House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Minister for Employment and Workplace Relations and Minister for Financial Services and Superannuation, the Hon Bill Shorten MP)

Chapter 2 - Low income superannuation contribution: technical amendments

Outline of chapter

2.1 Schedule 2 to the Tax and Superannuation Laws Amendment (Increased Concessional Contributions Cap and Other Measures) Bill 2013 amends the Superannuation (Government Co-contribution for Low Income Earners) Act 2003 (Co-contribution Act) in order to make a number of technical changes to ensure the low income superannuation contribution (LISC) operates effectively.

2.2 All references to legislative provisions in this chapter are references to the Co-contribution Act unless otherwise stated.

Context of amendments

2.3 Currently, concessional contributions to superannuation are taxed at 15 per cent regardless of the individual's relevant marginal income tax rate (which may be lower than 15 per cent). As a result, individuals who have a marginal tax rate below 15 per cent pay more tax on these concessional contributions than if they had received the money as salary or wages and paid tax at their marginal income tax rate.

2.4 In order to address this inequity, the LISC was introduced in 2012 as part of the Tax Laws Amendment (Stronger, Fairer, Simpler and Other Measures) Act 2012 and applies from the 2012-13 income year.

2.5 The LISC is a payment that is designed to give a tax concession to low income earners and effectively refunds the tax paid on concessional contributions (such as superannuation guarantee payments, salary sacrificed amounts and an individual's personal contributions that are deducted) for low income earners with an adjusted taxable income (ATI) at or below $37,000. The maximum amount of this annual payment is $500.

2.6 The LISC will boost the superannuation savings of an estimated 3.6 million individuals for concessional contributions for the 2012-13 income year. This is equivalent to 30 per cent of workers who in 2009-10 only received around 1.2 per cent of superannuation concessions.

2.7 In order to ensure that the LISC operates equitably and according to its original policy intent some technical amendments are required to the existing LISC provisions.

2.8 The tax-free threshold for 2012-13 was raised from $6,000 to $18,200. With the increase in the tax-free threshold, an estimated one million additional low income earners are no longer required to lodge an income tax return. As a result, the Commissioner of Taxation (the Commissioner) will not receive income tax return information to assess eligibility for the LISC for these individuals.

2.9 The policy intent for the LISC when it was initially introduced was that individuals who are not required to submit an income tax return (for example, as they earn below the tax-free threshold) would receive the LISC based on information held by the Australian Taxation Office (ATO) about their eligibility.

2.10 The proposed amendments are required so that these individuals (where they are eligible) are entitled to the LISC without having to lodge an income tax return.

2.11 Technical amendments are also required to enhance the operation of the LISC, ensure all concessional contributions (including allocations from reserves and notional taxed contributions) are eligible for the payment and to ensure that this payment operates effectively and according to its policy intent.

Summary of new law

2.12 Schedule 2 to this Bill amends the Co-contribution Act in order to make a number of technical changes to ensure the LISC operates effectively and as intended.

2.13 Predominantly, this measure includes a technical change to introduce an estimations process that allows the Commissioner to determine a person's eligibility for the LISC.

2.14 This estimations process will be triggered when the Commissioner has insufficient information to make the determination under the existing eligibility provisions and has not already made a determination after 12 months following the relevant income year. This will allow the Commissioner to pay the LISC for low income earners (determined from third party data) who are eligible for the LISC but are not required to lodge an income tax return as intended when the LISC was first introduced.

2.15 The measure will also make technical changes to:

•

ensure that all concessional contributions for a year attract LISC, including allocations from reserves and notional taxed contributions;

•

replace the existing minimum payment rule so that any individual that is entitled to less than $10 of LISC will have their entitlement rounded up to $10;

•

enable the Commissioner to not rectify small overpayments and underpayments of the LISC that are less than $10; and

•

require tabling of quarterly and annual Parliamentary reports on the LISC with details to be specified in the regulations.

Comparison of key features of new law and current law

Detailed explanation of new law

2.16 There are five technical amendments to the LISC provisions in the Co-contribution Act which will enhance the operation of the LISC and ensure that this payment operates effectively according to its policy intent. These technical amendments include:

•

introducing an estimations process for ascertaining LISC eligibility for those taxpayers who do not need to lodge an income tax return;

•

ensuring all concessional contributions, including allocations from reserves and notional taxed contributions, attract LISC;

•

replacing the existing minimum payment rule;

•

preventing small overpayments and underpayments of LISC; and

•

introducing quarterly and annual Parliamentary reporting requirements.

