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INCOME TAX ASSESSMENT (1997 ACT) REGULATIONS 2021 - SCHEDULE 1AA

Working out defined benefit contributions

Note:   See subsection   293 - 115.20(2).

Part   1 -- Preliminary

Division   1 -- Definitions

1   Meaning of accruing member

    In this Schedule, accruing member of a superannuation fund for a financial year, has the meaning given by subsection   293 - 115.05(2).

2   Meaning of benefit category

  (1)   A benefit category is a category of membership of a defined benefit fund as certified by an actuary.

  (2)   An actuary must not certify a category of membership to be a benefit category unless the actuary is satisfied that:

  (a)   each hypothetical new entrant to the benefit category with the same entry age would accrue retirement benefits on substantially the same basis; or

  (b)   if any 2 hypothetical new entrants to the benefit category accrued retirement benefits on a different basis, the new entrant rates for each member calculated under Parts   2 and 3 would be equal.

2A   Meaning of defined benefit fund

    A defined benefit fund is a superannuation fund in which a member has a defined benefit interest.

2B   Treatment of superannuation sub - funds

    If there are 2 or more superannuation sub - funds in relation to defined benefit members of a superannuation fund, apply this Schedule to the superannuation fund separately in respect of each superannuation sub - fund.

3   Accruing member must not belong to more than one benefit category at the same time unless certified by an actuary

  (1)   An accruing member must not belong to more than one benefit category of the same defined benefit fund on the same day unless certified by an actuary.

  (2)   An actuary must not certify that a member belongs to more than one benefit category on the same day unless the actuary is satisfied that the amount of defined benefit contributions to be reported will not be materially different from the amount of defined benefit contributions that would have been reported had the member belonged to only one benefit category on each relevant day.

Note:   An accruing member would be ordinarily expected to belong to only one benefit category at a time. However, there might be circumstances in certain funds where it is materially more practical for the purpose of calculating the total amount of defined benefit contributions to deem that some members belong to more than one benefit category from time to time.

Division   2 -- Method

4   Method of determining amount of defined benefit contributions

  (1)   The defined benefit contributions for an accruing member of a defined benefit fund for a financial year is the amount worked out using the following formula:

Start formula open bracket BC minus NTC close bracket times 0.85 plus NTC end formula

where, for the financial year:

"BC" is the notional employer contribution calculated for the member under subclause   (2).

"NTC" is the notional taxed contributions calculated for the member for the financial year under Schedule   1A, disregarding Subdivision   291 - C of the Income Tax (Transitional Provisions) Act 1997 .

Note 1:   Section   291 - 170.04 sets out circumstances in which notional taxed contributions are nil.

Note 2:   Salary packaged contributions which do not contribute towards funding the defined benefit interest are included in the amount calculated under step 1 of the method statement set out in section   293 - 105 of the Act and do not form any part of the method of determining defined benefit contributions.

  (2)   The notional employer contribution for an accruing member of a defined benefit fund for a financial year is the amount worked out using the following formula:

Start formula sum of NEFC plus open bracket 1.2 times open bracket category change or discretion adjustment amount plus governing rules change adjustment amount plus increased exit benefit adjustment amount plus increased superannuation salary adjustment amount close bracket close bracket end formula

where, for the financial year:

"category change or discretion adjustment amount" is an amount worked out on advice from an actuary under Part   5.

"governing rules change adjustment amount" is an amount worked out on advice from an actuary under Part   6.

"increased exit benefit adjustment amount" is an amount worked out on advice from an actuary under Part   4.

"increased superannuation salary adjustment amount" is an amount worked out on advice from an actuary under Part   7.

"sum of NEFC" is the sum of the amounts of notional employer financed contributions for each benefit category that the member belongs to during the financial year calculated under subclause   (3).

  (3)   The notional employer financed contributions for an accruing member for a benefit category of a defined benefit fund for a financial year is the amount worked out using the following formula:

Start formula 1.2 times open bracket new entrant rate times superannuation salary amount times start fraction number of days over 365 end fraction minus member contributions amount close bracket end formula

where, for the financial year:

"member contributions amount" is the amount of member contributions:

  (a)   paid by or on behalf of the member in respect of the member's defined benefit interest in the fund during that part of the financial year that the member was an accruing member of the benefit category; and

  (b)   which are not assessable income of the fund;

but excluding any amounts which are not assessable income of the fund because of:

  (c)   item   5.3 of the table in section   50 - 25 of the Act; or

  (d)   a choice made under section   295 - 180 of the Act.

