House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

Chapter 1 - Amendment of the Small Superannuation Accounts Act 1995

Overview

1.1 Schedule 1 to this Bill will change the arrangements governing the early release of monies from the Superannuation Holding Accounts Reserve (SHAR) to individuals on whose behalf the monies are held. Thearrangements will be altered in three aspects:

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access to monies in SHAR on the ground that the individual has ceased employment will be restricted to cases where the monies are less than $200 (currently this amount is $500);

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SHAR will be able to release monies to a person who claims to be a non-resident only after that person has reached the preservation age, currently 55; and

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the severe financial hardship test will be replaced with an objective test of hardship based on whether the individual has received specified Commonwealth payments for a certain period.

Summary of the amendments

Purpose of the amendments

1.2 The amendments will tighten the preservation arrangements relating to monies in SHAR in a manner consistent with arrangements that currently apply to superannuation funds and RSAs. The purpose of the amendments is to ensure that leakage from superannuation funds prior to genuine retirement is kept to a minimum.

Date of effect

1.3 The amendments will apply to withdrawal requests, in respect of monies in SHAR given to the Commissioner of Taxation on or after the Royal Assent of the Bill. [Item 12]

Background to the legislation

1.4 The Government announced in the 1997-98 Budget that it would tighten the arrangements for the early release of superannuation benefits. The decision was made in response to concerns that there is unnecessary leakage of preserved superannuation monies.

1.5 SHAR was established by the Small Superannuation Accounts Act 1995 (SSAA 1995). The SSAA 1995 was part of a legislative package requiring superannuation funds to protect small superannuation amounts by ensuring that fees and charges applying to small amounts are no greater than the interest earned on such amounts.

1.6 The SSAA 1995 enables SHAR to accept superannuation contributions from employers. This was done to ensure that where an employers superannuation fund did not accept a particular contribution because it had to protect it, the employer had an accessible fund with no contribution restrictions into which they could make contributions. SHAR is administered by the Commissioner of Taxation.

1.7 Consistent with the Governments retirement incomes policy that superannuation savings should be preserved for retirement, SHAR only permits contributions to SHAR to be accessed by the individual for whose benefit they are held in limited circumstances.

1.8 These limited circumstances are set out in Division 5 of Part 7 of the SSAA 1995. Section 62 of the SSAA 1995 provides a simplified outline of these circumstances and provides that the balance of an individuals account may be withdrawn if:

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the balance is less than $500 and the individual has ceased to be employed by all depositors;

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the individual is in severe financial hardship;

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the individual has retired because of permanent disability;

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the individual has turned 65; or

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the individual is not an Australian resident and is not employed in Australia.

Explanation of the amendments

1.9 Schedule 1 to the Bill alters three of the circumstances in which individuals can access money from SHAR so that they are consistent with the arrangements that already apply to superannuation funds and RSAs. The three circumstances altered are:

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individuals will no longer be able to request payment of their SHAR balance on the basis that their balance is less than $500. The limit will be reduced to $200;

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the severe financial hardship test will be replaced with an objective test of whether an individual has received specified Commonwealth payments over a certain period of time; and

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individuals will only be able to request payment of their SHAR balance on the basis that they are not an Australian resident if they have reached 55 years of age.

Balance of less than $200

1.10 Individuals will only be able to request payment of their SHAR balance on the ground that they have ceased employment if their balance is less than $200, instead of the $500 amount which currently applies. Section63 of the SSAA 1995, which allows individuals to access their balance on the ground that they have ceased employment, will be amended to account for the reduction in the amount from $500 to $200. [Item 8]

1.11 This reduction necessitates two consequential amendments. Section 14, which outlines the types of debits that can be made to an individuals SHAR account, and section 62, which provides a simplified outline of Division 5 of Part 7, are both amended to reflect the amendment of section 63. [Items 1 and 5]

Replacing the severe financial hardship test

1.12 The current severe financial hardship test in section 64 essentially allows individuals to access their SHAR balance where the Australian Prudential Regulation Authority (APRA) determines in writing that the individual is in severe financial hardship. This test will be replaced with an objective test that relies on the individual receiving specified Commonwealth payments for a certain period of time.

1.13 To access their SHAR balance under the replacement arrangements, individuals face slightly different tests depending upon their age.

1.14 Where an individual is 55 years of age or older he or she must be able to provide to the Commissioner of Taxation a letter from the Department or agency administering the particular payment or payments, that evidences the individuals receipt of that payment or payments for either:

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a period of at least 39 weeks or two or more periods that add up to at least 39 weeks, since the person has turned 55 [Item 9, new subparagraph 64(1)(b)(i) and new paragraph 64(1)(c)] ; or

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a continuous period of at least 26 weeks [Item 9, new subparagraph 64(1)(b)(ii) and new paragraph 64(1)(c)] .

1.15 Where an individual is aged less than 55 years of age, he or she must be able to provide to the Commissioner of Taxation a letter from the Department or agency administering the particular payment or payments they are receiving, that evidences the individuals receipt of that payment or payments for a continuous period of at least 26 weeks. [Item 9, new subparagraph 64(1)(b)(ii) and new paragraph 64(1)(c)]

1.16 The letter is taken to provide evidence that the continuous period of payment or payments has continued for 21 days after the date of the letter unless there is evidence to the contrary [Item 10, new subsection64(6)] . This extends the life of the letter to allow the individual 21 days after the date of the letter to give the Commissioner of Taxation a withdrawal request.

1.17 The Commonwealth payments that are specified for the purposes of the new test are social security benefits (other than an austudy payment or a youth allowance paid to a person undertaking full-time study) or social security pensions, service pensions, drought relief payments, or income support supplements as defined in section 23 of the Social Security Act 1991 . In addition, the amendments will provide for additional payments to be prescribed if such a need arises. [Item 10, new subsection 64(7)]

1.18 This change also results in consequential amendments to sections 14 and62 similar to those outlined in paragraph 1.11. [Items 2 and 6]

Examples of the new Commonwealth income support test

1.19 Elise, aged 54, has been in receipt of a service pension from the Department of Veterans Affairs for the last 26 weeks. Elise may access her superannuation money in SHAR by giving the Commissioner of Taxation a withdrawal request and a letter from the Department of Veterans Affairs stating that she has been in receipt of a service pension for at least the last 26 weeks.

1.20 Chantilly, age 64, received social security pension payments from Centrelink for 20 weeks when she was 61 and for another 20 weeks when she was 62. Chantilly may access her superannuation money in SHAR by giving the Commissioner of Taxation a withdrawal request and a letter from Centrelink stating that Chantilly has been in receipt of a social security pension for at least 39 weeks since she reached 55.

1.21 Simon, age 30, ceases to be in receipt of social security benefits. Simon had been in continuous receipt of social security benefits for twoyears prior to that date but had not applied to withdraw his superannuation money from SHAR before that time. Simon is unable to now withdraw his superannuation money because he is no longer in receipt of social security benefits.

Not an Australian resident

1.22 The current test effectively allows persons who intend to permanently depart Australia to have access to their account balance. TheBill changes this test to only allow non-residents access to their SHAR balances where they have reached 55 years of age. [Item 11]

1.23 This change also results in consequential amendments to sections 14 and 62 of the SSAA 1995 similar to those outlined in paragraph 1.11. [Items 3, 4 and7]