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This Digest was prepared for debate. It reflects the legislation as
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CONTENTS
Passage History
Purpose
Background
Main Provisions
Concluding Comments
Endnotes
Contact Officer and Copyright Details
Superannuation Legislation Amendment
Bill (No. 2) 1999
Date Introduced: 11 March 1999
House: House of Representatives
Portfolio: Treasury
Commencement: The Act commences on the day
on which it receives the Royal Assent. The dates on which the
amendments proposed in the various Schedules commence are indicated
in the Main Provisions of each Schedule in this Digest.
The amendments
proposed in the three Schedules to the Bill have the following
purposes:
-
- The amendments in Schedule 1 change the arrangements in the
Small Superannuation Accounts Act 1995 (SSAA 1995)
relating to the early release of money held in the Superannuation
Holding Accounts Reserve (SHAR) in a manner consistent with the
arrangements that currently apply to superannuation funds and
retirement savings accounts (RSAs). The purpose of the amendments
is to ensure that leakage from superannuation funds prior to
genuine retirement is minimised.
-
- The amendments in Schedule 2 close a loophole in section 273 of
the Income Tax Assessment Act 1936 (ITAA 1936) which
allows certain distributions of trust income to superannuation
funds set up for the benefit of trust beneficiaries under non-arm's
length arrangements to be taxed at the concessional rate of
15%.
-
- The amendments in Schedule 3 continue with effect from 1 August
1996 a former exemption from the superannuation guarantee (SG)
charge for employers under the Superannuation Guarantee
(Administration) Regulations (the SG Regulations). This exemption
applied to employers in respect of certain senior foreign
executives who met the criteria for the former class 413 overseas
executive visa. The exemption will not apply to the spouses and
dependants of such executives.
As this Bill proposes disparate amendments in
three Schedules, for the convenience of the reader the background
and main provisions to the significant amendments in each Schedule
are considered separately in this Digest.
Amendments in Schedule 1 -
Changes in access to the Superannuation Holding Accounts
Reserve
The Small Superannuation Accounts Act
1995 (SSAA 1995) established the Superannuation Holding
Accounts Reserve (SHAR) with effect from 1 July 1995 to protect
small superannuation amounts by ensuring that fees and charges
applying to small amounts are no greater than the interest earned
on such amounts. The SSAA 1995 is administered by the Commissioner
of Taxation (the Commissioner) and the simplified explanation of
the SSAA 1995 as given in section 3 is as follows.
Simplified explanation of the Small
Superannuation Accounts Act 1995
The following is a simplified explanation of
this Act:
-
- The Australian Taxation Office has accounts that allow
employers to deposit money for their employees instead of making
superannuation contributions
-
- The account offers employees with small balances an opportunity
to avoid the erosion of those balances by fees
-
- Employees may request that account balances be transferred to a
nominated superannuation fund or RSA
-
- Except in special cases, employees will not have direct access
to their account balances
-
- Interest will be calculated on the daily balance of the account
and credited to the account on a quarterly basis
-
- Interest is exempt from income tax
-
- If an account balance exceeds $1,200, interest will only be
credited on the first $1,200 of the balance. This is an incentive
for employees to request that balances of more than $1,200 be
transferred to a superannuation fund
-
- Under the Income Tax Assessment Act 1936, employers
may get income tax deductions for deposits. There is an annual
deduction limit of $1,200 per employee, and
-
- Under the Superannuation Guarantee (Administration) Act
1992, deposits made by an employer will be treated as
superannuation contributions.
Brief outline of the access provisions
of the Small Superannuation Accounts Act 1995
In compliance with Government's retirement
incomes policy SSAA 1995 permits contributions to be accessed by an
individual for whose benefit they are held only in the following
limited circumstances:
-
- where the balance is less than $500 and the individual has
ceased to be employed by all depositors
-
- where the individual is in severe financial hardship
-
- where the individual has retired because of permanent
disability
-
- where the individual has turned 65
-
- where the individual is not an Australian resident and is not
employed in Australia.
