Bills Digest No. 166 2002-03
Superannuation (Surcharge Rate
Reduction) Amendment Bill 2003
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 (Surcharge Rate
Reduction) Amendment Bill 2003
Date Introduced:
29 May 2003
House: House of Representatives
Portfolio: Treasury
Commencement:
1 July 2002 except for
item 30 which has a commencement date of 28 December
2002.(1)
The purpose of
this Bill is to:
reduce the superannuation surcharge rates by one-tenth of their
current level over 3 years.
Background to
reducing the superannuation surcharge rates
General information on reducing the
superannuation surcharge rates was provided in the Bills Digest for
the original Bill for this measure, Taxation
Laws Amendment (Superannuation) Bill (No. 2) 2002
(TLA(S) Bill No. 2 2002)(2) and in
Superannuation
Legislation Amendment Bill 2002
(SLA Bill 2002).(3)
During debate on the
TLA(S) Bill No. 2 2002 on 27 June 2002, the
Government withdrew the amendments that reduced the superannuation
surcharge rates.(4) These amendments were reintroduced
in Schedule 2 of the SLA Bill 2002. The
SLA Bill 2002 was introduced with the Superannuation
(Government Co-contribution for Low Income Earners) Bill 2002.
These two bills were last debated in the Senate on 18 November 2002
in cognate debate.
To attempt to meet its 2001 Election
commitment to reduce the superannuation surcharge rate and
introduce the Government co-contribution for low income earners the
Government has split the SLA Bill 2002 into this Bill and the
Superannuation (Government Co-contribution for Low Income Earners)
(Consequential Amendments) Bill 2003. This will allow this Bill to
be debated separately from the Government co-contribution for low
income earner bills.
All employer contributions, certain 'golden
handshakes' and tax deductible personal contributions made to
superannuation funds for high-income earners are subject to a
surcharge of up to 15 per cent. For the 2002-03 income year, the
surcharge is phased in over the income levels of $90 527 to $109
924 with the surcharge increasing by one per cent for each
additional $1295 of income from $90 527.
During the 2001 election campaign, the
Government released A Better Superannuation
System(5) containing a number of proposed reforms
to superannuation. This document contained 13 election promises.
One of these promises was to reduce the superannuation and
termination payments surcharge rates by ten per cent of their
current level over each of the next three years (a maximum of 1.5
percentage points each year) with a date of effect of 1 July
2002.
The 2002-03 Budget provided further details
about the implementation of these proposals. This section provides
the Budget announcements on this measure.
A
Better Superannuation System reducing the Superannuation
Surcharge rate
Revenue
($m)
| |
2002‑03
|
2003‑04
|
2004‑05
|
2005-06
|
|
Australian Taxation Office
|
-
|
-50.0
|
-120.0
|
-200.0
|
Explanation
From 1 July 2002, the superannuation
and termination payments surcharge rates will be reduced by one
tenth of their current levels for each of the next three income
years. As a consequence, the maximum surcharge rates will be
reduced to 13 per cent in 2002‑03,
12 per cent in 2003‑04 and 10 per cent
in 2004‑05 and succeeding years.
Further, in keeping with its election
commitment, the Government
will review the surcharge arrangements after three years to
determine whether any further changes are
required.(6)
The
Explanatory Memorandum for this Bill updates the figures included in the 2002-03
Budget Papers. The financial impact is now expected to be a cost to
revenue of $65 million in 2003-04, $170 million in 2004-05 and
$290 million in 2005-06.(7)
On
25 May 2003
the Minister for Revenue and
the Assistant Treasurer, Senator, the Honourable Helen Coonan,
announced that the Federal Government would:
increase the
momentum for superannuation reform with renewed efforts to
implement its election promises.(8)
Part of
the proposal to revitalise superannuation was the reintroduction
into the House of Representatives of the superannuation surcharge
rate reduction legislation by splitting it from the Government
co-contribution for low income earners.
Item 1 adds a new
subsection 5(1AA) into the Superannuation
Contributions Tax Imposition Act 1997 (SCT Act) that changes
the definitions in a formula used to calculate the superannuation
surcharge. This simplifies the calculation of the surcharge over
the years in which the surcharge rate is reduced each year. The new
terms in the formula do not affect the indexation of the
thresholds, only the maximum rate of surcharge levied over the next
three financial years.
Item 3 inserts a new
subsection 5(1) (formula) into the SCT Act to substitute a
new formula for calculating the surcharge to incorporate the new
definitions in item 1.
Item 9 adds a new
subsection 5(1A) into the Superannuation Contributions
Tax (Members of Constitutionally Protected Superannuation Funds)
Imposition Act 1997 (SCTMCPSF Act) that changes the
definitions in a formula used to calculate the superannuation
surcharge. This simplifies the calculation of the surcharge over
the years in which the surcharge rate is reduced each year. The new
terms in the formula do not affect the indexation of the
thresholds, only the maximum rate of surcharge levied over the next
three financial years.
