Supplementary Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)Chapter 1 - Amendments to the Superannuation Legislation Amendment (Choice of Superannuation Funds) Bill 2002
Outline of chapter
1.1 The amendments improve the proposed choice of superannuation fund legislation contained in the Superannuation Legislation Amendment (Choice of Superannuation Funds) Bill 2002.
1.2 The amendments prescribe new arrangements for how an employee will choose a superannuation fund and prescribe new arrangements for where SG contributions will be paid when an employee does not make a choice.
1.3 The amendments will give effect to new penalty provisions for a contravention of the choice of fund requirements and defer the start date until 1 July 2005.
1.4 The amendments also prescribe a class of employee who cannot choose the fund into which their superannuation contributions are paid and makes a consequential amendment to the RSA Act.
Explanation of amendments
Retirement Savings Accounts Act 1997
1.5 A consequential amendment to the RSA Act will be inserted to ensure that choice of fund operates as intended. [Amendment 2]
1.6 Division 3 of Part 5 of the RSA Act contains section 52. Section 52 requires employers to provide employees with a choice of alternative superannuation vehicles before making an application for an RSA on behalf of the employee.
1.7 The effect of the choice of fund amendments made by Schedule 1 to the bill will mean that section 52 is no longer necessary.
1.8 The amendments defer the commencement date to 1 July 2005. [Amendments 1, 23 and 24]
1.9 Currently the choice of fund bill has 2 choice processes: a formal process and an informal process. These have been deleted and replaced by a system where an employee has more flexibility in choosing a fund. These amendments simplify choice of fund for employees and minimise employer obligations. [Amendments 9, 13 to 16, 18, 19, 21, 22, 25 to 27, 29, 30 and 35]
1.10 The amendments remove the requirement to choose a fund within 28 days after receiving a standard choice form. This will provide more time for employees to decide whether they want to choose a fund and employers will not have to monitor whether a choice was made within the 28 day period.
1.11 An employee must give their employer written notice to the effect that they want a fund to be a chosen fund [Amendment 15]. An employer may refuse to accept the employee's choice of fund if the employee chose another fund within the previous 12 months.
1.12 Employers do not have to accept a choice if the employee is unable to provide certain information such as the name of the fund and evidence that the chosen fund will accept the contributions from the employer on behalf of the employee. This could be evidence of an account number. [Amendment 18]
1.13 Section 32G outlines which fund may be chosen by an employee. A fund can only be a chosen fund if it is an eligible choice fund and it will accept contributions from the employer on behalf of the employee. [Amendment 19]
1.14 Employers are still required to provide a standard choice form before 29 July 2005 to people who were employees on 1 July 2005, to all new employees within 28 days of the person commencing employment, on request or when a fund ceases to be a chosen fund. However, an employer is not required to provide a standard choice form if the employee has chosen a fund before the time specified in the bill [Amendment 29]. For example, a new employee chooses a fund 2 weeks after commencing work and notifies the employer before receiving a standard choice form.
1.15 An employer also does not have to provide a standard choice form if they make contributions to a fund identified in subsections 32C(3) to (9) (inclusive). These include contributions in compliance with a State award or a collective agreement.
1.16 Currently employers will satisfy their SG obligations by making contributions to any complying superannuation fund or RSA. However, the bill prescribes rules to determine which fund an employer must contribute to if an employee does not make a choice. To retain the status quo, the default fund rules will be deleted from the bill. [Amendments 8, 11, 20, 31 to 34 and 37 to 39]
1.17 If the employee does not choose a fund then the employer can make contributions to any eligible choice fund [Amendment 11]. An eligible choice fund is a complying superannuation fund or RSA. Employers who are required to make award payments to a fund nominated in a Commonwealth industrial award will continue to make payments to that fund. The employer can choose any eligible choice fund if they are not required to make contributions to a fund nominated in a Commonwealth industrial award. This is consistent with the current application of the SGAA Act.
