act. (c) liabilities for entitlements relating to membership from 1 July 1988 onwards and for which corresponding assets can be identified; Example Fully funded productivity, superannuation guarantee or salary sacrifice account balances. (d) liabilities representing benefits that have been funded; (e) liabilities representing death and disability benefits for which costs are claimed as deductible under subsection 279 (1) or (2) of the Act.
1.4 Apportion the discounted present value of the liabilities, between: (a) the period of superannuation fund membership completed before 1 July 1988; and
(b) the period of superannuation fund membership completed on and after 1 July 1988; for each superannuation fund member or former member for whom a liability is being valued.
1.5 The apportionment in item 1.4 must be made having regard to the following requirements and principles: (a) superannuation fund membership must be consistent with the definition used by the fund to determine the benefit being valued; (b) the actuary of the superannuation fund may use an alternative method for apportioning the discounted present value of liabilities only if the actuary certifies that the method will provide a reasonable approximation of the apportionment;
(c) the actuary may use an apportionment method that reflects non‑linear accrual of entitlements, provided the actuary considers that such an approach achieves an outcome that is consistent with the principle that funding credits can only be used against contributions intended to provide for entitlements relating to membership completed before 1 July 1988.
1.6 The actuary must retain documentation of the liability and valuation apportionment calculations for not less than 5 years.
1.7 The discounted present value of liabilities for all members apportioned to pre‑1 July 1988 membership is the *value of pre‑1 July 1988 liabilities*.
Step 2 (apportion assets)	2.1 Calculate the total amount of superannuation fund assets at their market value at the start of the year of income, on the basis which the superannuation fund’s actuary would consider appropriate for a valuation under Part 9 of the Superannuation Industry (Supervision) Regulations 1994.
2.2 Allow deductions for realisation costs and charges incurred in the normal course of operation of the superannuation fund.
2.3 Deduct the amount of assets that relate to excluded liabilities mentioned in item 1.3 of Step 1 of this method.
2.4 All remaining assets should be treated as available to provide for the value of pre‑1 July 1988 liabilities unless the trustee can provide the actuary with written evidence to support exclusion of both an amount of assets and a corresponding value of liabilities.
2.5 The actuary must retain documentation to support calculations made for the asset apportionment for not less than 5 years.
2.6 The result is the *assets available to fund pre‑1 July 1988 liabilities* for the year of income.
Step 3 (unfunded pre‑1 July 1988 liabilities)	3.1 Deduct the assets available to fund pre‑1 July 1988 liabilities from the value of pre‑1 July 1988 liabilities. 3.2 The result is the value of unfunded pre‑1 July 1988 liabilities.
Step 4 (pre‑1 July 1988 taxable contributions)	4.1 The trustee must notify to the actuary the amount of taxable contributions that are allocated to fund pre‑1 July 1988 liabilities for the year of income. 4.2 The trustee must retain documentation to support calculations of pre‑1 July 1988 taxable contributions for not less than 5 years. 4.3 The result is the pre‑1 July 1988 taxable contributions.

Method 2 — Notionally updated funding credit valuation process

Step 1 (notionally update value of liabilities)	1.1 The actuary must notionally adjust the value of pre‑1 July 1988 liabilities from the start of the previous year to the start of the current year of income, taking into account any factors likely to affect the value of the pre‑1 July 1988 liabilities.
1.2 In making a calculation under item 1.1 the actuary must have regard to the valuation basis used by the fund.
1.3 In making a calculation under item 1.1 the actuary must have regard to actual experience gained from the operation of the fund if the experience is materially different from valuation assumptions used in the calculation of the previous pre‑1 July 1988 liabilities.
1.4 The actuary must retain documentation of the notional updating of the pre‑1 July 1988 liability valuation calculations for not less than 5 years.
1.5 The result is the notionally updated value of pre‑1 July 1988 liabilities for the year of income.
Step2 (notionally update apportionment of assets)	2.1 The actuary must notionally adjust the amount of the assets available to fund pre‑1 July 1988 liabilities, from the start of the previous year to the start of the current year of income, taking into account any factors likely to affect the amount of the assets available to fund pre‑1 July 1988 liabilities.
2.2 Add taxable contributions allocated to fund pre‑1 July 1988 taxed liabilities in the previous year of income.
2.3 Deduct the employer financed component of pre‑1 July 1988 taxed benefits paid out during the previous year of income.
2.4 Add actual investment earnings net of tax and investment expenses for the previous year of income using a basis that is consistent with the underlying investment earnings achieved and normal practices of the superannuation fund.
2.5 The actuary must retain documentation to support notional updating of the amount of assets available to fund pre‑1 July 1988 liabilities for not less than 5 years.
2.6 The result is the notionally updated amount of assets available to fund pre‑1 July 1988 liabilities.
Step 3 (unfunded pre‑1 July 1988 liabilities)	3.1 Deduct the notionally updated amount of assets available to fund pre‑1 July 1988 liabilities from the notionally updated value of pre‑1 July 1988 liabilities. 3.2 The result is the *value of unfunded pre‑1 July 1988 liabilities* for the year of income.
Step 4 (pre‑1 July 1988 taxable contributions)	4.1 The trustee must notify to the actuary the amount of taxable contributions that are allocated to fund pre‑1 July 1988 liabilities for the year of income. 4.2 The trustee must retain documentation to support calculations of pre‑1 July 1988 taxable contributions for not less than 5 years. 4.3 The result is the pre‑1 July 1988 taxable contributions.

(8)If an actuary certifies an amount under subregulation (5) the actuary must, if requested by a trustee of the superannuation fund, provide sufficient information to enable another actuary to check the certification.

(9)An actuary must, in making a calculation under or applying method 1 or 2:

(a)follow any professional standards prepared by the Institute of Actuaries of Australia; and

(b)have regard to any professional guidance notes prepared by the Institute of Actuaries of Australia;

that relate to the determination of accrued benefits mentioned in method 1 or 2.

A trustee of a superannuation fund must, if requested to do so, provide sufficient information to support a funding credit claim under subsection 275B (1) of the Act, including any relevant information that relates to a year of income for which a claim was not made.

In this regulation:

actuary has the meaning given by subsection 267 (1) of the Act.

method 1 means the method described in the table ‘Method 1 — Funding credit valuation process’.

method 2 means the method described in the table ‘Method 2 — Notionally updated funding credit valuation process’.

Note

All legislative instruments and compilations are registered on the Federal Register of Legislative Instruments kept under the Legislative Instruments Act 2003. See