"new entrant rate" is the new entrant rate for the benefit category worked out by an actuary under Parts   2 and 3.

"number of days" is the number of days during the financial year that the member was an accruing member of the benefit category.

"superannuation salary amount" is the member's annual superannuation salary relevant to the benefit category on the first day of the financial year on which the member had a defined benefit interest in the fund.

Part   2 -- New entrant rate

 

5   Method of working out new entrant rate for a benefit category

  (1)   The new entrant rate for a benefit category is the rate calculated under this Part and using the assumptions set out in Part   3.

  (2)   The new entrant rate for a benefit category is the rate that represents the long - term cost, expressed as a percentage of superannuation salary, of providing the benefits payable on a voluntary exit to a hypothetical new entrant to the benefit category.

  (3)   The new entrant rate is calculated as the present value of the benefits payable on voluntary exit (resignation, early retirement, or retirement) under the rules of the defined benefit fund which are applicable to a new entrant to the benefit category divided by the present value of future superannuation salaries payable to the new entrant.

  (4)   The present value of the benefits payable is to be calculated having regard to the rules and practice of the defined benefit fund including benefit structure, caps, member options, reasonably expected discretions and member contributions, and using the economic, decrement and other parameters and the other assumptions set out in Part   3.

6   New entrant rate to be based on period of membership needed to reach maximum benefit accrual

  (1)   If the rules of the defined benefit fund applicable to the benefit category provide for a maximum benefit accrual, the new entrant rate is to be calculated on the basis that the benefit is funded over the period to when maximum accrual is attained.

Note:   This means that, for the purpose of calculating the present value of future salaries payable to the new entrant, the superannuation salary is to be assumed to be zero at those ages after reaching maximum benefit accrual.

Example :   If maximum accrual is attained after 20 years of membership, the superannuation salary for a 30 - year - old new entrant will be assumed to be zero at age 50 and above for the purpose of calculating the present value of future salaries payable to the new entrant.

  (2)   For the Governor - General Pension Scheme, the period to when maximum benefit accrual is attained for a member of the Scheme is taken to be the period:

  (a)   starting on the day the member's appointment as Governor - General starts; and

  (b)   ending at the end of the financial year in which the member's appointment as Governor - General started.

7   New entrant rate to be rounded down

    The new entrant rate is to be rounded down to the lower 1 percentage point.

Example :   10.6% would be rounded down to 10%.

8   No allowance for administration expenses or income tax on assessable contributions

    The new entrant rate is to be calculated ignoring:

  (a)   administration expenses; and

  (b)   income tax on assessable contributions.

Note:   These items are allowed for in the formula in subclause   4(3) by multiplying by 1.2.

9   Certain discretions to be allowed for

  (1)   The new entrant rate is to be calculated assuming that certain discretions are always exercised.

  (2)   Subject to subclause   (3), if the fund rules provide a discretion to pay, on voluntary exit, a benefit that is higher than the standard benefit, the actuary must assume that a higher benefit is always paid on voluntary exit on or after age 55.

  (3)   If the higher benefit mentioned in subclause   (2) exceeds the accrued retirement benefit, the actuary may assume that the benefit is an amount:

  (a)   greater than or equal to the accrued retirement benefit; and

  (b)   less than or equal to the higher benefit.

  (4)   If the actuary believes that there is a reasonable expectation that a higher benefit than either the standard benefit or the accrued retirement benefit will be paid, then the actuary should assume that the benefit paid on voluntary exit on or after age 55 is always equal to the benefit reasonably expected to be paid.

Note:   In considering whether there is a reasonable expectation that a higher benefit will be paid, it would generally not be appropriate to assume payment unless such an assumption was adopted in the most recent actuarial review.

Part   3 -- Valuation parameters

 

10   Application of economic, decrement and other parameters

    For the purpose of working out the new entrant rate for a benefit category mentioned in Part   1 or 2, the actuary is to apply the economic, decrement and other parameters set out in this Part.

11   Discount rate

  (1)   The discount rate to be used to discount projected future benefits and salaries is 8% per year.

