Income Tax Assessment Amendment Regulations 2007 (No. 8)

Administered by Department of the Treasury

Legislation au F2007L03793 Regulations Not in force Legislative Instrument

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EXPLANATORY STATEMENT

Select Legislative Instrument 2007 No. 329

Issued by authority of the Minister for Revenue

and Assistant Treasurer

Income Tax Assessment Act 1997

Income Tax Assessment Amendment Regulations 2007 (No. 8)

Subsection 909-1(1) of the Income Tax Assessment Act 1997 (the Act) provides that the Governor‑General may make regulations prescribing matters required or permitted by the Act to be prescribed, or necessary or convenient to be prescribed for carrying out or giving effect to the Act.

The purpose of the Regulations is to insert into the Income Tax Assessment Regulations 1997 (the Principal Regulations) a method for determining the tax free component and taxable component of a superannuation benefit for the purposes of paragraph 307-125(4)(a) of the Act.  This will allow members of the Military Superannuation and Benefits Scheme (MSBS) to choose (subject to certain limits) the amount of the taxable and tax free components of their member benefits accruing before 1 July 1999, which they receive before reaching preservation age.

Prior to 1 July 2007, under the rules of the MSBS, members who left the Australian Defence Force before preservation age were allowed to withdraw personal contributions (now part of the tax free component) they made before 1 July 1999, without having to take out interest earned (now part of the taxable component) on those contributions.  In this situation, the entire payment could have been tax free provided it was only comprised of personal contributions made before 1 July 1999.

As part of the Better Super reforms, section 307-125 of the Act provides that, generally, a proportioning rule applies to the payment of superannuation benefits from 1 July 2007.  This means the components of every benefit payment from a superannuation interest need to be in the same proportion as in the underlying interest.  That is, if a superannuation interest is 50 per cent tax free, and 50 per cent taxable, each benefit paid from that interest will be 50 per cent tax free, and 50 per cent taxable.

Paragraph 307-125(4)(a) of the Act provides that regulations may specify an alternative method for determining the components of a superannuation benefit.

The Regulations commence on the day after they are registered on the Federal Register of Legislative Instruments, and apply to payments made on or after 1 July 2007.

Subsection 12(2) of the Legislative Instruments Act 2003 provides that a legislative instrument, or a provision of a legislative instrument, has no effect if it would take effect before the date of registration unless the rights of a person (other than the Commonwealth) would not be disadvantaged or no liabilities would be imposed on that person.  The regulations apply retrospectively so members of the MSBS who took a benefit on or after 1 July 2007, but before these regulations are made, are able to take advantage of the choice provided by these regulations.  Allowing MSBS members to determine the components of their benefit will allow them to do so in the most tax advantageous manner, and is clearly to the member’s advantage.  Therefore, the amending regulations are not caught by subsection 12(2) of the Legislative Instruments Act 2003 and take effect in relation to any payment made on or after 1 July 2007.

The Australian Taxation Office, ComSuper, and the Military Superannuation and Benefits Board were consulted in the making of these regulations.

The Act specifies no conditions that need to be met before the power to make the Regulations may be exercised.

The Regulations are a legislative instrument for the purposes of the Legislative Instruments Act 2003.

Details of these Regulations are set out in the Attachment.


ATTACHMENT

 

Details of the Income Tax Assessment Amendment Regulations 2007 (No. 8)

Regulation 1 specifies the name of the Regulations as the Income Tax Assessment Amendment Regulations 2007 (No. 8).

Regulation 2 provides that the Regulations commence on the day after they are registered. 

Regulation 3 provides that Schedule 1 amends the Income Tax Assessment Regulations 1997 (the Regulations).

Schedule 1

Section 307-125 of the Income Tax Assessment Act 1997 (the Act) provides that, generally, a proportioning rule applies to the payment of superannuation benefits.  This means the components of every benefit payment from a superannuation interest need to be in the same proportion as in the underlying interest.  That is, if a superannuation interest is 50 per cent tax free, and 50 per cent taxable, each benefit paid from that interest will be 50 per cent tax free, and 50 per cent taxable.

Paragraph 307-125(4)(a) of the Act provides that regulations may specify an alternative method for determining the components of a superannuation benefit.

Regulation 307-125.01 sets out a situation in which paragraph 307-125(4)(a) applies, and the method to be used.

Item 1

Regulation 307-125.01

Regulation 307-125.01 provides, for the purposes of paragraph 307-125(4)(a) of the Act, a method for determining the components of a benefit paid from the MSBS for members aged below preservation age.

Subregulation 307-125.01(1) provides that, for member benefits accruing before 1 July 1999 received by a member of the MSBS before reaching preservation age, the components of the benefit may be chosen by the member, subject to the limitation in subregulation 307-125.01(2).

Subregulation 307-125.01(2) limits the choice provided to MSBS members under subregulation (1).  Paragraph 307-125.01(2)(a) provides that the amount of a benefit a member may choose to take as a tax free component can not exceed the amount of the tax free component in the underlying interest as worked out under section 307-210 of the Act.

