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 3 - Sustaining the superannuation contribution concession: context and overview

Outline of chapter

3.1 Schedule 3 to the Tax and Superannuation Laws Amendment (Increased Concessional Contributions Cap and Other Measures) Bill 2013 reduces the tax concession that individuals with income above $300,000 receive on their concessional superannuation contributions from 30 per cent to 15 per cent by imposing tax under Division 293 of the Income Tax Assessment Act 1997 . It also amends the Income Tax (Transitional Provisions) Act 1997 , the Taxation Administration Act 1953 , the Superannuation (Resolution of Complaints) Act 1993 and a number of Acts which govern the operation of some of the Commonwealth defined benefit superannuation schemes.

3.2 Superannuation contributions that are potentially affected are concessional contributions (low tax contributions) to interests other than defined benefit interests (accumulation interests) and defined benefit contributions, other than contributions that are subject to excess contributions tax. Certain contributions to interests in constitutionally protected funds, including employer contributions and defined benefit contributions, are also potentially impacted by the change. Special rules apply to certain Commonwealth judges and justices, and certain State higher level office holders.

3.3 The amendments apply in relation to contributions in respect of very high income earners made on or after 1 July 2012.

Context of amendments

3.4 High income earners receive a significantly larger tax concession on superannuation contributions than average income earners. Concessional contributions that are included in the assessable income of superannuation funds are subject to a flat rate of tax of 15 per cent regardless of the income of the individual members of the fund. If the superannuation contributions made for the individual had instead been included in their salary and wages or business income, the high income earning individual would have been taxed on this income at a marginal income tax rate of 45 per cent (excluding the Medicare levy). As a result, currently these individuals effectively receive a 30 per cent tax concession (excluding the Medicare levy) on their superannuation contributions. In contrast, average income earners are subject to a marginal tax rate of 32.5 per cent (excluding the Medicare levy) and effectively receive a 17.5 per cent tax concession (excluding the Medicare levy) on their superannuation contributions.

3.5 These amendments give effect to the 2012-13 Budget measure, 'Superannuation - reduction of higher tax concession for contributions of very high income earners' announced by the Minister for Financial Services and Superannuation on 8 May 2012 in Media Release No. 024 of 8 May 2012.

3.6 The sustaining the superannuation contribution concession measure improves the fairness of the taxation system by ensuring the tax concession received by those individuals earning more than $300,000 is more closely aligned with the concession received by average income earners.

3.7 Only around 1.2 per cent - 129,000- people contributing to super in 2012-13 will be affected by the reduced superannuation concession.

3.8 In general, the tax concession for very high income earners with contributions made to an interest other than a defined benefit interest or notional contributions in respect of a defined benefit interest is reduced from 30 per cent to 15 per cent (excluding the Medicare levy) by these changes. It is estimated that these changes will only impact around 1.2 per cent of individuals with contributions to superannuation in 2012-13.

3.9 Individuals whose total income for surcharge purposes (other than reportable superannuation contributions) and concessionally taxed superannuation contributions for an income year are above $300,000 are affected by the change. Income for surcharge purposes is a measure of income similar to that used to assess if individuals are liable for the Medicare levy surcharge. Reportable superannuation contributions are deducted from income for surcharge purposes to avoid double counting.

3.10 Individuals affected by the change are liable to pay an amount of 15 per cent of the total of concessionally taxed contributions, including defined benefit contributions, which exceed $300,000. There are some exceptions to this rule in respect of certain Commonwealth judges and justices, and certain State higher level office holders.

3.11 Broadly, superannuation contributions which attract tax concessions to which the changes apply include:

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employer contributions to accumulation interests;

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personal contributions which are claimed as an income tax deduction, generally claimed by the self-employed; and

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notional employer contributions for defined benefit interests (valued by an actuary).

3.12 Contributions that are subject to excess contributions tax in the form of either excess concessional contributions tax and/or excess non-concessional contributions tax do not attract a tax concession. Accordingly, they are not included in amounts of low tax contributions to which these changes apply.

3.13 This measure complements the low income superannuation contribution measure, which, from 1 July 2012 effectively refunds the income tax paid by superannuation providers (capped at $500 each year) on concessional contributions for individuals with adjusted taxable income up to $37,000. These individuals previously received limited or no tax concessions on their superannuation contributions.

3.14 On 5 April 2013, the Government announced further reforms to make the superannuation system fairer, including reforming the tax exemption for earnings on superannuation assets supporting income streams. In addition, individuals will be taxed at their marginal personal tax rate (rather than the top marginal tax rate) on any excess concessional contributions made from 1 July 2013 plus an interest charge. These changes are not reflected in Schedules 3 or 4 of the Tax and Superannuation Laws Amendment (Increased Concessional Contributions Cap and Other Measures) Bill 2013 or Chapters 3 to 6 of this explanatory memorandum.

Constitutional issues

State higher level office holders

3.15 The High Court ruled that the Commonwealth could not impose the superannuation contributions tax (surcharge) under legislation that was enacted in 1997 on contributions to constitutionally protected funds for State higher level office holders.

3.16 Constitutionally protected funds are operated by some state governments for their employees. These funds do not pay income tax on contributions or earnings they receive.

3.17 However, the Commonwealth has legislative power to impose tax on contributions made to a superannuation interest in a constitutionally protected fund, where those contributions are salary packaged contributions made in respect of constitutionally protected State higher level office holders. Accordingly, contributions (including defined benefit contributions) that are not salary packaged contributions made to a constitutionally protected fund by a State on behalf of individuals identified in the regulations (constitutionally protected State higher level office holders) are not subject to Division 293 tax.

3.18 Therefore, these amendments impose Division 293 tax on such salary packaged contributions to an interest in a constitutionally protected fund made in respect of constitutionally protected State higher level office holders.

Commonwealth justices and judges

3.19 The Constitution requires justices and judges of the High Court, and of other courts created by the Parliament, to receive such remuneration as determined by the Parliament and prevents the remuneration being reduced during their period in office. The imposition of Division 293 tax may in effect constitute a diminution of judicial remuneration in cases where certain defined benefit pension entitlements form part of their remuneration.

3.20 Accordingly, these amendments do not impose Division 293 tax on the contributions in respect of a defined benefit interest in a superannuation fund established under the Judges' Pensions Act 1968 .

Summary of new law

3.21 Division 293 tax is imposed at a rate of 15 per cent on very high income earners whose income and relevant concessionally taxed superannuation contributions (referred to as low tax contributions) exceed $300,000 for an income year.

3.22 Special rules for working out Division 293 tax apply to:

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individuals with defined benefit interests;

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State higher level office holders with superannuation contributions to constitutionally protected funds; and

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Commonwealth justices and judges in respect of contributions for a defined benefit interest in a superannuation fund established under the Judges' Pensions Act 1968 .

3.23 The amount of Division 293 tax is assessed by the Commissioner of Taxation (Commissioner) and is generally due and payable within 21 days of the Commissioner giving the notice of assessment. For defined benefit interests, Division 293 tax is generally deferred for payment until 21 days after the first benefit is paid from the interest. Individuals are authorised to have amounts released from certain superannuation interests to facilitate payment of Division 293 tax.

Comparison of key features of new law and current law