Estimations process for LISC eligibility

2.17 When the LISC was introduced it was intended that when an individual does not lodge an income tax return, the Commissioner would determine eligibility for the LISC based on the information available to the ATO.

2.18 Consequently, it was intended that the Commissioner would be able to make a LISC payment on behalf of the individual if the Commissioner was reasonably satisfied that an individual was eligible for the payment based on the information the ATO held for the individual.

2.19 However, based on the current wording of the eligibility provisions in the Co-contribution Act, the Commissioner could breach his or her obligations under the Financial Management and Accountability Act 1997 unless there was a specific provision permitting the Commissioner to estimate entitlement to the LISC as a basis for making the payment.

2.20 To rectify this situation and ensure the Commissioner can pay LISC on behalf of those low income earners who are not required to lodge an income tax return, a technical amendment is required to be made to the LISC provisions to permit the Commissioner to estimate eligibility for the LISC.

Structure of the estimations process

2.21 Currently, the Commissioner determines eligibility for LISC under the existing provisions in section 12C (the 'standard process') which requires the Commissioner to establish that the individual:

•

has concessional contributions for the year;

•

has an ATI that does not exceed $37,000;

•

is not a holder of a temporary resident visa; and

•

satisfies an income test in which 10 per cent or more of their total income is derived from business or employment (known as the '10 per cent eligible income test').

2.22 The Commissioner will be required to determine eligibility for the LISC under the standard process until the estimations process is triggered.

Triggering the estimations process

2.23 The estimations process is triggered if, after 12 months following the relevant income year, the Commissioner reasonably believes that there is insufficient information to decide whether or not to make a determination that the LISC is payable (under the standard process) for that individual in respect to the relevant income year. [Schedule 2, item 7, paragraph 12C(2)(b)]

Example 2.3

In the 2012-13 income year Oskar was a low income earner with taxable income below the tax free threshold and met the eligibility requirements for the LISC. However, because he is not required to lodge an income tax return, the Commissioner does not have sufficient information to be satisfied that Oskar is entitled to the LISC under the standard process.

For that reason, 12 months after the end of the 2012-13 income year the estimations process is triggered in respect to Oskar. At that point in time, the Commissioner (who has insufficient information to determine eligibility for the LISC based on the standard process), is able to use the estimations process to determine Oskar's eligibility for the LISC using information he or she holds on Oskar from other sources.

2.24 What is considered insufficient information will be at the discretion of the Commissioner. However, it is intended to mean that the Commissioner does not, at that point in time, have within his or her possession all the information that is required for him or her to be satisfied that the individual is eligible for the LISC. The required information may include (but is not limited to) the income tax return, the member contribution statement, the payment summary for the individual, reports from other government agencies on government payments, child maintenance expenditure, or even outcomes from audits or compliance activity that is outstanding.

2.25 If a determination is not made within 12 months following the end of the income year because the Commissioner decides the individual is not entitled to the LISC, then the estimations process is not triggered. It can only be triggered when the 12 months has passed and the Commissioner has insufficient information to decide whether or not to make a determination that LISC is payable (because the Commissioner cannot be satisfied about eligibility).

Example 2.4

In the 2012-13 income year Ash had a taxable income of $140,000 and consequently lodged his income tax return for that year.

The Commissioner established that Ash was not entitled to the LISC under the standard process after receiving information from his employer and having regard to his income tax return, but did not make a determination as it cannot be made unless the individual is entitled to the LISC.

After 12 months following the end of the 2012-13 income year Ash has not received a LISC determination, however, the estimations process is not triggered because in Ash's case the Commissioner has sufficient information to know that a determination does not need to be made.

Determining eligibility for the LISC under the estimations process

2.26 Once the estimations process has been triggered, the Commissioner can then determine eligibility for the LISC which requires the Commissioner to estimate that the individual:

•

has an ATI that does not exceed $37,000; and

•

satisfies the 10 per cent eligible income test.

[Schedule 2, item 7, paragraph 12C(2)(c)]

2.27 Under this process, the Commissioner will also be required to ensure that the individual has concessional contributions for the year and is not a holder of a temporary resident visa in the same way as the standard process. [Schedule 2, item 7, paragraphs 12C(2)(a) and 12C(2)(d)]

Estimating ATI of the individual

2.28 ATI for the purposes of the LISC is defined in Schedule 3 to the A New Tax System (Family Assistance) Act 1999 (disregarding Clauses 3 and 3A of that Schedule) as including taxable income, adjusted fringe benefits total, target foreign income, total net investment loss, tax-free pension or benefit, reportable superannuation contributions less any deductible child maintenance expenditure for that year. [Schedule 2, item 7, subparagraph 12C(2)(c)(i)]

2.29 When estimating the ATI of the individual, the Commissioner must do so on the basis of evidence or information or methods reasonably available to him or her.

