EXPLANATORY STATEMENT
STATUTORY RULES 1984 NO. 172
ISSUED BY THE AUTHORITY OF THE TREASURER
These regulations amending the Income Tax Regulations arise from changes in the income tax law governing the taxation of lump sum superannuation and other termination payments, described in the law as “eligible termination payments”. The changes were introduced by the Income Tax Assessment Amendment Act (No. 3) 1984, which was assented to on 25 June 1984.
The amending regulations have four functions. Principally, they provide a framework for calculating the part of an eligible termination payment from which a PAYE tax instalment is to be deducted and prescribe the rate of that deduction. A second purpose of the regulations is to give effect to the facility to “roll-over” eligible termination payments tax-free by payment within 90 days to a superannuation fund or approved deposit fund or in purchasing particular kinds of annuities. Persons and funds taking advantage of that facility will be required to follow procedures set down by these regulations.
Thirdly, the regulations will prescribe the time and manner in which an election may be made by a person as to the way in which the components of an eligible termination payment are to be applied in making roll-over payments. The final function of the regulations is to prescribe Life Tables to which reference is to be made in ascertaining life expectation factors for the purpose of calculating the annual exclusion from assessable income of the capital cost component of an annuity that commenced after 30 June 1983.
Regulation 1 provides for the amending regulations to come into operation on 1 August 1984.
Regulation 2 replaces regulation 4A of the Income Tax Regulations with new regulation 4AE. Sub-regulation (1) repeals regulation 4A and inserts regulation 4AE, which prescribes Life Tables for the purpose of ascertaining life expectation factors used in calculating annual amounts to be excluded from assessable annuities under sub-section 27H(4) of the Income Tax Assessment Act (“the Act) as representing the return of the capital cost of the annuity. The prescribed tables are the Australian Life Tables 1975 - 1977 prepared by the Australian Government Actuary. Sub-regulation (2) ensures that regulation 4A, which prescribed Life Tables for a similar purpose under the now-repealed section 26AA of the Act, continues, as does section 26AA, to apply to annuities that commenced to be paid before 1 July 1983. As a result, regulation 4AE will apply only to annuities that commenced on or after that date.
Regulation 3 inserts new regulation 33A which provides procedures to be followed by persons rolling over amounts of eligible termination payments within 90 days by way of deposit in superannuation funds or approved deposit funds or in buying certain types of annuities.
Sub-regulation (1) of regulation 33A inserts definitions that are used in the regulations. The term “eligible termination payment” is given the same meaning as it has for the purposes of the new provisions of the Act that tax a wide range of superannuation and other termination payments. A “roll-over payment” is defined as the payment of an amount within 90 days of receiving an eligible termination payment in one of the ways specified in the Act as qualifying the relevant part of the eligible termination payment for exemption from tax if the person concerned elects to treat that part as having been expended in making the roll-over payment. The other three definitions have the same meanings as in regulation 54DAO (refer below to the notes on that regulation).
Sub-regulation 33A (2) requires a person wanting to make a roll-over payment (or to have his or her employer make such a payment at the time the eligible termination payment is made) to apply to the relevant fund or person to whom the roll-over payment is to be made. By sub-regulation (3) the application is to be made on a form - a Roll-over Payment Notification - approved by the Commissioner of Taxation, which will require the person making the roll-over payment to indicate the manner in which the components of the eligible termination payment are being applied in making the roll-over payment.
Once the application and roll-over payment are made the person receiving them is required by sub-regulation 33A(4) to make a declaration on that application form that the payment has been received and return the original and a copy of the form within 14 days to the person making the roll-over payments.
Sub-regulation 33A(5) applies to a person who has made a roll-over payment or roll-over payments in accordance with sub-regulations (1) to (4) and who is therefore required to make an election under sub-section 27D(3) of the Act for income tax assessment purposes stating which of the components of the eligible termination payment are to be regarded as having been applied in making the roll-over payments. Paragraph (a) prescribes the time within which the election is to be lodged with the Commissioner. In the general run of cases the time is the time of lodgment of the income tax return (sub-paragraph (i)) but, if no return is required, the election must be lodged within 4 months of the end of the year of income (sub-paragraph (ii)). Sub-paragraph (a) (ii) also provides for the Commissioner to allow further time for lodgment of the election. Paragraph (b) provides that the prescribed manner in which the election is to be lodged is with the originals of the Roll-over Payment Notification forms completed in respect of the roll-over payments that are the subject of the election and the original of the Statement of Termination Payment referred to in regulation 54DAQ (refer to the notes on that regulation later in
this explanatory statement) that was delivered to the person at the time the eligible termination payment to which the election relates was made. All of these documents together are to be lodged with the tax return referred to in the notes on paragraph (a) above or with a statement that explains why no tax return is required.
Regulation 4 is a drafting measure which excludes eligible termination payments from the operation of the Subdivision of the Income Tax Regulations that deals generally with PAYE tax instalment deductions from salary or wages paid to employees.
New Subdivision AAA of Division 2 of Part VI of the regulations is to be inserted by regulation 5 to provide for PAYE deductions to be made from so much of an eligible termination payment as is equal to the fully assessable portion of the eligible termination payment, that is, the part that is referable to employment or superannuation fund membership after 30 June 1983.