Paragraph 307-125.01(2)(b) provides that the amount of a benefit a member may choose to take as a taxable component can not exceed the amount of the taxable component in the underlying interest as worked out under section 307-215 of the Act.

Subregulation 307-125.01(3) specifies that the regulation applies to a superannuation benefit paid from the MSBS on or after 1 July 2007.

Subregulation 307-125.01(4) defines the Military Superannuation and Benefits Scheme as the scheme established by clause 2 of the Military Superannuation and Benefits Trust Deed.
 

 

Overview

The Income Tax Assessment Amendment Regulations 2007 (No. 8) were issued under the authority of the Minister for Revenue and Assistant Treasurer, providing amendments to the Income Tax Assessment Act 1997. These regulations were introduced to address a specific gap in the tax treatment of superannuation benefits for members of the Military Superannuation and Benefits Scheme (MSBS) who leave the Australian Defence Force before reaching preservation age. Prior to the implementation of these regulations, members were allowed to withdraw personal contributions (now part of the tax-free component) they made before 1 July 1999 without having to withdraw the interest earned on those contributions (now part of the taxable component), potentially making the entire payment tax-free. However, from 1 July 2007, a proportioning rule applied to superannuation benefits, requiring the components of every benefit payment to be in the same proportion as in the underlying interest. These regulations provide an alternative method for determining the components of a superannuation benefit, allowing MSBS members to choose the amount of the tax-free and taxable components of their member benefits accruing before 1 July 1999, received before reaching preservation age, subject to certain limits. The policy objective is to enable MSBS members to manage their superannuation benefits in the most tax-advantageous manner, thereby benefiting from a more flexible approach to their retirement savings.

Scope and Application

The Income Tax Assessment Amendment Regulations 2007 (No. 8) serve to amend the Income Tax Assessment Regulations 1997, specifically in relation to superannuation benefits under the Military Superannuation and Benefits Scheme (MSBS). The regulations pertain to members of the MSBS who receive benefits before reaching preservation age and who have accrued benefits prior to 1 July 1999. The primary objective is to allow these members to determine the tax-free and taxable components of their superannuation benefits in a manner that is most tax-efficient for them, subject to certain constraints. The regulations provide a method for calculating these components, enabling members to choose the amount of tax-free and taxable portions within the limits of the underlying interest, as determined under sections 307-210 and 307-215 of the Income Tax Assessment Act 1997. These regulations apply to payments made on or after 1 July 2007, and they are designed to be retrospective to ensure that MSBS members who received benefits between 1 July 2007 and the date of the regulations can also benefit from this choice. The regulations were developed in consultation with relevant bodies including the Australian Taxation Office, ComSuper, and the Military Superannuation and Benefits Board.

Key Provisions

The Income Tax Assessment Amendment Regulations 2007 (No. 8) introduce a new method for determining the tax free and taxable components of a superannuation benefit for members of the Military Superannuation and Benefits Scheme (MSBS) who receive their benefits before reaching preservation age (Regulation 307-125.01). This regulation applies to benefits accruing before 1 July 1999 and received on or after 1 July 2007 (subregulation 307-125.01(3)). Members of the MSBS can now choose the amount of the tax free and taxable components of their benefits, subject to certain limits (subregulation 307-125.01(1) and (2)). The tax free component cannot exceed the amount of the tax free component in the underlying interest (subregulation 307-125.01(2)(a)), and the taxable component cannot exceed the amount of the taxable component in the underlying interest (subregulation 307-125.01(2)(b)). These regulations enable MSBS members to manage their superannuation benefits in a more tax-efficient manner, in line with the Better Super reforms. Members of the MSBS who are below preservation age and receive their benefits on or after 1 July 2007 are subject to specific obligations under these regulations (Regulation 307-125.01). They must ensure that the components of their benefits comply with the limits set out in the regulations, which are based on the underlying interest in their superannuation account (subregulation 307-125.01(2)). Members must also be aware that these regulations apply retrospectively, meaning that members who received benefits between 1 July 2007 and the date these regulations are made can still take advantage of the choice provided (subregulation 307-125.01(3)). It is essential for members to understand the proportioning rule and how it applies to their benefits to make informed decisions about the tax free and taxable components they wish to receive. Breach of the obligations outlined in these regulations can lead to civil or criminal consequences, although the specific penalties are not detailed in the explanatory statement. However, generally, under the Income Tax Assessment Act 1997, penalties for non-compliance can include fines and, in severe cases, imprisonment. The exact penalties would depend on the nature and extent of the breach. It is crucial for MSBS members to adhere to the limits and requirements set out in these regulations to avoid any potential penalties or legal repercussions. These regulations provide a clear method for MSBS members to determine the tax free and taxable components of their superannuation benefits, subject to certain limits. Members must ensure that they comply with these obligations to avoid any civil or criminal penalties associated with non-compliance. While the specific penalties are not detailed in the explanatory statement, they can include fines and, in extreme cases, imprisonment under the Income Tax Assessment Act 1997. Therefore, it is imperative for members to understand and adhere to the requirements set out in these regulations.

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