HOUSE OF REPRESENTATIVES

Explanatory Memorandum

(Circulated by the authority of the Treasurer, the Hon. John Dawkins, M.P.)

Chapter 1 - Limits on deductions for superannuation contributions

Limits on deductions for superannuation contributions

Summary of proposed amendments

Purpose of amendment: To limit the amount of the deductions available to an employer or serf employed person for contributions to a superannuation fund.

Date of Effect: 1994-95 year of income and all subsequent years.

Background to the legislation

The Income Tax Assessment Act 1936 (the Act) and the Occupational Superannuation Standards Act 1987 (the OSS Act) contain provisions which attempt to limit the funding of excessive superannuation benefits in superannuation funds. These provisions operate in conjunction with the reasonable benefit limit rules in the OSS Act to limit the amount of concessionally taxed superannuation benefits available to a person.

Under the OSS Act and its associated regulations, a superannuation fund cannot accept deductible superannuation contributions which exceed the amount necessary to fund superannuation benefits up to the person's reasonable benefit limit. The OSS Regulations contain complex formulas for determining the maximum deductible contributions which can be received by a superannuation fund.

Subsections 82AAC(2), (2A) and 82AAT(2) of the Act also limit the funding of excessive superannuation benefits in a superannuation fund. Under subsection 82AAC(2), an employer is not entitled to a deduction for superannuation contributions for the benefit of employees, if the employer contributes to more than two superannuation funds (known as the 'two fund rule'). An exception is where the employer contributes to three superannuation funds and one of those funds was established by a Commonwealth, State or

Territory law and was in existence before 1 July 1990 (subsection 82AAC(2A)).

Under subsection 82AAT(2), a self-employed person's deduction for superannuation contributions is limited to the lesser of:

•

$3,000 plus 75% of the amount of contributions exceeding $3,000; and

•

the person's maximum deductible contributions as determined under the Income Tax Regulations (ie., the amount necessary to fund superannuation benefits at the person's reasonable benefit limit as determined under the OSS Regulations).

Explanation of proposed amendments

The proposed amendments will replace the existing two fund rule for employers, with a set dollar limit on the amount of the deductible superannuation contributions an employer can make on behalf of employees. The maximum deductible contributions a self employed person can make will also be based on a set dollar limit.

As a consequence of these amendments, it is proposed that superannuation funds will no longer have an obligation to monitor the excessive funding of superannuation benefits. This change will require consequential amendments to OSS legislation to remove the existing complex benefit funding limits.

Employer Superannuation Contributions

Under the proposed amendments, an age based limit will be placed on the amount of deductible employer superannuation contributions made for the benefit of each employee during a year of income. However, in limited circumstances, an employer may elect to use a standard contribution limit [Clause 4].

Age based Limit on Employer Contributions

The total deductions allowable to an employer for superannuation contributions made for the benefit of an employee must not exceed the 'employee's deduction limit', unless the employer elects to use the standard contribution limit (see discussion below). The age based limits will also apply to the total deductions for superannuation contributions made by the employer and an associate of an employer for the benefit of the one employee [New subsection 82AAC(2)].

The 'employee's deduction limit', for the 1994-95 year of income is as follows:

For subsequent years the deduction limits will be indexed.

In determining which deduction limit applies, the age of the person is based on the following:

•

if only one contribution is made during the year of income by the employer or an associate of the employer for the benefit of the employee - the employee's age at the end of the day that the contribution is made; or

•

if more than one contribution is made during the year by the employer or an associate of the employer for the benefit of the employee - the employee's age at the end of the day on which the last contribution for the year is made [New subsection 82AA C(2A)].

Example

Assume an employer makes two superannuation contributions during the 1994-95 year for an employee on 31 December 1994 and 30 June 1995. If the employee turned 50 years of age on 30 March 1995, the employee's deduction limit for the sum of the two contributions during the year will be $62,000. This is because the employer was 50 years of age on the day the last contribution for the year was made.