The new Subdivision is to consist of three regulations. Regulation 54DAO defines terms used in the Subdivision. Sub-regulation 54DAO(1) ensures that there is consistency in the use of expressions in both this Subdivision and Subdivision A, which deals generally with PAYE deductions from salary or wages, by adopting the meanings of expressions used in the Division of the Act that authorises the making of regulations prescribing rates of PAYE deductions.
Sub-regulation 54 DAO(2) defines four terms used in the Subdivision. The “concessional component” of an eligible termination payment is the part that consists of invalidity, redundancy or early retirement scheme payments and is included in assessable income to the extent of 5 per cent of the component. The “post 30 June 1983 component” of an eligible
termination payment is the part that is referable to employment or superannuation fund membership after 30 June 1983. The component is assessable in full. The “pre 1 July 1983 component” is the part referable to employment or fund membership up to 30 June 1983. It is assessable only as to 5 per cent of the component. The “undeducted contributions” is the component that represents the return of the person’s superannuation fund contributions after 30 June 1983 that have not attracted a tax deduction.
Regulation 54DAP specifies the rate (including a rate of 1 per cent on account of medicare levy) at which a tax instalment is to be deducted by an employer (a term that includes any payer of an eligible termination payment, whether or not an employer in the ordinary sense of the term) from an eligible termination payment. Paragraph (1)(a) specifies that, where the employee is 55 years of age or over, the rate of deduction is the sum of 16 per cent of the first $50,000 of an amount equal to the part of the fully assessable component that is not being rolled over at the time of payment and 31 per cent of the balance of that amount. Where the employee is under 55 years of age, paragraph (1)(b) provides that the rate of deduction is 31 per cent of an amount equal to the part of the fully assessable component that is not being rolled over at the time of payment.
Sub-regulation 54DAP(2) is a drafting measure. It defines an amount that is equal to the part of the fully assessable component that is not being rolled over at the time of payment. This is the amount to which the respective percentages of 16 per cent and 31 per cent are applied in sub-regulation (1) in calculating the rate of tax instalment deduction. The amount is defined by reference to the relevant entries made by the employer and the employee on the Statement of Termination Payment (see notes below on regulation 54DAQ) completed by the employer and employee in respect of the eligible termination payment.
Regulation 54DAQ provides for an employer (the payer of an eligible termination payment) and employee (the payee of an eligible termination payment) together to complete a form approved by the Commissioner of Taxation, to be known as a Statement of Termination Payment. The purpose of the form is to provide sufficient information to enable the employer to calculate the appropriate PAYE tax instalment deduction in terms of regulation 54DAP.
Sub-regulation 54DAQ(1) sets out the actions to be taken by an employer and an employee before an eligible termination payment is made. By paragraph (a) the employer is to provide the information required by the form, including an analysis of the composition of the eligible termination payment, based upon the employer’s knowledge of the eligible service period to which the payment relates, the amount of any concessional component or undeducted contributions and, where relevant, the amount of any unused undeducted purchase price of an annuity or pension. The employer is then required to give the form to the employee. By paragraph (b) of sub-regulation 54DAQ (1) the employee is then to complete the part of the form described as the Roll-Over Nomination and return the form to the employer.
Sub-regulation 54DAQ(2) provides that the Roll-Over Nomination may specify that the employee authorises the employer to make roll-over payments (see the notes earlier on regulation 33A for an explanation of this concept) in respect of the components of the eligible termination payment recorded on the form by the employer. An employee who wishes to have roll-over payments made by the employer is required to specify the amounts to be rolled-over from each of the components.
Within 7 days of making the eligible termination payment the employer is required by sub-regulation 54DAQ(3) to make a declaration on the form in accordance with sub-regulation (4) and give the completed form, with a copy, to the employee.
By sub-regulation (4) the employer is to declare whether the amounts specified by the employee on the Roll-Over Nomination part of the form have in fact been rolled over and to verify, to the best of the employer’s knowledge, the information provided by the employer. Where roll-over payments are made, a form referred to in sub-regulation 33A(3) (see earlier notes) will also have been completed in respect of each such payment.
The function of sub-regulation 54DAQ(5) is to direct an employer in making an analysis of the composition of an eligible termination payment on the Statement of Termination Payment in a case where the payment is attributable, by roll-over of an earlier eligible termination payment, to that earlier payment. In these circumstances the eligible service period that had attached to the earlier payment is a relevant period for the purposes of the later payment only to the extent that the pre 1 July 1983 component of the earlier payment (see earlier notes on regulation 54DAO) has been rolled-over. This sub-regulation allows the employer, in ascertaining whether and to what extent the earlier eligible service period is to be retained for the purpose of completing a Statement of Termination Payment in respect of the subsequent eligible termination payment, to have regard only to the roll-over payments of which the employer has knowledge. If, however, the Commissioner of Taxation notifies the employee that the earlier eligible service period is to be truncated to a lesser extent in the light of the total of the actual roll-over payments and that fact is brought to the attention of the employer, that advice is to be adopted by the employer in completing the Statement of Termination Payment.