Bills Digest No. 140  1998-99 Superannuation Legislation Amendment Bill (No. 2) 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 and Copyright Details

Passage History

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.

Purpose

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.

Main Provisions

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

Background

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.

Concluding Comments

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.

Endnotes

  1. Explanatory Memorandum to the Superannuation Legislation Amendment Bill (No. 2) 1999; paragraphs 2.5 to 2.8.

  2. 26th Report of the Senate Select Committee on Superannuation titled - Super-Restrictions on Early Access, p. 67.

  3. Ibid., paragraphs 3.2 and 3.3, p. 13

  4. Ibid., paragraphs 3.5 to 3.7.

  5. Ibid., paragraphs 3.8 to 3.9.

  6. Regulation 5.17of the Superannuation Industry (Supervision) Regulations.

  7. 26th Report of the Senate Select Committee on Superannuation titled - Super-Restrictions on Early Access, paragraphs 3.14 to 3.15.

  8. Ibid., Recommendation 7.2, p. 67.

  9. Ibid., Recommendation 7.2, p. 67.

  10. Ibid., Recommendation 7.5, p. 68.

  11. Ibid., paragraphs 5.98 to 5.110.

Contact Officer and Copyright Details

Bernard Pulle
23 March 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

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Published by the Department of the Parliamentary Library, 1999.

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