Outlines of the 1997-98 Budget proposals
for change of early access provisions
In the 1997-98 Budget, the Treasurer and the
Minister for Social Security issued a joint statement on savings
and retirement incomes policy - Savings: Choice and
Incentive. This statement included measures to streamline and
tighten arrangements for the early release of superannuation
savings so that superannuation is better directed towards the
provision of retirement income.
To achieve these objectives the Small
Superannuation Accounts Amendment Bill 1997 was introduced in the
House of Representatives on 29 May 1997 and was passed by the House
on 17 June 1997. It was introduced in the Senate on 18 June 1997
and referred to the Senate Select Committee on Superannuation
(SSCS) on 19 June 1997. The changes were aimed at:
-
- abolishing the $500 threshold
-
- restricting the release of monies to a non-resident only after
preservation age, and
-
- replacing the subjective 'severe financial hardship' test with
an objective test of hardship based on receipt of specified
Commonwealth payments for a specified period.
The SSCS in its 26th Report titled
Super-Restrictions on Early Access issued in September
1997 reported on these proposed changes and where the measures in
the Bill vary from the recommendations in the 26th
Report reference will be made in the Concluding Comments of this
Digest.
Changes for early access made by
regulations for the superannuation industry
To effect the same changes for the major part of
the superannuation system Statutory Rules Nos 150-153 to take
effect from 1 July 1997 were gazetted on 26 June 1997 to amend the
Superannuation Industry (Supervision) Regulations and the
Retirement Savings Accounts Regulations. The amendments to these
regulations were tabled in the Parliament on 25 August 1997 and
have not been disallowed. Further amendments were made by Statutory
Rules and where the measures in the access provisions in this Bill
differ from those applying to the superannuation industry as a
whole reference will be made in the Concluding Comments of this
Digest.
Main Provisions
Schedule 1 of the Bill amends the SSAA 1995 so
that the conditions for withdrawal of funds by individuals from
SHAR are consistent with the conditions for withdrawal from
superannuation funds and retirement savings accounts (RSAs).
Balance of less than $200
Paragraph 63(1)(d) of the SSAA 1995 allows
access of an individual's balance, on the grounds that the
individual has ceased employment, where the balance is less than
$500. Item 8 of Schedule 1 amends
paragraph 63(1)(d) by substituting $200 for $500 so that access
will be permissible in these circumstances where the balance is
less than $200.
Change in the 'severe financial
hardship' test
Currently, the 'severe financial hardship' test
in section 64 of the SSAA 1995 is satisfied where the Australian
Securities and Investments Commission (ASIC) determines in writing
that an individual is in severe financial hardship. This subjective
test is being replaced by an objective test that is dependant upon
whether the individual is receiving specified Commonwealth income
payments. The test varies with the age of the individual and
requires the applicant to provide evidence in writing to the
Commissioner of Taxation from the department or agency making the
specified Commonwealth income payment.
Where an individual is 55 years of age or older
proposed subparagraph 64(1)(b)(i) and
proposed paragraph 64(1)(c) to be inserted by
Item 9 require that he or she must have been in
receipt of a specified Commonwealth payment for a period of at
least 39 weeks or two or more periods that add up to at least 39
weeks, since the person turned 55. Where that individual is under
55 years of age proposed subparagraph 64(1)(b)(ii)
and proposed paragraph 64(1)(c) require that the
individual should have received a specified Commonwealth payment
for a continuous period of at least 26 weeks.
The Commonwealth payments that are specified by
proposed subsection 64(7) to be inserted by
Item 10 are social security benefits (other than
an austudy payment or a youth allowance paid to a person
undertaking full-time study) or social security pensions, service
pensions, drought relief payments, or income support supplements as
defined in section 23 of the Social Security Act
1991. Proposed paragraph 64(7)(e) provides
for other payments to be specified for the purposes of the
definition of Commonwealth income support payments.
