Bills Digest No. 66   1997-98 Superannuation Legislation Amendment (Superannuation Contributions Tax) Bill 1997


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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

Passage History

Superannuation Legislation Amendment (Superannuation Contributions Tax) Bill 1997

Date Introduced: 2 October 1997
House: House of Representatives
Portfolio: Treasury
Commencement: Royal Assent, 5 June 1997 for Schedule 9

Purpose

To amend certain Acts dealing with the superannuation surcharge for Federal Parliamentarians, new federal Judges and certain tribunal members with the status of a Judge, Commonwealth sector civilian employees, Defence Force personnel and the Governor-General who are members of unfunded, or mainly unfunded defined benefits schemes.

Background

The reader is referred to the Digest for the Superannuation Contributions Tax (Members of Constitutionally Protected Superannuation Funds) Assessment and Collection Bill 1997.

Main Provisions

These amendments ensure that the superannuation contributions surcharge applies to those people mentioned above who are entitled to superannuation benefits under the Acts referred to in the following Schedules:

  • Schedule 1 - Amendments of the Superannuation Act 1976
  • Schedule 2 - Amendments of the Superannuation Act 1990
  • Schedule 3 - Amendments of the Parliamentary Contributory Superannuation Act 1948
  • Schedule 4 - Amendments of the Governor General Act 1974
  • Schedule 5 - Amendments of the Judges' Pensions Act 1968
  • Schedule 6 - Amendments of the Defence Force Retirement and Death Benefits Act 1973
  • Schedule 7 - Amendments of the Military Superannuation and Benefits Act 1991
  • Schedule 8 - Amendments of the Defence Act 1903
  • Schedule 9 - Amendments of the Superannuation Contributions Tax (Application to the Commonwealth -Reduction of Benefits) Act 1997

Accordingly, the amendments will ensure that the superannuation contributions surcharge applies in respect of Federal Parliamentarians, new federal Judges and certain tribunal members with the status of a Judge, Commonwealth sector civilian employees, Defence Force personnel and the Governor-General.However, serving federal Judges are constitutionally protected from the surcharge.

The amendments by the Bill deal with either unfunded or largely unfunded defined benefits schemes. In these cases there is no superannuation fund from which to pay the surcharge liability as is done with the accumulation schemes.The surcharge tax legislation provides for the deferral of the payment of the tax, except where the surcharge is pre-paid by a scheme member.It is notionally accumulated during a member's service and paid by the scheme trustee or administrator when the member's benefits become payable.The superannuation provider is required to maintain a surcharge debt account for each scheme member and the member's account will be debited each year with any surcharge amount advised by the ATO.In order to ensure that no advantage is obtained by the deferral of the payment of the surcharge in unfunded or partially funded schemes, interest on the balance of the account, at the 10 year Treasury bond rate, as defined in the surcharge tax legislation, will be added to the surcharge debt on an annual basis. When a benefit becomes payable, the provider must pay the total amount in the surcharge debt account of the member to the ATO before the benefit is paid.

The Bill ensures that reductions in benefits in respect of the surcharge are made in a manner which is fair and equitable taking into account the complexities of defined benefits schemes.However, any reduction must not be more than fifteen per cent of the employer-financed component of the benefit that accrued after 20 August 1996.

The Bill also ensures that trustees are able to meet their surcharge liability.

The following discussion deals with amendments to the nine Acts.

Schedule 1 - Amendments of the Superannuation Act 1976

Items 1 to 3 deal with definitions of accumulated contribuitons, surcharge debt account and surcharge deduction amount.

Item 4 amends subsection 42(5A) of the 1976 Act to make the Board and Fund subject to taxation under the Superannuation Contributions Tax (Assessment and Collection) Act 1997.

Items 5 to 13 deals with the reduction of an age retirement pension where there is a surcharge debt.When a member reaches standard retirement age, the rate of pension is to be worked out by the method provided by section 80A (see item 52).Items 14 and 15 deal with the case where there is an additional age retirement pension and any residual lump sum benefits.In this case, the rate of pension is to be worked out by the method provided by section 80C (see item 52).

