Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)General outline and financial impact
Clarification of the meaning of 'eligible employee'
Schedule 1 to this Bill amends the Income Tax Assessment Act 1936 by clarifying the definition of 'eligible employee' in section 82AAA.
This clarification is intended to put beyond doubt the fact that a taxpayer cannot be an employee of themselves. This will ensure that only contributions made for genuine eligible employees are deductible.
Date of effect: The amendments will apply to any superannuation contributions made after 4.00 pm, by legal time in the Australian Capital Territory, on 30 June 2000.
Proposal announced: This measure was announced in the Assistant Treasurer's Media Release No. 35 of 30 June 2000.
Financial impact: Negligible.
Compliance cost impact: Negligible.
Summary of regulation impact statement
Impact: Low.
Main points:
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- Business will benefit from slightly reduced ongoing compliance costs, by virtue of the greater simplicity and clarity.
- •
- The very limited number of taxpayers affected will incur small up-front costs familiarising themselves with the measures or having advisers familiarise themselves with the new law.
Removal of deductions for contributions to non-complying superannuation funds
Schedule 1 to this Bill amends the Income Tax Assessment Act 1936 and the Income Tax Assessment Act 1997 to deny deductions for employer contributions knowingly made to non-complying superannuation funds. Contributions will only be deductible if the contributions are made to a complying superannuation fund.
Non-complying funds have generally not been used for retirement income purposes but instead have been extensively used in tax schemes attempting to achieve a tax wipe-out.
Date of effect: The amendments will apply to any superannuation contributions made after 4.00 pm, by legal time in the Australian Capital Territory, on 30 June 2000.
Proposal announced: This measure was announced in the Assistant Treasurer's Media Release No. 35 of 30 June 2000.
Financial impact: Negligible.
Compliance cost impact: Negligible.
Summary of regulation impact statement
Impact: Low.
Main points:
- •
- Business will benefit from slightly reduced ongoing compliance costs, by virtue of the greater simplicity and clarity. Deductions will be available for contributions to the same category of superannuation funds that qualify for contributions under superannuation guarantee.
- •
- The very limited number of taxpayers affected will incur small up-front costs familiarising themselves with the measures or having advisers familiarise themselves with the new law.
Superannuation excluded from fringe benefits only when made for an employee
Schedule 1 to this Bill amends the Fringe Benefits Tax Assessment Act 1986 to ensure that the exclusion of payments to superannuation funds and retirement savings accounts from the term 'fringe benefit' applies only to payments made for the employee.
Superannuation contributions made by an employer for the benefit of an associate of the employee will be subject to fringe benefits tax.
Date of effect: Contributions made after introduction of this Bill.
Proposal announced: Not applicable.
Financial impact: Negligible.
Compliance cost impact: Negligible.
Chapter 1 - Clarification of the meaning of 'eligible employee'
Outline of Chapter
1.1 The amendment made by item 3 of Schedule 1 clarifies the meaning of the term 'eligible employee', as defined in Subdivision AA, to ensure that the controlling interest holder and the employee cannot be the same person.
Background to the legislation
1.2 Subdivision AA of Division 3, Part III of the Income Tax Assessment Act 1936 provides a code for deductions for contributions to superannuation funds made by employers for the benefit of eligible employees.
1.3 The definition of eligible employee found in section 82AAA includes an individual who is an employee of a company in which the taxpayer, including an individual taxpayer, holds a controlling interest. A taxpayer who holds a controlling interest in a company can claim a deduction for a contribution to a superannuation fund for an employee of the company, subject to certain limits which have varied over time.
1.4 The purpose of introducing the term eligible employeewas to allow business some flexibility in making deductible contributions for employees of the business, for example, through a controlling entity rather than the direct employer.
1.5 However, tax promoters have been abusing these provisions, arguing that taxpayers can claim deductions under these provisions for contributions made for their own benefit. They argue that they can be an eligible employee of themselves if they are employed by an entity controlled by themselves.
1.6 It was not intended that an individual could be treated as an employee of themselves. The well established general principle under common law, that an individual cannot enter into a contract with themselves, is not overturned by anything specific in this section.
1.7 Subdivision AB, on the other hand, contains specific provisions for the deductibility of contributions made to a superannuation fund by an individual on their own behalf. Subdivision AA was never intended to allow a deduction for personal contributions.
Summary of the clarification
1.8 The concessions made available for contributions to superannuation funds have been targeted by some tax planners who seek to gain much greater tax concessions than those that were intended to be available.