Restriction on access by
non-residents
At present an individual who intends to
permanently depart from Australia could under section 67 of the
SSAA 1995 have access to his or her balance. Proposed
paragraph 67(1)(ba) to be inserted by Item
11 provides that the individual who makes a withdrawal
request must be at least 55 years old.
Application of amendments
The amendments made by Schedule
1 apply to requests for withdrawal made to the
Commissioner on or after the day on which the Act receives Royal
Assent.
Amendments in Schedule 2 -
Non-arm's length trust distributions etc. to superannuation and
similar funds
Background
Scope of 'special component' of a
superannuation entity taxed at 47%
Part IX of the ITAA 1936 deals with the taxation
of the income of a superannuation entity. Generally, the income of
a superannuation entity is taxed at 15% where there is no 'special
component' of the taxable income. The 'special component' is taxed
at 47% and is 'special income' derived from certain types of
non-arm's length transactions that fall within the provisions of
section 273 of the ITAA 1936. These provisions are designed to
prevent tax minimisation.
The provisions of section 273 do not at present
cover arrangements by some trusts (usually discretionary trusts)
which divert pre-tax income to superannuation entities set up for
the benefit of the beneficiaries of the trust rather than to the
beneficiaries themselves. The effect of such arrangements is that
such income is taxed at 15% rather than at the marginal rate of tax
applicable to the beneficiaries of the trust.
On 25 November 1997, the Treasurer in a Press
Release outlined anti-avoidance measures to prevent these tax
minimisation practices. The announcement indicated that the tax law
would be amended so that trust distributions made from all trusts,
other than unit trusts, to a superannuation entity would be treated
as special income of the entity and taxed at the non-concessional
rate of 47%. It was also announced that distributions from unit
trusts in excess of an arm's length amount would also be taxed at
47%.
Amendments to give effect to these measures were
originally introduced in Taxation Laws Amendment Bill (No. 5) 1998
on 2 July 1998. The Bill lapsed on the announcement of the Federal
Election of October 1998.
Main Provisions
Item 2 of Schedule
2 will insert proposed subsections 273(6) to
(8) to close the loophole by which certain distributions
of trust income to superannuation entities made under non-arm's
length arrangements are taxed at the concessional rate of 15%.
What trust distributions to
superannuation entities will be treated as special income?
Proposed subsection 273(6)
provides that the income derived by a superannuation entity in the
capacity of a beneficiary of a trust estate is special income of
the entity. Income derived by virtue of holding a fixed entitlement
to the income is not covered by proposed subsection
237(6) as this is dealt with by proposed
subsection 237(7).
Proposed subsection 273(7)
provides that income derived by a superannuation entity in the
capacity of beneficiary of a trust estate by virtue of holding a
fixed entitlement to the income, is special income if two tests are
satisfied.
The two tests are:
-
- there was an arrangement under which the fixed entitlement was
acquired or the income was derived and some or all of the parties
to the arrangement were not dealing with each other at arm's length
(proposed paragraph 273(7)(a)), and
-
- the amount of the income derived by the entity was greater than
might have been expected if the parties to the arrangement had been
dealing with each other at arm's length (proposed paragraph
273(7)(b)).
Proposed subsection 273(8)
gives a very wide definition of arrangement for the purposes of
proposed subsection 237(7).
Application
Item 3 of Schedule
2 provides that, subject to the transitional measures in
Item 4, the amendments made by Schedule
2 apply to income derived after 2 pm by standard time in
the Australian Capital Territory on 25 November 1997. This is
referred to as the commencement time in Item
3.
Income of Unit Holders - Transitional
Measures
Item 4 is a transitional
measure and provides that income derived by a superannuation entity
as holder of a unit in a trust estate is special income if it
satisfies two tests.
