House of Representatives

Explanatory Memorandum

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

Chapter 2 - Reduction in the surcharge rates

Outline of chapter

2.1 Part 1 of Schedule 2 to this bill will amend the Superannuation Contributions Tax Imposition Act 1997 (SCT Imposition Act 1997), the Superannuation Contributions Tax (Members of Constitutionally Protected Superannuation Funds) Imposition Act 1997 (CPF Imposition Act 1997) and the Termination Payments Tax Imposition Act 1997 (TPT Imposition Act 1997) to reduce the maximum superannuation contributions and termination payments surcharge rates to 12.5% for 2004-2005, 10.0% for 2005-2006, and 7.5% for 2006-2007 and later financial years.

2.2 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 constitutionally protected funds (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.

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

Context of amendments

2.4 The Government announced in the 2004-2005 Budget that it will reduce the maximum superannuation and termination payments surcharge rates in three stages to 7.5% for 2006-2007 and subsequent years.

Summary of new law

2.5 The maximum surcharge rates will be reduced to 12.5% for 2004-2005, 10.0% for 2005-2006, and 7.5% for 2006-2007 and subsequent years.

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

Comparison of key features of new law and current law

Detailed explanation of new law

2.7 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.

2.8 Subsection 5(1AA) of the SCT Imposition Act 1997, subsection 5(1A) of the CPF Imposition Act 1997 and subsection 5(1AA) of the TPT Imposition Act 1997 provide definitions of 'maximum surcharge percentage'. Under these definitions, the maximum surcharge percentage is 13.5% for the 2004-2005 financial year, and 12.5% for 2005-2006 and later financial years.

2.9 The definition of maximum surcharge percentage in the SCT Imposition Act 1997, the CPF Imposition Act 1997 and the TPT Imposition Act 1997 will be amended to provide for the following rates:

•

for the 2004-2005 financial year - 12.5%;

•

for the 2005-2006 financial year - 10.0%; and

•

for the 2006-2007 financial year and later financial years - 7.5%.

[Schedule 2, Part 1, items 1 to 3]

2.10 The Defence Force Retirement and Death Benefits Act 1973 (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.

2.11 Under the DFRDB Act 1973, the trustee may not reduce the benefits of a member by more than the amount of the employer financed component of the benefits that accrued after 20 August 1996, as determined by the trustee in accordance with subsection 6C(3). Subsection 6C(3) of the DFRDB Act 1973 will be amended to reflect the reduction in the maximum surcharge rates. [Schedule 2, Part 2, item 4]

2.12 The Parliamentary Contributory Superannuation Act 1948 (Parliamentary Contributory Act 1948) provides for an occupational superannuation scheme for Members of the Australian Parliament. The payment of the surcharge liability in respect of surchargeable contributions of Members of the Australian 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.

2.13 Under the Parliamentary Contributory Act 1948, the Parliamentary Retiring Allowances Trust may not reduce the benefits of a member by more than the amount of the employer financed component of the benefits that accrued after 20 August 1996, as determined by the Trust in accordance with subsection 4E(3). Subsection 4E(3) of the Parliamentary Contributory Act 1948 will be amended to reflect the reduction in the maximum surcharge rates. [Schedule 2, Part 2, item 5]

2.14 The Superannuation Act 1976 (SA 1976) provides for an occupational superannuation scheme, known as the Commonwealth Superannuation Scheme (CSS), for people employed by the Australian Government 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 Commonwealth Superannuation Scheme Board (CSS Board) is liable to pay the deferred surcharge liability plus accumulated interest.

2.15 Under the SA 1976, the CSS Board may not reduce the benefits of a member by more than the amount of the employer financed component of the benefits that accrued after 20 August 1996, as determined by the Board in accordance with subsection 80A(3). Subsection 80A(3) of the SA 1976 will be amended to reflect the reduction in the maximum surcharge rates. [Schedule 2, Part 2, item 6]

2.16 The Superannuation Contributions Tax (Application to the Commonwealth - Reduction of Benefits) Act 1997 (Cth Reduction Act 1997) allows trustees of certain unfunded defined benefits superannuation schemes to reduce the benefits payable to members of such funds by no more than an amount of the employer financed component of that part of the benefits payable to the member that accrued after 20 August 1996, as determined under subsection 4(2A). Subsection 4(2A) of the Cth Reduction Act 1997 will be amended to reflect the reduction in the maximum surcharge rates. [Schedule 2, Part 2, item 7]

2.17 The Superannuation Contributions Tax (Members of Constitutionally Protected Superannuation Funds) Assessment and Collection Act 1997 (CPF Act 1997) imposes the superannuation contributions surcharge on certain members of CPFs. Surcharge assessed each year for each surchargeable CPF member, plus interest, accumulates in a 'surcharge debt account' maintained by the Commissioner of Taxation. Under subsections 15(6), 15(6AA) and 15(6A) 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. Subsection 15(6AA) applies where a superannuation interest in a CPF has been split and subsequently becomes payable. CPF members' surcharge liability is the lesser of the amount by which their surcharge debt account is in debit or the value of the employer-financed component of that part of the benefits payable to the member that accrued after 20 August 1996, as determined under either paragraph 15(6)(b), paragraph 15(6AA)(d) or paragraph 15(6A)(b), as relevant.

2.18 As a result of the proposal to reduce the surcharge rates, paragraphs 15(6)(b), 15(6AA)(d) and 15(6A)(b) will be amended to reflect the reduction in the maximum surcharge rates. [Schedule 2, Part 2, items 8 to 10]

Application and transitional provisions

2.19 The measure to reduce the surcharge rates will apply in relation to surcharge liability arising in respect of the 2004-2005 financial year and later financial years. The amendments to reduce the limit applying to CPF members (other than where a CPF ceases to be a CPF) and certain unfunded defined benefits superannuation schemes will apply to benefits that become payable on or after 1 July 2004. 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 on or after 1 July 2004. [Schedule 2, Part 3, item 11]