1.18 Employers are still required to provide employees with a standard choice form. If the employer does not provide a standard choice form then they may be liable for a choice penalty if they make contributions to a fund other than a chosen fund. However, this will not apply to any contributions made after the employer has provided the standard choice form to their employees. [Amendment 11]
1.19 The bill will be amended to insert new penalty provisions that apply for a contravention of the choice of fund requirements [Amendments 3 to 7, 10 and 12]. The previous penalty provisions will be removed [Amendments 28 and 36].
1.20 The amendments insert subsections 19(2A) and (2B) into the SGAA 1992. These are the key subsections as they potentially give rise to an increase in the amount of an employer's quarterly shortfall determined under subsection 19(1). Subsection 19(2A) applies when an employer makes contributions to an RSA or superannuation fund (other than a defined benefit scheme) which are not in compliance with the choice of fund requirements. Subsection 19(2B) applies where the contributions are paid to a defined benefit scheme. The 'choice penalty' will be paid to the employee.
1.21 Section 19A places a $500 cap on the amount of 'choice penalty' for an employee. Subsection 19A(1) places the cap on a particular quarter while subsection 19A(2) applies the cap for a notice period, which can consist of multiple quarters. For example an employer may be liable for a $300 shortfall in a quarter due to a breach of choice. The employer also breaches choice in the next quarter and is liable for an additional shortfall of $300. Under subsection 19A(2) the shortfall for the first quarter will be $300, and for the second quarter it will be the difference between the sum of the previous and $500, being $200. In this case all subsequent quarters that the employer breaches choice will not accumulate a penalty, as the $500 cap has already been reached. [Amendment 4]
1.22 This maximum limit does not reduce an employer's liability to any quarterly shortfall as a result of failing to pay the required level of SG contributions for an employee.
1.23 A notice period will start upon commencement of choice, the day on which the employee is first employed by the employer, or once the preceding notice period has ended. A notice period will end once the Commissioner gives the employer written notice that the notice period has ended.
1.24 Once a new notice period has begun, an employer can accumulate shortfall liabilities to the maximum $500 cap, if the employer breaches choice again. [Amendment 4]
1.25 The Commissioner will have the discretion to reduce (including to nil) any increase in an employer's quarterly shortfall under new subsection 19(2E). The Commissioner is required to issue guidelines that the Commissioner must have regard to when deciding whether or not to reduce the increase in the quarterly shortfall. The guidelines must be made available for inspection on the Internet. [Amendment 6]
1.26 It should be noted that any increase in an employer's quarterly shortfall will also lead to an increase in the nominal interest component under subsection 31(1) and potentially an increase in the administration component under section 32 of the SGAA 1992.
Increases in quarterly shortfall where contributions are made to an RSA or a superannuation fund other than a defined benefit scheme
1.27 Where an employer makes a superannuation contribution in respect of an employee to an RSA or a superannuation fund other than a defined benefit scheme, and that contribution is not in compliance with the choice of fund requirements, subsection 19(2A) may apply to increase the employer's quarterly shortfall. The amount of any increase is calculated in accordance with the following formula which is 25% of the shortfall that would apply if the contributions had not been paid.
25% *
[notional quarterly shortfall - amount worked out under subsection 19(1)]
1.28 As noted above, the maximum increase in the amount of an employer's quarterly shortfall is $500.
1.29 The following examples outline the steps an employer will take in determining whether any increase in the quarterly shortfall arises.
1.30 Examples 1.1 to 1.5 assume the following information:
- •
- Lucille is the only employee of Roger. Lucille has chosen a superannuation fund in compliance with the choice of fund requirements set out in Part 3A;
- •
- Lucille's salary is $36,000 (i.e. $9,000 per quarter) which is also her notional earnings base; and
- •
- the SGC percentage for the year is 9%.
For simplicity, only the calculations for a particular quarter have been performed. All contributions are made to complying funds.
Example 1.1
Roger does not make any superannuation contributions for the quarter on behalf of Lucille.