Item 11 inserts a new
subsection 5(1) (formula) into the SCTMCPSF Act to
substitute a new formula for calculating the surcharge to
incorporate the new definitions in item 9.
Item 17 adds a new
subsection 5(1AA) into the Termination
Payments Tax Imposition Act 1997 (TPTI Act) that changes the
definitions in a formula used to calculate the superannuation
surcharge. This simplifies the calculation of the surcharge over
the years in which the surcharge rate is reduced each year. The new
terms in the formula do not affect the indexation of the
thresholds, only the maximum rate of surcharge levied over the next
three financial years.
Item 19 inserts a new
subsection 5(1) (formula) into the TPTI Act to substitute
a new formula for calculating the surcharge to incorporate the new
definitions in item 17.
Constitutionally protected superannuation
schemes(9) have complicated methods of calculating
superannuation surcharge, primarily due to the design of such
schemes. For members of these schemes, superannuation surcharge
liability accumulates in a 'surcharge debt account.' The member's
liability is the lesser of the amount in the 'surcharge debt
account' and 15 per cent of the employer contribution (reflecting
the current maximum surcharge rate). Trustees of certain
constitutionally protected superannuation funds can reduce the
benefits payable to members of such funds by no more than 15 per
cent of the employer financed component that accrued after the
commencement of the surcharge to discharge a surcharge
liability.
The items in this Part 2 of Schedule
1 enable trustees to reduce this employer component of a
benefit by the following amounts:
- 13.5% for the amount that accrued in the 2002-03 financial
year
- 12% for the amount that accrued in the 2003-04 financial year,
and
- 10.5% for the amount that accrued in the 2004-05 financial
year.
The new reduction amounts are implemented
by:
- Item 24, which replaces subsection
6C(3) of the Defence Force Retirement and
Death Benefits Act 1973
- Item 25, which replaces subsection
4E(3) of the Parliamentary Contributory Superannuation
Act 1948
- Item 26, which replaces subsection
80A(3) of the Superannuation Act 1976
- Items 27 and 28, which
replace subsections 4(1) and 4(2)
of the Superannuation Contributions Tax (Application to the
Commonwealth Reduction of Benefits) Act 1997, and
- Items 29, 30 and
31, which replace paragraphs
15(6)(b) and 15(6AA)(d) and
15(6A)(b) of the Superannuation Contributions
Tax (Members of Constitutionally Protected Superannuation Funds)
Assessment and Collection Act 1997.
Item 32 states that
amendments made in Part 1 apply to surcharge in
respect of the 2002‑03 and subsequent financial years.
Item 33 states that
amendments made by items 24 to 29
apply in relation to benefits that become payable on or after 1
July 2002.
Item 34 states that the
amendment made by item 30 continues to apply in
relation to benefits that become payable before that item commences
as if the amendment made by that item had not been made.
Item 35 states that the
amendment made by item 31 applies in relation to
superannuation funds that cease to be constitutionally protected
funds on or after 1 July 2002.
The amendments in this
Bill reduce the superannuation
surcharge rates by one-tenth of their current level over 3 years.
These amendments are the subject of some controversy. The
Government is implementing its election promises to reduce the
superannuation surcharge. Apart from 2002-03 Budget
Papers, the Government has not produced any economic analysis
of the benefits of this proposal. The Government could correctly
argue that such arguments have been made
elsewhere.(10)
Notwithstanding this omission, the
inescapable conclusion is that, based on the estimates in the
Explanatory Memorandum, this Bill will narrow the tax base and
reduce the tax burden of high income earners by $525 million by the
end of the 2005-06 year. The superannuation contributions and
termination payments surcharge are important sources of revenue for
the Government. In 2001-02 surcharge collections alone amounted to
$824 million.(11) This
Bill will reduce these collections
significantly. The surcharges were introduced as 'equity measures'
to make the level of superannuation taxation concessions available
to high income earners more comparable to those available to middle
and lower income earners.
However, the surcharge has never really
met this objective with around 900,000 superannuation contributions
and termination payments assessments issued in
1998‑99(12) compared to around 450,000 taxpayers
declaring a taxable income of $70,000 or more in 1998
99.(13) Two groups adversely affected by the surcharges
are individuals in an employment catch-up phase(14) or
individuals who have received redundancy payouts.(15)
The eroding of the equity argument was enhanced on 5 February 2003
when the High Court ruled that the method used to impose the
superannuation surcharge on Supreme Court Judges and Masters of the
State Supreme Courts by making them personally liable for the
surcharge debt when they retired from the bench was a
discriminatory tax.(16)
While these amendments will assist in a
small way the individuals in the catch-up phase and those receiving
redundancy payments, the amendments in this
Bill also undermine the equity
argument by increasing the level of tax concession available to
high income earners. The Government has yet to justify the vertical
inequity of this measure (i.e., why high income earners should be
treated to this tax cut and not lower income earners).
