House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP)

Chapter 4 - Amendments to reportable employer superannuation contributions definition

Outline of chapter

4.1 Schedule 4 to this Bill amends the definition of 'reportable employer superannuation contributions' in the Taxation Administration Act 1953 (TAA 1953) to exclude certain employer contributions to superannuation made for the benefit of an employee where the amount of additional contribution must be made pursuant to some requirement that the employee cannot influence.

Context of amendments

4.2 The 'reportable employer superannuation contributions' definition was inserted into Schedule 1 to the TAA 1953 by the Tax Laws Amendment (2009 Measures No. 1) Act 2009 .

4.3 Reportable employer superannuation contributions are employer contributions to superannuation in addition to the superannuation guarantee charge of 9 per cent made for an individual's benefit where the individual has or had some capacity, or might reasonably be expected to have or have had some capacity to influence the size of the contribution or the way in which the contribution was made so that assessable income was reduced.

4.4 The contributions will typically be those made under effective 'salary sacrifice' arrangements. However, the definition also includes other contributions made for an individual's benefit that the individual has capacity to influence.

4.5 Reportable employer superannuation contributions have been assessed as income in determining eligibility for a range of means-tested government assistance programs in the tax and transfer system, since 1 July 2009.

Summary of new law

4.6 Schedule 4 amends the 'reportable employer superannuation contributions' definition to clarify that it does not include any contributions to superannuation that are made for an employee's benefit pursuant to an 'industrial instrument' as defined in section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) or the rules of a superannuation fund.

4.7 The former Minister for Financial Services, Superannuation and Corporate Law announced in Media Release No. 080 of 30 June 2010 that the Government would amend the reportable employer superannuation contributions definition to exclude additional employer contributions that are prescribed in legislation or other requirement that neither the employee nor their employer can directly control.

4.8 These amendments have effect from 1 July 2009, which is when the definition was first enacted.

Comparison of key features of new law and current law

Detailed explanation of new law

4.9 These amendments clarify that the reportable employer superannuation contributions definition extends to all applicable contributions made for an individual's benefit in respect of an income year irrespective of when they are made. This follows some uncertainty at the scope of the phrase 'amount contributed' in the initial wording of subsection 16-182(1) of the TAA 1953.

4.10 The amendments mean that additional contributions made for a person's benefit either before or after the end of an income year that are in respect of the income year are reportable employer superannuation contributions, as well as amounts contributed for the individual's benefit during the year that are in respect of the year. [Schedule 4, items 1 and 2, subsection 16-182(1)]

4.11 These amendments also confirm that an amount contributed before or after the end of an income year that is in respect of the income year and that the individual has or has had, or might reasonably be expected to have or have had, capacity to influence to be made in such a way that assessable income is reduced are reportable employer superannuation contributions. [Schedule 4, item 3, paragraph 16-182(1)(d)]

Example 4.5

Michael is an employee of JYU Pty Ltd (JYU). Michael has entered an effective salary sacrifice agreement with JYU that means 2 per cent of his fortnightly pay is contributed to Michael's superannuation fund in addition to the compulsory 9 per cent superannuation guarantee contribution. JYU typically makes contributions to Michael's superannuation fund on the 25th day of the month after the month in which Michael's salary is paid. On this occasion, the 11 per cent contribution made on Michael's behalf, including the 2 per cent 'salary sacrificed' contribution, is made on 25 July following the relevant income year.

Michael has capacity to influence the making of this additional 2 per cent contribution in a way that his assessable income is reduced so that it is a reportable employer superannuation contribution. Because the additional contribution made on 25 July is made in respect of the preceding income year, it will be considered a reportable employer superannuation contribution and included in income when determining Michael's eligibility for relevant means-tested government assistance payments for the previous income year.

4.12 These amendments also revise the reportable employer superannuation contributions definition to ensure that it does not include additional contributions to superannuation made on behalf of an employee as a result of some action or inaction by the employee if the contributions are required by an 'industrial instrument' or rules of a superannuation fund and the employee had or has no capacity to influence, and cannot reasonably be expected to have or have had, capacity to influence, the content of that requirement. [Schedule 4, item 4, subsection 16-182(5)]

4.13 Industrial instrument is defined in section 995-1 of the ITAA 1997 as an 'Australian law or an award, order, determination or industrial agreement in force under an Australian law'.

