House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

Chapter 2 - Calculation of adjusted taxable income

Outline of chapter

2.1 This chapter explains the amendments necessary to change how a taxpayers adjusted taxable income is determined under the surcharge legislation in certain circumstances.

Context of reform

2.2 This measure was announced in the 2001-2002 Federal Budget and is designed to improve the operation of the termination payments surcharge and the superannuation contributions surcharge as they apply to employer ETPs, such as redundancies.

2.3 It is intended that taxpayers who receive moderate ETPs and who otherwise do not have high incomes should have reduced or no liability to the termination payments surcharge and superannuation contributions surcharge.

Summary of new law

2.4 This Bill provides that where an ETP is below the upper surcharge threshold for the financial year, only the amount calculated by dividing the taxable amount of the ETP by the taxpayers period of service is included in the calculation of ATI.

Detailed explanation of new law

2.5 ATI is defined in section 43 of the SCT(A & C)A 1997. The Commissioner calculates a persons ATI to determine whether superannuation contributions surcharge or termination payments surcharge are payable and if so at what rate (up to a maximum of 15%).

2.6 This Bill repeals the definition of ATI in section 43 in the SCT(A & C)A 1997 and inserts new provisions which provide 2 methods of calculating ATI which apply in different circumstances. Which method is applicable depends upon whether a person received one or more employer ETPs (as defined in paragraph (a) of the definition of ETP in subsection 27A(1) of the ITAA 1936 in the financial year and on the total amount of the ETPs). The total amount of such payments is compared to the upper surcharge threshold for the financial year (as specified in subsection 5(2) of the Superannuation Contributions Tax Imposition Act 1997 ).

2.7 For the purposes of comparison against the upper surcharge threshold for the financial year, the amount of an employer ETP used is the reduced amount of the ETP. The reduced amount of an ETP is the employer ETP less any CGT exempt component, post-June 1994 invalidity component and any part of the payment that was made from an employee share acquisition scheme.

2.8 The first case method of calculating ATI (set out in new section 7A of the SCT(A & C)A 1997) applies where a person did not receive any employer ETPs in a financial year or if they did, the sum of the reduced amounts was equal to or greater than the upper surcharge threshold for that year. In these circumstances, the calculation of ATI is the same as under the existing definition of ATI in section 43 of the SCT(A & C)A 1997. [Schedule 1, item 1, section 7A]

2.9 At present, where an employer ETP is retained (taken in cash), the taxable portion of the ETP (less the CGT exempt component, post-June 1994 invalidity component and any part of the payment that was made from an employee share acquisition scheme) is included in the calculation of the persons ATI. Where an employer ETP is rolled over to a superannuation provider the portion which accrued after 20 August 1996 of the ETP (less the CGT exempt component, post-June 1994 invalidity component and any part of the payment that was made from an employee share acquisition scheme) is included in the calculation of ATI as a surchargeable contribution.

2.10 The second case method of calculating ATI (set out in new section 7B of the SCT(A & C)A 1997) applies where a person receives one or more employer ETPs in a financial year and the total of the reduced amounts of the ETPs is less than the upper surcharge threshold for that year. In this case, the calculation of ATI will be different from the current calculation, under the existing definition of ATI in section 43 of the SCT(A & C)A 1997. [Schedule 1, item 1, section 7B]

2.11 Under the new provisions to determine the calculation of ATI, where the second case method applies and the taxpayer retains an employer ETP which has a relevant service period of 365 days or more, the following arrangement will apply. The taxable portion of the reduced amount of each employer ETP will be deducted from the persons taxable income, and an amount derived by dividing the taxable amount of the reduced amount of each employer ETP by the relevant period of service will be included in the calculation of ATI.

2.12 Where the second case method applies and the taxpayer rolls over an employer ETP which has a relevant service period of 365 days or more to a superannuation provider, the taxpayers ATI will be adjusted as follows. The portion of the reduced amount of each employer ETP that would be taxable if the employer ETP had been retained in cash, is divided by the relevant period of service and included in the calculation of ATI. The portion of the rolled over employer ETP that accrued after 20 August 1996 (calculated under subparagraph 8(2)(c)(iii) of the SCT(A & C)A 1997 as a surchargeable contribution) is deducted from surchargeable contributions for the purposes of calculating the persons ATI.

2.13 However, where the taxpayers ETP has a relevant period of service after 20 August 1996 which is less than 365 days, instead of the taxable portion of the reduced amount of the employer ETP divided by period of service being included in ATI, only the amount that is taken to have accrued after 20 August 1996 is included in ATI. This is to ensure that the taxpayer does not have a higher ATI, and possibly higher surcharge rate under the new arrangements than under the existing legislation.

