Income Tax Regulations (Amendment)

EXPLANATORY STATEMENT

STATUTORY RULES 1990 No. 126

ISSUED BY THE AUTHORITY OF THE TREASURER

These regulations will amend the Income Tax Regulations governing the application of the rollover and tax instalment deduction provisions of the Income Tax Assessment Act 1936 (the Act) in respect of eligible termination payments (ETPs), superannuation pensions and rollover annuities.

Eligible termination payments include retirement, termination and similar payments made in consequence of the termination of a taxpayer’s employment. Payments from superannuation funds are included, except those in the form of a pension. Amounts paid in commutation of, or of the residual capital value of, a superannuation pension and certain annuities are included and so are payments by an approved deposit fund.

The amending regulations are required as a result of amendments to the Act by the Taxation Laws Amendment (Superannuation) Act 1989 (the amending Act).

First, the regulations will update references to certain components of an ETP which are now obsolete as a result of changes made by the amending Act and insert definitions of new components. These changes affect the amount of PAYE tax to be deducted from an ETP and information requirements under the regulations.

Secondly, amendment of the regulations is needed to reflect the reduction in the rates of tax that apply to the post-June 83 components of certain ETPs. The relevant ETPs are those that are to some extent attributable to a source, such as a superannuation fund or an approved deposit fund, that is taxable under new superannuation taxing measures applying from 1 July 1988.

Thirdly, the regulations will allow recipients of certain superannuation pensions (known as rebatable superannuation pensions) and qualifying annuities (called rebatable ETP annuities) who are entitled to a rebate of tax under section 159SM or 159SU of the Act respectively to give a declaration to the relevant payer in order to obtain a reduction in the amount of tax instalment deductions that would otherwise be made to take account of the entitlement to the rebate.

Throughout this statement, in order to be consistent with existing regulations, the term “employer” has been used to refer to the payer of an eligible termination payment and likewise, “employee” should be taken as referring to the recipient of an eligible termination payment even if the person would not be an employee of the payer in the ordinary sense of that word.

ATTACHMENT

DETAILS OF AMENDMENTS

OF THE INCOME TAX REGULATIONS

Regulation 1 provides for these amending regulations to come into effect on 30 June 1990.

Regulation 2 amends regulation 33A, which requires a recipient of an eligible termination payment that is to be rolled over, to complete a form detailing which components of the payment are being applied in making the rollover payment.

Subregulation 33A(1) describes the various terms that are used in this regulation. As a result of amendments made by the amending Act, some of the terms in subregulation (1) are obsolete, while some new terms have been inserted in the Act that are relevant to the operation of regulation 33A.

Paragraphs (a) and (b) of amending regulation 2 update subregulation 33A(1). The terms “post 30 June 1983 component” and “pre 1 July 1983 component” have been omitted and replaced with “post-June 83 component” and “pre-July 83 component” respectively. The new terms have the same meanings as the old ones but reflect the terms now used in the Act. In broad terms, the pre-July 83 component is the part of an ETP that accrued before 1 July 1983 and the post-June 83 component is the part that accrued after 30 June 1983.

As well as this amendment, paragraph (b) of regulation 2 also inserts definitions of two new terms in subregulation 33A(1). They are “taxed element of the post-June 83 component” and “untaxed element of the post-June 83 component”. These two terms have the meaning given to them in section 27AB of the Act. The need for the new terms arises because the law now breaks down the post-June 83 component of an ETP into these elements.

This is required because of the decision to bring forward part of the tax that was payable some time in the future on ETPs paid from superannuation funds and approved deposit funds. This bring forward has been achieved by taxing employer and other deductible contributions to superannuation funds at the time when the contributions are made - the so-called “contributions tax”.

However, not all ETPs are paid from a taxed source. “Golden handshakes” paid to retiring employees by employers are prime examples. As well, there are some public sector superannuation schemes that do not have a specific fund in which benefits are accumulated by investing contributions. In these cases, retirement benefits are paid out of the relevant government’s Consolidated Revenue account so there is no fund to tax.

