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CONTENTS
Passage History
Purpose
Background
Main Provisions
Concluding Comments
Endnotes
Contact Officer & Copyright Details
Superannuation Contributions and
Termination Payments Taxes Legislation Amendment Bill
1999
Date Introduced: 30 June 1999
House: House of Representatives
Portfolio: Treasury
Commencement: Amendments made by Schedule 1 of
the Bill will be deemed to have commenced on 5 June 1997 (although
those relating to advance instalments will only apply from 23 March
1999); those made by Schedule 2 will commence on 7 December 1997;
and the amendments in Schedule 3 will commence on Royal
Assent.
The main
amendments will:
-
- remove the advance payment of the superannuation surcharge for
members of accumulation funds
-
- provide for superannuation providers to self-assess the amount
of surcharge payable
-
- alter the method of calculation of the value of surchargeable
contributions when determining if a member of a defined benefit
scheme is liable to pay the surcharge
-
- amend time limits for amendments of assessments; and
-
- make a number of other relatively minor, and in some case
technical, amendments to legislation dealing with the
surcharge.
A tax was introduced in 1996-97 with the
intention of reducing the tax benefits available to higher income
earners contributing to superannuation, either personally or
through a 'salary sacrifice' or other arrangement with an employer.
Tax benefits for superannuation contributions can be gained due to
the deductibility of personal contributions where there are no or
minimal employer contributions, and the reduced rate of tax on the
earnings of complying superannuation funds. The tax is imposed by a
number of imposition and assessment and collections Acts which
reflect the requirements of section 55 of the Constitution that a
law imposing tax is to deal with one subject of taxation only. The
tax is known as the superannuation surcharge.
The surcharge is payable where a person's
adjusted taxable income exceeds the threshold ($70 000 in 1996-97;
$73 220 in 1997-98 and $75 856 in 1998-99). Above this threshold
the rate of surcharge is increased by 1% for each $1 000 (at 1997
value) that the threshold is exceeded so that the maximum rate of
15% is payable at an income level of $85 000 in 1996-97 ($88 910 in
1997-98 and $92 111 for 1998-99). Adjusted taxable income
includes:
-
- the person's taxable income reduced by most eligible
termination payments received in the year and lump sum payments for
certain unused leave
-
- amounts excluded from taxable income due to certain trust
distributions, and
-
- the person's surchargeable contributions.
The later term is defined according to the type
of fund the person is a member of, ie. an accumulation fund or a
defined benefit fund. For a complying accumulation fund (basically
one where the member's final benefit depends on the level of
contributions and the earnings of the fund) or approved deposit
fund, the surchargeable contributions are based on a combination
of:
-
- contributions made by the person's employer or another
person
-
- any superannuation guarantee shortfall paid on behalf of the
member
-
- amounts paid from the Superannuation Holding Accounts Reserve
(which provides an alternative mechanism for the payment of small
amounts of superannuation)
-
- tax deductible personal contributions
-
- certain amounts rolled-over in respect of eligible termination
payments, and
-
- Any surplus allocated by the superannuation provider.
For a defined benefit fund (ie one where the
benefit does not depend on the earnings of the fund, such as where
benefits depend on length of service and final remuneration), the
surchargeable contributions are based on the person's annual salary
and the notional surcharge contributions factor, which is
determined by actuaries according to issued guidelines. This
factor, being an estimate of the value of the benefits that may be
received and not being necessarily related to current value or
market movements, has caused much concern for those covered by
defined benefits schemes.
The surcharge is generally payable by the
superannuation provider who holds the person's contributions and
receives an assessment of the surcharge payable. Superannuation
providers are required to provide information to the Commissioner
of Taxation who prepares the assessment of the amount of surcharge,
if any, payable. (The Bill provides for self-assessment in some
circumstances.) Assessment of any surcharge payable is based on
members providing their tax file numbers (TFN) which enables their
contributions to be matched to their taxable income. If a member
fails to provide their TFN to their superannuation provider and, in
conjunction with other methods, their TFN is unknown to the
Australian Taxation Office (ATO) they are liable to pay the
surcharge. In such a case, if contributions were made to the
superannuation provider in respect of the member prior to 7 May
1997 they will be liable for the 15% surcharge if their
contributions exceed a threshold amount. If contributions were
first made only after 7 May 1997, the 15% rate applies to all of
the contributions.