2.30 The information that the Commissioner may consider when estimating the individual's ATI may include a broad range of information that is already held by the Commissioner and available to him or her about the individual.

2.31 For example, this may include information that has been collected for another purpose, information from other agencies with respect to the components of an individual's ATI and an individual's member contribution statement.

2.32 The Commissioner can also use information relating to an individual's tax file number (TFN) if this has been provided to the Commissioner for another purpose.

2.33 Additionally, when estimating whether an individual's ATI exceeds $37,000, the Commissioner may treat the individual as having total deductions of $300 for the relevant income year, unless, the Commissioner has information to the contrary. Such information may indicate that the individual has a greater or smaller amount of deductions for that income year. [Schedule 2, item 7, subsection 12C(4)]

2.34 This deduction presumption is included to assist the Commissioner in making the estimation of the ATI. The taxable income component of the ATI requires the Commissioner to determine the assessable income minus the total deductions. However, as will often be the case when using the estimations process, the Commissioner will not have the individual's income tax return which is usually the primary source to determine deductions of an individual.

2.35 For that reason, this presumption allows the Commissioner to estimate the ATI on the basis of the total work related expense deductions for low income earners that are not subject to substantiation under the taxation law. If the Commissioner has any information that the individual has a higher or lower amount of total deductions, the presumption will be rebutted and the Commissioner will estimate the ATI using the deduction information at hand.

Example 2.5

In the 2012-13 income year, Celia worked as a part-time employee. Celia pays union fees and arranges to deduct $20 from each fortnightly pay for the fees.

Amongst other information, Celia's payment summary for 2012-13 recorded $520 for the year in union fees paid. As union fees are deductible, the Commissioner may take this into account in estimating Celia's adjusted taxable income instead of presuming a deduction of $300.

Estimating the 10 per cent eligible income test

2.36 The 10 per cent eligible income test for the purposes of the standard process requires the individual to have 10 per cent or more of their total income attributable to employment-related activities.

2.37 When estimating the 10 per cent eligible income test, the Commissioner would effectively first come to a view that the person has income from engaging in the activities covered under subsection 6(2) and then 'estimate' that 10 per cent of the person's total income is attributable to those activities.

2.38 However, unlike the standard process, when coming to the view that the person engaged in the employment-related activities, the Commissioner is not required to determine that the individual engaged in those employment-related activities during the relevant income year that contribution was made in. [Schedule 2, item 7, subsection 12C(5)]

2.39 This change assists the Commissioner in making the estimation. This is because in lieu of sufficient information it would be difficult to ascertain with any certainty that the employment-related activities were undertaken in the relevant income year that the contribution was made.

Making the determination that the LISC is payable based on the estimations process

2.40 If the estimations process has been triggered and the Commissioner has estimated the individual is eligible for LISC, then under the existing provisions (section 13 of the Co-contribution Act), the Commissioner must make a determination that LISC is payable in respect of that individual for the relevant income year.

2.41 To facilitate this process a minor amendment has been made to the determination provisions to ensure that in making the determination the Commissioner is not required to have regard to the income tax return of the individual lodged for that income year as is currently required when the Commissioner is considering eligibility for the LISC under the standard process. [Schedule 2, item 3, subsection 12B(3)] Consequences if the estimation is no longer accurate

2.42 A determination that the LISC is payable under the estimations process will be taken to never have been made if, after making the determination, the Commissioner obtains further information that leads the Commissioner to decide that had that information been obtained before making the determination, a determination would not have been made under the estimations process. [Schedule 2, item 13, section 12F]

2.43 This will allow the Commissioner to treat an estimations-based determination as never have being made if, subsequent to making the determination, the Commissioner receives further information that evidences that the individual was never entitled to receive a LISC payment.

2.44 There can only be one determination of eligibility for the LISC, either under the standard process or the estimations process. This provision allows the Commissioner to revisit the determination when eligibility was derived using the estimations process, if the further information received by the Commissioner leads him or her to decide that no determination should have been made.

2.45 Where that further information leads the Commissioner to decide that a smaller or larger amount of LISC is payable, then the overpayment and underpayment provisions in sections 19 and 24 will apply normally based on the Commissioner making a re-estimation under the estimations process.