The two tests are:
-
- there was an arrangement under which the entity acquired the
unit or by which the income was derived and some or all of the
parties to the arrangement were not dealing with each other at
arm's length (proposed paragraph (1)(a) of
Item 4); and
-
- the amount of the income derived by the entity was greater than
might have been expected if the parties to the arrangement had been
dealing with each other at arm's length (proposed paragraph
(1)(b) of Item 4).
The term arrangement has the meaning given to it
by proposed subsection 273(8).
It applies to income derived between the
commencement time as defined in Item 3 and the end
of 2 July 1998.
These transitional arrangements became necessary
as the amendments in Schedule 2 of this Bill and in the Taxation
Laws Amendment Bill (No. 5) are different in form to the measures
announced on 25 November 1997.The Explanatory Memorandum gives the
background to the changes that were made in the Taxation Laws
Amendment Bill (No. 5) which was introduced on 2 July 1998.(1) The
transitional measures are intended to ensure that superannuation
entities that relied on the details contained in the announcement
of 25 November 1997 are not adversely affected by the subsequent
changes to the announced details.
Amendments in Schedule 3 -
Exemption of certain senior foreign executives from the
superannuation guarantee charge
Background
Prior to 1 August 1996, senior foreign
executives were exempt from the SG on the basis that they are
usually in Australia for only short periods and have arrangements
for their retirement equivalent or greater than SG in their home
countries. The exemption was available under subregulation 7(1) of
the Superannuation Guarantee (Administration) Regulations (the SG
Regulations) by identifying the foreign executives concerned by
reference to those who held a class 413 overseas executive visa.
This class of visa was issued under the Migration Regulations
1994.
From 1 August 1996, new Subclass 456 and 457
visas were introduced under the Migration Regulations 1994 for all
business entrants and these replaced the 413 visa and several other
visa classes. Under the Migration Regulations 1994, employees of
persons who were issued with a 413 visa prior to 1 August 1996
continue to hold them and in consequence the employers concerned
are entitled to the SG exemption under the SG Regulations.
On 25 June 1997, the Assistant Treasurer in a
Press Release announced Government's intention to continue the
former SG exemption from 1 August 1996 for senior foreign
executives.
Main Provisions
Item 1 of Schedule
3 amends subregulation 7(1) of the SG Regulations to
continue the exemption from the SG legislation for employers in
respect of employees holding either a visa Subclass 456 or 457 and
Subclass 956 or 997. These latter Subclass visas refer to
electronic travel authority for business entrants for long and
short validity respectively.
The issue of these visas is subject to certain
criteria being satisfied by a senior foreign executive. The senior
executive must satisfy any one of the following conditions.
-
- Hold the position of a national managing or deputy managing
executive or state manager of his or her employer. Visa class 457
covers the case of a nomination by the employer including the case
of an employer identified under a regional headquarters agreement
or labour agreement.
-
- Hold the position of a full-time senior executive and has
qualifications which are appropriate to the position (including
qualifications through prior demonstrated work experience and
skills).
-
- The visa holder is an employee establishing a business activity
in Australia on behalf of his or her employer and carrying
substantial executive responsibility. The employee must have
appropriate qualifications for the position including
qualifications through prior demonstrated work experience and
skills.
Lowering of threshold for access from
$500 to $200
It was mentioned earlier that the Small
Superannuation Accounts Amendment Bill 1997 provided for the
abolition of the $500 threshold. That Bill was referred to the
Senate Select Committee on Superannuation (the Committee). In its
26th Report titled Super - Restrictions on Early
Access the Committee in Recommendation 7.1 suggested that
Government substitutes a lower threshold of say $200. The
Australian Democrats did not support this recommendation as they
were not persuaded that low income workers are better off being
required to hold such small amounts in superannuation funds and
reserved their position on this matter.(2)
The 26th Report points out that the
Committee had in two previous reports also recommended that access
to preserved amounts of less than $500 should be removed. (3)
However, in view of the arguments both for and
against abolishing the $500 threshold which were presented to the
Committee on this occasion, it felt obliged to review its earlier
recommendations.