Items 16 to 20 deal with the reduction of early retirement pension where there is a surcharge debt.When an early retirement age pension becomes payable to a person who has a surcharge debt, the rate of pension is to be worked out by the method provided by section 80A (see item 52).

Items 21 to 25 deal with the reduction of a lump sum benefit on involuntary retirement where there is a surcharge debt.The provisions provide that the lump sum involuntary retirement benefit payable to a person who has a surcharge debt is reduced by the amount of the surcharge deduction amount.

Items 26 to 47 deal with the reduction of invalidity benefit where there is a surcharge debt. Where the CSS Board approves the retirement of a CSS member on the grounds of invalidity, various provisions of the 1976 Act provide for the calculation of the benefit depending on individual circumstance.The level and type of benefit will vary according to length of scheme membership (including possible future membership to age 65) and whether the medical condition that led to the retirement was in existence prior to membership of the CSS.

The following circumstances all involve a person who receives a pension and has a surcharge debt.In each of these instances, the rate of pension is to be worked out by the method provided for in section 80D (see item 52):

  • full pension entitlement - no reduction for pre-existing condition
  • pension and lump sum entitlement - no reduction for pre-existing condition
  • pension only benefit - reduce for pre-existing condition
  • pension and lump sum benefit reduced for pre-existing condition

Where there is a lump sum only benefit and membership is less than 8 years, the benefit may be reduced or not reduced for a pre-existing condition.In either case, where the lump sum becomes payable to a person who has a surcharge debt, the amount of the benefit is reduced by the surcharge deduction amount.This treatment also applies to the case of an election for lump sum only benefit which had a pre-existing condition.

Items 48 and 49 deal with the situation where there is a partial invalidity pension (PIP) payable to an invalidity pensioner who has returned to employment. Here the rate of invalidity pension that was payable to the person prior to his or her return to employment is used in the calculation of the PIP.Any reduction of that pension because of a surcharge debt should not be taken into account for the purposes of calculating the PIP as the person is again a scheme member and may begin to accrue a further surcharge debt.The PIP will form part of the income on which future surcharge debts may be based.

Items 50 and 51 deal with partial invalidity pension where a member's salary decreases for health reasons.The PIP payable is calculated by reference to the invalidity pension that would have been paid if the person had retired on invalidity grounds at the time of the salary reduction.Such a person may accrue a surcharge debt during the period when the PIP is paid and the PIP forms part of the income on which the debt is calculated.

Item 52 deals with the reduction of pension benefits where there is a surcharge debt. Depending upon the circumstances, the surcharge debt is reduced under sections 80A, 80B, 80C and 80D.Section 80A deals with the case where a person's surcharge debt account is in debt when benefits become payable to the person.Section 80B deals with the lump sum benefit.Sections 80C deals with a person who is entitled to additional age retirement pension or additional early retirement pensions.Section 80D(1)provides for the calculation of a reduced rate of pension while section 80D(2) provided for the reduced rate of additional age retirement pension and additional early retirement pension.

Items 58 and 59 deal with the case where a member ceases to be a CSS member, the productivity contributions are generally paid as a lump sum.These items provide a reduction of a productivity benefit where there is a surcharge debt.Unless that amount has been deducted from another benefit payable under the Act (eg a pension), only the balance if any should be deducted from the productivity benefit.

Item 60 provides a reduction of a Superannuation Guarantee top-up benefit payable where there is a surcharge debt.Where a person to whom a superannuation guarantee top-up benefit becomes payable has a surcharge debt, the top-up benefit should be reduced by the surcharge amount.However, where part of the amount has been deducted from another benefit payable under the 1976 Act, only the balance of the amount, if any should be deducted from the top-up benefit.

Items 61 and 62 provide a deduction of a surcharge debt amount from the minimum amount payable on death of a member without dependants.Where a lump sum benefit becomes payable under that section in respect of a person who has a surcharge debt, the lump sum benefit should be reduced by the surcharge deduction amount.