4.14 Australian law is defined in section 995-1 of the ITAA 1997 and means a law of the Commonwealth Parliament or a state or territory parliament. It includes primary legislation and subordinate legislation, being laws made by the executive arm of government with authorisation of Parliament such as regulations, rules, by-laws, proclamations, deeds and notices.

Example 4.6

Rodger's employer is required to make an employer contribution for Rodger's benefit under the deed of the superannuation fund into which Rodger's employer contributes. This deed is subordinate legislation under a provision of state legislation. The amount of the contribution is prescribed in the deed and is based on the amount of personal superannuation contribution made by Rodger. For example, Rodger can elect to contribute 0 per cent, 5 per cent or 8 per cent of his salary as a personal after-tax contribution. The deed requires that if Rodger elects to contribute 0 per cent, 5 per cent or 8 per cent, his employer must contribute 9 per cent, 11.5 per cent or 13 per cent respectively. Rodger elects to contribute 8 per cent of his salary as a personal after-tax contribution. His employer contributes 13 per cent to Rodger's superannuation as required.

None of the amount the employer contributes is a reportable employer superannuation contribution as the additional employer contributions are required by an Australian law. Neither Rodger nor his employer has capacity to influence the requirement for the additional contribution to be made or its size as the contribution and its amount are determined by the deed. None of Rodger's personal after-tax superannuation contributions are reportable employer superannuation contributions as they are made from his assessable income.

4.15 'Australian law' also includes any international instrument that has the force of law in Australia. Examples include international conventions, model laws, international agreements or international rules that are legislated as having the force of law by an Australian Parliament. Additional contributions that must be made for an individual's benefit under an international instrument as a result of some action or inaction of the individual are not reportable employer superannuation contributions to the extent the requirement for the contributions and their size are prescribed in the instrument.

Example 4.7

Rani's employer is required to make a 6 per cent contribution for Rani's benefit in accordance with an international agreement that has the force of law in Australia where Rani makes a 7 per cent or greater personal after-tax contribution. Rani has no capacity to influence, and could not reasonably be expected to have capacity to influence, the content of the requirement for this contribution to be made or its size as the requirement is contained in an international agreement. The international agreement was negotiated between Australia and other foreign nations. None of the 6 per cent contribution made by Rani's employer is a reportable employer superannuation contribution and none of the 7 per cent personal after-tax contribution made by Rani is a reportable employer superannuation contribution as the amounts are included in Rani's assessable income.

4.16 The definition of 'industrial instrument' includes 'an award, order, determination or industrial agreement in force under an Australian law', which includes a modern award or enterprise agreement as defined in the Fair Work Act 2009 .

4.17 These amendments mean that the reportable employer superannuation contributions definition does not include contributions that are required by a modern award or enterprise agreement to the extent that the individual has no capacity to influence the content of the modern award or enterprise agreement as they relate to the requirement for the contribution to be made or the size of the contribution. So long as the employee has no capacity to influence the content of the requirement for the additional contribution to be made or the size of the contribution, then there will be no reportable employer superannuation contribution.

Example 4.8

Thomas is an employee of MHT Pty Ltd (MHT). Thomas' employment conditions are governed by an enterprise agreement that was negotiated between MHT and workplace and union representatives. Thomas was not involved in the negotiations and had no involvement in the preparation of the enterprise agreement, aside from voting on it. The terms of the enterprise agreement provide that MHT will make an additional 0.75 per cent, 1.75 per cent or 2.75 per cent employer contribution if Thomas elects to contribute 3 per cent, 4 per cent or 5 per cent of his salary as a personal after-tax contribution. Thomas elects to contribute a 5 per cent personal after-tax contribution. MHT makes an additional 2.75 per cent contribution as required.

None of the amount MHT contributes is considered a reportable employer superannuation contribution as the additional 2.75 per cent contribution is required to be made under an Australian law, being the enterprise agreement entered between MHT and its employees. None of Thomas' personal after-tax superannuation contributions are reportable employer superannuation contributions as they are made from his assessable income.

4.18 These amendments also mean the definition of reportable employer superannuation contributions excludes additional contributions that are required to be made for an individual's benefit by the rules of a 'superannuation fund' (as defined in section 995-1 of the ITAA 1997).

