WARNING:
This Digest was prepared for debate. It reflects the legislation as
introduced and does not canvass subsequent amendments. This Digest
does not have any official legal status. Other sources should be
consulted to determine the subsequent official status of the
Bill.
CONTENTS
Superannuation Contributions Surcharge (Assessment and
Collection) Bill 1997
Date Introduced: 13 February 1997
House: House of Representatives
Portfolio: Treasury
Commencement: The Bill will commence on Royal
Assent. However, the surcharge will apply to contributions made
after the time of the Budget announcement of the introduction of
the measure (ie. 7.30 pm on 20 August 1996).
To provide for the assessment and collections of a 'surcharge'
that will be payable by superannuation providers where member's
assessable income and superannuation contributions exceeds $70
000.The surcharge will be at the rate of 1% for each $1 000 of
assessable income and superannuation contributions that exceed $70
000 to a maximum of 15%, at $85 000.
The income of a superannuation fund, including member's
contributions, is subject to concessional tax treatment if the fund
satisfies certain conditions.The principal condition is that the
fund satisfies the Superannuation Industry (Supervision) Act
1993 and it's regulations, which relate to matters such as
vesting, the provision of information to members and financial
management requirements.The concessional tax treatment means that
income is generally taxed at the rate of 15% rather than at the
normal company tax rate.
It was announced in the 1996–97 Budget that the
concessional tax treatment would be altered and that a 'surcharge'
would apply to contributions that are subject to a tax deduction
(this will include employer contributions and those made by the
members where there is no employer contribution and a deduction has
been claimed) where the member's assessable income and
superannuation contributions exceeds $70 000.The surcharge will be
imposed at the rate of 1% for each $1 000 of assessable income and
superannuation contributions to a maximum of 15% when assessable
income and superannuation contributions reaches $85 000.The
surcharge will apply to both accumulated benefits funds, ie.the
'normal' type of superannuation fund where the member's ultimate
benefit will depend on the investment performance of the fund, and
defined benefits funds, which are funds where the members benefits
are defined, usually on such matters as the number of years of
contributions and final salary.The most common examples of defined
benefits funds are those relating to most public servants and
Members of Parliament (other matters in relation to defined
benefits funds will be discussed below).
The concessional tax treatment of superannuation contributions
has encouraged the use of 'salary packaging', which principally
applies in the private sector,to maximise the value of the after
tax returns to the employee and also allows the employer to offer a
total remuneration package that would be less than if the employee
were subject to the full PAYE taxation rates.While the use of such
packaging may be desirable from both the employer and employees
points of view, the usual result is that the revenue to government
is less than would be the case if the full income package was taxed
at normal PAYE rates, as they do to most lower paid employees.The
concessional treatment available for superannuation contributions
is a significant cost to government revenue, which has recently
been reported to be approximately $6.2 billion.(1)
In it's superannuation policy statement issued prior to the 1996
General Election, titled Super For All - Security and Flexibility
in Retirement, the coalition stated that if elected it would
'retain the current taxation treatment of superannuation'.(2)
The proposed surcharge is to be collected by the superannuation
funds rather than from the member's employer.The second reading
speech to this Bill gives the following reasons for the fund,
rather than employer, being responsible for the collection of the
surcharge:
Alternative measures of collecting the surcharge have been put
to the Government. The Government has given careful consideration
to these suggestions.
The alternatives suggested all involve an unacceptable increase
in compliance costs for employers, small business and all
Australians.
The proposal has come under criticism for a number of reasons,
most relating to the administration of the scheme.Before discussing
comments relating the administration of the scheme, it has also
been criticised for more general policy reasons.The first of these
relates to the imposition of the surcharge on a yearly basis for
accumulated funds.The treatment of unfunded defined benefits funds
will be different (see below).
