Bills Digest No. 26 1999-2000 Superannuation Contributions and Termination Payments Taxes Legislation Amendment Bill 1999


Numerical Index | Alphabetical Index

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
Purpose
Background
Main Provisions
Concluding Comments
Endnotes
Contact Officer & Copyright Details

Passage History

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.

Purpose

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.

Background

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'.

Main Provisions

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).

Concluding Comments

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.

Endnotes

  1. Australian Taxation Office, Taxation Statistics 1996-97, p. 73.

  2. Australian Chamber of Commerce and Industry, Statement, 13 November 1998.

  3. ASFA and IFSA, The Surcharge: Survey of Costs and Implementation Issues, October 1998.

  4. Ibid., p. 8.

  5. Ibid., p.10.

  6. Ibid., p. iii.

  7. Ross Clare, ASFA Research Centre, Superannuation Contributions - Recent Trends, January 1999, p. 3.

  8. Superfunds, June 1998, p. 22.

Contact Officer and Copyright Details

Chris Field
10 August 1999
Bills Digest Service
Information and Research Services

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.

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 1328-8091
© Commonwealth of Australia 1999

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, 1999.

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