Explanatory Memorandum
CHAPTER 8 - Superannuation guarantee charge - excess benefits
Overview
8.1 Part 2 of Schedule 3 of the Bill will exempt employers from the superannuation guarantee charge in respect of an employee who makes an election because his or her accumulated superannuation entitlements exceed the pension reasonable benefit limit (RBL). Taxpayers who make this election will not be entitled to deductions for personal superannuation contributions.
Summary of the amendments
8.2 There is no policy rationale for forcing a person to accumulate superannuation benefits in excess of the RBL. However, the present superannuation guarantee system can have that effect. Therefore, the amendments will allow employees who can demonstrate that they have excess superannuation benefits to elect not to receive superannuation support from their employers.
8.3 If an employee makes such an election because he or she has accumulated superannuation benefits in excess of the RBL, there is no justification for allowing an income tax deduction to the employee for personal superannuation contributions.
8.4 The amendments apply from the next quarter commencing after the date of Royal Assent. Under superannuation guarantee legislation, quarters commence on 1 July, 1 October, 1 January and 1 April. [Items 14 and 16]
Background to the legislation
8.5 Employers who fail to make sufficient superannuation contributions for their employees are subject to a superannuation guarantee charge equal to the amount of the shortfall. The employer's shortfall for a year is the sum of quarterly shortfalls in respect of individual employees, as well as an interest and administration component.
8.6 A person who receives superannuation benefits in excess of the RBL is not entitled to concessional tax treatment on those benefits, which are taxed instead at the top marginal rate. There are two RBLs - a lump sum RBL for benefits taken in a lump sum and a pension RBL for amounts taken as a complying pension. The pension RBL (which is the higher figure) is currently $800 000 but is adjusted annually in line with movements in full-time adult average weekly ordinary time earnings and will rise to $836 000 for the year 1 July 1995 to 30 June 1996. The RBL provisions are contained in Division 14 of Part III of the Income Tax Assessment Act 1936 (ITAA).
8.7 Section 82AAT of the ITAA allows taxpayers who do not receive superannuation support from their employers to claim deductions for personal superannuation contributions.
Explanation of the amendments
Amendments to the Superannuation Guarantee (Administration) Act 1992
8.8 The first part of these amendments will affect the Superannuation Guarantee (Administration) Act 1992 (SGAA).
8.9 Section 19 of the SGAA provides for the calculation of quarterly shortfalls. The usual method of calculation in respect of an employee will not apply if the employee has given the employer an election removing the employer's liability to superannuation guarantee charge because the employee has accumulated excess superannuation benefits. [Item 12 - amended subsection 19(2)]
8.10 If an employee has made an election during the quarter, the quarterly shortfall for that employee for that quarter, and all subsequent quarters, will be nil. If the quarterly shortfall for an employee is nil, there is no liability to superannuation guarantee charge in respect of that employee. [Item 13 - new subsection 19(4)]
How does an employee make an election?
8.11 The election will be a statement in writing given by an employee to an employer, electing that the employer will not be liable to superannuation guarantee charge for that employee. Once the election is made it will be irrevocable. [Item 13 - new subsections 19(4) and (5)]
8.12 The election must be accompanied by supporting statements in writing showing that, at the test time, the total of the following amounts exceeds the ordinary pension RBL:
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- the sum of adjusted RBL amounts of previous benefits , as calculated under section 140ZA of the ITAA. Broadly, these are superannuation benefits (including superannuation pensions) which the employee has previously received that have been counted for RBL purposes; and
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- the employee's entitlement amounts . Broadly, the entitlement amounts are the sum of the employee's vested superannuation benefits that are counted for RBL purposes.
8.13 An employee will be able to elect out of Superannuation Guarantee if, at the test time, the sum of these amounts exceeds the ordinary pension RBL specified in section 140ZD of the ITAA. The fact that the employee may have a higher transitional RBL does not change this situation.
8.14 The test time is the time at which the employee wants the entitlement amount to be calculated.
8.15 The election and supporting statements can be in any format, providing they contain sufficient information and are in writing. There will be two kinds of supporting statements. As evidence of the amount of benefits previously received, the employee will be required to obtain a statement from the Commissioner of Taxation. As evidence of the employee's entitlement amounts, the employee will be required to obtain statements from the trustee or manager of each body in which a benefit is held. [Item 13 - new subsections 19(6) and 19(7)]
What are the employee's entitlement amounts?
8.16 The entitlement amount in relation to a particular benefit depends upon the source and nature of the benefit. For each source of benefit, the entitlement amount will be equal to the resignation RBL amount or the sum of two resignation RBL amounts . The resignation RBL amount is only that part of the superannuation entitlement that is counted for RBL purposes. Therefore, it does not include, for example, undeducted contributions or concessional component.