Step one: determine quarterly shortfall for employee
Since the prescribed SG charge percentage has not been reduced by any amount, the charge percentage remains at 9% (i.e. 9% prescribed less 0% provided). The quarterly shortfall under subsection 19(1) in respect of Lucille is therefore $810 (9% $9,000).
Step two: determine any increase in quarterly shortfall
As Roger does not make any contributions in respect of Lucille, subsection 19(2A) does not apply.
Accordingly, Roger is not subject to any increase in the SGC.
Example 1.2
Roger makes a $810 superannuation contribution for the quarter on behalf of Lucille. The contribution is not made to the fund chosen by Lucille.
Step one: determine quarterly shortfall for employee
Since the contribution represents 9% of Lucille's notional earnings base, the charge percentage is reduced to nil (i.e. 9% prescribed less 9% provided). The quarterly shortfall under subsection 19(1) in respect of Lucille is therefore $0.
Step two: determine any increase in quarterly shortfall Since the contributions are not made in compliance with the choice of fund requirements, the quarterly shortfall under subsection 19(1) will be increased using the formula under subsection 19(2A) (see paragraph 1.27) up to a maximum increase of $500. Note that the quarterly shortfalls can be increased from nil under subsection 19(2D).
The amount of the increase in SGC is determined as follows:
- The 'notional quarterly shortfall' is what the quarterly shortfall would be had Roger not made the contributions that did not comply with the choice of fund requirements (in this case, if Roger had not made any contributions), that is:
9% * $9,000 = $810- The amount worked out under subsection 19(1) is the amount calculated under step one, that is $0.
- Using the formula in new subsection 19(2A), the increase in Roger's quarterly shortfall is:
25% * ($810 - $0) = $202.50
Example 1.3
Roger makes a $540 superannuation contribution for the quarter to Lucille's chosen fund and $270 to another fund not chosen by Lucille.
Step one: determine quarterly shortfall for employee
The total contribution of $810 is 9% of Lucille's notional earnings base. Therefore, the quarterly shortfall worked out under subsection 19(1) is $0.
Step two: determine any increase in quarterly shortfall
$270 of the contributions (3% of Lucille's notional earnings base) do not comply with the choice of fund requirements. The quarterly shortfall under subsection 19(1) will be increased using the formula under subsection 19(2A):
The amount of the increase in the SGC is determined as follows:
- The 'notional quarterly shortfall' is worked out on the basis that this contribution had not been made. If this were the case, the charge percentage would only be reduced to 3%. Therefore, the notional quarterly shortfall is:
3% * $9,000 = $270- The amount worked out under subsection 19(1) is $0.
- Using the formula in new subsection 19(2A), the increase in Roger's quarterly shortfall is:
25% * ($270 - $0) = $67.50
Example 1.4
Roger makes a $810 superannuation contribution for the quarter to Lucille's chosen fund and $270 to another fund not chosen by Lucille.
Step one: determine quarterly shortfall for employee
The total contribution of $1,080 is 12% of Lucille's notional earnings base. Roger's charge percentage is accordingly reduced to 0%.
Therefore, the quarterly shortfall worked out under subsection 19(1) is $0.
Step two: determine any increase in quarterly shortfall
$270 of the contributions (3% of Lucille's notional earnings base) do not comply with the choice of fund requirements. However, as Roger has met the required SG with contributions that satisfy the choice of fund requirements, there is no increase in the quarterly shortfall.
That is, using the formula under subsection 19(2A):
- The 'notional quarterly shortfall' is worked out on the basis that the $270 contribution had not been made. If this were the case, Roger's charge percentage would still be reduced to 0% as Roger has contributed the prescribed amount to Lucille's chosen fund.
- Therefore, the notional quarterly shortfall is:
0% * $9,000 = $0- The amount worked out under subsection 19(1) is $0.