There is no reason to lower the rates of tax on the post-June 83 component of these types of ETPs, so the old rates of tax have been retained for them. Consequently, this means that there are two sets of rates that may apply to the post-June 83 component Regulation 1 provides for these amending regulations to come into effect on 30 June 1990.

Regulation 2 amends regulation 33A, which requires a recipient of an eligible termination payment that is to be rolled over, to complete a form detailing which components of the payment are being applied in making the rollover payment.

Subregulation 33A(1) describes the various terms that are used in this regulation. As a result of amendments made by the amending Act, some of the terms in subregulation (1) are obsolete, while some new terms have been inserted in the Act that are relevant to the operation of regulation 33A.

Paragraphs (a) and (b) of amending regulation 2 update subregulation 33A(1). The terms “post 30 June 1983 component” and “pre 1 July 1983 component” have been omitted and replaced with “post-June 83 component” and “pre-July 83 component” respectively. The new terms have the same meanings as the old ones but reflect the terms now used in the Act. In broad terms, the pre-July 83 component is the part of an ETP that accrued before 1 July 1983 and the post-June 83 component is the part that accrued after 30 June 1983.

As well as this amendment, paragraph (b) of regulation 2 also inserts definitions of two new terms in subregulation 33A(1). They are “taxed element of the post-June 83 component” and “untaxed element of the post-June 83 component”. These two terms have the meaning given to them in section 27AB of the Act. The need for the new terms arises because the law now breaks down the post-June 83 component of an ETP into these elements.

This is required because of the decision to bring forward part of the tax that was payable some time in the future on ETPs paid from superannuation funds and approved deposit funds. This bring forward has been achieved by taxing employer and other deductible contributions to superannuation funds at the time when the contributions are made - the so-called “contributions tax”.

However, not all ETPs are paid from a taxed source. “Golden handshakes” paid to retiring employees by employers are prime examples. As well, there are some public sector superannuation schemes that do not have a specific fund in which benefits are accumulated by investing contributions. In these cases, retirement benefits are paid out of the relevant government’s Consolidated Revenue account so there is no fund to tax.

There is no reason to lower the rates of tax on the post-June 83 component of these types of ETPs, so the old rates of tax have been retained for them. Consequently, this means that there are two sets of rates that may apply to the post-June 83 component of an ETP. One set applies to the part of the post-June 83 component (the taxed element) of an ETP that is attributable to a taxed source. The other set applies to the part of a post-June 83 component (the untaxed element) of an ETP that is attributable to an untaxed source.

Paragraph (c) updates paragraph 33A(3)(b) by replacing the term “the post 30 June 1983 component” with the new terms “the taxed element of the post-June 83 component” and “the untaxed element of the post-June 83 component”. The paragraph will also substitute the term “the pre-July 83 component” for the existing term “the pre 1 July 1983 component”.

Subregulations 33A(2) and (3) operate to require that a person who intends rolling over all or part of an ETP gives written notice of that intention to the rollover institution, specifying which components of the ETP are to be rolled over.

Paragraph 33A(3)(b) lists the components of an ETP that may be rolled over and which must be specified on the rollover payment notification form. As a result of breaking the post-June 83 component into two elements, the rollover payment notification form needs to distinguish between the taxed and untaxed elements.

As a separate issue, paragraph (d) of regulation 2 will amend paragraph 33A(6)(c) to correct a previous minor drafting error. The reference to “eligible termination” is to be changed to “eligible termination payment”.

Regulation 3 will insert new Subdivision AAAA of Division 2 of Part VI of the Income Tax Regulations. Regulation 54AA in the new Subdivision will prevent the need to redefine a number of expressions that are used in Division 2 of Part VI of the Act (Collection by Instalments of Tax on Persons other than Companies) in Division 2 of the regulations by deeming the expressions to have the same meaning, unless the contrary intention appears.

Regulation 4 will amend regulation 54A. In a similar fashion to regulation 3 described above, paragraph (a) will insert new subregulation 54A(1AA) to give expressions used in Subdivision A of Division 2 of the Regulations the same meaning as in Subdivision AAB of Division 17 of Part III of the Act, unless the contrary intention appears.

