SENATE

Explanatory Memorandum

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

Chapter 1 - Introduction

Overview

1.1 The measures contained in this Bill provide a legislative framework for the introduction of a collection mechanism for small superannuation contributions called the Superannuation Holding Accounts Reserve.

1.2 This chapter provides an introduction to the need for such a Reserve and explains in general terms how the Reserve is to operate. This chapter provides a simplified explanation of the definitions of terms used in the Bill.

1.3 Subsequent chapters will go into the detail of the measures contained in the Bill and the mechanics of the system.

Purpose

1.4 The object of the Superannuation Holding Accounts Reserve is to improve the operation of the compulsory superannuation system, in particular to provide a much better outcome for employees who have small, and especially intermittent, superannuation amounts. The Reserve is to be established to accept amounts paid instead of superannuation contributions required by the Superannuation Guarantee (Administration) Act 1992 . The Reserve will also be able to accept amounts paid instead of superannuation contributions from employers that are not specifically required by industrial awards or the Superannuation Guarantee (Administration) Act 1992 .

1.5 The aim of the measures announced by the Treasurer is to protect small superannuation amounts from erosion due to administrative fees and charges. This protection will allow the small amounts to grow to a self sustaining level.

1.6 Small amounts are particularly prevalent in industries which employ a high number of casual workers - such as the tourism (eg. hospitality staff) and agriculture industries (eg. fruit pickers). Women in particular are likely to be holders of small amounts.

What is the problem?

1.7 The small accounts problem refers to the fact that the superannuation guarantee (SG) arrangements (and industrial awards) may require small, one off contributions to be made into superannuation funds. Those contributions are often eroded by fees (entry, exit and administration) imposed by funds.

1.8 The SG requires employers to make superannuation contributions from a wage threshold ($450 per month) and at specific rates of contribution (currently 4% to 5% increasing to 9% by the year 2003). The system works well where an employee has one full-time, or regular part-time, job and receives contributions over a long period to a single fund. However, employees who regularly change jobs, work intermittently or engage in short term work (eg consultancies) often end up with one or a number of small account balances dispersed through the superannuation system, each incurring fees and charges. Substantial fund "exit" and in some cases "entry" charges make it difficult to combine these accounts into one account with only one set of fees and charges.

Example of the problem

1.9 Paul is an 18 year old full-time accountant/bookkeeper with a small company in the hospitality industry and receives a salary of $22,000. Paul's employer contributes 4% of Paul's salary ($880) to its superannuation fund. The fund pays 15% contributions tax on the employer contributions. The balance of Paul's account after tax is therefore $748. The fund also charges a $5 entry fee and 25c a week administration fee ($13 per year). Therefore total charges are $18 per year. The fund earns a return of 4% therefore Paul's employer's contributions earn $29.92. The balance of Paul's superannuation account at the end of the year is $759.92 ($880 - $132 + $29.92 -$18).

1.10 In contrast Karen (also 18 years old) does the same type of work as Paul but for two different employers. Karen has 2 different employers who each pay her $11,000. Each employer also pays 4% of Karen's salary ($440) into separate superannuation funds. Each superannuation fund charges the same fee structure as Paul's fund. Karen's superannuation position for each employer at the end of the year is as follows:

1.11 Karen's total superannuation account is $741.92 ($370.96 x 2) This simple example illustrates that Karen is worse off than Paul by $18.00 (Paul $759.92 - Karen $741.92) even though both received the same wage and worked for the full year. The reason Karen is worse off is that by having two separate funds she pays $18.00 more in fees.

1.12 To address this problem of erosion of small account balances this Bill will establish under the administration of the ATO, an alternative and convenient 'collection' mechanism known as the Superannuation Holding Accounts Reserve into which employers can pay money instead of superannuation contributions for their employees. Monies paid into the Reserve will be allocated to an account of the employee and will be maintained for that employee's benefit. All subsequent amounts paid by any employer for that individual shall be combined in the one account.

1.13 The payment by an employer of an amount instead of a superannuation contribution is, for the ease of understanding, called a deposit. This is merely a label used for the purposes of explanation. The employer's payments are not deposits in the legal sense of that term and the nature of the Reserve is not that of a bank or financial institution.

1.14 No administration charges will be applied to the employee's account and the monies will remain untaxed whilst in the account. When the monies are paid to a complying superannuation fund those amounts will be treated as employer contributions to that fund.

1.15 The Superannuation Holding Accounts Reserve can be likened to a nursery. Employers can plant money for employees in the Reserve where they will remain protected from fees and charges until they grow to a sustainable level of $1,200 when they can then be transplanted into a complying superannuation fund.