- Using the formula in subsection 19(2A), the increase in Roger's quarterly shortfall is:
25% * (0$ - $0) = $0
Example 1.5
Roger makes a $540 contribution to a fund not chosen by Lucille and makes no further contributions.
Step one: determine quarterly shortfall for employee
The contribution of $540 is 6% of Lucille's notional earnings base.
Therefore the quarterly shortfall worked out under subsection 19(1) is $270.
Step two: determine any increase in quarterly shortfall
$540 of the contributions (6% of Lucille's notional earnings base) do not comply with the choice of fund requirements under subsection 19(2A). The quarterly shortfall under subsection 19(1) will be increased using the formula under subsection 19(2A).
The amount of the increase in the SGC is determined as follows:
- The 'notional quarterly shortfall' is what the quarterly shortfall would be had Roger not made the contributions that did not comply with the choice of fund requirements in addition to any contributions he did not make at all. That is 9% of Lucille's notional earnings base.
9% * $9,000 = $810- The amount worked out under subsection 19(1) is the amount calculated under step one, that is $270.
- Using the formula in the new subsection 19(2A), the increase in Roger's quarterly shortfall is:
25% * (810 - 270) = 135
Increases in quarterly shortfall where contributions are made to a defined benefit scheme
1.31 Subject to new section 20, subsection 19(2B) may apply where an employer provides superannuation support in respect of an employee through a defined benefit scheme. If an employer currently provides superannuation support on behalf of employees to a defined benefit scheme, there must be a benefit certificate (covering the whole or part of the contribution period) specifying a notional employer contribution rate for a class of employees in the scheme or schemes to which the employer is providing support in order for the employer to meet his or her SG obligations.
1.32 Employers who use such schemes are still required to provide superannuation support in compliance with the choice of fund requirements. This is tested by reference to notional contributions to the defined benefit scheme. If on any day in the quarter the notional contributions to the scheme would not have been in accordance with the choice of fund requirements, the employer may be liable to extra SGC, calculated as:
25% *
[notional quarterly shortfall - amount worked out under subsection 19(1)]
* (number of breach of condition days / relevant days in quarter)
1.33 Examples 1.6 and 1.7 assume the following information:
- •
- Ben is an employee of IQ Pty Ltd (IQ) whose salary and wages for the quarter is $10,000;
- •
- Ben is an employee for the whole of the quarter and the number of days in the quarter is 90 days;
- •
- the SGC percentage for the year is 9%;
- •
- IQ provides superannuation support for all of its employees through a defined benefit scheme. IQ has a benefit certificate specifying a notional employer contribution rate of 9% which has effect for the quarter;
- •
- Ben is a member of the defined benefit scheme for the whole of the quarter (i.e. 90 days); and
- •
- Ben chooses a different fund in compliance with the choice of fund requirements, which becomes Ben's chosen fund 60 days into the quarter (i.e. there are 30 days which are in breach of the choice of fund requirements).
Example 1.6
Step one: determine quarterly shortfall for employee
Since IQ has a benefit certificate covering the whole of the quarter, the quarterly shortfall worked out under subsection 19(1) is $0.
Step two: determine any increase in quarterly shortfall
Since there is at least one day in the relevant period which is not in accordance with the choice of fund requirements (in actual fact, there are 30 days in breach of the choice of fund requirements), the quarterly shortfall under subsection 19(1) will be increased using the formula provided in paragraph 1.32.
- The 'notional quarterly shortfall' is the amount that would have been worked out under subsection 19(1) if no reduction were made under subsection 22(2) in respect of the scheme. That is, the formula initially assumes that all of the notional contributions to the scheme are not in compliance with the employee's choice of fund. In this case, the charge percentage would remain as 9%, giving a notional quarterly shortfall of $900.
- The 'number of breach of conditions days' is 30 days.
- The number of 'relevant days in the quarter' is 90 days (note, that in this case, the value of B in the formula in subsection 22(2) is 1, as the scheme membership period equals the employment period for the quarter).