The arguments for retaining the threshold at
$500 included the fact members of superannuation funds have
multiple accounts and reducing the threshold to say $200 will
prevent members from rolling these small amounts over into larger
benefits they already have as the costs of the rollover will exceed
the threshold. There would in consequence be a proliferation of
small balances in the system with escalating costs of
administration.(4)
The Association of Superannuation Funds of
Australia (ASFA) argued that the threshold should be abolished in
the interest of preventing leakage from the retirement incomes
system. ASFA argued that as many of the SHAR account holders are
low income or casual workers they should be encouraged to start
saving for their own retirement.(5)
The Committee whilst acknowledging that there
was a case for minimising leakage and encouraging low income
earners building on their small superannuation savings concluded
that given the present arrangements for member protection on
balances less than $1,000,(6) the importance of gaining access to
balances less than $500 has diminished.
The Committee concluded that a balance would be
struck between these two competing interests by reducing the
threshold to say $200.(7) The Measure in the Bill accepts the
recommendation of the Committee.
Release of money to non-residents only
after preservation age
The Committee in the 26th Report supported the
measure in the Small Superannuation Accounts Amendment Bill 1997 to
release superannuation benefits to Australian citizens or permanent
residents departing overseas only after such persons have reached
retirement age.(8) However, the Labor and Democrat Senators
suggested a reasonable transition period of six months from the
date of operation of the revised rules to allow those people who
were leaving Australia to notify the superannuation fund of their
intention.(9) The Bill provides for the release of funds when the
individual making the withdrawal request is at least 55 years old
but has no transition period before it takes effect.
Release on hardship and compassionate
grounds
The Committee recommended that in addition to
the objective tests for the early release of SHAR balances on
grounds of severe financial hardship in the Small Superannuation
Accounts Amendment Bill 1997 a subjective test be added. The
suggested test was the total inability of an applicant for
withdrawal to meet immediate and reasonable family expenses.(10)
The current Bill has no provision for the application of a
subjective test on the lines recommended by the Committee.
Exemption of senior foreign executives
from superannuation guarantee
The Committee received evidence that the
complexity of the Australian taxation system discouraged foreign
companies from establishing operations in Australia and that the
application of the superannuation guarantee to expatriate employees
added to this complexity. The evidence also indicated that the
removal of the permanent departure ground for the release of
superannuation balances, will discourage employment of expatriates
in Australia as well as the establishment of Regional Headquarters
(RHQs) in Australia.(11)
The Committee in particular considered that the
requirement that Subclass 456 or 457 visa holders should preserve
their superannuation benefits until retirement age will be a
discouraging factor to those foreign companies wanting to establish
operations such as RHQs in Australia.
The measures in the Bill to exempt senior
foreign executives with a Subclass 456 or 457 visa as well as
Subclass 956 or 977 visa from the superannuation guarantee meet the
concerns of the Committee.
-
- Explanatory Memorandum to the Superannuation
Legislation Amendment Bill (No. 2) 1999; paragraphs 2.5 to 2.8.
- 26th Report of the Senate Select Committee on
Superannuation titled - Super-Restrictions on Early
Access, p. 67.
- Ibid., paragraphs 3.2 and 3.3, p. 13
- Ibid., paragraphs 3.5 to 3.7.
- Ibid., paragraphs 3.8 to 3.9.
- Regulation 5.17of the Superannuation Industry (Supervision)
Regulations.
- 26th Report of the Senate Select Committee on
Superannuation titled - Super-Restrictions on Early
Access, paragraphs 3.14 to 3.15.
- Ibid., Recommendation 7.2, p. 67.
- Ibid., Recommendation 7.2, p. 67.
- Ibid., Recommendation 7.5, p. 68.
- Ibid., paragraphs 5.98 to 5.110.
Bernard Pulle
23 March 1999
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