Items 64 and 65 deal with a deduction of a surcharge deduction amount from a transfer value payable to an eligible superannuation scheme.A person who has elected for preservation who subsequently joins a superannuation scheme which is an eligible superannuation scheme for the purposes of the 1976 Act may elect to pay a transfer value to that scheme in lieu of eligibility for deferred benefits.Any surcharge deduction amount must be deducted from the transfer value before it is paid to the eligible superannuation scheme.

Item 66 to 74 deal with the reduction of deferred benefits where there is a surcharge debt.Various formulae are calculated to reduce a person's surcharge deduction amount depending upon the deferred benefits which become payable, due to age or early retirement, invalidity retirement or death.

Item 75 provides that the Board, with the advice of the Australian Government Actuary,may determine the factors, having regard to a person's age and any other relevant factor, for the conversion of the surcharge deduction amount to an annual amount.This annual amount is required to reduce standard or additional pension benefits payable under the 1976 Act where the person has had a surcharge debt when the benefits become payable.Such factors are to be usedin the reduction of standard pension and invalidity pension and in the reduction of additional pension.Any determination made must be published in the Gazette.

Item 76 provides that the Board is a separate entity to the Commonwealth and is liable to pay the surcharge under the Superannuation Contributions Tax (Assessment and Collection) Act 1977.

Item 77 provides that regulations made under the Act within 12 months of the commencement of this Bill, may be made with a retrospective date no earlier than the date of commencement.

Schedule 2 - Amendments of the Superannuation Act 1990

Item 1 amends paragraph 26(1)(a) to provide that the PSS Board and PSS Fund are liable to taxation under the Superannuation Contributions Tax (Assessment and Collection) Act 1997.

Item 2 inserts new section 37A to remove any doubt that for the purpose of the surcharge tax legislation and in its capacity as a superannuation provider, the Board is distinct from the Commonwealth and is therefore liable under the legislation to pay surcharge on the surchargeable contributions of members.Subsection 37A(2) provides that the amounts payable under the surcharge tax legislation are to be paid from the Consolidated Revenue Fund, which is appropriated accordingly.

Schedule 3 - Amendments of the Parliamentary Contributory Superannuation Act 1948

Items 1 and 2 insert the definitions of surcharge debt account and surcharge deduction amount.

Item 3 amends subsection 4(4A) of the Act to provide that a member of Parliament is taken to be employed by the Commonwealth, This amendment is made as a consequence of Item 4 which includes a reference to the employer-financed component of a benefit payable under the Parliamentary Contributory Superannuation Scheme (PCSS).

Item 4 amends section 4E and determines the surcharge deduction amount.The Trust must determine the amount it considers reasonable to reduce the benefits when they become payable to a person, and must take into account the person's surcharge debt account, the value of the employer component and the value of the benefits which were likely payable for the purposes of working our the notional surchargeable contributions factors under the Superannuation Contributions Tax (Assessment and Collection) Act 1997.The amount determined by the Trust may not be more than 15% of the employer- financed component which accrued after 20 August 1996.

Items 5 to 10 deal with the reduction of retiring allowance and lump sum in respect of the surcharge debt.Accordingly, Item 10 provides that where a retiring allowance becomes payable, the rate of retiring allowance is to be reduced in accordance with a specified formula, which takes into account how much the surcharge deduction amount reduced the basic retiring allowance.The formula will also take into account any parliamentarian who has been entitled to a retiring allowance and is re-elected.Where a lump sum only benefit becomes payable, the benefit is to be reduced by the member's surcharge deduction amount.Items 5 to 9 are consequential amendments to Item 10 to ensure that benefits payable are subject to the surcharge reduction provisions.

Items 11 to 13 deal with the member's election to pay a surcharge debt out of a commutation lump sum.These items enable a member who elects to commute a retiring allowance to a lump sum to also elect to pay off the surcharge to the Commonwealth out of the lump sum, and that the commutation lump sum is reduced by the surcharge deduction amount.

