Explanatory Memorandum
(Circulated by the authority of the Treasurer,the Hon Peter Costello, MP)Chapter 8 - Tax file numbers
Overview
8.1 The amendments contained in Schedule 4 of the Bill will expand the use of tax file numbers (TFNs) by allowing the TFNs of beneficiaries of eligible superannuation entities and regulated exempt public sector superannuation schemes to be used to assist in streamlining, and reducing the costs of, the administration of superannuation.
8.2 The amendments will also allow the Insurance and Superannuation Commissioner (ISC) to obtain superannuation entities' TFNs and provide those TFNs to the Commissioner of Taxation (ATO).
8.3 Section references in this chapter are to the Superannuation Industry (Supervision) Act 1993 (the SIS Act) unless otherwise indicated.
Summary of the amendments
8.4 The amendments are intended to:
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- reduce the numbers of lost beneficiaries and small amounts (which because of their size do not grow into retirement savings) in the superannuation system;
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- facilitate the efficient administration of superannuation; and
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- assist the ISC and ATO to properly supervise the superannuation industry (eg. enable the ATO to use funds' TFNs to ensure that funds pay the correct amount of tax).
8.5 To achieve these broader purposes, the Bill will amend the SIS Act and the Income Tax Assessment Act 1936 (the Act) to:
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- enable a beneficiary of a fund or scheme to quote his or her TFN to the fund or scheme, either directly or through his or her employer [item 15 - new sections 299A - 299D] ;
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- require trustees of funds to seek beneficiaries' TFNs where beneficiaries have not already quoted them [item 15 - new sections 299F and 299G] ;
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- allow funds and schemes to use TFNs to identify and amalgamate beneficiary benefits [item 15 - new sections 299H, 299J, 299K and 299L] ;
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- require funds to provide TFNs when transferring beneficiary benefits to other funds or schemes unless the beneficiary requests otherwise [item 15 - new section 299M] ;
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- allow the ISC to require superannuation entities' TFNs in certain circumstances and pass them on to the ATO [items 2, 3, 4, 13, 14 and 15 - new section 299U] ;
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- allow the ATO to use the TFNs of individuals held by the ATO for the purpose of processing reasonable benefit limits forms not already containing the individual's TFN [items 19, 20, 21 and 22] ; and
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- deem TFNs of beneficiaries quoted for superannuation purposes to be also quoted for certain taxation purposes [item 24 - new section 202DH of the Act] .
8.6 These amendments will apply from the 60th day after Royal Assent except for amendments requiring funds to seek TFNs from existing beneficiaries, which commences with either the first member or fund statement (as chosen by the fund) that is sent to the beneficiary on or after that 60th day. [Subclause 2(4) and item 15 - new section 299F]
Background to the legislation
8.7 On 28 June 1994, the Labor Government announced measures allowing for greater use of TFNs in the superannuation industry. The greater use of TFNs will:
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- enable the administration of the superannuation system to be streamlined;
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- enable superannuation trustees to locate amounts for beneficiaries;
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- assist in specifically identifying beneficiaries when transferring amounts between funds and schemes and enable funds and schemes to internally identify beneficiaries; and
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- allow superannuation trustees to amalgamate multiple contributions on behalf of the same individual.
8.8 In addition to the use of beneficiaries' TFNs, there are administrative benefits if the ISC can use superannuation entities' TFNs in monitoring superannuation entities' activities. For example, under the SIS Act the ISC provides superannuation entity information including details of a superannuation entity's complying status (eligibility for concessional tax treatment) to the ATO which, amongst other data matching activities, matches superannuation entities' complying status with their income tax returns. This will be greatly assisted if the ISC can use superannuation entities' TFNs as a means of identifying them and referring data to the ATO.
8.9 Eligible superannuation entities (including excluded funds - see below) are required to participate in the expanded use of TFNs by being required to seek, record and pass on TFNs in certain circumstances. Regulated exempt public sector superannuation schemes, consistent with their exemption from existing requirements in the SIS Act, will be allowed, rather than required, to seek, record and pass on TFNs.
Explanation of the amendments
8.10 The term 'eligible superannuation entity' is defined to mean a regulated superannuation fund or an approved deposit fund [item 15 - new section 299W] . This includes excluded funds and covers most superannuation funds. For ease of reference, the explanation in the rest of this chapter refers simply to 'funds'.
8.11 The term 'regulated exempt public sector superannuation scheme' is defined to mean an exempt public sector superannuation scheme (defined in section 10 of the SIS Act) which either has a constitutional corporation as a trustee or has the sole or primary purpose of the provision of old age pensions [item 15 - new section 299W] . For ease of reference, the explanation in the rest of this chapter refers simply to 'exempt schemes'.