1.9 The Subdivision is being amended to ensure that the taxpayer and the employee must be different people. This amendment is for the purpose of clarification.
Detailed explanation of the clarification
1.10 The definition of eligible employee in section 82AAA is amended to make clear that an eligible employee must be a person other than the taxpayer. The taxpayer cannot be an eligible employee of themselves. [Schedule 1, item 3]
1.11 This amendment is for the purpose of clarification. It should be read as a confirmation of the effect of the current law, rather than a change. It should not be read to mean that the current law was in any way defective.
1.12 This amendment will not affect the ability of an individual taxpayer to claim a deduction for contributions made in respect of employees of a company other than themselves in which the individual taxpayer has a controlling interest.
Example 1.1
Jim runs a small business through a company called Jim's Realty. Jim holds a controlling interest in the company, which employs Jim, Spiro and Tina. The company could claim a deduction for contributions made for all 3 employees, because they are all eligible employees of the company.
Jim is unable to claim a deduction through the controlling interest provisions for contributions made for himself because he cannot be an eligible employee of himself.
Application and transitional provisions
1.13 This measure, which is for the purpose of clarification only, was announced in the Assistant Treasurer's Media Release No. 35 of 30 June 2000.
1.14 The amendments will apply to any superannuation contributions made after 4.00 pm, by legal time in the Australian Capital Territory, on 30 June 2000. [Schedule 1, subitem 11(1)]
Chapter 2 - Removal of deductions for contributions to non-complying superannuation funds
Outline of Chapter
2.1 The amendments made by items 1, 2 and 4 to 7 of Schedule 1 ensure that taxpayers cannot claim a deduction for a superannuation contribution knowingly made to a non-complying superannuation fund, including a non-resident superannuation fund.
Background to the legislation
2.2 Subdivision AA of Division 3, Part III of the Income Tax Assessment Act 1936 (ITAA 1936) provides a code for deductions for contributions to superannuation funds for the benefit of eligible employees. This is an exclusive code for deductions to be claimed for employer contributions to either complying superannuation funds under section 82AAC or non-complying superannuation funds under section 82AAE.
2.3 The concessions available for contributions to non-complying superannuation funds have been targeted by some tax planners who seek to gain much greater tax concessions than those that were intended to be available.
2.4 Under the current law, contributions to a non-complying superannuation fund are deductible to employers and subject to fringe benefits tax (FBT). Taxation planners, however, are using tax planning structures to maximise deductions while claiming that FBT does not apply, marketing the schemes as a complete tax wipe-out.
2.5 The application of FBT to contributions made to any non-complying fund, both resident and non-resident, was intended to ensure that these funds were not attractive in comparison to complying funds, the Government's preferred vehicle for retirement savings.
Summary of new law
2.6 The amended provisions ensure that no deduction is available for a contribution knowingly made to a non-complying superannuation fund in any circumstances, including a contribution made to a non-resident superannuation fund, through either the ITAA 1936 or the Income Tax Assessment Act 1997 (ITAA 1997).
| New law | Current law |
|---|---|
| No deduction available for contributions knowingly made to non-complying superannuation funds. | Deductible contributions can be made to non-complying superannuation funds. |
Detailed explanation of new law
2.7 Section 82AAE is repealed. This removes the major provision through which deductions have previously been available for a contribution to a non-complying superannuation fund (including a non-resident superannuation fund). [Schedule 1, item 4]
2.8 The insertion of subsection 26-75 in the ITAA 1997 ensures that no deduction is available under any other section of either Act for contributions made to a non-complying fund, with only one limited exception. [Schedule 1, item 6, section 26-75]
2.9 A definition of 'non-complying superannuation fund' is inserted into section 995-1 of the ITAA 1997. [Schedule 1, item 7]
2.10 In rare circumstances, a deduction may be available to an employer that makes a contribution to a non-complying superannuation fund that the employer reasonably believes to be a complying superannuation fund. Section 82AAD sets out the strict circumstances where this may apply.
2.11 The repeal of section 82AAE brings all taxpayers into line with visitors from overseas on short term visas (exempt visitors under section 517 of the ITAA 1936), since there was already no deduction available for these employees. However, contributions made to a non-resident superannuation fund for these exempt visitors remain excluded from the definition of fringe benefit.
2.12 Restricting the deduction for superannuation contributions to those contributions made to a complying superannuation fund ensures that the concession is better targeted to the provision of retirement income. Complying superannuation funds are the government's preferred vehicle for retirement savings.