The argument has been put that it is more equitable to tax the
contributions of higher income earners when the income from the
superannuation fund is realised, rather than in the year of
contribution.A director of Access Economics is reported as
stating:
The best way to tackle the problem is to tax accumulated
superannuation contributions when they are paid out at appropriate
progressive marginal tax rates.(3)
The argument also contains the view that a person's income may
not be steady throughout their working life and that such people
may be liable to the surcharge in some years when they have a
higher income but that their superannuation contributions may be
minimal in other years.Such people may not have a higher than
normal superannuation accumulation but will be liable to the
surcharge during years of high income which will reduce their final
benefits.The comparison has been made with income averaging
provisions that apply to certain taxpayers, including primary
producers, that have fluctuating income from year to year.The
chairman of the Institute of Charted Accountants small and medium
enterprise (SME) committee has been reported as stating:
.... we are concerned that in sectors where income fluctuates
year to year, with significant peaks and troughs, there is no
provision for income averaging.
Many SMEs and sole traders do not have a consistent income
stream, such as farmers, sports people, artists and
musicians.(4)
A major area of contention relating to the surcharge has been
the way it will be administered. Basically, the procedure will be
that a superannuation fund will supply the tax file number (TFN) of
it's members to the Australian Tax Office (ATO) which will then
calculate the person's assessable income and the superannuation
contributions made in respect of the person and if these exceed $70
000 the ATO will notify the fund to remit the surcharge amount to
the ATO (this will not apply to unfunded defined benefits schemes
which will be discussed below).There have been a number of
reactions to the proposed scheme.
First, funds and the industry body, the Association of
Superannuation Funds of Australia (ASFA), have argued that the
measure will increase administrative costs for all members and not
only for those liable to the surcharge.This will occur as
information has to be supplied to the ATO in respect of all members
of the fund and the cost of this will increase the administrative
costs of the fund.The impact of administrative costs of
superannuation funds has been an issue for a number of years and
prompted the passage of the Small Superannuation Accounts Act
1985and member protection rules that aim to ensure that
superannuation accounts with small balances are not reduced due to
administrative costs.The proposed Retirement Savings Accounts are
also generally aimed to provide access to superannuation
withadministrative costs not being able to reduce the capital value
of the account.
While there has been consultation with the superannuation
industry regarding the administration of the surcharge, ASFA has
expressed concerns regarding the measure and the results of the
consultation.The Chief Executive Officer of ASFA has been reported
as stating:
There doesn't seem to be any modification [of the initial
proposals] along the lines that industry had hoped, so it's pretty
much the unworkable process that we warned against(5).
The Chief Executive of the Australian Chamber of Commerce and
Industry (ACCI), a major employer group, is reported as
stating:
They have come up with a highly complex structure that won't
avoid cost burdens and responsibilities on small business.(6)
The second major criticism of the administration of the
surcharge relates to the provision of TFNs.While it will not be
compulsory for members of a fund to provide their TFN to the fund,
which will then pass the TFN onto the ATO, the result of failing to
provide a TFN will be that the members contributions will be
subject to the full surcharge regardless of their actual income.The
Chief Executive of ACCI is reported as stating:
There's a significant possibility that many people who don't
fall into the income stream that was targeted by the Budget will be
caught by not understanding their obligations in relation to
TFNs.'(7)
The increasing requirement to provide TFNs and the imposition of
the surcharge to those who would not otherwise be liable to pay it
raises concerns about whether its quotation is fully optional and
whether another identifications system, such as the proposed
Australia Card, would be a more efficient system.
A further concern with the surcharge is the effective tax rate
that will apply when the surcharge is applied.As the surcharge will
be applied to all of the superannuation contributions of a person
liable to pay it, rather than to amounts that exceed a certain
threshold, the increase in the effective tax rate on superannuation
contributions once the $70 000 threshold is reached results in a
greater rate of tax than the initial 1% per $1 000 that income and
superannuation contributions exceeds $70 000.A number of effective
rates have been suggested in the media, including:
- for certain incomes within the phasing-in range of the
surcharge (ie. $70 000 to $85 000) while the total amount of
superannuation contributions may increase their net value will
fall(8);
- when a person's income first exceeds the $70 000 threshold
their effective tax rate may be as high as 90%(9); and
- that with 6% employer superannuation contributions, the net
value for those on $70 000 and $85 000 will be the same(10).