8.12 The term 'superannuation entity' is defined by section 10 of the SIS Act to mean a regulated superannuation fund, approved deposit fund or pooled superannuation trust.
8.13 The term 'excluded fund' is defined by section 10 of the SIS Act to mean a regulated superannuation fund with less than 5 members or an approved deposit fund that meets certain conditions specified in the Superannuation Industry (Supervision) Regulations (the SIS Regulations) and has only one beneficiary.
8.14 A beneficiary, or potential beneficiary, of a fund or an exempt scheme has two avenues for providing his or her TFN so that it may be used by the fund or exempt scheme in identifying his or her benefits:
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- by quoting to his or her employer who then passes the TFN on to the trustee of the fund or scheme [item 15 - new sections 299A, 299B and 299C] ; or
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- by quoting directly to the trustee of the fund or scheme [item 15 - new section 299D] .
8.15 Quotation is not compulsory and there are no sanctions for not providing a TFN. However, provision of a TFN will help to ensure a beneficiary's benefits do not become 'lost' to that beneficiary and to consolidate different amounts which are accumulated on behalf of the beneficiary during the beneficiary's working life.
8.16 The manner of quoting a TFN must be approved by the ISC [item 15 - new section 299P] . This allows the ISC to ensure that, prior to quoting, beneficiaries and potential beneficiaries are properly informed:
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- of the legal basis for the collection of their TFNs;
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- that declining to quote their TFNs is not an offence; and
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- of the consequences of not quoting their TFNs.
8.17 The usual entry point into the superannuation system is when an employer makes superannuation contributions on behalf of its employees. In order to ensure that TFNs are attached to his or her benefits the employee may quote his or her TFN to the employer for superannuation purposes. [Item 15 - new section 299A]
8.18 Quotation to an employer places an obligation on an employer contributing to a fund for the employee to pass on the TFN to the trustee of the fund, generally when the next contribution is made [item 15 - new section 299C] . The exception is where the TFN is provided less than 14 days before the contribution is made, in which case the employer must pass the TFN to the trustee within 14 days of it being quoted. In either case the employer may pass on the TFN sooner, if this is more convenient [item 15 - new section 299B] .
8.19 In the case where the employer is contributing to an exempt scheme for the employee, the employer is not required to pass on the TFN but may do so. [Item 15 - new section 299B]
8.20 An employer is only obliged to pass on the TFN to the trustee once, in respect of the first time an employee quotes his or her TFN to the employer after the commencement of the amendments. [Item 15 - new paragraph 299C(1)(a), 'quotes or first quotes']
8.21 A beneficiary, or an applicant to become a beneficiary may quote his or her TFN directly to the fund or exempt scheme. [Item 15 - new section 299D]
8.22 There are also certain circumstances in which a beneficiary is deemed to have quoted his or her TFN to a trustee of a fund or an exempt scheme for superannuation purposes [item 15 - new sections 299Q, 299R, 299S and 299T] . The effect of the deeming is to enable the trustee to use the TFN as if it had been quoted directly by the beneficiary for superannuation purposes.
8.23 The circumstances in which a beneficiary is deemed to have quoted his or her TFN to a trustee for superannuation purposes are:
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- where an employee quotes his or her TFN to an employer and the employer subsequently informs the trustee [item 15 - new section 299Q] ;
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- where one trustee informs another trustee in accordance with new sections 299M and 299N [item 15 - new section 299R] ;
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- where the beneficiary has provided his or her TFN to a trustee in applying for a benefit from a fund or exempt scheme [item 15 - new section 299S] ;
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- where the beneficiary has quoted his or her TFN to the trustee for taxation purposes [item 15 - new section 299T] ;
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- where the beneficiary has quoted his or her TFN for the purposes of Parts 22 or 24 of the SIS Act prior to their amendment by this Bill [item 15 - new section 299T] ; or
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- where the beneficiary has quoted his or her TFN for the purposes of the repealed Part IIIA of the Occupational Superannuation Standards Act 1987 [item 15 - new section 299T] .
Obligation of trustees to seek TFNs
8.24 Trustees of funds are obliged to request the TFNs of existing beneficiaries (where they do not already have them) within these time limits:
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- within 7 days of the first member or fund report (as chosen by the fund) as required to be sent out to the beneficiary after commencement of the amendments (if no choice is made it is the first report sent out after commencement); or
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- within 7 days of the end of 12 months from commencement;
- whichever is earlier. [Subclause 2(4) and item 15 - new subsections 299F(2) and 299F(6)]
8.25 Where the trustee is not required to send a member or fund report to the existing beneficiary, the trustee is obliged to request the TFN of the existing beneficiary, where they do not already have them, within 7 days after the commencement of the amendments. [Subclause 2(4) and item 15 - new subsections 299F(2) and 299F(7)]
8.26 The requirement on superannuation trustees to send member and fund reports is set out respectively in Subdivisions 2.4.2 and 2.4.3 of Part 2 of the SIS Regulations.