Where a person is liable to pay the surcharge in
a financial year, the Superannuation Contributions Tax
(Assessment and Collection) Act 1997 (CTA) provides that an
advance instalment equal to 50% of the liability is to be paid by
15 June for the next financial year, so that during the a year a
person will be liable to pay 50% of the liability for the previous
year (the other 50% having been paid by advance instalment) and 50%
of the liability as an advance for the current year. The advance is
not compulsory in respect of members of unfunded defined benefit
schemes, where the fund may create a surcharge debit account in
respect of the member and debit surcharge liability to this account
which is paid when benefits become payable. This removes the
necessity that would otherwise exist for the unfunded scheme to
find some funds to pay the surcharge liability as it is assessed.
However, the member may chose to pay the surcharge as it becomes
due and so avoid the interest payable on the surcharge debit
account balance. (The advance instalment will be abolished by the
Bill.)
The surcharge raised $346 million in
1997-98.(1)
A number of groups have expressed opposition to
the surcharge, based on its complexity and cost operation, cost
effects for those not targeted by the measure and its efficiency.
The general aim of reducing some of the tax advantages offered by
superannuation to higher income earners has not been disputed. The
Chief Executive of the Australian Chamber of Commerce and Industry
stated:
The superannuation surcharge has proved to be a
particularly onerous burden on employers and superannuation funds,
with evidence clearly pointing to gross inefficiencies in the tax.
Changes to the superannuation surcharge to remove the inequity and
inefficiency of the system should be an immediate priority.(2)
The surcharge and its implementation has been
examined by the main industry body, The Association of
Superannuation Funds of Australia (ASFA). A recent survey of funds
by ASFA and Investment and Financial Services Association Ltd
(IFSA) on the costs and implementation of the surcharge found,
amongst other matters, that:
-
- Implementation costs would be approximately $190 million,
comprising approximately $130 million of costs already incurred,
$30 million of costs not yet incurred at the time of the survey
(August and September 1998) and an estimate of $30 million for
implementation costs for excluded funds (now self managed funds).
The later estimate was prepared by the Australian Society of
Certified Practicing Accountants. Major items of implementation
costs were systems development and enhancement, salaries and
actuarial and legal advice costs.(3) (Note: Many of these costs
will be of a one-off nature and, as they have already been
incurred, will not significantly affect future administrative
costs.)
-
- Extra costs associated with the surcharge amounted to an 8%
increase in total administration expenses, with 50% of funds
passing the additional costs on to all members, while in
approximately 15% of cases the implementation cost was paid by
employers, and that 'there was no evidence to suggest that the
costs are being charged only to those fund members with
surchargeable contributions'.(4)
-
- In addition to increased costs for untargeted members due to
increased administrative costs, the surcharge was having an adverse
effect on members who failed to provide their TFN, as they were
subject to the surcharge. The survey found that on average 75% of
members provided their fund with their TFN, but that the percentage
varied considerably (from 40% to 80%) with funds with larger member
numbers, such as industry funds, having the lowest percentage of
TFNs supplied.(5) (This does not mean that 25% of members paid the
surcharge as their TFN was not provided as from the number that did
not supply their TFN to their superannuation provider must be
deducted the number who's TFN was located by the ATO due to its own
checks).
-
- The number of complaints and inquiries to funds increased by an
average of 28% for 70% of funds during the implementation of the
surcharge. As well, funds have increased the number of complaints
against assessments, with 55% of respondents to the survey having
lodged formal objections.(6)
ASFA research also showed that total
superannuation contributions fell with the introduction of the
surcharge. The research found:
Contributions are now some $2.5 billion per
annum less than would have been the case if salary sacrifice and
other voluntary employer contributions had maintained their share
of total employer contributions.(7)
Defined benefit funds are also experiencing
difficulties with the allocation to members accounts of the
surcharge as members of such funds do not have individual
accounts.(8) Such funds are creating another surcharge liability
account for members subject to the surcharge, with the associated
additional administrative costs.
The second reading speech to the Bill states
that: 'The surcharge has been effective at meeting the government's
policy objective of imposing a surcharge on the superannuation
contributions of high income earners', and that: 'The Bill [will]
enhance the overall efficiency of the superannuation surcharge
through clarifying and simplifying aspects of the legislation'.
Section 8 of the CTA deals with the calculation
of the surchargeable contributions used in determining if the
surcharge is payable. Item 2 of Schedule 1 of the
Bill will substitute new subsections into section 8 of the CTA. In
calculating the surchargeable contributions for accumulation funds,
certain 'contributed amounts', as defined in section 43 of CTA,
which will be amended by item 31, are included.
