EXPLANATORY STATEMENT
Select Legislative Instrument 2005 No. 33
Issued by authority of the Minister for Revenue
and Assistant Treasurer
Income Tax Assessment Act 1936
Income Tax Amendment Regulations 2005 (No. 2)
Section 266 of the Income Tax Assessment Act 1936 (the Act) provides, in part, that the Governor-General may make regulations not inconsistent with the Act, prescribing all matters which by the Act are required or permitted to be prescribed, or which are necessary or convenient to be prescribed for giving effect to the Act.
Section 282B of the Act provides that any amount of normal assessable income derived by a complying superannuation fund from assets that, when the income is derived, are segregated current pensions assets, is exempt from tax.
Section 273A of the Act defines segregated current pension assets. Broadly, they are assets which are held for the sole purpose of enabling the fund to discharge current pension liabilities. The Superannuation Laws Amendment (2004 Measures No. 2) Act 2004, which received the Royal Assent on 30 June 2004, amends that definition to provide that an actuary’s certificate is not required in order to meet the definition of segregated current pension assets when the only type of pension that a superannuation fund is paying is a type that is prescribed in the Income Tax Regulations 1936. The amendment to section 273A commenced on Royal Assent.
The purpose of the Regulations is to specify that an allocated pension and a market linked pension, within the meaning of the Superannuation Industry (Supervision) Regulations 1994, are prescribed pensions for the purposes of section 273A of the Act.
Details of the Regulations are as follows:
Regulation 1 specifies the name of the Regulations as the Income Tax Amendment Regulations 2005 (No. 2).
Regulation 2 provides that regulations 1 to 3 and Schedule 1, which deals with allocated pensions, are taken to have commenced on 1 July 2004, and that Schedule 2, which deals with market linked pensions, is taken to have commenced on 20 September 2004.
Regulation 3 provides that schedules 1 and 2 amend the Income Tax Regulations 1936.
Schedule 1 inserts new Part 9A Taxation of superannuation business and related business and new regulation 170 Segregated current pension assets – prescribed pensions into the Income Tax Regulations 1936 and specifies that an allocated pension (within the meaning of the Superannuation (Industry) Supervision Regulations 1994) is a prescribed pension.
Schedule 2 amends regulation 170 Segregated current pension assets – prescribed pensions by listing a market linked pension as a prescribed pension in addition to the existing allocated pension.
Regulation 170 provides that for subsections 273A(2) and (3) of the Act, an allocated pension and a market linked pension (within the meaning of the Superannuation Industry (Supervision) Regulations 1994) are prescribed pensions.
This means that if allocated pensions and/or market linked pensions are the only kind of pensions paid by a superannuation fund, then an actuary’s certificate is not required in order for assets supporting those pensions to meet the definition of segregated current pension assets, so long as they are segregated from other assets of the fund. Any amount of normal assessable income derived by the fund from segregated current pension assets is exempt from tax. The requirement for an actuary’s certificate in this circumstance is redundant and the removal of the requirement will reduce compliance costs for these funds.
The Act specifies no conditions that need to be met before the power to make the proposed Regulations may be exercised.
The Regulations are taken to have commenced on 1 July 2004 in respect of allocated pensions and 20 September 2004 in respect of market linked pensions and are therefore retrospective. The Office of Legislative Drafting has advised that the legislative instrument does not infringe subsection 12(2) of the Legislative Instruments Act 2003 because the amendments are beneficial in nature, and do not affect the rights of a person (other than the Commonwealth or an authority of the Commonwealth) as at the date of registration under the Legislative Instruments Act 2003 so as to disadvantage that person. Further, the legislative instrument does not impose any liabilities on any person (other than the Commonwealth or an authority of the Commonwealth) in respect of anything done or omitted to be done before the date of registration.
The Regulations are a legislative instrument for the purposes of the Legislative Instruments Act 2003.