8.27 As indicated earlier, a beneficiary is not obliged to provide his or her TFN if requested by the trustee. [Item 15 - new subsection 299F(5)]
8.28 If a person becomes a beneficiary of a fund after commencement of the amendments the trustee must request the person's TFN, within 7 days of him or her becoming a beneficiary, unless the trustee already has the TFN [subclause 2(4) and item 15 - new section 299G] . Trustees may satisfy this requirement by seeking a TFN from people when they apply to become a beneficiary [item 15 - new section 299E] .
8.29 In the case of an exempt scheme, the trustee is not required to seek the TFNs of beneficiaries but may do so. [Item 15 - new section 299E]
Purposes for which TFNs can be used by trustees
8.30 Once a trustee has been, or is taken to have been, quoted a beneficiary's TFN, subject to certain exceptions, the trustee may use it to locate and identify amounts held for a particular person and, where appropriate, to consolidate those amounts. [Item 15 - new sections 299H, 299J, 299K and 299L]
8.31 The exceptions are that the TFN may only be used to identify amounts held for a particular person where other information is insufficient to identify the amounts or if that other information is sufficient, to confirm the identification of the amounts resulting from the use of that information. [Item 15 - new subsections 299H(5), 299J(5), 299K(5) and 299L(5)]
8.32 The effect of this amendment is that after the trustee uses the TFN to locate the benefits, other information must be used, in priority to the TFN, to identify as necessary the benefits of a particular beneficiary. This means that, for general administration purposes, items like a member number, name and address or other identification must be used rather than the TFN. Accordingly, it should not be the norm for a beneficiary to quote his or her TFN in ordinary dealings with a fund. The level of non-TFN information required will depend on the circumstances although the beneficiary should normally be asked to provide two or more non-TFN forms of identification .
8.33 This is further explained in an example given below.
Example of use by trustee of TFN
8.34 A trustee of a fund uses a TFN to locate two accounts of $100 of a beneficiary, John Smith with a birthdate of 28/12/1939 and amalgamates those accounts into $200.
8.35 Once location is achieved, on-going identification of benefits in the general administration of the fund becomes relevant (eg. identification of benefits of persons claiming to be beneficiaries who ask for details about their benefits).
8.36 A reasonable checklist of non-TFN forms of identification should be used (before any TFN form of identification) to link the benefits to the correct John Smith for the purposes of on-going identification.
8.37 Non-TFN forms of identification include the beneficiary's address, the beneficiary's birthdate, the beneficiary's membership number and the beneficiary's name.
8.38 Accordingly, if a person claiming to be John Smith rings the fund to inquire about his benefits they should first be asked to provide non-TFN forms of identification. Likewise in preparing member statements, the transactions for the relevant period should normally be linked to the beneficiary only by using non-TFN forms of identification. It is not expected that a beneficiary's TFN would appear on general correspondence from the fund to the beneficiary.
8.39 This is consistent with the general principle that a TFN must not be used as a primary identifier.
8.40 However if those non-TFN forms of identification are not sufficient (eg. there are two or more John Smiths with the same birthdate), then the person may be asked to provide his or her TFN.
Other purposes - eligible termination payments
8.41 The Bill amends the current law to provide that TFNs quoted for superannuation purposes are taken to be quoted for the purpose of calculating the tax to be deducted from an eligible termination payment (ETP). Currently, to avoid adverse tax consequences a beneficiary of a fund or exempt scheme must quote his or her TFN to the fund or scheme before the payment of an ETP (eg. a superannuation payment made on termination of employment). If the TFN is not quoted for taxation purposes in the prescribed manner, tax is deducted from the payment at the rate of 48.5% (being the current top marginal tax rate plus the medicare levy) despite the beneficiary having previously quoted his or her TFN to the fund or scheme for superannuation purposes.
8.42 The Bill changes this position by amending the Act so that where a beneficiary has quoted his or her TFN to the fund or scheme under new Part 25A of the SIS Act (ie. for superannuation purposes), the TFN will also be taken to have been quoted for the purpose of calculating the tax to be deducted from an ETP. The effect of this will be that the fund or scheme will deduct tax from the beneficiary's ETP at the normal concessional rates of tax [item 24 - new section 202DH of the Act] . Where appropriate, the TFN will also be disclosed on the beneficiary's group certificate and to the ATO for RBL purposes.