- Using the formula in new subsection 19(2B), the increase in IQ's quarterly shortfall is:
= 25% * [$900 - $0] * (30 / 90)
= 25% * $300
= $75
Example 1.7
Assume the same information as in Example 1.6 except:
- Ben commenced employment at the beginning of the quarter, and becomes a member of the defined benefit scheme after 30 days, (and this membership continues for the remainder of the quarter).
- Ben has a chosen fund, in compliance with the choice of fund requirements, 70 days into the quarter (i.e. 20 days will be in breach of the choice of fund requirements).
Step one: determine quarterly shortfall for employee
In this case, IQ is not covered by the benefit certificate in respect of Ben for the first 30 days of the quarter and is covered for the remaining 60 days of the quarter. Under subsection 22(2), the employment period (i.e. 90 days in the quarter) is greater than the scheme membership period (i.e. 60 days), which means the reduction in the charge percentage is:
A * B = 9% * (60 / 90) = 6%
Therefore, IQ's quarterly shortfall worked out under subsection 19(1), is 3% (i.e. 9% - 6%) multiplied by Ben's quarterly salary and wages ($10,000), which equals $300.
Step two: determine any increase in quarterly shortfall
Since there is at least one day in the quarter which is not in accordance with the choice of fund requirements (actually there are 20 days in breach in this case), the quarterly shortfall under subsection 19(1) will be increased using the formula provided in paragraph 1.32.
- The 'notional quarterly shortfall' in this example is $900 (for the same reasons given in Example 1.6, that is, assuming all of the notional contributions to the scheme are not in compliance with the employee's choice of fund. Therefore, the charge percentage would remain as 9%, giving a notional quarterly shortfall of $900).
- The 'number of breach of conditions days' is 20 days.
- The number of 'relevant days in the quarter' is 60 days (note, that in this case, the value of B in the formula in subsection 22(2) is 0.333).
- Using the formula in new subsection 19(2B), the increase in IQ's quarterly shortfall is:
= 25% * [$900 - $300] * (20 / 60)
= 25% * $200
= $50
1.34 The amendments to the penalty regime require proposed section 32V in the bill to be moved to new section 20. No amendments have been made to the operation of this section. [Amendment 5]
1.35 The bill will be amended to prescribe a class of employee who cannot choose a fund into which their superannuation contributions are paid. [Amendment 17]
1.36 This amendment will ensure that employers are not required to fund additional superannuation benefits for employees.
1.37 The trust deeds of some defined benefit schemes require a full retirement, retrenchment or resignation benefit to be paid to a person provided they are a member of the fund on these events. These benefits would not be reduced even though the employer is required to make contributions to another fund under the choice of fund requirements. Generally, a person can remain a member of these schemes provided they are still employed with the company, that is, an employer cannot force an employee to leave the scheme.
1.38 Subsection 32F(3) ensures that employees who remain members of these defined benefit schemes cannot choose another fund. This will ensure that an employer in this situation will not have to make contributions to the fund chosen by the employee while also being required to finance that employee's rights to receive a full retirement, retrenchment or resignation benefit in the defined benefit scheme.
1.39 For example, Simone is a member of the Crows Superannuation Fund (a defined benefits scheme which secures her right to a retirement benefit of 8 times her final average salary). Simone requests her employer to make contributions to the Bombers Superannuation Fund (an accumulation fund). However, she intends to remain a member of the Crows Superannuation Fund.
1.40 Without this amendment, Simone's employer would have to fund the 8 times final average salary benefit, as well as an additional 9% SG contributions to the Bombers Superannuation Fund.
1.41 However, Simone's employer will be required to contribute to the Bombers Superannuation Fund if she ceases to be a member of the Crows Superannuation Fund.
1.42 Subsection 32F(3) does not apply if the benefits the person is eligible for in the defined benefit scheme change as a result of choosing another fund. For example, the retirement benefit changes from being 8 times final average salary to accrued benefits indexed to the consumer price index or fund earnings.