Example 2.1

Theo commenced work with Jacks Investment Services on 21 August 1994. On 19 February 1997, Theo terminates employment with Jacks Investment Services and is paid an employer ETP of $25,000 which he takes in cash.

For the 1996-1997 financial year, Theo has taxable income of $86,000 (including the ETP) and surchargeable contributions of $3,600.

As the total amount of employer ETPs received by Theo in the 1996-1997 financial year is less than the upper surcharge threshold ($85,000), his ATI for surcharge purposes is worked out under the second case method. His ATI will therefore be:

($86,000 - $25,000) + ((183 days / 914 days) * $25,000) + $3,600
= $61,000 + $5,005 + $3,600
= $69,605


Since Theos ATI is less than the surcharge threshold amount ($70,000), no surcharge will be payable. Under the current arrangements, Theo would have a surcharge rate of 15%.

Example 2.2

Kate was employed by Solutions IT on 13 October 1997. She ceases work for Solutions IT on 1 September 2000 and was paid an employer ETP of $40,000 which she takes in cash.

She subsequently finds employment with another company from 1 October 2000 until 15 May 2001. On ceasing employment with the second company she receives an employer ETP of $1,000 which she also takes as cash.

For the 2000-2001 financial year, Kate has taxable income of $106,000 (including the 2 ETPs) and surchargeable contributions of $5,200.

As the total amount of employer ETPs received by Kate in the 2000-2001 financial year is less than the upper surcharge threshold ($98,955), her ATI for surcharge purposes is worked out under the second case method. Her ATI will therefore be:

($106,000 - $41,000) + ((365 days / 1055 days) * $40,000) + ((228 days / 228 days) * $1,000) + $5,200
= $65,000 + $13,838 + $1,000 + $5,200
= $85,038


Kates ATI is above the surcharge threshold amount ($81,493), and her surcharge rate will be 3.04292%. Under the current arrangements, Kate would have a surcharge rate of 15%.

Example 2.3

Stuart commenced work with Sunrise Airlines on 1 August 1991. On 1 June 2001, Stuart leaves the company and receives an employer ETP of $95,000, of which he decides to take $45,000 in cash and rollover $50,000 into his superannuation fund.

For the 2000-2001 financial year, Stuart has taxable income of $115,000 (including the retained ETP), and surchargeable contributions of $29,897.24 (including $24,297.24 representing the post-20 August 1996 amount of the rolled over ETP).

As the total amount of employer ETPs received by Stuart in the 2000-2001 financial year is less than the upper surcharge threshold ($98,955), his ATI for surcharge purposes is worked out under the second case method. His ATI will therefore be:

($115,000 - $45,000) + ((365 / 3593 days) * $95,000) + ($29,897.24 - $24,297.24)
= $70,000 + $9,650 + $5,600
= $85,250


Stuarts ATI is above the surcharge threshold amount ($81,493), and his surcharge rate will be 3.22489%. Under the current arrangements, Stuart would have a surcharge rate of 15%.

Application and transitional provisions

2.14 The amendments to the SCT(A & C)A 1997 and the TPT(A & C)A 1997 take effect from 5 June 1997. The amendments to the SCT(MCPSF)A 1997 take effect from 7 December 1997. This will provide continuity of application of the surcharge and termination payments legislation.

2.15 It is intended that a person should not be in a worse position as a result of the amendments contained in this Bill. An anti-detriment provision has been inserted in each Act to ensure that the Commissioner can only amend an assessment to reduce a persons liability to the surcharge as a result of the amendments made by this Bill. An assessment cannot be amended to increase a persons surcharge liability if the increase is only as a result of amendments made by this Bill. [Schedule 1, item 9; Schedule 2, item 8; Schedule 3, item 5]

Consequential amendments

2.16 The definition of ATI in section 43 of the SCT(A & C)A 1997 is repealed and replaced with a reference to the new methods of calculating ATI in sections 7A and 7B. [Schedule 1, item 6, section 43]

2.17 The definition of ATI in section 38 of the SCT(MCPSF)A 1997 is repealed and replaced with a reference to the SCT(A & C)A 1997. This will ensure that the definition of ATI under SCT(MCPSF)A 1997 will have the same meaning as ATI in section 43 of the SCT(A & C)A 1997 (which will refer to new sections 7A and 7B). [Schedule 2, item 5, section 38]