2.13 Table 2.1 summarises the treatment of contributions made by an employer to a non-complying superannuation fund for the benefit of employees.
| For whose benefit is the contribution paid? | Is the contribution deductible to the employer? | Is the contribution subject to FBT? | Explanation |
|---|---|---|---|
| Individuals who are not residents of Australia and are employed overseas. | No | No | No FBT is payable on payments to employees where the source of their income is outside Australia. The proposals do not change the FBT treatment |
| Exempt visitors (i.e. temporary visa of 4 years or less). | No | No | The exemption from FBT is based on the assumption that these taxpayers intend to leave Australia and will not seek an Australian pension. The proposals do not change the FBT treatment |
| Resident employees who are not exempt visitors including Australian residents employed by an Australian company to work outside Australia. | No | Yes | These contributions are subject to FBT. This is an appropriate outcome since there is no reason for concessional taxation treatment for a resident contributing to a non-complying fund, and there is no reason why they cannot contribute to a complying fund.
The same treatment applies to individuals recruited to Australia for a period of more than 4 years. Contributions could be made to a complying fund to avoid this treatment. The Government's preferred approach in this instance is to endeavour to enter into bilateral negotiations with other countries to facilitate reciprocal agreements for the transfer of superannuation benefits by non-residents on permanent departure from Australia. Residents employed overseas (on a basis which allows them to maintain their residency status) receive concessional treatment for contributions only if they are made to a complying fund because they may intend to return to Australia. The proposals do not change the FBT treatment. |
Example 2.1
Harry employs Betty and Lara to manage his financial affairs. All are Australian residents. He makes contributions for Betty into a complying superannuation fund, which are deductible to the employer and not subject to FBT. He makes contributions for Lara into a non-complying superannuation fund. These contributions are not deductible and will be subject to FBT.
An exception to this is found in the case of contributions to a non-resident fund for individuals who are exempt visitors under section 517 of the ITAA 1936. If Lara were an exempt visitor the contributions would be excluded from FBT.
Example 2.2
Harry also employs Clive, a resident of Nepal, to manage his businesses in Nepal. A contribution made for Clive into Clive's local superannuation fund, a non-resident and non-complying superannuation fund for the purposes of Australian legislation, would not be deductible to Harry, nor would it attract a fringe benefits liability. This is consistent with the treatment of exempt visitors to Australia.
Example 2.3
Clive also has a business in Australia, where he employs Jane and Julia. A contribution made for Jane into a complying superannuation fund would be deductible to Clive. However, a contribution made for Julia to her Nepal based fund would not be deductible and would be subject to FBT (unless Julia is an exempt visitor).
2.14 It is an intended consequence of this amendment that superannuation benefits made to a non-complying superannuation fund will not be deductible but will be subject to FBT. Although unusual, this is designed to thwart tax planning arrangements that seek to gain greater tax concessions than those that were intended to be available.
Application and transitional provisions
2.15 This measure was announced in the Assistant Treasurer's Media Release No. 35 of 30 June 2000.
2.16 The amendments will apply to any superannuation contributions made after 4.00 pm, by legal time in the Australian Capital Territory, on 30 June 2000. [Schedule 1, subitem 11(1)]
Consequential amendments
2.17 Reference to section 82AAE will be removed from the following provisions because they will become redundant:
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- paragraph 67AAA(1)(b) [Schedule 1, item 1] ; and
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- subsection 73B(1) [Schedule 1, item 2] .
2.18 Reference to section 82AAE will be replaced by reference to section 26-75 of the ITAA 1997 in section 12-5 of the ITAA 1997. [Schedule 1, item 5]
Chapter 3 - Superannuation excluded from fringe benefits only when made for an employee
Outline of Chapter
3.1 The amendment made by Part 3 of Schedule 1 ensures that the exclusion of payments to superannuation funds and retirement savings accounts from the term 'fringe benefit' applies only to payments made for the employee, and not to payments made for associates of the employee.
Background to the legislation
3.2 Section 136 of the Fringe Benefits Tax Assessment Act 1986 contains definitions of terms relevant to the administration of that Act, including a definition of the term fringe benefit.
3.3 The definition of fringe benefit includes benefits provided to an employee or an associate of an employee by the employer, an associate of the employer or a third party, in respect of the employee's employment. However, certain payments and benefits are specifically excluded from the definition and therefore exempt from fringe benefits.
3.4 One of the exclusions, contained in paragraph (j) of the definition, is a benefit constituted by, broadly:
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- superannuation contributions paid to a complying superannuation fund;
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- superannuation contributions paid to a non-resident fund in respect of an 'exempt visitor'; or
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- amounts paid to a retirement savings account.