Benefits in a complying approved deposit fund (ADF)
8.17 If the employee has benefits in a complying ADF, the benefits will be solely a present or future entitlement to a lump sum. The resignation RBL amount will be the RBL amount, worked out under section 140ZH of the ITAA, of the ETP that would be payable if the employee resigned at the test time. [Item 11 - new subsection 15A(2); definition of resignation RBL amount in new subsection 15A(6)]
Benefits in a deferred annuity
8.18 If the employee has benefits in a life insurance company or registered organisation in the form of a deferred annuity, the resignation RBL amount will be the RBL amount, worked out under section 140ZI of the ITAA, of the ETP that would be payable if the employee commuted the entitlement at the test time. [Item 11 - new subsection 15A(3); definition of resignation RBL amount in new subsection 15A(6)]
Benefits in a complying superannuation fund
8.19 If the employee has benefits in a complying superannuation fund, the benefits may be in the form of a present or future entitlement to a lump sum, an entitlement to a pension that has not become payable or a combination of lump sum and pension. In addition, the employee may be able to choose whether to take the benefit as a lump sum or a pension, or as a combination of lump sum and pension.
8.20 If the employee can elect the amount of benefit which is taken as a lump sum and the amount which is taken as a pension, the resignation RBL amount is the greatest of:
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- the RBL amount, worked out under section 140ZH of the ITAA, of the ETP that would be payable if the employee resigned at the test time and elected to take the whole of the benefit as a lump sum;
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- the RBL amount, worked out under section 140ZK of the ITAA, of the pension that would be payable if the employee resigned at the test time and elected to take the whole of the benefit as a pension; and
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- the sum of the RBL amount, worked out under section 140ZH of the ITAA, of the ETP that would be payable if the employee resigned at the test time and elected to take part of the benefit as a lump sum and the RBL amount, worked out under section 140ZK of the ITAA, of the pension that would be payable if the employee resigned at the test time and elected to take part of the benefit as a pension.
8.21 If the benefit in the superannuation fund is solely a present or future entitlement to a lump sum, the resignation RBL amount will be the RBL amount, worked out under section 140ZH of the ITAA, of the ETP that would be payable if the employee resigned at the test time.
8.22 If the benefit in the superannuation fund is solely an entitlement to a pension that has not become payable, the resignation RBL amount will be the RBL amount, worked out under section 140ZK of the ITAA, of the pension that would be payable if the employee resigned at the test time.
8.23 If the benefit in the superannuation fund is a fixed combination of a present or future entitlement to a lump sum and of a pension that has not become payable, the resignation RBL amount will be the sum of the RBL amount, worked out under section 140ZH of the ITAA, of the ETP that would be payable if the employee resigned at the test time and the RBL amount, worked out under section 140ZK of the ITAA, of the pension that would be payable if the employee resigned at the test time.
[Item 11 - new subsections 15A(4) and (5); definition of resignation RBL amount in new subsection 15A(6)]
8.24 The second part of these amendments will affect section 82AAT of the ITAA.
8.25 A person who has made an election that his or her employer should not be liable to superannuation guarantee charge on behalf of the employee will not be entitled to deductions for personal superannuation contributions. [Item 15 - new subsection 82AAT(1F)]
8.26 Deductions will not be allowed for contributions made during the quarter in which the election was made, or for any later quarter. A quarter for these purposes is a period of three months, beginning on 1 July, 1 October, 1 January and 1 April. [Items 15 and 16]
8.27 Elizabeth works for Jasper Enterprises. Elizabeth has a considerable amount of vested superannuation benefits and decides she does not want to have any additional superannuation contributions made on her behalf.
8.28 Elizabeth has the following accumulated superannuation benefits:
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- $120 000 in the Access ADF (including $40 000 undeducted contributions);
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- $150 000 in a lump sum personal superannuation fund (including $30 000 undeducted contributions); and
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- accumulated benefits in the Jasper Superannuation Fund which can be taken at Elizabeth's option as a lump sum or a pension (or any combination of lump sum and pension). The RBL amount, worked out under section 140ZH of the ITAA, of the ETP that would be payable if Elizabeth resigned and elected to take a lump sum is $500 000. The RBL amount, worked out under section 140ZK of the ITAA, of the pension that would be payable if Elizabeth resigned and elected to take a pension is $650 000. The RBL amount of any mixture of lump sum and pension is between these two amounts.
8.29 Therefore, Elizabeth's entitlement amounts are as follows:
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- $80 000 in Access ADF;
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- $120 000 in Elizabeth's personal superannuation fund; and
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- $650 000 in the Jasper Superannuation Fund.
8.30 In addition, Elizabeth previously received superannuation benefits which were counted for RBL purposes. The sum of adjusted RBL amounts of those previous benefits worked out under section 140ZA of the ITAA is $90 000.
8.31 Elizabeth obtains statements from the trustees of the superannuation funds and the ADF providing evidence of her superannuation entitlements. She also obtains a statement from the Commissioner of Taxation in relation to the benefits she has previously received that were counted for RBL purposes.
8.32 As the sum of these amounts ($940 000) exceeds the ordinary pension RBL of $836 000 for the 1995-96 year, Elizabeth decides to give an election (together with the accompanying statements) to Jasper Enterprises in February 1996 to remove Jasper's responsibility to make additional superannuation contributions on Elizabeth's behalf.
8.33 As a consequence Jasper is not liable for the superannuation guarantee charge contributions in respect of Elizabeth for the January 1996 and later quarters. In addition, Elizabeth is not entitled to a deduction for any personal superannuation contributions made on or after 1 January 1996.