Amendments in item 2, when combined with the
proposed change in definition in item 31, will
allow components of the contributed amounts to also be defined by
regulation.
For defined benefits schemes, the amendments
provide for the 'actuarial value of benefits, the value of
administration expenses and the risk benefits' to be used in
calculating the value of the surchargeable contributions of the
member. The value of the benefits, administrative expenses and risk
benefits are to be calculated in accordance with the regulations
which are to take account of non-deductable contributions to such
schemes or, if the Commissioner approves another method for a
member, that method. The amendment will apply for the 1999-2000 and
later financial years. It will be necessary to examine the
regulations, once made, to determine if including the value of
administrative expenses and risk benefits results in a greater
amount of surcharge that under the current method but this could be
expected to be the case (item 3).
Proposed section 8A will
clarify who is the superannuation provider for the CTA. The main
clarifications provide that there may be more than one provider in
respect of a person who is a member of more than one fund to which
contributions were made during the year and that if a member dies
during the year, the fund is not a provider in respect of the
member for the year (item 4).
Where a superannuation provider has given a
statement to the Commissioner relating to the 1998-99 or later
years of income and the information in the statement has not
otherwise been provided to the member, item 11
proposes that the member may request that the information be
supplied to them and the provider must comply with such a
request.
Section 15 of CTA provides for the Commissioner
to make assessments of any surcharge and advance
instalment payable. The major change proposed by
item 13 is that the Commissioner is only to
determine an advance instalment for an assessment made before 23
March 1999 (this was the date of the Assistant Treasurer's
announcement that the advance instalment would no longer
apply).
If a member dies and a surcharge assessment is
made after their death, the assessment will be deemed not to have
been made (item 14 which will amend section 15 of
CTA).
Self-assessment by funds is
dealt with in proposed sections 15A and 15B which
will be inserted into CTA by item 15. The
Commissioner may determine that a superannuation provider, or a
member of a class of providers, is a self-assessing provider for
the specified year or years from 1998-99. The Commissioner may also
determine the notification date in respect of a self-assessing
provider (proposed section 15A). If a
self-assessing provider holds contributed amounts in respect of a
member and has not provided a statement as required under section
13 of CTA by 31 October of the following financial year, the
provider must supply information by the notification date. The
information to be supplied includes the information already
required to be provided under CTA and details of the assessment
made in respect of the member. For 1999-2000 and later years, the
provider will be required to pay the amount of surcharge assessed
to the Commissioner within 7 days of the information being
provided. Members will not be required to provide information to
the self-assessing superannuation provider regarding their adjusted
taxable income.
The time for assessment and amendments to
assessments is dealt with in proposed section 17A.
Subject to the rules noted below, the Commissioner has a general
power to amend an assessment at any time. The restrictions on this
rule are:
-
- If an assessment has been amended in a particular manner that
reduces an assessment and in making the assessment the Commissioner
accepted a statement by the member or provider, the assessment may
be further amended within 4 years to increase the assessment.
-
- If there has been avoidance of the surcharge by fraud or
evasion the assessment may be amended at any time. If the avoidance
is due to another reason, the amendment must be made within 4
years. However, in the later case the Commissioner may apply to the
Federal Court for an extension of time if the affairs of the member
or a provider are being examined in relation to the avoidance and
the examination has not been completed.
-
- An assessment reducing the amount of surcharge payable is not
to be made more than 4 years after the original assessment is due
and payable.
-
- If an assessment is amended, the Commissioner may further amend
the amended assessment to reduce the surcharge payable within 4
years of the first amendment to the assessment.
-
- If information relating to an amendment is given to the
Commissioner within the allowed time, the Commissioner may amened
the assessment at a time after the allowed period (item
16).
A new section 24, dealing with
objections against assessments, will be substituted into the
Principal Act by item 25. The main difference
between the existing and proposed sections is that proposed section
24 allows superannuation providers to object against a class of
assessments as well as individual assessments.