  (2)   The discount rate is not to be adjusted for investment expenses or investment - related taxation or for any other reason.

12   Fund earning rate and crediting rate

  (1)   If necessary, the fund earning rate to be assumed is 8% per year.

  (2)   If necessary, the assumed crediting rate is to be based on the assumed fund earning rate.

13   Rate of future salary or wages growth

  (1)   The rate of salary or wages growth to be applied is 4.5% per year.

  (2)   This rate is to be used:

  (a)   to project the value of future salary or wages; and

  (b)   to project benefits that increase in accordance with a general wage index (for example, average weekly earnings).

14   Rate of increase in price indices

    If a benefit is linked to an increase in a price index (for example, the Consumer Price Index), the rate of increase in the price index to be applied is 2.5% per year.

15   New entrant age

  (1)   The age of new entrants to be assumed is based on the average age of entry to the fund of the persons who were defined benefit members of the fund at 1   July 2007.

  (2)   The following table sets out the age of new entrants that is to be assumed.

 

New entrant age

Item

Average age last birthday at commencement in fund of defined benefit members of the fund at 1   July 2007

New entrant age to be assumed

1

<30

25

2

30 - 34

30

3

35 - 39

35

4

40 - 44

40

5

45 - 49

45

6

50+

50

  (3)   If:

  (a)   there has been a transfer of defined benefit members from a predecessor fund into the fund, or a superannuation sub - fund of the fund; and

  (b)   the actuary considers it reasonable to do so;

the actuary may determine a new entrant age for the fund or superannuation sub - fund taking account of the average age of entry used for or relevant for those members in the predecessor fund.

  (4)   For the purposes of this clause, a defined benefit member does not include a person who:

  (a)   is receiving only a pension benefit from the fund; or

  (b)   has deferred the person's benefit entitlement in the fund.

  (5)   If the actuary believes that there is insufficient information available to calculate the average age of entry, the actuary is to assume that the age of a new entrant is 40.

  (6)   If an actuary certifies a benefit category for the purposes of subclause   2(1) in relation to a person's membership of the Governor - General Pension Scheme, then, despite subclauses   (1) to (5) of this clause, the new entrant age to be assumed for the benefit category is:

  (a)   the new entrant age specified by the Governor - General Act 1974 ; or

  (b)   if that Act does not specify a new entrant age--the person's age when the person's appointment as Governor - General commences.

16   Exit rates

  (1)   The following table sets out the rates of voluntary exit from the fund that are to be assumed.

 

Voluntary exit rates

Item

Age band

Exit rate

1

<40

0.05

2

40 - 44

0.04

3

45 - 49

0.04

4

50 - 54

0.04

5

55 - 59

0.08

6

60

0.12

7

61 - 64

0.10

8

65

1.00

  (2)   However, if an actuary certifies a benefit category for the purposes of subclause   2(1) in relation to a person's membership of the Governor - General Pension Scheme, then, despite subclause   (1) of this clause, the voluntary exit rates to be assumed for the benefit category are:

  (a)   the voluntary exit rates specified by the Governor - General Act 1974 ; or

  (b)   if that Act does not specify voluntary exit rates--the following rates:

  (i)   from the age of the person on the day the person's appointment as Governor - General commences (the appointment day ) to the person's age on the fourth anniversary of the appointment day--0.00;

  (ii)   from the age of the person on the person's next birthday after the fourth anniversary of the appointment day to any later age--1.00.

  (3)   The rate of involuntary exit (including by redundancy, death or invalidity) to be assumed is zero.

17   Pensions

  (1)   If the benefit is a single life pension, the pension is to be valued using the assumptions set out in this Part.

  (2)   If the benefit is a reversionary pension, the value of the pension is to be taken as the value of the pension assuming it is a single life pension, increased by 10%.

18   Mortality of pensioners

    The following table sets out the rates of pensioner mortality ( qx ) that are to be assumed.

