Commonwealth Numbered Regulations - Explanatory Statements

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SUPERANNUATION INDUSTRY (SUPERVISION) REGULATIONS (AMENDMENT) 1997 NO.293

STATUTORY RULES 1997 No. 293

Issued by the authority of the Assistant Treasurer

Superannuation Industry (Supervision) Act 1993

Superannuation Industry (Supervision) Regulations (Amendment)

Section 353 of the Superannuation Industry (Supervision) Act 1993 (the Act) provides that the Governor-General may make Regulations for the purposes of the Act.

The Act and the Superannuation Industry (Supervision) Regulations (the Principal Regulations) provide for the prudent management of certain superannuation funds, approved deposit funds and pooled superannuation trusts and for their supervision by the Insurance and Superannuation Commissioner.

The Regulations are necessary following the enactment of the Taxation Laws Amendment Act (No. 3) 1997 which implements the 1996-97 Budget initiatives to provide a tax rebate for a person contributing to a superannuation fund on behalf of a low-income or non-working spouse, and to provide an exemption from capital gains tax for proceeds of the sale of a small business where used for retirement income purposes.

In order to give effect to these initiatives, the Regulations:

*       include new classes of persons in the principal regulation which sets out who is taken to be a member of a prescribed class for the purpose of exempting certain superannuation funds from becoming a public offer superannuation fund and therefore being required to comply with more onerous supervisory requirements (refer regulation 3);

*       provide that superannuation benefits arising from contributions made in respect of a spouse will be fully preserved given the concessional taxation treatment which will apply to these benefits (refer regulations 4 and 9);

*       preserve the benefits arising from the capital gains tax exempt component amount of the proceeds of the sale of a small business where rolled over into a superannuation fund or approved deposit fund (in order that the capital gains tax exemption may apply) (refer regulations 5, 6 and 9); and

*       allow regulated superannuation funds to accept contributions made by a contributing spouse in respect of a spouse and provide for the accrual of benefits by defined benefit funds where the accrual is attributable to such contributions (refer regulations 7 and 8).

The Regulations are described in detail in the Attachment.

The Regulations will commence on gazettal.

ATTACHMENT

Regulation 1 - Amendment

Regulation 1 provides that the Superannuation Industry (Supervision) Regulations (the Principal Regulations) are amended as set out in these Regulations.

Regulation 2 - Regulation 1.03 (Interpretation)

Regulation 2 inserts new definitions of 'capital gains tax exempt component' and 'eligible spouse contributions' in regulation 1.03 of the Principal Regulations. These terms have the meanings given by the Income Tax Assessment Act 1936 (the Tax Act) and define expressions used in these Regulations.

Regulation 3 - Regulation 3.01 (Public offer superannuation fund - prescribed persons)

Regulation 3 amends regulation 3.01 of the Principal Regulations which enables a class of persons to be prescribed for the purposes of sub-subparagraph 18(1)(a)(ii)(B) and paragraph 18A(2)(e) of the Superannuation Industry (Supervision) Act 1993 (the Act).

Public offer superannuation funds are, generally speaking, those funds which make Coffers' of superannuation to the public. However, sub-subparagraph 18(1)(a)(ii)(B) of the Act provides that a standard employer-sponsored fund will be a public offer superannuation fund if, among other things, it has at least one member who is not a standard employer-sponsored member and who is not a member of a prescribed class. Paragraph 18A(2)(e) of the Act provides that an excluded fund will not be a public offer superannuation fund if, among other things, a member of the fund is a member of a prescribed class. A public offer superannuation fund is subject to more onerous supervisory requirements under the Act and Principal Regulations.

This amendment inserts new paragraphs (b) - (e) in regulation 3.01 of the Principal Regulations to provide for new subclasses of the prescribed class of persons.

The new subclasses in paragraphs (b) and (c) comprise a spouse or former spouse of an existing or former standard employer-sponsored member of the relevant fund that has accepted the eligible spouse contributions.

The new subclasses in paragraphs (d) and (e) comprise a spouse or former spouse of an existing or former standard employer-sponsored member of another fund which has the same standard employer-sponsor as the relevant fund that accepted eligible spouse contributions. That is, these subclasses enable a fund to accept eligible spouse contributions from a person who is an existing or former standard employer-sponsored member of another fund without becoming a public offer superannuation fund where the two funds concerned have the same standard employer-sponsor. This would apply, for example, where an employer has several funds, some of which may be 'closed' and others 'open' to new contributions in these circumstances, paragraphs (d) and (e) will allow a person who is only a member of a 'closed' fund to make contributions on behalf of a spouse or former spouse to one of the 'open' funds operated by the employer (rather than having to use some other fund) without the 'open' fund becoming a public offer fund.