The above will be referred to collectively in this Chapter as superannuation contributions.
3.5 This exclusion has meant that superannuation contributions are excluded from the definition of fringe benefits even if paid for the benefit of an associate.
3.6 The exclusion of these contributions from fringe benefits has made the sacrifice of salary to the superannuation fund of a spouse or associate attractive. This is particularly so for public servants and employees of some tax exempt bodies, since the absence of a deduction for these contributions is of no concern.
3.7 This has enabled employees of tax exempt bodies to salary package in a more tax effective manner than that available to other employees.
Summary of new law
3.8 The amendment ensures superannuation contributions paid for an associate of an employee are no longer excluded from the definition of a fringe benefit.
3.9 Superannuation contributions paid to non-complying funds will continue to be subject to fringe benefits tax (FBT) in all cases except where made for an employee who is also an 'exempt visitor'.
| New law | Current law |
|---|---|
| Superannuation contributions paid to a complying superannuation fund for an employee are excluded from FBT. | Superannuation contributions paid to a complying superannuation fund are excluded from FBT regardless of who the payment is for |
| Superannuation contributions paid to a non-resident superannuation fund for an employee are excluded from FBT if that employee is an exempt visitor. | Superannuation contributions paid to a non-resident superannuation fund are excluded from FBT if paid in respect of an exempt visitor regardless of who the payment is for |
| Payments to a retirement savings account for an employee are excluded from FBT. | Payments to a retirement savings account are excluded from FBT regardless of who the payment is for. |
Detailed explanation of new law
3.10 Amendments made by this Bill ensure that superannuation contributions are included in the definition of fringe benefits if they are paid for the purpose of making provision for superannuation benefits for associates of an employee. [Schedule 1, items 8 to 10]
3.11 It is an intended consequence of this amendment that superannuation contributions made for the benefit of associates of employees will now be subject to FBT, even though such contributions are generally not deductible. Although unusual, this is designed to thwart tax planning arrangements that seek to gain greater tax concessions than were intended to be available.
3.12 This amendment does not affect in any way the ability to make contributions for, or the ability to claim, a rebate for contributions made by an individual on behalf of a low income spouse.
3.13 This amendment does not affect the ability of taxpayers to claim a deduction for superannuation contributions made in respect of employees.
3.14 Superannuation contributions made in respect of associates of employees are not generally deductible. This does not change.
3.15 Table 3.1 summarises the treatment of contributions made by an employer to a complying superannuation fund for the benefit of both an employee and an associate of an employee.
| For whose benefit is the contribution paid? | Is the contribution tax deductible to the employer? | Is the contribution subject to FBT? | Explanation |
|---|---|---|---|
| Superannuation paid for the employee. | Yes | No | Concessional tax treatment, including the exclusion from FBT, is provided to encourage the provision of superannuation for employees |
| Superannuation paid for an associate of the employee. | No | Yes | Superannuation policy intends to provide concessional treatment to contributions for employees only. |
Application and transitional provisions
3.16 The amendments will apply to any superannuation contributions made after introduction of this Bill. [Schedule 1, subitem 11(2)]
Chapter 4 - Regulation impact statement
4.1 The Office of Regulation Review has advised that a regulation impact statement is not required for the measure relating to the exclusion of superannuation from fringe benefits when made to an employee.
Policy objective
Clarification of the meaning of 'eligible employee'
4.2 This clarification is intended to put beyond doubt the fact that a taxpayer cannot be an employee of themselves. This will ensure that only contributions made for genuine eligible employees are deductible.
Removal of deductions for contributions to non-complying superannuation funds
4.3 This measure gives effect to the Government decision to deny deductions for employer contributions knowingly made to non-complying superannuation funds. Contributions will only be deductible if the contributions are made to a complying superannuation fund.
4.4 Contributions made to non-complying superannuation funds (i.e. funds which do not meet the Government's criteria for concessional taxation treatment) will no longer be deductible, in line with personal contributions made to non-complying superannuation funds.
4.5 Non-complying funds have generally not been used for retirement income purposes but instead have been extensively used in tax schemes attempting to achieve a tax wipe-out.
Implementation options
Clarification of the meaning of 'eligible employee'
4.6 Only one option is for consideration. It involves inserting a subsection which clearly states that the taxpayer cannot be an eligible employee of themselves under section 82AAA.
