House of Representatives

Explanatory Memorandum

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

Chapter 3 - Reduction of the superannuation surcharge

Outline of chapter

3.1 Part 1 of Schedule 2 to this bill will amend the SCT Imposition Act 1997, the CPF Imposition Act 1997 and the TPT Imposition Act 1997 to reduce the superannuation contributions and the termination payments surcharge rates by 1/10th of their current levels in each of the 3 income years commencing from 1 July 2002.

3.2 Part 2 of Schedule 2 to this bill will amend the provisions which impose a limit on the maximum amount of surcharge payable by members of CPFs and the maximum reduction of benefits of members of certain unfunded defined benefits superannuation schemes. These limits reflect the current maximum surcharge rates, which will be reduced under this measure.

3.3 Part 3 of Schedule 2 to this bill sets out the application of the amendments in Parts 1 and 2.

Context of amendments

3.4 On 5 November 2001, in the election policy document A Better Superannuation System , the Government foreshadowed a number of measures designed to enhance the overall attractiveness, accessibility and security of superannuation.

3.5 In line with the foreshadowed measures, the Government announced in the 2002-2003 Federal Budget the implementation of the commitment to reduce the superannuation and termination payments surcharge rates by 1/10th of their current levels for the next 3 income years commencing from 1 July 2002. As a consequence, the maximum surcharge rates will be reduced to 13.5% for 2002-2003, 12% for 2003-2004 and 10.5% for 2004-2005.

3.6 The reduction in the surcharge rates is intended to ensure that superannuation remains attractive and encourages all employees to save for their retirement. The amendments in this Schedule will have a beneficial impact on people whose superannuation contributions are subject to the surcharge.

3.7 A related issue arising from the reduction of the surcharge rates is the consequences for the limits that apply to the amount of surcharge payable by members of CPFs and the amount of reduction of benefits for members of certain unfunded defined benefits superannuation schemes. The limits reflect the current maximum surcharge rates which will be reduced under this measure.

Summary of new law

3.8 The maximum surcharge rates and the method of calculating rates within the upper and lower thresholds will be amended so that all rates will be reduced by 1/10th of their current levels for each of the next 3 income years commencing on 1 July 2002.

3.9 Where a limit of 15% applies in relation to the surcharge liability of members of CPFs and the reduction of benefits of members of certain unfunded defined benefits superannuation schemes, the limit will be amended to reflect the reducing maximum surcharge rates.

Detailed explanation of new law

Reduction in the surcharge rates

3.10 The superannuation contributions surcharge is determined under the SCT Imposition Act 1997 in relation to superannuation contributions other than contributions to CPFs. Superannuation contributions surcharge in relation to contributions to CPFs is determined under the CPF Imposition Act 1997. The termination payments surcharge is determined under the TPT Imposition Act 1997.

Application of maximum surcharge rate

3.11 Subsection 5(2) of the SCT Imposition Act 1997, subsection 5(3) of the CPF Imposition Act 1997 and subsection 5(2) of the TPT Imposition Act 1997 provide that the maximum surcharge rate of 15% applies where a members adjusted taxable income for a financial year is $85,000 (as indexed) or a higher amount. Adjusted taxable income is determined under section 7A or 7B of the SCT Act 1997. In general terms, the Commissioner determines a persons adjusted taxable income by adding to a persons taxable income, surchargeable superannuation contributions and reportable fringe benefits.

3.12 Under paragraphs 5(3)(c), (d) and (f) of the SCT Imposition Act 1997 and paragraphs 5(4)(c), (d) and (f) of the CPF Imposition Act 1997, in certain circumstances where a members TFN is not known, a 15% surcharge rate may apply in relation to the superannuation contributions of the member.

3.13 The references to 15% in the SCT Imposition Act 1997, the CPF Imposition Act 1997 and the TPT Imposition Act 1997 reflect current maximum surcharge rates which will be reduced over the 3 income years commencing from 1 July 2002. The references to 15% will be replaced by the term maximum surcharge percentage, which will be defined as:

(a)

for the 2002-2003 financial year - 13.5%;

(b)

for the 2003-2003 financial year - 12%; and

(c)

for each later financial year - 10.5%.

[Schedule 2, Part 1, items 1, 5, 6, 9, 13, 14, 17 and 21]

Formulae to calculate surcharge rates

3.14 In addition to reducing the maximum surcharge rates by 1/10th of their current levels for each of the 3 income years commencing from 1 July 2002, each formula for determining the applicable rate between the lower and upper surcharge thresholds will be replaced with a new formula.

3.15 Subsection 5(1) of the SCT Imposition Act 1997, the CPF Imposition Act1997 and the TPT Imposition Act 1997 will be amended to insert new formulae to calculate surcharge rates so that the rate calculated will be 1/10th of their current levels for each of the 3 income years from 1 July 2002. [Schedule 2, Part 1, items 3, 11 and 19]

3.16 Definitions of the terms higher income amount and lower income amount will be included in the SCT Imposition Act 1997. Higher income amount is defined as $103,507 for the 2001-2002 financial year and that amount as indexed for later financial years. Lower income amount is defined as $85,242 for the 2001-2002 financial year, and that amount as indexed for later financial years. [Schedule 2, Part 1, items 1, 9 and 17]

3.17 The terms higher income amount and lower income amount are used in the new formulae and also replace references in the Acts to the original threshold amounts of $70,000 and $85,000. [Schedule 2, Part 1, items 2, 4, 10, 12, 18 and 20]

3.18 For the 2002-2003 financial year and later financial years the higher and lower income amounts will be indexed in line with average weekly ordinary time earnings under the indexation provisions. These provisions are section 7 of the SCT Imposition Act 1997, section 7 of the CPF Imposition Act 1997 and section 6 of the TPT Imposition Act 1997. [Schedule 2, Part 1, items 7, 8, 15, 16, 22 and 23]

Reduction of the surcharge cap, etc.