1.16 In order to provide an incentive to transfer accounts that exceed $1,200 to a superannuation fund, interest will not be credited on amounts that exceed $1,200. Also, in order to provide an incentive to employers not to make deposits for employees that exceed $1,200, income tax deductions will not be available to employers to the extent that a deposit for an individual in a particular year of income exceeds $1,200.

Date of effect

1.17 The Superannuation Small Accounts Bill 1995 will commence on 1 July 1995. [Clause 2 of Part 1]

Background to the legislation

1.18 The Government's statement of Superannuation Policy Measures, circulated by the Treasurer on 28 June 1994, outlined a number of new initiatives to improve the effectiveness of its superannuation policies. The ATO superannuation accounts collection mechanism was one of those initiatives. In order for the superannuation accounts collection mechanism to function it is necessary to establish the Reserve to facilitate the collection of those small accounts.

Explanation of the provisions

1.19 The following is only a simplified explanation of the operation of the Bill and subsequent chapters will go into greater detail in relation to the operative provisions of the Bill.

1.20 The ATO will set up accounts that will allow employers to pay money for their employees to the ATO instead of making superannuation contributions. The Reserve offers employees with small balances an opportunity to avoid the erosion of those balances by fees. Employees may at any time have the balance of their account transferred to a superannuation fund of their choice. Generally, employees will not have direct access to their account balance. [Clause 3 of Part 1]

1.21 Employees' accounts will earn interest on accounts that have balances of up to $1,200 provided that the interest earned by the Reserve exceeds the costs of administering the Reserve. Interest will not be paid on so much of an account balance that exceeds $1,200. This is an incentive to get employees to transfer their account balances to a superannuation fund of their choice. Interest earned on the accounts will be free from income tax in the Reserve. Interest earned on accounts within the Reserve will not be taxed in the employee's hands but will be treated as part of the employer's contribution when transferred to a superannuation fund. Upon transfer of the account balance to a superannuation fund the amount shall be treated as an employer contribution (and so subject to contributions tax of 15%). [Clause 3 of Part 1]

1.22 Employers who make deposits to the small superannuation accounts fund may get income tax deductions for such deposits. Such deposits will also count as superannuation contributions for the purposes of the Superannuation Guarantee (Administration) Act 1992 . [Clause 3 of Part 1]

1.23 The income tax deduction is only available to employers making payments that do not exceed $1,200 per employee per year. Where such a payment exceeds $1,200 the amount that exceeds $1,200 will not be deductible for income tax purposes. This is to encourage employers who make payments to the Reserve instead of superannuation contributions which exceed $1,200 to place those contributions with a superannuation fund.

Meaning of 'employer' and 'employee'

1.24 The Bill potentially applies to all employers in respect of their employees. An 'employer' and 'employee' have their ordinary meaning. In addition, a person will be taken to be an employer or an employee in the following circumstances:

•

a person who receives payments as a member of the executive body of a body corporate (whether described as a board of directors or otherwise) is an employee of the body corporate;

•

a person who works under a contract wholly or principally for labour is an employee of the other party to the contract;

•

a member of a Commonwealth or State Parliament or Territory Legislative Assembly is an employee of the Commonwealth, State or Territory;

•

a person who receives payments for performing, presenting, participating or providing services in connection with any music, play, dance, entertainment, sport, display, or promotional activity or any similar activity involving the exercise of creative talents is an employee of the payer;

•

a person who receives payments to perform or provide services in connection with the making of any film, tape or disc or of any television or radio broadcast is an employee of the payer;

•

a person who holds, or performs the duties of an appointment, office or position under the Constitution or under a law of the Commonwealth, of a State or a Territory (including members of the defence force or a police force) is an employee of the Commonwealth, State or Territory;

1.25 A member of a local government council in the capacity of a councillor of that council is not an employee of the council.

1.26 These provisions are similar to section 12 of the Superannuation Guarantee (Administration) Act 1992 with the exception being subsection 12(11) of that Act. Subsection 12(11) of the Superannuation Guarantee (Administration) Act 1992 excludes from the definition of employee a person who is paid to do work of a domestic or private nature for less than 30 hours per week. This is to enable people who are employed in work of a private or domestic nature and who are not covered by the SG legislation to nevertheless have amounts paid into the Reserve for their benefit. [Clause 4 of Part 1 and the Schedule]

Example of private or domestic work

1.27 Anne, a widow, has two children of school age. Anne has a full-time job but needs someone to look after the children after school and to prepare meals each day. Anne employs a person to help in the home and to prepare meals from 3.00 pm to 7.00 pm Monday to Friday a total of 20 hours per week. Although Anne is not required to provide superannuation support for her employee under the SG legislation she may make payments instead of superannuation contributions to the Reserve.

Administration

1.28 The Commissioner of Taxation has the general administration of this Bill. [Clause 6 of Part 1]