Paragraph (b) amends subregulation 54A(2) by inserting paragraph 54A(2)(c). Existing paragraphs (a) and (b) of subregulation 54A(2) list the types of declaration that employees may furnish with their employer in order to have the general rates of tax instalment deductions reduced to take account of an entitlement to the general exemption (i.e., the tax-free threshold), a concessional rebate in respect of a

dependant, a zone rebate or a Medicare levy variation. Recipients of certain superannuation pensions and qualifying annuities are now also entitled to a rebate of tax. Under an amendment being made by regulation 6, employees who qualify for these rebates (under section 159SM or 159SU of the Act) will be able to give a declaration (under new regulation 54DACC or paragraph 54DAJ(c)) to the relevant employer to seek a reduction in the amount of tax instalment deductions that would otherwise be made.

The amendment made by paragraph (b) of regulation 4 will extend the list in subregulation 54A(2) to include a declaration furnished by a taxpayer under new regulation 54DACC.

Regulation 5 will insert new regulation 54DAAD which will provide the basis for determining the reduced rate of PAYE deductions to be made from an amount of rebatable superannuation pension or rebatable ETP annuity. Paragraphs (a) and (b) of new regulation 54DAAD set down the tests to be met before the regulation will apply. They are that the pension or annuity is a rebatable pension or annuity and that the employee has lodged a declaration under new regulation 54DACC (see notes on regulation 6).

Where the tests in paragraphs (a) and (b) are met the amount of PAYE deduction that would otherwise be made (paragraph (c)) may be reduced. The amount of the reduction in the rate of PAYE deductions is determined under paragraph 54DAAD(d) in the case of an amount of rebatable superannuation pension and paragraph 54DAAD(e) in the case of an amount of rebatable ETP annuity.

In both cases the amount of PAYE tax to be deducted is determined by reducing the amount presently prescribed in the income tax regulations by an amount calculated in accordance with a formula.

In paragraph (d) the formula is :

The formula in paragraph (e) is very similar. The only differences are that the references to rebatable superannuation pension are replaced with references to a rebatable ETP annuity and there is no reference to a S.159SS amount.

“Deductible 27H amount” means the deductible amount calculated in accordance with section 27H of the Act. In broad terms, this amount is calculated by dividing that part of the purchase price of the pension or annuity that has not attracted a tax deduction (the undeducted purchase price) by the number of years during which the pension or annuity is expected to be paid. The deductible amount is an annual amount of the pension that is treated as tax-free.

“Final percentage” has the meaning given in section 159SP of the Act for a rebatable superannuation pension. For a rebatable ETP annuity, the term has the meaning given by section 159SW.

A “S.159SS amount” is an amount of an otherwise rebatable superannuation pension that is specified by the payer of the pension to be non-rebatable. This can happen where the superannuation fund has some or all of its otherwise taxable contributions treated as non-taxable under the option in subsection 274(7) of the Act. The quid pro quo for having contributions treated as tax-free is that some part of any pensions paid by the fund does not qualify for a rebate.

Regulation 6 will insert new regulation 54DACC. New subregulation 54DACC(1) allows an employee in receipt of an amount of rebatable superannuation pension or rebatable ETP annuity to have the rebate entitlement taken into account in determining the appropriate rate of PAYE deductions. To do so, the employee must furnish a declaration under regulation 54DACC to the employer specifying that the employee is entitled to the rebate.

In the event that circumstances pertaining to the rebate entitlement change, new subregulation 54DACC(2) allows the employee to furnish another declaration to the employer setting out the circumstances as changed.

New subregulation (3) simply requires that declarations must be lodged in a form provided by the Commissioner of Taxation, be signed and dated by the employee. Subregulations (4) and (5) allow the form to be combined with other forms on which similar declarations, e.g. to spouse rebate entitlements, may be made.

Regulation 7 will amend existing subregulation 54DAG(4) to include reference to a declaration under regulation 54DACC whereby an employee may furnish a declaration of his or her entitlement to a rebate in respect of a superannuation pension or ETP annuity. Subregulation 54DAG(4) provides that any declaration lodged with an employer by an employee is overridden by any subsequent declaration lodged by the employee.