4.19 However, a contribution remains a reportable employer superannuation contribution to the extent that an individual has or has had capacity to influence the content of the requirement for the contribution to be made. Examples include additional employer contributions made under a common law employment contract whose terms and conditions the employee has influenced or additional employer contributions made on behalf of an employee as part of some negotiated remuneration package.

Example 4.9

Charlotte has a common law employment contract with her employer, KPT Pty Ltd (KPT). The contract governs the terms and conditions of Charlotte's employment and was settled following negotiations between Charlotte and KPT. KPT made it clear to Charlotte during negotiations that she could influence the contents of the contract. Under the contract, if Charlotte elects to make a 5 per cent personal superannuation contribution from her assessable income, this will be matched by a 2 per cent employer contribution from KPT (in addition to the compulsory 9 per cent superannuation guarantee contribution). Charlotte's 5 per cent contribution from assessable income is not a reportable employer superannuation contribution. Because Charlotte had capacity to influence the terms of the contract and the making of the additional employer contribution, the additional 2 per cent employer superannuation contribution is a reportable employer superannuation contribution.

Example 4.10

Tina is one of two trustees of the Michaels Family self managed superannuation fund. The other trustee is her husband, Peter. Tina is also an employee of KJY Pty Ltd (KJY). Under the Michaels Family self managed superannuation fund deed (deed), KJY is required to contribute 15 per cent of Tina's fortnightly pay to the fund. The contents of the deed were negotiated between Tina and Peter with the assistance of their tax agent. Tina had full capacity to influence the content of the deed as it relates to the requirement for the amount of contribution exceeding the compulsory 9 per cent superannuation guarantee contribution to be made (being 6 per cent).

Because Tina had capacity to influence the requirement in the deed for this additional 6 per cent contribution to be made, the fact it is required pursuant to the rules of a superannuation fund does not exclude it from the reportable employer superannuation contributions definition. The 6 per cent contribution is a reportable employer superannuation contribution.

4.20 These amendments also do not alter the application of paragraph 16-182(1)(d) of the TAA 1953 of the reportable employer superannuation contributions definition. That is, any contributions to superannuation made on behalf of an employee that the employee has influenced to be made in such a way that assessable income is reduced are reportable employer superannuation contributions even if the requirement for making of the contribution or their size are prescribed by or under an 'industrial instrument' or rules of a superannuation fund.

Example 4.11

Kurt is required to make a prescribed personal superannuation contribution to his superannuation fund by a legislative instrument. This instrument allows Kurt to elect to have the amount of the contribution paid from post-tax salary or he can choose to enter into an arrangement to 'salary sacrifice' the prescribed personal superannuation contribution and have his employer contribute the amount from his pre-tax salary. Kurt has exercised the option to 'salary sacrifice' his required contribution and has it paid from his pre-tax income. Because Kurt has influenced the way his superannuation contribution is made so that it reduces his assessable income, the amount of the contribution is a reportable employer superannuation contribution. This is the case notwithstanding that the amount of the contribution is required by a legislative instrument.

Example 4.12

Lana is an employee of ZXO Pty Ltd (ZXO). Lana's employment conditions are governed by an enterprise agreement that was negotiated between ZXO and its employees. Lana had no capacity to influence the terms of this agreement. In particular, Lana had no capacity to influence a clause of the agreement that requires 3 per cent of all employees' fortnightly salaries to be contributed to the employer's default superannuation fund. This contribution is in addition to the compulsory 9 per cent superannuation guarantee contribution.

Under the terms of the enterprise agreement, employees may elect to have the 3 per cent contribution paid to them as assessable income. Because Lana has capacity to influence the way the 3 per cent contribution is made so that assessable income is reduced by electing to have the contribution made to superannuation rather than receive assessable income, the amount of the 3 per cent contribution is a reportable employer superannuation contribution.

Application and transitional provisions

4.21 These amendments commence retrospectively from 1 July 2009, which is the date the reportable employer superannuation contributions definition commenced, so that the relevant contributions will never have fallen within the definition. [Schedule 4, item 5]

4.22 The retrospective application of these amendments has no adverse implications for taxpayers as these amendments exclude particular contribution amounts that would otherwise have been caught by the reportable employer superannuation contributions definition and assessed as income for certain means-tested tax and transfer system programs.