 

Pensioner mortality ( qx ) rates

Item

Age

qx

1

35 - 49

0.003

2

50 - 54

0.004

3

55

0.005

4

56

0.006

5

57

0.006

6

58

0.007

7

59

0.008

8

60

0.008

9

61

0.009

10

62

0.010

11

63

0.012

12

64

0.013

13

65

0.014

14

66

0.016

15

67

0.017

16

68

0.019

17

69

0.021

18

70

0.023

19

71

0.026

20

72

0.029

21

73

0.032

22

74

0.035

23

75

0.039

24

76

0.043

25

77

0.048

26

78

0.053

27

79

0.059

28

80

0.064

29

81

0.070

30

82

0.077

31

83

0.085

32

84

0.095

33

85

0.106

34

86

0.116

35

87

0.128

36

88

0.139

37

89

0.149

38

90

0.159

39

91

0.168

40

92

0.176

41

93

0.184

42

94

0.193

43

95

0.202

44

96

0.211

45

97

0.219

46

98

0.228

47

99

0.236

48

100

1.000

19   Other assumptions to be set by the actuary

  (1)   Any other assumptions which may be necessary are to be set by the actuary responsible for calculating the new entrant rate.

  (2)   The assumptions are to be based on the assumptions used in the most recent actuarial valuation of the fund, unless the actuary believes, having regard to the expected future experience of the fund, that they are no longer appropriate.

  (3)   If the actuary believes that the assumptions used in the most recent actuarial valuation are no longer appropriate, the assumptions should be set on a best estimate basis.

Part   4 -- Exercise of discretion to pay a benefit greater than the benefit assumed in calculating the new entrant rate

 

20   Method of working out the increased exit benefit adjustment amount in the formula in subclause   4(2)

    For the purposes of the formula in subclause   4(2):

  (a)   for a financial year in which the trustee of the defined benefit fund pays, as a result of an exercise of a discretion, a benefit to the member on:

  (i)   voluntary exit; or

  (ii)   redundancy that is not bona fide;

    which exceeds the benefit assumed in calculating the new entrant rate for the benefit category to which the member belongs at the time the benefit is paid--the increased exit benefit adjustment amount equals an amount worked out on advice from an actuary that represents the amount of the excess; and

  (b)   for any other financial year--the increased exit benefit adjustment amount equals zero.

Part   5 -- Member has changed benefit category

 

21   Method of working out the category change or discretion adjustment amount in the formula in subclause   4(2)

  (1)   For the purposes of the formula in subclause   4(2):

  (a)   for a financial year in which the member's accrued retirement benefit increases as a result of:

  (i)   a change of benefit category; or

  (ii)   an exercise of discretion;

    the category change or discretion adjustment amount equals an amount worked out on advice from an actuary that represents the increase in the value of the accrued retirement benefit, if any, as a result of the change in benefit category or the exercise of the discretion; and

  (b)   for any other financial year--the category change or discretion adjustment amount equals zero.

  (2)   The economic, decrement and other parameters and the other assumptions to be used are set out in Part   3.

Part   6 -- Governing rules have changed

 

22   Method of working out governing rules change adjustment amount in the formula in subclause   4(2)

  (1)   For the purposes of the formula in subclause   4(2):

  (a)   for a financial year in which there is an amendment of the governing rules (within the meaning of subsection   10(1) of the SIS Act) of the defined benefit fund that:

  (i)   may result in an increase in the member's benefit; and

  (ii)   is made for a reason other than to satisfy a legislative requirement;

    the governing rules change adjustment amount equals an amount worked out on advice from an actuary that represents the increase in the value of the accrued retirement benefit, if any, that accrued to the member as a result of the amendment to the governing rules; and

  (b)   for any other financial year--the governing rules change adjustment amount equals zero.

  (2)   The economic, decrement and other parameters and the other assumptions to be used are set out in Part   3.

Part   7 -- Non - arm's length increase in superannuation salary

 

23   Method of working out the increased superannuation salary adjustment amount in the formula in subclause   4(2)

  (1)   For the purposes of the formula in subclause   4(2):

  (a)   for a financial year in which the member's superannuation salary is increased in a non - arm's length way with the primary purpose of achieving an increase in superannuation benefit--the increased superannuation salary adjustment amount equals an amount worked out on advice from an actuary that represents the increase in the value of the accrued retirement benefit, if any, that accrued to the member as a result of the change in superannuation salary; and

  (b)   for any other financial year--the increased superannuation salary adjustment amount equals zero.

  (2)   The economic, decrement and other parameters and the other assumptions to be used are set out in Part   3.


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