Senate

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Ralph Willis, MP)

Return of deducted superannuation contributions

Overview

4.1 The amendments ensure that section 82AAQ operates to include in assessable income any amounts representing the return of deductible superannuation contributions to a sponsoring employer or to an associate of a sponsoring employer.

Summary of the amendments

Purpose of the amendments

4.2 The Bill proposes to amend section 82AAQ to ensure that any amount paid from a superannuation fund, or from a fund which is a successor of that superannuation fund, which represents the return of deductible superannuation contributions to a sponsoring employer, or an associate of a sponsoring employer, is included in the recipient's assessable income. The purpose of the amendment is to overcome arrangements which pose a serious risk to the revenue whereby the surplus from an employer sponsored superannuation fund is paid back to the sponsoring employer or an associate in a way which avoids the payment of tax on receipt of the surplus.

Date of effect

4.3 The amendments are proposed to apply from 1 July 1988 [item 88 of Schedule 1]. The proposed amendments have retrospective application because of:

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the nature of the arrangements entered into;

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the serious threat to the revenue caused by those arrangements (a review of ten company groups by the Australian Taxation Office identified a total surplus of $3.2 billion in their employer sponsored superannuation funds. If these figures are indicative of the industry in general, then the revenue impact of any defect in the current law is potentially very significant); and

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the clear thrust of the existing law.

4.4 Moreover, to allow surpluses to be repatriated tax free would give an undue benefit to employers who entered into arrangements to avoid the existing law at the expense of the taxpayer community in general.

Background to the legislation

4.5 Section 82AAC of the Income Tax Assessment Act 1936 allows a deduction for contributions paid to a superannuation fund by an employer for the benefit of employees. However, any amounts that are repaid to the sponsoring employer by the fund must be included in the employer's assessable income under section 82AAQ.

4.6 Some companies have entered into arrangements so that the surplus from an employer sponsored superannuation fund is paid back in a way which avoids the payment of tax on receipt of the surplus. This has been achieved by:

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paying the surplus to an associate of the employer who contributed to the fund (such as the holding company for the group) rather than the sponsoring employer; and

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transferring all the assets of the superannuation fund to a new superannuation fund (a successor fund) and then transferring the surplus from the successor fund to the sponsoring employer or to an associate of the sponsoring employer.

4.7 Essentially, by paying the surplus to a company that has not contributed to the superannuation fund, or by paying the surplus from a successor superannuation fund, the companies argue that section 82AAQ is circumvented and that the payment of surplus is tax free in the hands of the company.

Explanation of the amendments

4.8 Item 87 of Schedule 1 inserts new subsection 82AAQ(2) to include in a recipient's assessable income the amount of any payment made to the recipient, or an amount equal to the value of any benefit given to the recipient, from a superannuation fund that reasonably represents a return of contributions (or earnings on those contributions) to a fund to provide superannuation benefits for an employee or for dependants of an employee.

4.9 A person will be a recipient for the purposes of new subsection 82AAQ(2) if:

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he or she receives a payment or a benefit from a superannuation fund or from a successor superannuation fund (other than in the capacity as a member of the fund) where another person has obtained deductions for superannuation contributions to the fund or to the successor fund for the benefit of an employee or for the benefit of a dependant of an employee; or

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he or she has obtained deductions for superannuation contributions to a fund for the benefit of an employee or for the benefit of a dependant of an employee and receives a payment or a benefit from a successor fund (other than in the capacity as a member of the fund).

[Item 87 of Schedule 1; new paragraph 82AAQ(2)(b)]

4.10 The main purpose of new subsection 82AAQ(2) is to ensure that any amount of surplus in a superannuation fund that is paid to a recipient will be included in the recipient's assessable income. However, other payments to the recipient from a fund (such as a return of contributions incorrectly made to a fund) may also come within the scope of the provision.

4.11 A payment or benefit from a superannuation fund to a recipient does not have to represent a return of actual employer contributions to reasonably represent a return of contributions or earnings on those contributions. Rather, any payment or benefit from a superannuation fund to a recipient reasonably represents a return of contributions or earnings on those contributions unless it represents a payment or benefit that is assessable (or specifically exempt) under another provision of the Act.

4.12 For example, a payment of an actuarially calculated surplus in a defined benefit fund to a recipient will reasonably represent a return of employer contributions plus earnings even though it may be paid out of an undissected pool of moneys held by the fund consisting of employer contributions, employee contributions and earnings. An amount of surplus usually arises in defined benefit funds and represents an actuarial calculation of the amount by which the current value of the fund's assets plus the present value of future contributions exceeds the present value of the fund's expected liabilities. New subsection 82AAQ(2) applies to such a payment because the surplus is clearly attributable to past employer contributions to the fund.

4.13 A payment or benefit to the recipient from a superannuation fund will not reasonably represent a return of contributions plus earnings, on the other hand, if it is a payment for services rendered or goods supplied to the fund by the recipient (which would usually be included in the assessable income of the recipient under subsection 25(1)).

4.14 Similarly, a payment or benefit will not be taxed under new subsection 82AAQ(2) if it is an eligible termination payment or a pension paid to the recipient because he or she is a member of the fund. Any such payment or benefit would be included in the recipient's assessable income under Subdivision AA of Division 2 of Part III of the Act.

4.15 The onus will be on the recipient to establish that any payment or benefit they receive from the fund is an amount that does not reasonably represent a return of contributions or earnings on those contributions.

4.16 A fund will be a successor fund of another fund if any assets have been transferred to the fund from the original fund (or from another fund that is a successor fund of the original fund) or if any amounts have been rolled-over to the fund from the original fund (or from another fund that is a successor fund of the original fund). [Item 87 of Schedule 1; new paragraph 82AAQ(3)]

Example 1

4.17 Atlas Pty Ltd has been contributing to the Atlas Superannuation Fund for a number of years. The fund identifies that it has surplus assets of $2 000 000 and decides to pay that amount to Atlas Enterprises. The $2 000 000 will be included in Atlas Pty Ltd's assessable income under existing subsection 82AAQ(1).

Example 2

4.18 Atlas Superannuation Fund (in Example 1) transfers the $2 000 000 to the Zeus Superannuation Fund rather than paying it to Atlas Pty Ltd. The amount is then paid by the Zeus Superannuation Fund to Atlas Pty Ltd. The amount will be included in Atlas Pty Ltd's assessable income under new subsection 82AAQ(2) because:

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the Zeus Superannuation Fund is a successor fund of the Atlas Superannuation Fund as defined in new subsection 82AAQ(3);

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Atlas Pty Ltd is a recipient as defined in new subparagraph 82AAQ(2)(b)(ii); and

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the amount reasonably represents a return of contributions plus earnings paid by Atlas Pty Ltd to the Atlas Superannuation Fund.

Example 3

4.19 The $2 000 000 transferred from the Atlas Superannuation Fund to the Zeus Superannuation Fund in Example 2 is paid to Titan Enterprises (rather than Atlas Pty Ltd). The amount will be included in the assessable income of Titan Enterprises under new subsection 82AAQ(2) because:

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the Zeus Superannuation Fund is a successor fund of the Atlas Superannuation Fund as defined in new subsection 82AAQ(3); and

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Titan Enterprises is a recipient as defined in new subparagraph 82AAQ(2)(b)(i); and

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the amount reasonably represents a return of contributions plus earnings paid by Atlas Pty Ltd to the Atlas Superannuation Fund.