Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)Chapter 4 - Regulation impact statement
Scope of this regulation impact statement
4.1 The 2001-2002 Federal Budget announced a package of amendments to the termination payments surcharge and the superannuation contributions surcharge legislation.
4.2 The amendments will improve the operation of the surcharge legislation as it applies to employer ETPs, such as redundancies.
4.3 This regulation impact statement deals with the 3 announced amendments.
Policy objective
4.4 The objective of the amendments is to improve the overall equity of the surcharge legislation. The issues specifically addressed by the amendments are:
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- where an employer ETP is received after 19 August 2001, the retained amount of the payment is potentially surchargeable (including any amounts which may relate to pre-20 August 1996 service - that is, before the date of the original 1996-1997 Federal Budget announcement);
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- certain individuals who would not normally be subject to the surcharge may become liable to pay the surcharge in a given year as a consequence of receiving an employer ETP;and
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- some individuals may be faced with an effective tax rate greater than the top marginal income tax rate plus the Medicare levy on their employer ETP due to the interaction of surcharge and the RBL systems.
Implementation options
4.5 The approach proposed as being appropriate to address the issues identified involves amendments to the surcharge legislation.
4.6 The first amendment is to the existing transitional arrangements.
4.7 Currently, as a transitional measure until 19 August 2001, taxpayers are liable for the termination payments surcharge only on the portion of the termination payment that accrued after the surcharge was announced on 20 August 1996. The amendment will remove the sunset provisions and continue to apply the termination payments surcharge only to the portion of the payment that accrued after 20 August 1996, when the surcharge commenced.
4.8 The second amendment will change how a taxpayers adjusted taxable income is determined under the surcharge legislation.
4.9 Under the proposed arrangements, only the taxable amount of the termination payment divided by the taxpayers period of service will be included in the calculation of adjusted taxable income, compared with either the full taxable or post-20 August 1996 amount at present. This will mean that taxpayers who receive moderate termination payments and who otherwise do not have high incomes will have a reduced or no surcharge liability.
4.10 This change will apply only for termination payments less than the upper surcharge threshold (e.g. $98,955 in 2000-2001, indexed to average weekly ordinary time earnings). For termination payments equal to or greater than the upper surcharge threshold, the entire payment will continue to be included in the taxpayers adjusted taxable income.
4.11 This second amendment will apply to all employer ETPs made since 20 August 1996.
4.12 The third amendment will exempt the excessive component of an employer ETP from liability to the termination payments surcharge, while retaining its liability to the top marginal income tax rate of 47% plus the Medicare levy as an excessive component of taxable income.
4.13 This third amendment will apply to payments received after 7.30 pm, by legal time in the Australian Capital Territory, on 22 May 2001.
Assessment of impacts
4.14 Each of the amendments set out in the previous paragraphs specifically deals with an issue that has been identified as needing to be addressed to enhance the equity of the surcharge regime. The impact of the amendments will be to reduce the amount of surcharge payable as a result of receiving certain termination payments, and to improve the overall operation of the surcharge legislation.
4.15 The impact groups affected by these amendments are:
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- superannuation providers;
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- certain individuals who received an employer ETP after 20 August 1996; and
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- the ATO.
4.16 Superannuation providers are currently required to report certain information to the ATO for surcharge purposes. For the 1998-1999 financial year, 18,390 administrators lodged statements on behalf of superannuation providers.
4.17 Where an employer ETP has been rolled over to a superannuation provider, additional reporting by the provider will now be required. This is to enable the ATO to calculate the notional value of an employer ETP (i.e. the taxable amount of the termination payment divided by the taxpayers period of service). This notional value is used in determining a taxpayers adjustable taxable income for surcharge purposes.
4.18 Employer ETPs rolled over to a superannuation provider are accompanied by an ETP rollover statement. Currently, these statements are used by superannuation providers for essentially internal purposes. As a consequence of the announced changes, superannuation providers will be required to provide information from the statement to the ATO. This will require most superannuation providers to institute systems changes so the information is recorded and reported to the ATO.
4.19 However, most employer ETPs are taken as cash, and only a small proportion (possibly 10%) are rolled over.
4.20 The ATO will be undertaking the bulk of the work necessary to implement the proposed amendments. A significant amount of this work will involve giving effect to the backdated aspects of the proposal. In this respect, the ATO will be writing to all taxpayers who are likely to benefit from the changes, seeking additional information to facilitate reassessment and payment of any refunds.
4.21 The proposed amendments are expected to result in a revenue cost of $14 million in 2001-2002, $21 million in 2002-2003, $17 million in 2003-2004 and $21 million in 2004-2005.
4.22 There will be a potential reduction, or no surcharge liability, in the surcharge payable on certain termination payments for taxpayers who receive moderate termination payments and who otherwise do not have high incomes. This may particularly benefit employees with reasonable periods of service who receive an employer ETP on becoming redundant.
4.23 The amendments to the surcharge legislation were developed following consultation between the Government, various departments and the Commissioner, in response to concerns raised by taxpayers.
4.24 Following the 2001-2002 Federal Budget announcement, the measures were raised with the superannuation industry in the context of a regular discussion on business systems. No significant concerns or issues in respect of the proposed reporting requirements were raised by the industry at that meeting.
Conclusion and recommended option
4.25 The amendments to the surcharge legislation will provide an appropriate balance between the objective of improving the equity of the arrangements, while maintaining the integrity of the superannuation contributions surcharge regime.