For the 1995-96 year of income and subsequent years, the deduction limit will be calculated using the formula:

Indexation factor x Previous indexable amount

The 'indexation factor' is the indexation factor for the year calculated under section 159SG of the Act. That is, the movement in the estimate of the full time adult average weekly ordinary time earnings, as published by the Australian Statistician, from the middle month of the March quarter two years prior to the year of income to the middle month of the March quarter immediately prior to the year of income.

The 'previous indexable amount' is the deduction limit for the previous year. Therefore, for the 1995-96 year the previous indexable amount are the amounts specified in the above table [New subsections 82AAC(2B) and (2C)1.

These deduction limits apply to a particular employer irrespective of superannuation contributions made by another employer for the benefit of the same employee, except where the two employers are associates. Therefore, if an employee works for two employers, either at the same time or at different times during the year of income, both employers are entitled to deductions for superannuation contributions up to the age based limit for the employee.

An employer will also be entitled to a deduction for superannuation contributions up to the whole amount of the age based limit where the employee works for the employer for only part of the year of income. There is no pro-rating of the deduction limits for the period during the year when the employee is employed by the employer.

However, if employers enter into arrangements to deliberately exploit these provisions to increase the deductions for superannuation contributions, the anti-avoidance provisions in Part IVA of the Act may apply.

Example 1

An employer makes superannuation contributions once a year on 30 April for three employees as follows:

The employer will be entitled to the following deductions (ignoring indexation):

Example 2

An employee, who is 30 years of age during the 1994-95 year of income, works 8 months for Employer X and 4 months for Employer Y. Employer X and Employer Y are not associates. Both Employer X and Employer Y are entitled to a maximum deduction of $9000 for superannuation contributions for the benefit of the employee. Therefore, the amount of the total deductible employer superannuation contributions made during the year for the benefit of the employee could be $18,000.

In the case of a defined benefit superannuation scheme (ie. a superannuation scheme which provides a defined benefit rather than a benefit based on accrued earnings on contributions) which uses the age based limit method, the Commissioner will accept that deductible contributions for a year of income may be allowed based on the sum of the deduction limits of each employee for whom the employer is contributing.

Example

An employer contributes $150,000 during the 1994-95 year of income to a defined benefit superannuation scheme for the benefit of 8 employees. Five employees are aged under 35 and three are aged between 35-49.

The total deduction limit in respect of these employees is the sum of:

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5 x $9,000; and

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3 x $25,000 ie. $120,000.

Therefore, of the $150,000 contributions made, the employer is entitled to a tax deduction of $120,000. The remaining $30,000 is not deductible.

Standard Contribution Limit

Instead of using the age based limits, an employer may elect to use a standard contribution limit for all employees. The purpose of the alternative is to reduce the administrative burden on employers who have a large number of employees. It may be difficult for these employers to identify the age based limit for each individual employee.

Under the standard contribution limit, the total deductions allowable to an employer for superannuation contributions for the benefit of all employees must not exceed that standard contribution limit. This limit will also apply to the total deductions for superannuation contributions made by the employer and an associate of the employer for the benefit of all of the employees.

An employer can only elect to use this limit if all of the following conditions are satisfied:

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at all times during the year of income when the taxpayer was an employer, the employer fills ten or more employee positions (that is, employs ten or more employees continuously);

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the employer, or an associate, makes superannuation contributions for employees who fill at least 10 of those positions during the year;

•

the taxpayer elects to adopt this method.

If the employer elects to adopt this method, the limit on deductions for employer superannuation contributions is calculated, for the 1994-95 year of income, as follows:

Full year employee positions * $25,000


'Full- year employee positions' are the number of employee positions which satisfy the following conditions:

•

they are filled by employees of the taxpayer at all times during the year of income; and

•

deductions are allowable to the employer, and/or associates of the employer, for contributions made during the year of income in respect of those employees.

An employee position may be a full-year employee position even if the position is vacant for a short time during the year. In this regard, if an employee ceases to fill a position and that position is filled by another employee within 3 months, the employee position is taken to have been filled by an employee during the vacant period [New subsection 82AA C(2H)].