Items 14 and 15 deal with the reduction of benefits payable to a personal representative on death of a member.These provisions ensure that if a member dies without dependents, the lump sum benefits payable to the personal representative is reduced by the member's surcharge deduction amount.

Items 16 to 18 deal with the repayment of previous lump sums on re-election to Parliament. Where a former member who received a reduced lump sum because of a previous surcharge is re-elected to Parliament and chooses to repay a previous lump sum entitlement, it is the pre-reduction lump sum that is to be paid back to the Commonwealth.The amount paid back will also need to be updated in proportion to increases in parliamentary allowance since previous retirement, in order to have the person's previous parliamentary service counted for the benefit purposes under the Act.

Item 19 deals with the determination with respect to the surcharge deduction amount by the Trust(with the advice of the Australian Government Actuary).The Trust must determine the factors for the conversion of the surcharge deduction amount to a pension in order to reduce the pension benefits payable which will allow recovery of an amount paid in respect of the members' surcharge deduction amount.These factors need to be unbiased and are to be published in the Gazette.

Item 20 inserts section 26C to provide that the Trust is the person who manages the PCSS, and ensures that the information and liability of a member's surchargeable (employer superannuation) contribution is provided to the ATO.

Schedule 4 - Amendments of the Governor General Act 1974

Items 1, 2 and 3 insert definitions of Scheme, surcharge debt account and surcharge deduction amount.

Items 4 to 7 reduce the allowance in respect of the surcharge debt. New subsection 4(3) provide that, where a Governor-General who ceases to hold office has a surcharge debt, the allowance that would otherwise be payable at the rate of 60% of the Chief Justice's salary is to be reduced in accordance with a specified formula.The allowance payable to the spouse of a Governor General is 5/8 of the rate or the reduced allowance that would have been payable to the former Governor-General having regard to the reduction resulting from any surcharge deduction amount.Where there is more than one spouse, the aggregate allowance payable will not exceed the allowance applicable to the governor-General if he or she had not died. The trustee of the scheme must determine the conversion factors used to reduce the allowance in order to recover an amount paid in respect of a Governor General's surcharge deduction amount, and must publish such in the Gazette.

Item 8 inserts new proposed section 5A into the Act to provide that the Secretary of the Department of the Prime Minister and Cabinet, or an officer of the Department appointed by the Secretary, is the person who manages the Scheme which ensures that the Governor General's surchargeable (employer superannuation) contributions are provided to the ATO and that there is a liability to pay to the ATO the surcharge accumulated in the surcharge debt account.

Schedule 5 - Amendments of the Judges' Pensions Act 1968

Items 1 to 7 amend section 4 which contains various definitions.New terms defined are period of exempt service, period of service as a Judge, qualifying period for a pension, Scheme, superannuation contributions surcharge and surcharge debt account.

Items 8 to 17 amend section 6 dealing with the criteria and qualifications for, and the rates of pension payable to judges.Various subsections are amended to omit the rates of pension applicable and will refer to new sections 6A and 6B (see item 19).

Item 18 deletes subsection 6(3), the provisions of which now appear in section 4.

Item 19 inserts new proposed sections 6A and 6B.New section 6A replicates the previous section6 and applies to a judge if their surcharge debt account is not in debit when a pension becomes payable to him or her, and provides for the rate of pension payable in various circumstances (age, length of service, permanent disability)A judge may qualify for a maximum pension of 60% of the appropriate current judicial salary.Where the maximum pension is not achieved, the rate of pension is 0.5% for each month of service.Section 6B applies to a judge when their surcharge debt account is in debit, and requires a reducedpension of 15% or the lower surcharge rate, depending upon the circumstances.Where a judge has prior judicial service which was exempt from the surcharge, the prior service will be exempt from the reduction.