Another concern of the impact of the surcharge is the effect it
may have on the investment decisions of those subject to the
surcharge.While superannuation is currently a favourable investment
and savings arrangement for higher income earners due to the
concessional tax treatment, the relative advantage of
superannuation contributions will alter due to the surcharge.While
superannuations may still be favourable in comparison to paying the
highest marginal tax rate, which will apply to those subject to the
levy, there are other methods of reducing assessable income so that
it, combined with superannuation contributions,will be below the
threshold at which the surcharge applies.The most obvious example
of such a method is the negative gearing of either property or
shares.Another option, given the potentially high effective
marginal rates referred to above, will be for employers to provide
greater fringe benefits as part of the salary package rather than
superannuation contributions above the statutory minimum.While
Fringe Benefits Tax (FBT) would apply to such salary sacrifices, if
the rates suggested above apply, this will still be beneficial to
the employee and could be negotiated with the employer.
Unfunded and defined benefit funds pose a number of problems for
the collection of the levy as there is no actual employer
contribution equal to a proportion of the defined benefit in the
year to which the surcharge applies.If the surcharge was deducted
in full from the employee's contributions, this would result in a
significant reduction in the earning of such contributions, which
in turn would reduce the available final benefit component based on
the deducted employees contribution and earnings.There are also
difficulties in determining the actual value of the employer's
contribution as there is usually no actual, funded, employer
contribution to the fund.This in turn makes the calculation of the
combined value of assessable income and superannuation
contributions, which determines if the person is liable to the
surcharge, very difficult. It was announced in the 1996-97 Budget
that an Acturiarial Advisory Committee would be established to
advise on the application of the surcharge to defined benefits
schemes.(11)
The Treasurer's Press Release dated 5 February 1997 announced
that such funds would be subject to an actuarial determination, to
be made under standards prepared by the Australian Government
Actuary, the ATO and Institute of Actuaries of Australia, which
will determine the value of the employer's contribution.This will
be used to determine the amount of surcharge payable.If the fund is
a defined benefits fund, as most defined benefit funds (which
usually relate to politicians and public servants) are, the
surcharge will not be payable annually.Instead, the value of the
contributions will be calculated annually according to the
actuarial tables and the sum of this amount, plus interest, is to
be deducted from the members final payment.
The cost to funds of collecting the surcharge was estimated in
November 1996 at approximately $30 million in the first year as
systems were established to comply with the requirements of the
legislation.(12) However, this estimate has increased considerably
since that time.It has been reported that an industry source has
recently estimated the cost to be approximately $100 million in the
first year of operation and that on-going costs will be between $20
million and $30 million per year.(13)
An interesting point is that judges of Federal courts, such as
the High Court and the Family Court, may not be liable to the
surcharge regardless of level of their salary.This is because
paragraph 72(ii) of the Constitution provides that judges of the
High Court and other courts created by the Commonwealth Parliament
cannot have their remuneration reduced during their period of
office.It has been reported that a Coalition party meeting has
approved amendments to the surcharge legislation that will exempt
federal judges from the surcharge.(14) However, it may be argued
that imposing the surcharge will not reduce the remuneration paid
to federal judges as it does not effect their gross pay and other
entitlements.In this regard, the same affect on the 'take-home' pay
of judges would be achieved from an increase in the rate of
taxation or in the Medicare levy.Federal judges have not been
exempted from previous increases in tax or the Medicare levy and it
is not proposed to exempt Federal judges from the additional
Medicare levy that will be payable for certain people who earn an
amount above the applicable threshold and do not have private
health insurance.Legislation introduced on 6 March 1997 [the
Superannuation Contributions Surcharge (Application to the
Commonwealth) Bill 1997 and the Superannuation Contributions
Surcharge (Application to the Commonwealth-Reduction of Benefits)
Bill 1997] are aimed at ensuring that 'new appointees are subject
to the surcharge'.(15) An unusual aspect of the latter Bill is that
it is not to apply if 'its application would or might result in a
contravention of the Constitution' [subclause 4(2)].The use of the
word 'might' has the potential to lead to difficulties in the
application of that Bill and there could be interesting arguments
put to a court not on the question of whether the Bill, if enacted,
actually breaches the Constitution but whether it might do so.
The explanatory memorandum to the Bill estimates that the
surcharge will raise $434 million in 1997–98, $500 million in
1998–99 and $526 million in 1999–2000.