8.43 A trustee may only retain a record of a person's TFN for as long as the person is a beneficiary or applicant to become a beneficiary of the fund or exempt scheme. If the person ceases to be a beneficiary or applicant of the fund or exempt scheme, the trustee must destroy all records of the person's TFN within a reasonable time. [Item 15 - new subsections 299H(3), 299J(3), 299K(3) and 299L(3)]
8.44 Also the trustee of an exempt public sector superannuation scheme may only retain TFNs for as long as the scheme is an exempt scheme for the purposes of new Part 25A [item 15 - new section 299Y]. This amendment is required to ensure that if schemes fall outside the constitutional coverage of the SIS Act, they dispose of the TFNs, as they are no longer allowed to use them.
Transfer of TFNs to other funds and exempt schemes
8.45 Where a beneficiary has quoted his or her TFN to the trustee of a fund and an amount held for the benefit of the beneficiary is transferred from the fund to another fund or exempt scheme, the transferor trustee must inform the transferee trustee of the beneficiary's TFN [item 15 - new section 299M] . However, if the beneficiary has requested that the trustee not pass on his or her TFN, the trustee must not pass on the TFN [item 15 - new subsection 299M(3)] . If the trustee transfers the TFN when the beneficiary has requested this not be done the trustee is guilty of an offence [item 15 - new subsection 299M(4)] . When the TFN is passed to the transferee trustee, the beneficiary is taken to have quoted his or her TFN to the transferee trustee at the time it was passed [item 15 - new section 299R] .
8.46 This same position applies to exempt schemes except that such schemes are not required to pass TFNs on to other exempt schemes and funds but may do so [item 15 - new section 299N] . However, if the trustee of an exempt scheme does pass on the TFN when the beneficiary has requested this not be done the trustee will be guilty of an offence [item 15 - new subsection 299N(4)] .
ISC may obtain superannuation entity TFNs
8.47 The amendments allow the ISC to collect superannuation entity TFNs. The forms or notices that may require a superannuation entity's TFN include:
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- a notice electing to become a regulated superannuation fund [items 2 and 15 - new subsection 299U(1)] ;
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- the annual return provided to the ISC by superannuation entities [items 3 and 15 - new subsection 299U(2)] ;
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- a notice to provide information to the ISC within a specified period of the establishment of a superannuation entity [items 13 and 15 - new subsection 299U(8)] ; and
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- a notice to provide information to the ISC within a specified period set out by the ISC [items 14 and 15 - new subsection 299U(9)] .
Purposes for which TFNs can be used by the ISC and ATO
8.48 The ISC and the ATO presently match financial data of superannuation entities to determine superannuation entities' compliance with taxation law. The amendments will enable the ISC and ATO to use superannuation entities' TFNs (whether collected under the Superannuation Entities (Taxation) Act 1987 or the SIS Act) for this purpose to increase the integrity of such data matching. [Items 4 and 15 - new subsection 299U(3)]
8.49 The amendments also allow the ATO to use the TFNs of individuals held by the ATO for the purpose of processing reasonable benefits limits forms not containing the individual's TFN. This will ensure that the individual is subject to normal concessional rates of tax rather than the top marginal tax rate, without the need for the ATO to separately seek from the individual TFN information which the ATO already has. [Items 19, 20, 21 and 22]
8.50 The use of TFNs is strictly controlled under taxation law. There are penalties of up to $10,000 or 2 years in prison for unauthorised requesting, recording, use or communication of a person's TFN (sections 8WA and 8WB of the Taxation Administration Act 1953 ). Certain uses of TFNs are authorised under Commonwealth laws including the SIS Act. The Bill amends the Act and the SIS Act to reflect the new purposes for which TFNs quoted under the SIS Act may be used [item 23] . In recognition of TFN privacy considerations, the wording of new paragraph 202(i) of the Act indicates that the use of individuals' TFNs for superannuation purposes is restricted to the listed Parts of the SIS Act. Superannuation entities' TFNs may be used more broadly in administering the SIS Act.
Consolidation of TFN provisions into one Part of the SIS Act
8.51 Previously, provisions relating to TFNs in the SIS Act were spread throughout that Act. The opportunity has been taken in these amendments to combine the provisions in one Part of the SIS Act [item 15 - new Part 25A] . Accordingly, a number of provisions have been repealed or amended to reflect their consolidation into the new Part. Also, where appropriate, a note has been added after certain provisions to flag the relevance of the new Part to those provisions. [Items 1 to 14, 16 and 17]
8.52 The Bill provides that new Part 25A does not apply with respect to State insurance that does not extend beyond the limits of the State concerned. This amendment recognises that the Commonwealth lacks power to legislate with respect to State insurance (section 51(xiv) of the Commonwealth Constitution). [Item 15 - new section 299X]