Regulation 8 will amend regulation 54DAJ. Regulation 54DAJ applies where an employee furnishes a declaration to the Commissioner of Taxation instead of an employer. Existing regulation 54DAH allows for declarations to be lodged with the

Commissioner in this way where it is impracticable for the employee to lodge a declaration with the employer, or where the employee does not desire to lodge a declaration with the employer.

New paragraph 54DAJ(c) specifies that where a declaration referred to in paragraph 54A(2)(c) is furnished by an employee, the Commissioner may issue to the employee a certificate specifying that a declaration under regulation 54DACC has been furnished to the Commissioner. The certificate issued by the Commissioner may also specify the reduction to be made from the prescribed rate of deductions for the purpose of subsection 221C(1) of the Act by an employer from any payments of an amount of rebatable superannuation pension or rebatable ETP annuity to the employee. The certificate is also to specify the date on which it is to cease to have effect, being a date not more than 13 months after the date of issue of the certificate.

Regulation 9 will amend regulation 54DAK which deals with the effect of a certificate issued to an employee by the Commissioner of Taxation under regulation 54DAJ. New paragraph 54DAK(1)(f) specifies that where the Commissioner has issued a certificate to an employee (under paragraph 54DAJ(c)), it is given effect to as though it were a declaration furnished under regulation 54DACC. The employee’s entitlement to a rebate under section 159SM or 159SU of the Act has effect for the purposes of deducting tax instalments from the payment of superannuation pension or rollover annuity as the case may be.

Regulation 10 amends regulation 54DAL which deals with the operation of a certificate issued to an employee by the Commissioner of Taxation under regulation 54DAJ. Subregulation 54DAL(1) is to be amended to include a reference to a Commissioner’s certificate issued to the employee under new paragraph 54DAJ(c) (see notes on regulation 8).

Regulation 11 will amend regulation 54DAM which describes the course of action to be taken in the event of a change of circumstances that affect an employee’s entitlement to, inter alia, a rebate of tax. Where a declaration has been lodged to reduce the general amount of PAYE deductions because of the rebate and the employee is no longer entitled to the rebate or is entitled to a reduced amount of rebate, the employee must notify the employer of the change in circumstances. Subregulation 54DAM(1) is to be amended to also cover cases where employees have sought reduced PAYE deductions because of an entitlement to a superannuation pension rebate under section 159SM of the Act or an ETP annuity rebate under section 159SU.

Regulation 54DAO defines the terms used in Subdivision AAA of the Regulations which deals with tax instalment deductions from ETPs. Paragraph (a) of regulation 12 will amend subregulation 54DAO(1) so that expressions used in Subdivision AAA of Division 2 of the Regulations that are used in Subdivisions AAA and AAB of Division 17 of Part III of the Act have the same meaning, unless the contrary intention appears.

Paragraphs (b) and (c) of regulation 12 serve the same purpose as paragraphs (a) and (b) of regulation 2. They simply update the terms in subregulation 54DAO(2) by replacing “post 30 June 1983 component” and “pre 1 July 1983 component” with the terms “post-June 83 component” and “pre-July 83 component”. Definitions of the taxed and untaxed elements of the post-June 83 component have also been inserted.

Regulation 13 amends regulation 54DAP which specifies the rates of PAYE tax to be deducted by an employer from an ETP. At present there are two PAYE rates, 16.25% and 31.25% (which include the 1.25% Medicare levy) where the employee has provided his or her tax file number. The appropriate rate of deduction depends on the age of the ETP recipient and the size of the post-June 83 component. For a person under 55, the rate of PAYE deduction from the post-June 83 component of an ETP is 31.25% (existing paragraph 54DAP(1)(b)). For a recipient of an ETP who is 55 or older two PAYE rates may apply. To the extent that the post-June 83 component does not exceed a threshold (the low rate threshold), presently set in the regulations at $55,000, the PAYE rate is 16.25% (subparagraph 54DAP(1)(a)(i)). A rate of 31.25% applies to any part of the post-June 83 component exceeding $55,000 (subparagraph 54DAP(1)(a)(ii)).