The surcharge will apply to the financial year commencing on 1
July 1996 and later financial years, although there are
transitional provisions for the 1996–97 financial year so
that the surcharge will effectively apply to contributions made
after 7.30 pm.on 20 August 1996 (the time of the Budget
announcement).The surcharge will not be payable by residents,
companies and trustees that reside in a Territory for the purposes
of Division 1A of Part III of the Income Tax Assessment Act
1936 (ITAA) (such Territories are the external Territories
and, depending on certain provisions of the ITAA, are Norfork
Island, the Cocas (Keling) Islands and Christmas
Island.(clause 7).
The surcharge threshold will be $70 000 for 1996–97 and
this amount will be indexed on the movement of the Australian
Statistician's estimate of full-time adult average weekly ordinary
time earnings, rather than the Consumer Price Index.The indexation
factor will be calculated on the such movements from March to March
each year (clause 9).
Who is liable to pay the surcharge is dealt with in
clause 10.If a superannuation provider (i.e. a
superannuation fund, approved deposit fund, Retirement Savings
Account provider, a life assurance company or a registered
organisation) holds contributions on behalf of a member and an
assessment of liability to pay the surcharge is made, the fund will
be liable to pay the surcharge.However, if the fund has begun to
pay a pension or annuity to a member before it receives the notice
of assessment it will not be liable to pay the surcharge in
relation to that member.If contributions are made to an entity
other than a superannuation provider or a pension is being paid a
pension or annuity and the contributions would have been subject to
the surcharge if they had been paid to a superannuation provider,
and a the pension or annuity was being paid, the person will be
liable to pay the surcharge.This will principally address the
situation where the surcharge would have been payable for a year
except for the fact that a pension or annuity is being paid to the
person.
Clauses 11 and 12 deal with advance payments of
the surcharge.Clause 11 provides that if an amount
of surcharge is payable in respect of a member in a financial year,
an amount equal to 50% of the surcharge is payable in respect of
the following year.The advance payment will not be required to be
paid where the member withdraws from the fund, or commences to
receive an annuity or pension from the fund, before 15 June in the
year in which the surcharge is payable.The advance will also not be
payable for contributions to unfunded defined benefits fund
(clause 12).
Superannuation providers are to forward a statement of
contributions they hold in relation to a member to the Commissioner
of Taxation (ie. the ATO) before 15 December 1997 in relation to
the 1996–97 financial year and 31 October following the end
of future financial years.The statement is to contain:
- the member's name and either residential or place of business
or employment address;
- the member's date of birth;
- the member's TFN if the member has provided it to the
superannuation provider;
- if the fund is an accumulated benefits fund, taxable
contributions made in respect of the member, contributions in
respect of which a deduction was allowed to the member or roll-over
amounts that fall under the definition of an eligible termination
payment under the ITAA;
- if the fund is a defined benefit fund,the members salary
multiplied by the amount determined by the actuaries (thus,
basically, the amount will be that determined by the actuaries);
and
- such other matters as required by regulation.
Similar information, other than the matters prescribed by
regulation, are also to be provided to the Commissioner when there
is a payment of contributions to a member or to another
superannuation provider.The member is also to be given a copy of
the statement, and it will be an offence, with a maximum penalty of
300 penalty units (a penalty unit is defined in the Crimes Act
1914to be $100), to breach these notification requirements
(clause 13).
Information required to be provided under clause
13 is to be provided in the form notified by the
Commissioner in the Gazette, although the Commissioner will be
given power to exempt information contained in a data processing
device from the requirement to comply with the form of the notice
(this will allow the Commissioner to accept electronic data rather
than data in accordance with the Gazetted form) (clause
14).
For superannuation providers other than unfunded defined benefit
funds, the Commissioner is to assess any amount of surcharge that
is payable in respect of a financial year and the assessment is to
include the total amount of surcharge payable.The Commissioner is
also to make an assessment of whether an advance installment is
payable and, if so, the amount of the advance installment.The
surcharge will generally be payable within 1 month of the
assessment being made (rather than 1 month after the assessment is
received) and advance installments are payable by 15 June in the
financial year to which the assessment relates.Notice of an
assessment is to be given to both the superannuation provider and
the member concerned (clause 15).