Amendments to the
Superannuation Contributions Tax (Members of Constitutionally
Protected Funds) Assessment and Collection Act
1997
Section 114 of the Constitution provides,
amongst other matters, that the Commonwealth is not to 'impose any
tax on property of any kind belonging to a State'. For State
government schemes defined benefit schemes, which comprise most
State government superannuation schemes, contributions are paid
into State consolidated revenue and member entitlements paid from
the same source as they become due. If a tax is placed on the State
superannuation fund, as occurs with the surcharge scheme for
general funds where the superannuation provider is liable to pay
the tax, it is likely that this would be considered to be a
Commonwealth tax on the property of a State and so invalid Similar
difficulties would be encountered with State government accumulated
benefit schemes where the assets of the fund belong to the
government, although in this case the matter would be complicated
by the vesting rules that may allow an argument to be made that the
assets of the fund are not State government property but merely
being held on trust for their ultimate beneficiaries, in whom the
ownership of the assets has vested. To remove such a potential
problem this Act imposes the tax on the members of the fund, rather
than on the superannuation provider. In other regards, such as the
calculation of the amount of surcharge payable, the provision of
information and use of the TFN, the Act mirrors the rules
applicable for the surcharge on general funds, although there will
be no self-assessment for constitutionally protected funds.
Item 2 and 3 of Schedule 2 will
substitute new subsections into the Act to insert new rules dealing
with the calculation of surchargeable contributions. The changes
are the same as those described in items 2 and
3 of Schedule 1 above.
Members of a constitutionally protected fund
will have the same rights to require certain information regarding
the surcharge from their fund as applies to general funds
(item 6 of Schedule 2 which has the same effect as
item 11 of Schedule 1).
Item 8 will amend section 14 of
the Act to make minor clarifications of the assessment process to
be used by the Commissioner and also provides that if an assessment
is issued after a member's death the assessment is to be taken not
to have been made.
Section 15 of the Act provides that the amount
of surcharge in relation to a defined benefit fund is payable by
the member when benefits become payable. Item 9
will amend section 15 to provide that where there is no amount
payable to the member as it has been rolled-over into another
superannuation provider or used to purchase an annuity, the person
may direct that entity pay all or part of the amount due and reduce
their benefits accordingly.
The amendment of assessments is dealt with in
item 10 which will amend the Act in the same
manner as item 16 of Schedule
1.
Amendments to the
Termination Payments Tax (Assessment and Collection) Act
1997
This Act will be amended by Schedule
3 of the Bill. The main amendment will insert new
provisions dealing with the amendment of assessments in the same
manner as item 16 of Schedule 1 (item
4).
There has been little comment on the benefits or
otherwise of the proposed self-assessment regime. It may be noted
that a superannuation provider may become a self-assessor through a
determination of the Commissioner, rather than the provider
applying to become a self-assessor. There is no significant public
indication that funds approve of their potential role as
self-assessors and ASFAs view is unknown. However, as the
assessment would add further costs to the funds administration in
relation to the surcharge it may be that funds would prefer the
option of being able to apply to be a self-assessor, rather than
being included through a determination of the Commissioner.
A further difficulty superannuation providers
will face in self-assessment is the calculation of whether a member
is liable to pay the surcharge. To determine a person's adjusted
taxable income it is necessary to also know their taxable income,
information not readily available to superannuation providers and
which they have no power to acquire. The Bill specifically provides
that a member is not required to provide information relevant to
their adjusted taxable income to a superannuation provider
(proposed sub-section 15B(6)). Without this
information a provider will not be able to assess a member and it
would therefore appear that even if a provider is determined to be
a self-assessor, this will not be able to be accomplished for all
members of the fund. As a result, the Commissioner will still have
to assess some members of the fund, with the proportion having to
be assessed by the Commissioner depending on the number who have
not provided the information to calculate their taxable income to
their superannuation provider. While there are no figures on the
percentage of people willing to provide such information to their
superannuation provider, it can be anticipated that a considerable
proportion would decline to supply such information when not
guaranteed the same degree of protection as applies with the ATO.
The result may be that superannuation providers have to establish a
mechanism that is of marginal use while the cost for that mechanism
is borne by all members of the provider.
-
- Australian Taxation Office, Taxation Statistics
1996-97, p. 73.
- Australian Chamber of Commerce and Industry,
Statement, 13 November 1998.
- ASFA and IFSA, The Surcharge: Survey of Costs and
Implementation Issues, October 1998.
- Ibid., p. 8.
- Ibid., p.10.
- Ibid., p. iii.
- Ross Clare, ASFA Research Centre, Superannuation
Contributions - Recent Trends, January 1999, p. 3.
- Superfunds, June 1998, p. 22.
Chris Field
10 August 1999
Bills Digest Service
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ISSN 1328-8091
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