Ensuring all concessional contributions, including allocations from reserves and notional taxed contributions, attract LISC

2.46 The LISC was intended to apply to all concessional contributions of a person, including allocations from reserves and notional tax contributions.

2.47 However, there is some ambiguity in the existing LISC provisions as to whether it applies to those kinds of contributions. The ambiguity is based on whether the terminology of the existing LISC provisions that refer to 'contributions made by, or for' a person include allocations from reserves or notional tax contributions which are not always able to be described as 'contribution' that is 'made'.

2.48 The key ambiguity with this terminology stems from allocations from reserves being made to the superannuation fund in one year but allocated in another year. Also, some allocations may not necessarily come from 'contributions'. Additionally, notional taxed contributions may not be based on actual 'contributions' 'made' to a fund.

2.49 To overcome this situation and provide clarity to those individuals who receive allocations from reserves and notional taxed contributions the wording in the LISC provisions are altered to refer to a person's 'concessional contribution'. [Schedule 2, items 6 and 7, paragraphs 12C(1)(a) and 12C(2)(a)]

2.50 The term 'concessional contribution' takes its meaning from the Income Tax Assessment Act 1997 and includes, amongst other amounts, allocations from reserves and notional taxed contributions. [Schedule 2, item 14, section 56]

2.51 This measure also makes some consequential amendments as a result of including allocations from reserves and notional tax contributions by removing the current section 12D and moving the content of that provision into the relevant eligibility provisions. [Schedule 2, items 8 and 10]

Preventing small overpayments and underpayments of LISC

2.52 Under the existing LISC provisions, the Commissioner may be liable to pay underpayments and recover overpayments directly from individuals or funds that the LISC payment was made into.

2.53 However, there are significant administrative costs when the Commissioner is required to pay or recover very small amounts as a consequence of underpayments or overpayments. These types of situations are not likely to be common.

2.54 To alleviate this administrative burden these amendments will ensure that overpayments and underpayments will not occur for amounts under $10. [Schedule 2, item 12, subsections 12E(3) and (4)]

Replacing the existing minimum payment rule

2.55 Under the current LISC provisions, there is a minimum payment rule that applies so that if the amount of LISC payable is less than $20, then no LISC is paid in respect of the individual.

2.56 However, these amendments will change the minimum payment rule so that any individual who is entitled to be paid less than $10 of LISC on their behalf will have their entitlement rounded up to $10. [Schedule 2, item 11, paragraph 12E(2)(c)]

2.57 Unlike the overpayments and underpayments (which do not apply to amounts under $10 because of the administrative costs of paying or recovering those small amounts), the minimum payment rule will require the Commissioner to pay out LISC payments of no less than $10 on an initial determination of eligibility which will be undertaken for every taxpayer.

Quarterly and annual parliamentary reporting requirements

2.58 The reporting requirements that apply to co-contributions under section 54 of the Co-contribution Act do not currently apply to LISC.

2.59 However, to ensure that Parliament is kept informed of how LISC is operating and details about how much LISC is being paid these amendments will introduce a requirement that the Commissioner must give the Minister a quarterly and annual report to be tabled in Parliament regarding the LISC. [Schedule 2, item 13, section 12G]

2.60 Both the quarterly and annual reports must include information about the beneficiaries of, and amounts of, LISC with the details of that information to be prescribed in the regulations.

Application date

2.61 These amendments apply to the 2012-13 income year and later income years. [Schedule 2, item 15]

2.62 These amendments apply retrospectively, however, payments of LISC are not made until after the end of the 2012-13 income year so the practical effect of these amendments is that they apply prospectively to ensure the law operates as intended.

Consequential amendments

2.63 In order to give effect to this measure a number of consequential amendments are required to various LISC provisions. [Schedule 2, items 1, 2, 4, 5 and 9]

2.64 These consequential amendments are very minor in nature and predominantly include wording changes to headings and other provisions to give effect to the amendments required by this measure.

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Low income superannuation contribution: technical amendments

2.65 Schedule 2 to the Tax and Superannuation Laws Amendment (Increased Concessional Contributions Cap and Other Measures) Bill 2013 is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 .

Overview

2.66 Schedule 2 to this Bill amends the Superannuation (Government Co-contribution for Low Income Earners) Act 2003 in order to make a number of technical changes to ensure the low income superannuation contribution (LISC) operates effectively.

Human rights implications

2.67 This Bill does not engage any of the applicable rights or freedoms.

Conclusion

2.68 This Bill is compatible with human rights as it does not raise any human rights issues.

Minister for Financial Services and Superannuation, the Hon Bill Shorten