Bills Digest no. 158 2008–09
Tax Laws Amendment (2009 Budget Measures No. 1) Bill
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
Background and Main provisions
Contact officer & copyright details
introduced: 27 May
House: House of Representatives
relevant links to the Bill, Explanatory Memorandum and second
reading speech can be accessed via BillsNet, which is at http://www.aph.gov.au/bills/.
When Bills have been passed they can be found at ComLaw, which is
The Bill has three main purposes.
- the Income Tax Assessment Act 1936 (ITAA 1936) to
refine the general exemption that currently applies to foreign
- the Superannuation (Government Co-contribution for Low
Income Earners) Act 2003 (the Superannuation Co-contribution
Act) to reduce the matching rate and maximum co-contribution for
eligible personal superannuation contributions made in the 2009 10
to 2013 14 income years, and
- the Income Tax Assessment Act 1997 (ITAA 1997) to
reduce the concessional contributions cap.
As the Bill has no central theme, the Digest deals
simultaneously with the background and main provisions of each of
the three schedules to the Bill.
As noted above, the purpose of Schedule 1 is to
refine the general exemption found in section 23AG of the ITAA 1936
that currently applies to income earned in overseas employment.
Currently, subsection 23AG(1) provides that where an Australian
resident, who is a natural person and not a body corporate, has
been engaged in foreign service for a continuous period of not less
than 91 days, any foreign earnings derived by the person from that
foreign service are exempt from tax.
The Treasurer stated in a media release on 12 May 2009 that the
new measure is designed to ensure that workers who earn income
overseas do not have an unfair advantage over workers who earn
income and pay tax in Australia . The Government wishes to make the exemption fairer
by ensuring that Australian resident taxpayers who work in low-tax
jurisdictions pay the same rate of Australian tax as those
taxpayers who work in Australia.
However, the Government also wishes to continue to exempt from
tax any income earned by Australian residents who are employed in
foreign service as aid or charitable workers, or in certain types
of government employment such as defence or police
Specifically, under proposed subsection 23AG(1AA),
the foreign earnings mentioned in existing subsection 23AG(1) are
not exempt from tax unless the continuous period of foreign service
is directly attributable to any of the following activities:
- the delivery by the person s employer of Australia s official
- the activities of the person s employer in operating a public
fund where the employer has been declared to be an international
affairs deductible gift recipient under the relevant provisions of
the ITAA 1997
- the activities of the person s employer if the employer is
either (i) a prescribed institution which is located outside
Australia and is exempt from income tax in the country in which it
is resident; or (ii) a prescribed institution that has a physical
presence in Australia but which incurs its expenditure and pursues
its objectives principally outside Australia
- the person s deployment outside Australia as a member of a
disciplined force by the Commonwealth, a State or a Territory (or
by an authority of one of them), or
- an activity of a kind specified in the regulations.
For practical examples of whether a taxpayer will be eligible
for the exemption in proposed subsection
23AG(1AA), the reader is referred to the Explanatory
Memorandum for the Bill.
The amendment was first raised by the Rudd Government in the
2009 10 Budget as part of its revenue measures aimed at improving
fairness and integrity in the tax system. The Government explained
that the original intent of section 23AG was to relieve double
taxation, however, in practice little foreign tax may actually be
paid on the foreign income concerned .
If an individual is no longer exempt from paying tax on foreign
earnings as a result of the operation of proposed
subsection 23AG(1AA), he or she will be eligible to claim
a non-refundable foreign tax offset under Division 770 of the ITAA
1997 for any foreign income tax paid on the earnings.
Further, if an individual is no longer exempt from paying tax on
foreign earnings as a result of proposed subsection
23AG(1AA), his or her employer will be required to comply
with the pay-as-you-go (PAYG) withholding rules in Division 12 of
the Taxation Administration Act 1953. Additionally, the employer will
need to comply with the Fringe Benefits Tax Assessment Act
1986 in relation to any fringe benefits provided to the
The amendment made by Schedule 1 applies to foreign earnings
derived on or after 1 July 2009 from foreign service performed on
or after this date. Even if the foreign income of an Australian resident is
not exempt from tax under proposed subsection
23AG(1AA) from 1 July 2009, the exemption in existing
subsection 23AG(1) continues to apply to foreign income earned
before this date. Further, even if the foreign income earned after
1 July 2009 is no longer exempt from Australian income tax,
employment after this date will still be included in the
calculation of the period of continuous foreign service.
The measure in Schedule 1 is expected to
provide an additional $675 million over the forward estimates
Together with the savings made by the measures in Schedules 2 and 3
of the Bill, the savings provided by Schedule 1 will enable the
Government to lift the base rate of the pension in the 2009
As mentioned above, the purpose of the amendments to the
Superannuation Co-contribution Act is to reduce the matching rate
and maximum co-contribution for eligible personal superannuation
contributions made in the 2009 10 to 2013 14 income years.
Currently, the Government not only matches, but pays 150 per
cent of a low income earner s eligible personal superannuation
This figure is known as the matching rate . Currently, the maximum
co-contribution payable is $1500. This sum is reduced by 5 cents in
the dollar for every dollar by which the individual s total income
for the relevant income year exceeds the lower co-contribution
income threshold. The lower income threshold is $31 920 for 2009
10. In 2008 09,
it was $30 342.
According to the ATO, there were 1 032 324
beneficiaries of the Government s co-contribution between 1 October
2008 to 31 December 2008. The total amount of superannuation co-contribution
entitlements made during the quarter was
$879 985 000. To be eligible for the co-contribution, these
beneficiaries earned between $30 342 and $60 342 for the
2008 09 income year.