Consultation was not undertaken in relation to this instrument because it is minor or machinery in nature and does not substantially change the law.
Overview
The Income Tax Amendment Regulations 2005 (No. 2) were enacted by the Minister for Revenue and Assistant Treasurer to amend the Income Tax Assessment Act 1936, addressing the gap in the tax exemption for income derived from segregated current pension assets in superannuation funds. These regulations, which received Royal Assent on 30 June 2004, aim to reduce compliance costs by removing the need for an actuary’s certificate when allocated and market linked pensions are the only types of pensions paid by a superannuation fund. The regulations specify that these pensions are considered prescribed pensions for the purposes of section 273A of the Act, thus ensuring that any income derived from assets held for these pensions is exempt from tax. The Regulations, which are retrospective, came into effect on 1 July 2004 for allocated pensions and 20 September 2004 for market linked pensions, and they do not impose any new liabilities or disadvantages to individuals, thereby aligning with the objectives of the Legislative Instruments Act 2003.
Scope and Application
The Income Tax Amendment Regulations 2005 (No. 2) are subsidiary legislation under the Income Tax Assessment Act 1936, aimed at amending the Income Tax Regulations 1936 to specify certain types of pensions as prescribed pensions for the purposes of tax exemptions related to segregated current pension assets. These Regulations apply to complying superannuation funds and their assets, specifically those designated for the purpose of enabling the fund to discharge current pension liabilities. The Act and Regulations are binding across the Commonwealth of Australia, applying to all entities and individuals involved in the superannuation industry and their transactions. The Regulations exempt any income derived by a superannuation fund from assets that are segregated current pensions assets from tax, provided that an actuary’s certificate is not necessary for these assets to meet the definition of segregated current pension assets, as long as they are segregated from other assets of the fund. The Regulations have commenced on 1 July 2004 for allocated pensions and on 20 September 2004 for market linked pensions, making them retrospective in effect. This legislative instrument was registered under the Legislative Instruments Act 2003 and does not impose any liabilities or affect the rights of individuals adversely.
Key Provisions
The Income Tax Amendment Regulations 2005 (No. 2) amends the Income Tax Regulations 1936 to provide clarity regarding the definition of segregated current pension assets for superannuation funds. Specifically, Regulation 170 of the Income Tax Regulations 1936 now includes allocated pensions and market linked pensions as prescribed pensions (Regulations 2 and 3). This means that if a superannuation fund only pays allocated pensions or market linked pensions, it does not require an actuary’s certificate to ensure that the assets supporting these pensions meet the definition of segregated current pension assets, provided they are segregated from other fund assets. Any income derived from these segregated current pension assets is exempt from tax, simplifying the tax treatment for such funds and reducing compliance costs.
Under the Regulations, the primary obligations for superannuation funds relate to the segregation of assets that support allocated pensions or market linked pensions. These assets must be clearly separated from other fund assets to qualify as segregated current pension assets. The Regulations also stipulate that these pensions must be the sole type of pensions paid by the fund for the exemption to apply. The burden is on the fund to ensure that their operations and asset management practices comply with these requirements to benefit from the tax exemption.
Failure to comply with the Regulations may result in the loss of tax exemption for income derived from assets that are not correctly classified as segregated current pension assets. This could lead to additional tax liabilities for the fund. While specific penalties for non-compliance are not detailed in the explanatory statement, the general penalties for non-compliance with tax laws could include fines or other financial penalties. It is important for funds to adhere strictly to the segregation requirements to avoid these consequences.
The explanatory statement notes that the Regulations are retrospective, effective from 1 July 2004 for allocated pensions and 20 September 2004 for market linked pensions. This means that the changes apply to transactions and assets that occurred before the Regulations came into effect. Importantly, the Office of Legislative Drafting has confirmed that the Regulations do not infringe upon any rights or impose any liabilities on individuals or entities, ensuring that the changes are beneficial without adversely affecting existing rights or obligations.