As explained in the notes on paragraphs (a) and (b) of regulation 2, a post-June 83 component of an ETP may now be broken down into two elements, i.e. the taxed and untaxed elements. While the PAYE rates for untaxed elements are the same as those prescribed in existing regulation 54DAP, the rates for taxed elements are different. As well, the amount of the low rate threshold has changed.

Paragraph (a) of regulation 13 will delete the existing subregulation 54DAP(1) and insert a new subregulation that sets out the new rates of PAYE deductions from ETPs. The new rates are set out in two tables in new subregulation 54DAP(1). The rates of PAYE deductions for ETPs mirror the actual maximum rates payable on assessment. Similar tables to those in new subregulation 54DAP(1) can be found in section 159SB of the Act. Table 1 specifies the rates of deduction to be made from the taxed element (see notes on paragraphs (a) and (b) of regulation 2) of a post-June 83 component of an ETP. Table 2 sets out the rates of deduction from an untaxed element. Table 1 is more detailed because it also deals with the transitional rates of tax for taxed elements as the new lower rates of tax for taxed elements are being phased in.

The tables identify the appropriate rate of PAYE deductions by reference to three criteria:

• whether the amount is a taxed or untaxed element - s.27B(1)(a) amounts are taxed elements while s.27B(1)(b) amounts are untaxed elements (the terms s.27B(1)(a) and s.27B(1)(b) are merely shortened references to paragraphs in the Act that describe taxed and untaxed elements);

• whether the recipient is under or over 55 years of age - B55 indicates payment is received before 55, A55 indicates a payment received on or after 55;

• for taxed elements (or s.27B(1)(a) amounts), how long the payment accrued in the period when superannuation funds were exempt from tax -

•• F84 indicates that the amount is attributable to fund membership that commenced before 1 July 1985,

•• F85 indicates that the amount is attributable to fund membership that commenced on or after 1 July 1985 and before 1 July 1986,

•• F86 indicates that the amount is attributable to fund membership that commenced on or after 1 July 1986 and before 1 July 1987, and

•• F87 indicates that the amount is attributable to fund membership that commenced on or after 1 July 1987.

The final criterion is important for taxed elements because the rate of tax that applies to a taxed element during the transitional period is reduced as the period of accrual in an exempt fund becomes smaller.

Each amount identified according to the above criteria is called a class of eligible assessable income. For each class that covers an eligible termination payment paid to a person older than 55, there may be one or two parts. This is because two different rates of tax may apply. A low rate applies to the part of a taxed or untaxed element below a special low rate threshold (the “low rate part”). The threshold is set at $64,500 for 1989-90 but as it is indexed to upward movements in average weekly earnings, it can be expected to increase over time. A higher rate applies to the “remaining part”, which is the part of the element exceeding the low rate threshold. For ETPs paid to persons below age 55 there is only one part, called the “derived amount”, and only one rate of tax can apply.

When the part of a taxed or untaxed element corresponding to a particular class of eligible assessable income is identified, the tables can be used to find the appropriate rate of PAYE tax to be deducted. Table 1 covers the various classes of taxed elements of a post-June 83 component of an ETP. To cover the transitional period which phases out in the income year commencing 1 July 1992, Table 1 sets out relevant rates for the income years 1990-91 to 1992-93 inclusive. The 1992-93 rates apply in later years as well. Table 2 covers the untaxed elements of ETPs. Only one set of tax rates applies to these parts.

Paragraph (a) will also insert several new subregulations in regulation 54DAP.

New subregulations 54DAP(1AA) and (1AB) respectively state that the amount that comes within a class of eligible assessable income described in Tables 1 and 2 is determined in accordance with subsections 159SC(1) and (2) of the Act. This means that the classes of eligible assessable income for PAYE purposes in the tables are determined consistently with the way they are determined for assessment purposes under the Act.