3.19 The CPF Act 1997 imposes superannuation contributions surcharge on members of CPFs. Surcharge assessed each year for each CPF member, plus interest, accumulates in a surcharge debt account maintained by the Commissioner. Under subsections 15(6), 15(6A) (inserted by TLAA5 2001 ) and 15(6A) (included in the Family Law Amendment Act 2001) of the CPF Act 1997 when a benefit becomes payable to a CPF member or when a CPF ceases to be a CPF, the CPF member is liable to pay the surcharge. CPF members surcharge liability is the lesser of the amount by which their surcharge debt account is in debit or 15% of the employer-financed component of that part of the benefits payable to the member that accrued after 20 August 1996.

3.20 The references to 15% in subsection 15(6) and both of the subsections 15(6A) of the CPF Act 1997 reflect the current maximum surcharge rates. As a result of the proposed reduction in the surcharge rates over each of the 3 income years commencing from 1 July 2002, the references to 15% will be amended to reflect the proposed reduction in the maximum surcharge rates. Subsection 15(6A) inserted into the CPF Act 1997 by the Family Law Amendment Act 2001, which has not yet commenced, applies where a superannuation interest in a CPF has been split and subsequently becomes payable. Schedule 6 to this bill will rename subsection 15(6A) as subsection (15(6AA). [Schedule 2, Part 2, items 29 to 31]

3.21 The Cth Reduction Act 1997 allows trustees of certain unfunded defined benefit superannuation schemes to reduce the benefits payable to members of such funds by no more than 15% of the employer financed component of that part of the benefits payable to the member that accrued after 20 August 1996. The reference to 15% in subsection 4(1) of the Cth Reduction Act 1997 reflects the current maximum surcharge rate and will be amended to reflect the proposed reduction in the maximum rates over each of the 3 income years commencing from 1 July 2002. [Schedule 2, Part 2, items 27 and 28]

3.22 The Superannuation Act 1976 provides for an occupational superannuation scheme, known as the CSS, for people employed by the Commonwealth and for certain other people. The payment of the surcharge liability in respect of CSS members surchargeable contributions is deferred until a benefit is paid. When a benefit becomes payable, the CSS Board is liable to pay the deferred surcharge liability plus accumulated interest.

3.23 Under subsection 80A(3) of the Superannuation Act 1976 the CSS Board may not reduce the benefits of a member by more than 15% of the employer financed component of that part of the benefits payable to the member that accrued after 20 August 1996. The reference to 15% reflects the current maximum surcharge rate and will be amended to reflect the proposed reduction in the maximum rates over each of the 3 income years commencing from 1 July 2002. [Schedule 2, Part 2, item 26]

3.24 The Parliamentary Contributory Act 1948 provides for an occupational superannuation scheme for Commonwealth Members of Parliament. The payment of the surcharge liability in respect of surchargeable contributions of Members of Parliament is deferred until a benefit is paid. When a benefit becomes payable the Parliamentary Retiring Allowances Trust is liable to pay the deferred surcharge liability plus accumulated interest.

3.25 Under subsection 4E(3) of the Parliamentary Contributory Act 1948 the Parliamentary Retiring Allowances Trust may not reduce the benefits of a member by more than 15% of the employer financed component of that part of the benefits payable to the member that accrued after 20 August 1996. The reference to 15% reflects the current maximum surcharge rates and will be amended to reflect the reduction in the maximum rates over each of the 3 income years commencing from 1 July 2002. [Schedule 2, Part 2, item 25]

3.26 The DFRDB Act 1973 generally provides for the payment of retirement benefits to certain defence force employees. The payment of the surcharge liability in respect of such employees superannuation contributions is deferred until a benefit is paid. When a benefit becomes payable the trustee of the fund is liable to pay the deferred surcharge liability plus accumulated interest.

3.27 Under subsection 6C(3) of the DFRDB Act 1973 the trustee may not reduce the benefits of a member by more than 15% of the employer financed component of that part of the benefits payable to the member that accrued after 20 August 1996. The reference to 15% reflects the current maximum surcharge rates and will be amended to reflect the proposed reduction in the maximum rates over each of the 3 income years commencing from 1 July 2002. [Schedule 2, Part 2, item 24]

Application and transitional provisions

3.28 The measure to reduce the surcharge rates will apply in relation to surcharge liability arising in respect of the 2002-2003 financial year and later financial years. [Schedule 2, Part 3, item 32]

3.29 The amendments to reduce the limit applying to CPF members (other than where a CPF ceases to be a CPF) and certain unfunded defined benefit superannuation schemes will apply to benefits that become payable on or after 1 July 2002. Where a CPF ceases to be a CPF and a member becomes liable to pay the surcharge, the amendments will apply where a CPF ceases to be a CPF after 1 July 2002. Where a superannuation interest in a CPF has been split and subsequently becomes payable, the amendment to reduce the limit applying to CPF members will apply to the payment of benefits after the commencement of the Family Law Amendment Act 2001. [Schedule 2, Part 3, items 33 to 35]

Consequential amendments

3.30 There are no consequential amendments relating to this measure.