The Leader of the Opposition, the
Hon. Simon Crean, MP,
argued that this proposal benefits the top 3 per cent of income
earners. His alternative proposal is outlined below.
Our alternative propositions for the use of
the money are these: we can redirect the money earmarked for the
few into cutting the superannuation tax for all Australians from
the present 15 per cent to 13 per cent; or we can cut the tax to 11
and a half per cent for people over 40 years of age the age when
most people start getting serious about planning for their
retirement. The last option would mean a cut of more than 25 per
cent in superannuation contributions tax. It would add many
thousands of dollars to everyone's retirement income whilst still
being economically responsible. It would be a powerful incentive
for Australians to invest in their own future, helping us to cope
with our future needs. It is a fairer
alternative.(17)
This proposal was refined during the
Leader of the Opposition s 2003 04 Budget Reply speech where he
announced that the Opposition would lower the superannuation
contributions tax from 15 per cent to 13 per cent.(18)
This proposal adds another layer of grandfathering to an already
complex area, i.e. the taxation of benefits and eligible
termination payments and it does not address the problem of how to
fix the administratively complex surcharge system.
It is arguable that reducing the
surcharge rates is a step in the right direction. Much has been
written about its complexity, poor design, and effect on the
incentive for employees to save for their retirement. At the very
least, the measures in the Bill are a
small concession to those who would prefer to see the surcharge
abolished altogether.
If the Parliament passes this
Bill, the surcharge legislation will remain on
the statute books. Many of the witnesses to the 23rd report of the
former Senate Select Committee on Superannuation provisions will
still be dealing with inefficiencies associated with the complex
administration, clumsy assessment procedures and on-going
administration costs that are borne not just by high income
earners, but all superannuation fund
members.(19)
- Item 30 has a commencement day of immediately
after the commencement of item 37 of Schedule 1 of the Family Law
Legislation Amendment (Superannuation) (Consequential Provisions)
Act 2001 (the FLLA(S)(CP) Act 2001). Item 37 of the FLLA(S)(CP) Act
2001 commenced on 28 December 2002.
- http://www.aph.gov.au/library/pubs/bd/2001-02/02bd161.pdf
.
- http://www.aph.gov.au/library/pubs/bd/2002-03/03bd016.pdf
- See Senator the Hon. Helen Coonan, Senate,
Debates, 27 June 2002, p. 2963.
- 'A Better Supernnuation System ', Press
Release, The Hon. John Howard, Prime Minister, Liberal Party
of Australia, 5 November 2001.
- The Hon. Peter Costello, MP, Treasurer,
Budget Paper No. 2: Budget Measures 2002-03,
p. 14.
- Superannuation (Surcharge Rate Reduction)
Amendment Bill 2003, Explanatory Memorandum, p. 3.
- Revitalising Superannuation Press
Release, Senator the Hon Helen Coonan, Minister for Revenue
and the Assistant Treasurer, 25 May 2003.
- The Income Tax Assessment Act 1936
section 267(1) defines these as "a fund that is declared by the
regulations to be a constitutionally protected fund." These are
State superannuation funds that cannot be taxed under the
Commonwealth's taxing power (see South Australia
v The Commonwealth 92 ATC 4066). The funds are listed in
Income Tax Regulation 177, schedule 14.
- For example, the 23rd report of the former
Senate Select Committee on Superannuation, Superannuation
Surcharge Legislation.
- Commissioner of Taxation, Annual Report
2001-02, p. 38.
- Australian Taxation Office, Tax
Statistics 1999-2000, p. 81.
- ibid., statistical tables, individuals table
no. 8
- An employment earnings catch-up phase is
where an individual returns to the workforce earning a high wage
after spending time out of work to raise children, to take up
further study or some other activity that causes them to be out of
the workforce for a substantial period of time.
- Senate Select Committee on Superannuation,
Superannuation and standards of living in retirement - Report
on the adequacy of the tax arrangements for superannuation and
related policy, Canberra, December 2002, p. 98.
- Austin v Commonwealth 2003 ATC
4042.
- The Hon. Simon Crean, MP, House of
Representatives, Debates, 16 May 2002, Second Reading
Speech, Appropriation Bill (No. 1) 2002-03, p. 2391.
- The Hon. Simon Crean, MP, House of
Representatives, Debates, 15 May 2003, Second Reading
Speech, Appropriation Bill (No. 1) 2003-04, p. 14497.
- See the 23rd report of the former Senate
Select Committee on Superannuation, Superannuation Surcharge
Legislation, especially Chapter 4: The Proposed Collection
Mechanism.
Graeme Selleck and David Kehl
3 June 2003
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ISSN 1328-8091
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