New subregulation 54DAP(1AC) explains how the amount of the “derived amount”, “low rate part” and “remaining part” (or high rate part) of either a taxed or untaxed element of a post-June 83 component are to be determined. Further, these terms are relevant in determining how the low rate threshold is to be applied. The derived amount is the whole amount of a taxed or untaxed element where the ETP is paid to someone under 55. The other terms apply to taxed and untaxed elements where an ETP is paid to someone aged 55 or more. The low rate part is the amount of the taxed or untaxed element below the low rate threshold while the remaining part is the amount exceeding the threshold.

In some cases, a post-June 83 component will comprise both taxed and untaxed elements. As well, a taxed element may comprise more than one class of eligible assessable income, e.g. where a person rolls over more than one ETP to an approved deposit fund and subsequently withdraws those moneys. Because of this, subregulations 54DAP(1AD) and (1AE) have been inserted to establish an order for applying the low rate threshold to the greatest advantage of the ETP recipient in these cases. Subregulation 54DAP(1AD) provides that where a post-June 83 component comprises both taxed and untaxed elements the low rate threshold (called the “upper limit” in the Act) is applied in total against the whole post-June 83 component. But subregulation 54DAP(1AD) ensures that the threshold is first applied against the taxed element, which gives the greatest advantage to the employee. This is because any taxed element that qualifies for a low rate of tax of zero, is also exempt from the Medicare levy.

In determining the low rate parts of taxed elements where a taxed element comprises more than one class of eligible assessable income (with the result that more than one rate of tax can apply), there also needs to be an order of application of the low rate threshold. This is determined by applying first the class of eligible assessable income that potentially may attract a zero rate of tax in respect of its low rate part. Once again, this is because such a low rate part is not subject to the Medicare levy. The order of application of the residual amount is set out in subregulation 54DAP(1AE).

New subregulation 54DAP(1AF) will simply ensure that the amount of PAYE tax to be deducted from an ETP is a multiple of 5 cents.

Paragraph (b) of regulation 13 updates the reference to “post 30 June 1983 component” in subregulation 54DAP(2) to “post-June 83 component”.

Paragraph (c) of this regulation will amend subregulation 54DAP(2). This subregulation identifies, for the purpose of subregulation 54DAP(1A), the part of a post-June 83 component that has not been rolled over and is, therefore, subject to PAYE tax deductions. Subregulation 54DAP(1A) applies where an ETP recipient does not quote a tax file number to the payer. Subregulation 54DAP(2) works by identifying the part of the post-June 83 component not specified (see notes on regulation 14) as an amount that the employee wants to be rolled over in accordance with subparagraph 54DAQ(2)(b)(iii). Subparagraph 54DAQ(2)(b)(iii) is being replaced by paragraph (b) of regulation 14 because the post-June 83 component of an ETP is now broken down into its taxed and untaxed elements. To have a taxed or untaxed element rolled over by an employer the employee will have to specify that intention in accordance with new subparagraphs 54DAQ(2)(b)(iii) and (iv) respectively, which are being inserted by paragraph (b) of regulation 14. The amendment made by paragraph (c) simply replaces the reference to existing subparagraph 54DAQ(2)(b)(iii) with references to new subparagraphs 54DAQ(2)(b)(iii) and (iv).

Regulation 14 will amend regulation 54DAQ. This regulation provides for an employer and an employee to jointly complete a form which sets out details of the eligible termination payment and any amounts that are to be rolled over by the employer on the employee’s behalf. The information on the form also enables the payer to determine the appropriate PAYE tax instalment deduction to be made from the part of the payment that is not to be rolled over.

Subregulation 54DAQ(1) sets out the actions that shall be taken by an employer and an employee before an eligible termination payment is made. The employer must give the employee a statement in relation to the payment setting out the details of the ETP. The employee must then make a rollover nomination in the manner prescribed by subregulation 54DAQ(2), stating which part, if any, of the payment the employee wishes the employer to rollover.

Paragraphs (a) and (b) of regulation 14 simply update the references in subregulations 54DAQ(1) and (2) respectively to the components of an eligible termination payment. In particular they provide for the fact that the post-June 83 component of an ETP is now broken down into taxed and untaxed elements.

Finally, paragraph (c) will update the term “pre 1 July 1983 component” to “pre-July 83 component” where it appears in the definition of variable B in subregulation 54DAQ(5).