Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)Chapter 4 - Regulation impact statement
4.1 The Office of Regulation Review has advised that a regulation impact statement is not required for the measure relating to the exclusion of superannuation from fringe benefits when made to an employee.
Policy objective
Clarification of the meaning of 'eligible employee'
4.2 This clarification is intended to put beyond doubt the fact that a taxpayer cannot be an employee of themselves. This will ensure that only contributions made for genuine eligible employees are deductible.
Removal of deductions for contributions to non-complying superannuation funds
4.3 This measure gives effect to the Government decision to deny deductions for employer contributions knowingly made to non-complying superannuation funds. Contributions will only be deductible if the contributions are made to a complying superannuation fund.
4.4 Contributions made to non-complying superannuation funds (i.e. funds which do not meet the Government's criteria for concessional taxation treatment) will no longer be deductible, in line with personal contributions made to non-complying superannuation funds.
4.5 Non-complying funds have generally not been used for retirement income purposes but instead have been extensively used in tax schemes attempting to achieve a tax wipe-out.
Implementation options
Clarification of the meaning of 'eligible employee'
4.6 Only one option is for consideration. It involves inserting a subsection which clearly states that the taxpayer cannot be an eligible employee of themselves under section 82AAA.
4.7 Retrospective application for this amendment is unnecessary since it is only a clarification.
Removal of deductions for contributions to non-complying superannuation funds
4.8 Only one option is for consideration. It involves repealing section 82AAE of the Income Tax Assessment Act 1936 and amending the Income Tax Assessment Act 1997 to ensure that no deduction is available for contributions made to a non-complying superannuation fund.
4.9 Retrospective application for this amendment is unnecessary. The Commissioner of Taxation (Commissioner) is confident that litigation will uphold the Australian Taxation Office (ATO) view on the application of the legislation to contrived schemes, and there is no intention to adversely affect other taxpayers by making the amendments retrospective.
Assessment of impacts
4.10 Potential compliance, administrative and economic impacts of the measures in this Bill have been considered. However, this consideration concluded that the impacts on taxpayers not involved in tax planning are negligible.
Clarification of the meaning of 'eligible employee'
4.11 No group of taxpayers will be adversely affected by the clarification of section 82AAE. This will simply ensure that all taxpayers follow the Commissioner's advice about the correct interpretation of the current law.
4.12 Individuals will benefit from the greater clarity in the law. This will confirm the correct treatment of superannuation contributions that a taxpayer makes for themselves, and deny scheme promoters any opportunity to mislead any such individual taxpayers.
Removal of deductions for contributions to non-complying superannuation funds
4.13 Employers will be largely unaffected by the proposal. Although this is not a provision that is widely used, they will need to be aware of this, as it is no longer effective to make contributions to non-complying superannuation funds.
4.14 ATO records were interrogated to determine how many superannuation funds lodged tax returns for the financial year ended 30 June 1999, indicated that they were non-complying superannuation funds and paid the relevant rate of tax (47%).
4.15 Of the approximately 200 funds that did so, very few declared any employer contributions received during the year. This suggests very few employers are making contributions to non-complying superannuation funds, except of course to those participating in aggressive tax planning which are less likely to report to the ATO.
4.16 Individuals will be unaffected by the proposal. Individuals may use non-complying superannuation funds, but no tax deduction is available under current law for personal contributions to non-complying superannuation funds, so this Bill has no effect on such individuals.
4.17 Aggressive tax planners and other scheme promoters will be hindered in their efforts to market schemes which clearly attempt to achieve results outside the intent of the legislation.
4.18 The proposal will have only a small impact on the ATO. Minor education costs will be incurred to ensure that staff are aware of the change. Minor changes will be needed to some information booklets.
4.19 Costs involved in combating aggressive tax planning will be reduced, or resources will be able to be better targeted.
4.20 As is standard with any new measure, groups affected by the measures will incur small up-front costs familiarising themselves with the measures or having advisers familiarise themselves with the new law.
4.21 However, overall, these measures are expected to slightly reduce ongoing compliance costs for business and individuals, by virtue of the greater simplicity and clarity.
4.22 Businesses will benefit most from greater clarity. Deductions will be available for contributions to the same category of superannuation funds that qualify for contributions under superannuation guarantee.
4.23 Individuals who participate in tax planning activities will benefit slightly from the greater certainty in the area.
4.24 There will be no increased compliance costs for superannuation funds. Non-complying superannuation funds do not receive significant contributions from employers (except those involved in schemes), and the measures have no effect on complying superannuation funds.
4.25 The proposal will involve small additional up-front costs for the ATO, such as minor education costs to ensure that staff are aware of the change. Minor changes will be needed to some information booklets.
4.26 Closing down these schemes will enable the ATO to reduce the resources allocated to combating these particular schemes and re-allocate these resources in a way which will better target new and emerging schemes.
4.27 The measures act to protect Government revenue. There is no additional revenue expected from these measures.
4.28 Industry and media figures suggest that several billion dollars are involved in these schemes. Initial ATO estimates of the amounts involved are not as high. In any case, these amounts are not lost to revenue. Although the collection is delayed, these amounts will be collected provided that compliance action and litigation is successful.
4.29 No impacts have been identified, since we are only clarifying one aspect of the effect of the legislation and making one minor change.
4.30 Industry has reacted positively to the Assistant Treasurer's Media Release No. 35 of 30 June 2000. There is a general acceptance in the genuine superannuation community that these measures are necessary to reign in those acting outside acceptable limits.
Conclusion and recommended option
4.31 The recommended measures should be adopted. These measures will contribute significantly to the fairness, integrity and equity of the tax system by reducing the scope for minimisation of tax by taxpayers which arises from current anomalies and alleged anomalies in the current taxation legislation.