Item 20inserts new proposed sections 19 to 21, which deal with the surchargeable contributions, the trustee of the scheme and the regulations.Subsection 19 provides for the calculation of the surchargeable contributions to be based on the Judge's annual salary multiplied by the notional surchargeable contributions factor, which may be prescribed by regulations.Subsection 20 provides that the Secretary (or a nominated delegate) of the Attorney-General's Department is the trustee of the Judges' pension scheme for the purposes of the surcharge legislation, and that their capacity to reduce the judge's benefits do not apply to them as trustee for the Pensions Act Scheme. Section 21 allows the Governor-General to make regulations in relation to matters arising under the Act.

Item 21 provides that these amendments do not apply in respect of judges of federal Courts who were appointed before the schedule commenced operation.

Schedule 6 - Amendments of the Defence Force Retirement and Death Benefits Act 1973

Item 1 to 2 amend definitions of benefit and productivity superannuation benefit.Items 3 to 4 inserts definitions of surcharge debt account and surcharge deduction amount.

Item 5 deals with the surcharge deduction amount.The Defennce Force and Retirement and Death Benefits (DFRDB) Authority must determine how much to reduce a member's benefits when they become payable taking into consideration the member's surcharge account debit, the value of the employer-financed component and the value of the benefits which would have been payable.In working out the notional surchargeable contributions factors, the amount determined by the Authority may not be more than 15% of the employer-financed component which accrued after 20 August 1996.

Items 6 to 8 deal with the reduction of retirement pay where the member has not elected to commute part of their employer-financed benefit to a lump sum. Where this pension becomes payable to a member whose surcharge debt account is in debit, the rate of pension is to be adjusted to take account of the surcharge deduction amount.A determination must be made setting out a conversion faction.

Items 9 to 10 deal with the reduction of retirement pay where the member has elected to commute part of their employer-financed benefit to a lump sum.Where the member's surcharge debt account is in debit and the member has elected to discharge the debt from benefits payable under this Act, the amount of the benefit is adjusted by the amount of the surcharge deduction amount.Where the lump sum is not sufficient the remaining pension will be adjusted and provides a determination factor must be taken into account in adjusting the residual pension.Where a member has not made an election and the productivity superannuation benefit is insufficient to discharge the deduction amount, any benefit payable will be adjusted to take account of the remaining surcharge account.

Items 11 to 13 deal with the reduction of invalidity pension for Class A or Class B recipients, being members who have an incapacity of more than 60% or more than 30%, respectively, in relation to their ability to undertake civil employment.Again, where a member's surcharge debt account is in debit and the member has elected to discharge the debt from benefits payable, the rate of pension is to be adjusted by taking into account the surcharge deduction amount.A determination is to be made setting out a conversion factor that must be taken into account when adjusting the rate of pension.

Items 14 to 16 deal with the reduction of invalidity pension for Class C recipients who have an incapacity of less than 30% in relation to their ability to undertake civil employment.Again, where a member's surcharge debt account is in debit and the member has elected to discharge the debt from benefits payable, the amount of benefit (retirement pay or lump sum) is to be adjusted by taking into account the surcharge deduction amount.

Items 17 to 18 deal with the reduction of invalidity Class C retirement pay where the member has elected to commute part of their employer-financed benefit to a lump sum.Again the surcharge debt account is taken into consideration in reducing benefits as outlined in items 9 to 10.

Items 19 to 23 deal with the reduction of a spouse benefit.Again the surcharge debt account is taken into consideration in reducing the benefits as outlined in items 9 to 10.

Items 24 to 28 deal with the reduction of a spouse benefit.Again the surcharge debt account is taken into consideration in reducing the benefits as outlined in items 9 to 10.

Items 29 to 30 deal with the reduction of an estate payment following the death of a contributor without dependents.The surcharge debt is taken into consideration in reducing the benefit paid to the legal representative.

Items 31 and 32 deal with the reduction of an estate payment following the death of a contributor without dependants who have more than one period of service.Again the surcharge debt accountis taken into consideration in reducing the benefit paid to the legal representative.