The amendment ensures that a standard employer-sponsored fund or excluded fund, will not become a public offer superannuation fund if it has a member who falls within these subclasses. It ensures the continued non-public offer status of a standard employer-sponsored or excluded fund which has accepted a 'spouse member' despite, for example, situations where a person subsequently ceases to be the spouse of the standard employer-sponsored member, or where the standard employersponsored member ceases to be a standard employer-sponsored member, or where the eligible spouse contributions cease.

Regulation 4 - Regulation 6.01 (Interpretation)

Regulation 4 amends the meaning of 'restricted non-preserved contributions' in subregulations 6.01(2) and 6.01(6) of the Principal Regulations with the effect of excluding eligible spouse contributions (defined in regulation 2) from being classified as 'restricted non-preserved contributions'.

The Taxation Laws Amendment Act (No. 3) 1997 (TLAA (No. 3) amended the Tax Act to provide a tax rebate for, a person contributing to superannuation on behalf of a low-income or non-working spouse.

The amendment made by regulation 4 is necessary because benefits arising from eligible spouse contributions (in respect of which a person way be entitled to claim the abovementioned tax rebate) must be preserve in the superannuation system until such time as an appropriate condition of release is satisfied (for example, in the case of a spouse who has never been gainfully employed, the attainment of age 65 or other non-employment related event such as death or severe financial hardship; in the case of a spouse who has, at any time, been gainfully employed, conditions of release also include retirement or permanent and temporary incapacity).

The requirement for benefits arising from eligible spouse contributions to be preserved recognises the concessional taxation treatment which will apply to these benefits whilst in the superannuation system and ensures that the intention behind the rebate, that is, that a spouse with intermittent work patterns has adequate opportunities and incentives to build up retirement income through superannuation, is achieved.

Regulation 6.03 of the Principal Regulations provides that preserved benefits in a regulated superannuation fund on or after the changeover day (that is, the date of the new preservation arrangements, which for most funds will be 1 July 1998) is equal to the amount of the member's benefits in the fund less the sum of the amount of the member's restricted non-preserved benefits and unrestricted non-preserved benefits in the fund.

As eligible spouse contributions will not be tax deductible under the Tax Act, in the absence of the amendment provided for by this regulation, after the changeover day such contributions would fall within the meaning of undeducted contributions and restricted non-preserved contributions in the Principal Regulations (and would not be fully preserved).

Regulation 5 - Regulation 6.10 (Unrestricted non-preserved benefits - regulated superannuation funds)

Regulation 5 amends the meaning of unrestricted non-preserved benefits as it applies in relation to regulated superannuation funds under regulation 6.10 of the Principal Regulations.

In order to be able to claim the exemption from capital gains tax on the sale of a small business (available under the Tax Act by virtue of amendments, introduced by TLAA (No. 3)) an individual must rollover the amount of the capital gains tax exempt component (defined in regulation 3) of the proceeds of the sale to a superannuation fund or approved deposit fund (ADF) to be preserved.

In the absence of the amendment provided for by regulation 5, the capital gains tax exempt component amount would fall within a type of unrestricted non-preserved amount under subregulation 6.10(2) of the Principal Regulations and therefore would not be preserved.

Regulation 5 expressly excludes capital gains tax exempt component amounts from the meaning of unrestricted non-preserved benefits in subregulation 6.10(2). Therefore the benefits arising from the capital gains tax exempt component amount will not be an unrestricted non-preserved benefit but rather will be fully preserved benefits in a regulated superannuation fund.

Regulation 6 - Regulation 6.11 (Unrestricted non-preserved benefits - approved deposit funds)

Regulation 6 amends the meaning of unrestricted non-preserved benefits as it applies in relation to ADFs under regulation 6.11 of the Principal Regulations.

In order to be able to claim the exemption from capital gains tax on the sale of a small business (available under the Tax Act by virtue of amendments introduced by TLAA (No. 3)) an individual must rollover the amount of the capital gains tax exempt component (defined in regulation 2) of the proceeds of the sale to a superannuation fund or ADF to be preserve .

Regulation 6.05 of the Principal Regulations provides that the amount of a member's preserved benefits in an ADF on or after the commencement day (generally the day the ADF becomes regulated under the Act or 1 July 1994) is the amount of the member's total benefits in the ADF less the amount of the member's unrestricted nonpreserved benefits in the ADF.