The measure contained in Schedule 2 is a
temporary reduction that applies only to the next five income
years. For the next three income years (2009 10, 2010 11 and 2011
12), the Government has reduced its co-contribution by one-third
(from a matching rate of 150 per cent to 100 per cent). For the two
income years after then (2012 13 and 2013 14), the co-contribution
will be higher than in 2009 12 (a matching rate of 125 per cent
compared with the matching rate of 100 per cent, but it will still
be lower than it is today (125 per cent compared with the current
150 per cent).
In 2014 15, the matching rate should return to its current level
(150 per cent).
Similarly, the maximum government co-contribution for the 2009
10 to 2011 12 income years is reduced in Schedule
2 from the current maximum of $1500 to $1000 (with this
figure being reduced by 3.333 cents for every dollar that the
person s total income exceeds the lower income threshold for the
relevant income year). For the 2012 13 and 2013 14 income years, the maximum
government co-contribution is $1250 (with this figure also being
reduced by 4.167 cents for every dollar that the person s income
exceeds the lower income threshold for the relevant income
lower income thresholds will continue to be indexed in line with
rises in wages .
The Government is of the view that these reductions will still
provide a very generous incentive for those low- and middle-income
earners to save towards their retirement .
The amendments made by Schedule 2 apply to the
2009 10 income year and later income years.
The measure in Schedule 2 is expected to save
$1.395 billion over the forward estimates period. The breakdown of this figure, as
set out in the Explanatory Memorandum, is as follows:
Schedule 3 reduces the cap on concessional
The ATO explains that caps apply to contributions made to a
person s superannuation fund, and that any contribution over the
cap amount is subject to extra tax. The cap amount and how much
extra tax you pay once you exceed it depends on whether the
contributions are concessional or non-concessional . Generally a
concessional contribution is a before-tax contribution that is made
by or for you to a complying super fund that is assessable income
of the fund and assessable income is income that is subject to tax
. Examples of
concessional contributions to a superannuation fund include
employer contributions (including those made under a salary
sacrifice arrangement); personal contributions by an eligible
person (such as a self-employed person) that are allowed as an
income tax deduction; and notional contributions for defined
benefit interest schemes.
Currently the concessional contribution cap is $50 000, but
item 1 of Schedule 3 to the Bill
seeks to reduce this figure to $25 000 for the 2009 2010
financial year (and to index that amount for the 2010 11 and later
financial years). The non-concessional cap (which generally applies to
after tax contributions made by or for you to a complying super
fund that are not included in your fund s assessable income) is
currently set at three times the concessional contributions cap.
Item 2 seeks to increase this figure to six times
the concessional contributions cap (that is, a total of
$150 000) for the 2009 10 and later financial years.
Notably, item 4 inserts proposed
subsections 292 170(8) and (9) to provide a separate
arrangement that applies to concessional contributions made to
defined benefit interests, including payments made by politicians
who are members of the old parliamentary defined benefit
Explanatory Memorandum says that the separate arrangement is
necessary because employer contributions into these interests are
not always attributable to individual members . In the case of such defined
benefit interests held at 12 May 2009, the notional taxed
contributions will be taken to be at the maximum level of the
concessional contributions cap (that is, $25 000 for the 2009
10 financial year), even if the notional contribution was in fact
greater than this amount.
The Government considers that the measure contained in
Schedule 3 is necessary to ensure that Australia s
income system remains sustainable into the future . Apparently, only 1.8
per cent of individuals making contributions will be affected by
the measure, which is targeted to reduce the disproportionate
benefits to high-income earners who can afford to make large
concessional contributions .
Schedule 3 will apply to all superannuation
concessional contributions made from the 2009 10 financial
Schedule 3 will result in a saving of $2.81
billion over the forward estimates period, as follows:
Source: Explanatory Memorandum, p. 8.
The Bill was introduced into the House of Representatives by the
Treasurer, Wayne Swan MP, on 27 May 2009. Following the Treasurer s
second reading speech, debate was adjourned until 1 June
2009. On that
date, three members spoke to the Bill:
- Chris Pearce MP (Liberal Party, Member for Aston, Shadow
Minister for Financial Services, Superannuation and Corporate
- Shayne Neumann MP (ALP, Member for Blair), and
- Chris Bowen MP (ALP, Member for Prospect, Minister for
Competition Policy and Consumer Affairs and Assistant
The Bill was then read a third time.
It is unnecessary at this point to state the position of the two
speakers from the ALP (representing as they do, the position of the
Government that introduced the Bill).
The position of the Opposition, as evidenced by Mr Pearce s
speech, is that the Bill should be the subject of a Senate inquiry
to assess any unintended consequences of the government s budget
measure . In
summary, Mr Pearce was concerned about the long-term effect of the
Government saving $4.3 billion in the short term, and was concerned
about the temporary nature of the cuts to the superannuation
co-contribution scheme. More importantly, he was concerned about changes to
both the superannuation co-contribution scheme and the reduction in
the concessional contribution cap because, in his view, for the
first time in many years, they discourage people to save more (via
personal superannuation contributions) for their retirement.
As at the date of writing, the Bill is yet to be introduced into
Under the Senate Order of 14 May 2009, the provisions of the
Bill were referred to the Senate Economics Legislation Committee
upon the introduction of the Bill into the House of Representatives
on 27 May 2009.
On 1 June 2009, the Selection of Bills Committee resolved to refer
the provisions to that same Committee, albeit on different terms.
The Senate Economics Committee is now to inquire and report on the
provisions of the Bill no later than 22 June 2009.
The Senate Standing Committee on the Scrutiny of Bills had no
comment on the Bill.
Members, Senators and Parliamentary staff can obtain further
information from the Parliamentary Library on (02) 6277
4 June 2009
Bills Digest Service
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