4.7 Retrospective application for this amendment is unnecessary since it is only a clarification.
Removal of deductions for contributions to non-complying superannuation funds
4.8 Only one option is for consideration. It involves repealing section 82AAE of the Income Tax Assessment Act 1936 and amending the Income Tax Assessment Act 1997 to ensure that no deduction is available for contributions made to a non-complying superannuation fund.
4.9 Retrospective application for this amendment is unnecessary. The Commissioner of Taxation (Commissioner) is confident that litigation will uphold the Australian Taxation Office (ATO) view on the application of the legislation to contrived schemes, and there is no intention to adversely affect other taxpayers by making the amendments retrospective.
Assessment of impacts
4.10 Potential compliance, administrative and economic impacts of the measures in this Bill have been considered. However, this consideration concluded that the impacts on taxpayers not involved in tax planning are negligible.
Clarification of the meaning of 'eligible employee'
4.11 No group of taxpayers will be adversely affected by the clarification of section 82AAE. This will simply ensure that all taxpayers follow the Commissioner's advice about the correct interpretation of the current law.
4.12 Individuals will benefit from the greater clarity in the law. This will confirm the correct treatment of superannuation contributions that a taxpayer makes for themselves, and deny scheme promoters any opportunity to mislead any such individual taxpayers.
Removal of deductions for contributions to non-complying superannuation funds
4.13 Employers will be largely unaffected by the proposal. Although this is not a provision that is widely used, they will need to be aware of this, as it is no longer effective to make contributions to non-complying superannuation funds.
4.14 ATO records were interrogated to determine how many superannuation funds lodged tax returns for the financial year ended 30 June 1999, indicated that they were non-complying superannuation funds and paid the relevant rate of tax (47%).
4.15 Of the approximately 200 funds that did so, very few declared any employer contributions received during the year. This suggests very few employers are making contributions to non-complying superannuation funds, except of course to those participating in aggressive tax planning which are less likely to report to the ATO.
4.16 Individuals will be unaffected by the proposal. Individuals may use non-complying superannuation funds, but no tax deduction is available under current law for personal contributions to non-complying superannuation funds, so this Bill has no effect on such individuals.
4.17 Aggressive tax planners and other scheme promoters will be hindered in their efforts to market schemes which clearly attempt to achieve results outside the intent of the legislation.
4.18 The proposal will have only a small impact on the ATO. Minor education costs will be incurred to ensure that staff are aware of the change. Minor changes will be needed to some information booklets.
4.19 Costs involved in combating aggressive tax planning will be reduced, or resources will be able to be better targeted.
4.20 As is standard with any new measure, groups affected by the measures will incur small up-front costs familiarising themselves with the measures or having advisers familiarise themselves with the new law.
4.21 However, overall, these measures are expected to slightly reduce ongoing compliance costs for business and individuals, by virtue of the greater simplicity and clarity.
4.22 Businesses will benefit most from greater clarity. Deductions will be available for contributions to the same category of superannuation funds that qualify for contributions under superannuation guarantee.
4.23 Individuals who participate in tax planning activities will benefit slightly from the greater certainty in the area.
4.24 There will be no increased compliance costs for superannuation funds. Non-complying superannuation funds do not receive significant contributions from employers (except those involved in schemes), and the measures have no effect on complying superannuation funds.
4.25 The proposal will involve small additional up-front costs for the ATO, such as minor education costs to ensure that staff are aware of the change. Minor changes will be needed to some information booklets.
4.26 Closing down these schemes will enable the ATO to reduce the resources allocated to combating these particular schemes and re-allocate these resources in a way which will better target new and emerging schemes.
4.27 The measures act to protect Government revenue. There is no additional revenue expected from these measures.
4.28 Industry and media figures suggest that several billion dollars are involved in these schemes. Initial ATO estimates of the amounts involved are not as high. In any case, these amounts are not lost to revenue. Although the collection is delayed, these amounts will be collected provided that compliance action and litigation is successful.
4.29 No impacts have been identified, since we are only clarifying one aspect of the effect of the legislation and making one minor change.
4.30 Industry has reacted positively to the Assistant Treasurer's Media Release No. 35 of 30 June 2000. There is a general acceptance in the genuine superannuation community that these measures are necessary to reign in those acting outside acceptable limits.
Conclusion and recommended option
4.31 The recommended measures should be adopted. These measures will contribute significantly to the fairness, integrity and equity of the tax system by reducing the scope for minimisation of tax by taxpayers which arises from current anomalies and alleged anomalies in the current taxation legislation.