The standard contribution limit does not limit the deductible superannuation contributions for a particular employee, but limits the total deductible superannuation contributions for all employees. Therefore, in the 1994-95 year an employer can contribute more than $25,000 for a particular employee so long as the total deductible superannuation contributions for all employees does not exceed the amount calculated under the above formula.

For the 1995-96 year of income and subsequent years, the deduction limit will be calculated using the formula:

Indexation factor * Previous indexable amount


The 'indexation factor' is the indexation factor for the year calculated under section 1595G of the Act. That is, the movement in the estimate of the full time adult average weekly ordinary time earnings, as published by the Australian Statistician, from the middle month of the March quarter two years prior to the year of income to the middle month of the March quarter immediately prior to the year of income.

The 'previous indexable amount' is the standard contribution limit for the previous year. Therefore, for the 1995-96 year the previous indexable amount is $25,000 [New subsections 82AAC(2D),(2E) and (2F)I.

If an employer elects to use the standard contribution limit, the election must be made before the date of lodgement of the taxpayer's income tax return for the year of income to which the election relates, or by a later date allowed by the Commissioner. Once an election is made it will apply to superannuation contributions made for all employees of the employer during the year of income. Therefore, an employer cannot use the age based limits for superannuation contributions on behalf of any employee during the year of income. However, as the election is an annual election, the employer may use the age based limits for the subsequent years of income [Subsection 82AAC(2G)].

Example 1

An employer employs 20 employees during a year, but the minimum number of employees at any one time during the year is 15. The employer makes superannuation contributions for all employees during the year which total $210,000. The employer chooses to use the $25,000 standard maximum contribution.

The employer will be entitled to a maximum deduction of $375,000 for total contributions for all employees (ie., $25,000 x 15). As the employer has only contributed $210,000 the entire amount will be deductible, irrespective of the amounts contributed for each individual employee.

Example 2

An employer employs a total of 25 employees during a year of income. However, the least number of employees at any one time during the year is 6 employees. The employer cannot elect to use the standard contribution limit because the employer did not have 10 employees at all times during the year of income. Therefore, the age based limits will apply.

Self-employed Superannuation Contributions

As mentioned earlier, under existing section 82AAT(2) of the Act, the deduction available to a self-employed person for contributions to a superannuation fund during a year of income is limited to the lesser of:

•

$3,000 plus 75% of the amount of the contributions exceeding $3,000; or

•

the taxpayer's maximum deductible contributions as determined under the Income Tax Regulations.

Under the proposed amendments, the deduction limit for a self employed person, from the 1994-95 year of income, will be the lesser of:

•

$3,000 plus 75% of the amount of the contributions exceeding $3,000; or

•

the taxpayer's age based limit on deductible superannuation contributions [New subsection 82AAT(2)].

•

The taxpayer's age based deduction limit, for the 1994-95 year of income, is as follows:

For subsequent years the deduction limits will be indexed.

In determining which deduction limit applies, the age of the person is based on the following:

•

if only one contribution is made during the year by the taxpayer - the taxpayer's age at the end of the day that the contribution is made; or

•

if more than one contribution is made during the year by the taxpayer - the taxpayer's age at the end of the day on which the last contribution for the year is made {New subsection 82AA T(2A)].

For the 1995-96 year of income and subsequent years, the deduction limit will be calculated using the formula:

Indexation factor * Previous indexable amount


The 'indexation factor' is the indexation factor for the year calculated under section 1595G of the Act. That is, the movement in the estimate of the full time adult average weekly ordinary time earnings, as published by the Australian Statistician, from the middle month of the March quarter two years prior to the year of income to the middle month of the March quarter immediately prior to the year of income.

The 'previous indexable amount' is the deduction limit for the previous year. Therefore, for the 1995/96 year the previous indexable amount are the amounts specified in the table above [New subsections 82A4 T(2B) and (2C)].

Example

A 45 year old self employed person contributes $30,000 to a superannuation fund during the 1994-95 year. The taxpayer will be entitled to a deduction of $23,250. That is, the lesser of:

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$23,250 [i.e., $3,000 + 75% of ($30,000 - 3000)]; and

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$25,000.