Items 33 and 34 deal with the deduction of a surcharge deduction amount from a transfer value. Again the surcharge debt account is taken into consideration in reducing the employer-financed transfer value benefits as outlined in items 9 to 10.

Items 35 and 36 deal with the deduction of a surcharge deduction amount from a deferred benefit where a member has reached the notional retiring age for rank. Again the surcharge debt account is taken into consideration in reducing the employer-financed transfer value benefits as outlined in items 9 to 10.

Items 37 and 38 deal with a deduction of a surcharge deduction amount from a deferred benefit for officers who have not reached their notional retiring age for rank. Again the surcharge debt account is taken into consideration in reducing the employer-financed transfer value benefits as outlined in items 9 to 10.

Item 39 deals with the election relating to surcharge deduction amount and the Determination with respect to the surcharge deduction amount.A member or a personal representative in the case of a deceased member who dies without leaving dependants, may elect for the surcharge deduction amount to be paid from the benefits payable under the DFRDB Act instead of the productivity superannuation benefit payable to the member under the Defence Act.This election can be made up to one year after a surcharge deduction amount becomes payable.No election is available for a widow or orphan since the productivity superannuation benefits is payable to the member's estate rather than the widow or orphan).The DFRDB Authority with advice from the Australian Government Actuary may determine the conversion factors, having regard to a persona age, to be used to adjust pension benefits payable to take account of the person's surcharge deduction amount and must be published in the Gazette.

Item 40 provides that the DFRDB Authority is a trustee for the purposes of the Superannuation Contributions Tax (Assessment and Collection) Act 1997.It ensures that the specific powers given to the Authority to resource benefits under the Act to take account of the surcharge are not in conflict with the general discretion given to the trustee of the scheme by amendment to Section 4 of the Superannuation Contributions Tax (Application to the Commonwealth - Reduction of Benefits ) Act 1997.

Schedule 7 - Amendments of the Military Superannuation and Benefits Act 1991

Item 1 amends Section 24 of the Act to ensure that the superannuation contributions tax applies to the Board and Fund.Item 2 inserts a new proposed section 42A which provides that the MSB Board is the body liable to pay the superannuation contributions tax, as it is an entity distinct from the Commonwealth, and ensures that there may be an appropriation form the Consolidated Revenue Fund to enable the MSB Board to pay the tax.

Schedule 8 - Amendments of the Defence Act 1903

Item 1 inserts a new proposed section 53 which will allow the superannuation contributions tax to apply to the superannuation productivity benefit by providing that the DFRDB Authority is a trustee for the purposes of the superannuation contributions tax legislation.

Schedule 9 - Amendments of the Superannuation Contributions Tax (Application to the Commonwealth -Reduction of Benefits) Act 1997

Items 1 and 2 are consequential amendments to the DFRDB Act and the Parliamentary Contributory Superannuation Act to allow the trustee of the schemes established under those Acts to exercise a discretion to reduce benefits in a fair and equitable manner having regard to any relevant matters, including:

  • the amount in the person's surcharge debt account;
  • the level of employer-financed benefit being paid;
  • and the level of projected benefit on which the person's surchargeable contributions are based.

Benefits must not be reduced by more that 15% of the employer-financed portion of a benefit accrued after 20 August 1996.

Contact Officer and Copyright Details

John Harrison
24 October 1997
Bills Digest Service
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This paper has been prepared for general distribution to Senators and Members of the Australian Parliament. While great care is taken to ensure that the paper is accurate and balanced, the paper is written using information publicly available at the time of production. The views expressed are those of the author and should not be attributed to the Information and Research Services (IRS). Advice on legislation or legal policy issues contained in this paper is provided for use in parliamentary debate and for related parliamentary purposes. This paper is not professional legal opinion. Readers are reminded that the paper is not an official parliamentary or Australian government document.

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ISSN 1328-8091
© Commonwealth of Australia 1997

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Published by the Department of the Parliamentary Library, 1997.

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Last updated: 27 October 1997

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