However, in the absence of the amendment provided for by regulation 6, the capital gains tax exempt component amount would fall within a type of unrestricted nonpreserved amount under subregulation 6.11(2) of the Principal Regulations and therefore would not be preserved.

Regulation 6 expressly excludes capital gains tax exempt component amounts from the meaning of unrestricted non-preserved benefit in subregulation 6.11(2). Therefore the benefits arising from the capital gains tax exempt component amount will not be an unrestricted non-preserved benefit but rather will be fully preserved benefits in an ADF.

Regulation 7 - Regulation 7.04 (Acceptance of contributions - regulated superannuation funds)

Regulation 7 amends subregulation 7.04(1) of the Principal Regulations in order to allow regulated superannuation funds to accept eligible spouse contributions (defined in regulation 2).

Regulation 7.04 of the Principal Regulations currently provides that a regulated superannuation fund, in respect of a member under age 65, can accept contributions only if the contributions are mandated employer contributions; or the contributions are non-mandated contributions and the member:

-       has, at any time in the period of 2 years immediately preceding the date of acceptance, engaged in full time or part-time gainful employment; or

-       ceased gainful employment because of ill health; or

-       is on authorised leave from his or her employer to carry out the parental responsibility of raising children.

TLAA (No. 3) amended the Tax Act to provide a tax rebate for a person contributing to superannuation on behalf of a low-income or non-working spouse. It is therefore necessary to insert new paragraph 7.04(1)(c) in the Principal Regulations to allow regulated superannuation funds to accept eligible spouse contributions (in respect of which a person may be entitled to claim the above-mentioned tax rebate) where these contributions do not meet the above conditions.

Regulation 8 - Regulation 7.05 (Accrual of benefits - defined benefit funds)

Regulation 8 amends subregulation 7.05(1) of the Principal Regulations in order to allow a defined benefit fund to grant an accrual of benefits where the accrual is attributable to eligible spouse contributions (defined in regulation 2).

Regulation 7.05 of the Principal Regulations currently provides that a defined benefit fund can only grant an accrual of benefits, in respect of a member under age 65, if:

*       the accrual is attributable to mandated-employer contributions;

*       the member has, at any time in the period of 2 years immediately preceding the grant of accrual, engaged in full time or part-time gainful employment;

*       ceased gainful employment because of ill health; or

*       is on authorised leave from his or her employer to carry out the parental responsibility of raising children.

TLAA (No. 3) amended the Tax Act to provide a tax rebate for a person contributing to superannuation on behalf of a low-income or non-working spouse. It is therefore necessary to insert new paragraph 7.05(1)(d) in the Principal Regulations to allow a defined benefit fund to accrue benefits attributable to eligible spouse contributions (in respect of which a person may be able to claim the above-mentioned tax rebate) where the above conditions are not met.

Regulation 9 - Schedule 2 (Modifications of the OSS laws in relation to preserved benefits in regulated superannuation funds)

Regulation 9 amends Schedule 2 of the Principal Regulations which provides for the modification of the Occupational Superannuation Standards (OSS) laws in relation to preserved benefits in regulated superannuation funds before the changeover day of the fund.

The amendment inserts new paragraphs 9(1)(1) and (g) into subclause 202.2 of Schedule 2 of the Principal Regulations to require benefits arising from eligible spouse contributions and capital gains tax exempt component amounts (each defined in regulation 2) to be preserved in a regulated superannuation fund before the fund's changeover day.

The amendment made by regulation 9 is necessary because benefits arising from eligible spouse contributions must be preserved in the superannuation system until such time as an appropriate condition of release is satisfied (for example, in the case of a spouse who has never been gainfully employed, the attainment of age 65 or other non-employment related event such as death or severe financial hardship; in the case of a spouse who has, at any time, been gainfully employed, conditions of release also include retirement or permanent and temporary incapacity).

The requirement for benefits arising from eligible spouse contributions to be preserved recognises the concessional taxation treatment which will apply to these benefits whilst in the superannuation system and ensures that a spouse with intermittent work patterns has adequate opportunities and incentives to build up retirement income through superannuation savings.

The regulation therefore expressly provides that benefits must be preserved where they arise from eligible spouse contributions.

The amendment provided for by regulation 9 is also necessary to expressly provide that benefits must be preserved if they arise from a capital gains tax exempt component amount rolled over to the fund. This gives effect to the requirement that, in order to be able to claim the exemption from capital gains tax on the sale of a small business (available under the Tax Act by virtue of amendments introduced by TLAA (No. 3)), the capital gains tax exempt component amount of the proceeds of the sale must be rolled over to a regulated superannuation fund (or ADF) to be preserved.