For unfunded defined benefit funds, records are to be kept about
any liability of a member to pay the surcharge and funds are to
notionally debit the account of the member by this amount.Any such
surcharge payable will be subject to interest, calculated at the
rate applicable to 10 year Treasury Note. The amount calculated is
to be deducted as a lump sum, annuity or pension becomes payable.It
will be an offence, with a maximum penalty of 300 penalty units,
for a superannuation provider not to comply with these
requirements(clause 16).
If an advance installment is made, this will reduce the member's
obligation to pay the surcharge for the relevant year and if no
surcharge is payable, or the amount of surcharge payable is less
than the advance installment, the difference between the advance
installment and the actual amount of surcharge is to be paid to the
superannuation provider (clause 17).
If a member's TFN has not been provided to the Commissioner at
the time an assessment is made (which will result in the full
surcharge being payable) and is subsequently provided to the
Commissioner, the members assessment is to be reviewed to determine
if an amount less than the original surcharge is payable and if so
the assessment is to be modified to reflect the actual amount of
surcharge, if any, payable (clause 18).Similarly,
if an assessment ofincome is amended, the assessment of the amount
of surcharge is to be amended to reflect the new assessment of
income (clauses 19 and 20).If an assessment is
amended or a new assessment is issued and this results in a higher
surcharge liability, the person will also be liable to interest on
the difference between the originally assessed surcharge and the
newly assessed surcharge.The rate of interest, which will also be
payable where a refund is payable, will be based on the the rate
applicable for refunds under the ITAA (clauses 21 and
22).
Clause 23 will allow the Commissioner to use a
person's TFN that has been supplied under a law relating to
superannuation or taxation, for the administration of the Bill.If
the Commissioner has a TFN in respect of a member of a fund, the
Commissioner may request that the relevant superannuation provider
to ask whether the member is willing to provide their TFN to the
superannuation provider (this is basically an administrative
mechanism that will allow a superannuation provider to forward a
TFN known by the ATO when the member consents).
The remainder of the Bill deals with administrative, rather than
policy, matters.More important matters relate to:
- the recovery of unpaid surcharge, or advance installments, and
the imposition of a penalty charge on bodies that fail to comply
with the remittance requirements (clause 25);
- the recovery of unpaid surcharge, which will be considered to
be a debt to the Commonwealth an so recoverable in a civil action
(clause 26);
- the review of decisions made by the Commissioner, which, in
accordance with normal legislative provisions, provide for an
internal review of the decision and review by the Administrative
Appeals Tribunal (clause 29)(the review of such
decisions may also be subject to review by the Federal and High
Courts); and
- the administration of the scheme will be vested in the
Commissioner of Taxation and an annual report on the operation of
the proposed Act is to be delivered (clauses 30 and
31).
- The Age, 30 January 1997.
- Super For All - Security and Flexibility in Retirement, 19
February 1996, p. 16.
- The Australian, 28 August 1996.
- The Australian Financial Review, 27 August 1996.
- The Australian Financial Review, 14 February 1997.
- The Australian Financial Review, 14 February 1997.
- The Australian Financial Review, 14 February 1997.
- The Australian, 28 August 1996.
- The Australian, 28 August 1996.
- Senior Executive Money Matters, 2 September 1996.
- 1996–97 Budget Paper No. 1, p. 4–17.
- The Australian Financial Review, 6 March 1997.
- The Australian Financial Review, 6 March 1997.
- The Canberra Times, 5 march 1997.
- Second reading speech to the Superannuation Contributions
Surcharge (Application to th
- Commonwealth-Reduction of Benefits) Bill 1997.
Chris Field
3 April 1997
Bills Digest Service
Information and Research Services
This Digest does not have any official legal status. Other
sources should be consulted to determine whether the Bill has been
enacted and, if so, whether the subsequent Act reflects further
amendments.
IRS staff are available to discuss the paper's contents
with Senators and Members and their staff but not with members of
the public.
ISSN 1323-9031
Commonwealth of Australia 1996
Except to the extent of the uses permitted under the
Copyright Act 1968, no part of this publication may be
reproduced or transmitted in any form or by any means, including
information storage and retrieval systems, without the prior
written consent of the Parliamentary Library, other than by Members
of the Australian Parliament in the course of their official
duties.
Published by the Department of the Parliamentary Library,
1997.
This page was prepared by the Parliamentary Library,
Commonwealth of Australia
Last updated: 10 April 1997
Back to top