House of Representatives

Explanatory Memorandum

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

General outline and financial impact

Imposition of taxation on superannuation payments made to certain persons who have permanently departed Australia

The Income Tax (Superannuation Payments Withholding Tax) Bill 2002 imposes tax on the different components of a departing Australia superannuation payment made to temporary residents permanently departing Australia.

Date of effect : The amendments will commence on the later of Royal Assent and Royal Assent of the related Taxation Laws Amendment (Superannuation) Bill (No. 1) 2002. The new tax will apply to payments made on or after 1 July 2002.

Proposal announced : The measure was foreshadowed in the Government's policy statement A Better Superannuation System on 5 November 2001, and clarified in Minister for Revenue and Assistant Treasurer's Press Release No. C301 of 27 December 2001.

Financial impact : This bill and the related Taxation Laws Amendment (Superannuation) Bill (No. 1) 2002 are expected to result in increased revenue of $70 million in 2002-2003, $110 million in 2003-2004 and $75 million in 2004-2005.

Compliance cost impact : The related amendments in the Taxation Laws Amendment (Superannuation) (No. 1) Bill 2002 will require superannuation funds to ensure the correct tax is withheld from departing Australia superannuation payments.

Summary of regulation impact statement

Regulation impact on business

Impact : In conjunction with amendments to the Superannuation Industry Supervision Regulations and Retirement Savings Account Regulations the measure will reduce ongoing administrative and compliance costs for superannuation funds in maintaining accounts for temporary resident members. Superannuation funds will have to ensure the correct tax is applied to the payments.

Main points :

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Superannuation benefits accessed under the new conditions will be subject to a special tax, which would be withheld by the superannuation fund and remitted to the Australian Taxation Office.

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Superannuation funds will face initial compliance costs associated with updating computer systems to reflect the new condition of release and to withhold the special tax levied on superannuation benefits accessed by departed temporary residents.

Chapter 1 - Imposition of taxation on superannuation payments made to certain persons who have permanently departed Australia

Outline of chapter

1.1 This bill will impose a tax on the recipients of a departing Australia superannuation payment.

Context of amendments

Background

1.2 A new payment, called a departing Australia superannuation payment will be created in the Income Tax Assessment Act 1936 (ITAA 1936) pursuant to the Taxation Laws Amendment (Superannuation) (No. 1) Bill 2002. However, it will not be classified as an eligible termination payment and will not form part of assessable income. The departing Australia superannuation payment will instead be subject to tax under this bill.

Summary of new law

1.3 This bill imposes the tax rates to apply to a departing Australia superannuation payment for the purpose of section 27GA of the ITAA 1936 (which is to be inserted by Schedule 1, Part 1, item 4 of the Taxation Laws Amendment (Superannuation) Bill (No. 1) 2002).

Comparison of key features of new law and current law

Detailed explanation of new law

1.4 A new payment, defined as a departing Australia superannuation payment will be subject to tax in accordance with section 27GA of the ITAA 1936 (which is to be inserted by Schedule 1, Part 1, item 4 of the Taxation Laws Amendment (Superannuation) (No. 1) Bill 2002).

1.5 Clause 5 provides the rates of tax that will apply to the departing Australia superannuation payment as follows:

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for so much of the payment as represents an undeducted contribution or post-June 1994 invalidity component - nil;

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for so much of the payment as represents an untaxed element of the post-June 1983 component - 40%; and

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for the remainder of the payment - 30%

Application and transitional provisions

1.6 This bill will commence on the later of Royal Assent and the day on which the related Taxation Laws Amendment (Superannuation) Bill 2002 receives Royal Assent.

Consequential amendments

1.7 Related amendments are contained in the Taxation Laws Amendment (Superannuation) Bill (No. 1) 2002.

Regulation Impact Statement

Background

1.8 Up until 1 July 1998, all individuals departing Australia on a permanent basis had access to their superannuation entitlements (which could be released on production of evidence that the individual was departing Australia permanently, such as a one way air ticket). Since then, a person who permanently departs Australia has only been able to access preserved benefits at or after preservation age. Early release of benefits may be possible, subject to the governing rules of the fund:

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where the person's preserved benefits in the fund are less than $200;

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if the benefits are taken in the form of a lifetime non-commutable pension or annuity; or

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if the benefits are unrestricted non-preserved benefits (which largely arise from deducted contributions in excess of the award or Superannuation Guarantee (SG) rate made prior to 1 July 1999).

1.9 There are approximately 275,000 individuals holding temporary residence visas (temporary residents) who are eligible to work in Australia at any given time. Treasury's Retirement and Income Modelling Unit estimates that the superannuation accounts of past and present temporary residents currently contain approximately $1.19 billion. This amount is expected to increase by approximately $300 million per year if there is no policy change.

1.10 Requiring superannuation funds to preserve temporary residents' superannuation benefits imposes ongoing administrative and compliance costs on the funds. These costs include complying with the member protection rules which require that fees charged on accounts with balances below $1,000 and lost member accounts do not exceed any investment gains. Any financial benefits that accrue to these temporary members are offset by additional administrative charges borne by other members. In addition, there is no justification on retirement income policy grounds for requiring the superannuation assets of temporary residents to be preserved as these individuals do not possess the right of retiring in Australia.

Policy objective

1.11 The policy objective is to reduce the administrative and compliance costs that superannuation funds incur in preserving the superannuation benefits of temporary residents who have permanently departed Australia and who will not be retiring in Australia.

Implementation options

Option 1: Exempt temporary residents from the Superannuation Guarantee

1.12 This option would exclude salary and wages paid to temporary residents performing work in Australia from the SG.

Assessment of impacts

Impact group identification

1.13 Employers will benefit from lower costs of employing temporary residents. Employment opportunities for Australian residents may be reduced as this option would be likely to give rise to labour market distortions by making temporary residents cheaper to employ than similarly skilled Australians.

Assessment of costs

Administrative costs

1.14 This option would increase the costs incurred by the Australian Taxation Office (ATO) in administering compliance with the SG arrangements by requiring identification of employees who are temporary residents.

Compliance Costs

1.15 Employers will face increased compliance costs if there are different rules for different categories of employees.

Government revenue

1.16 This option would result in a loss of superannuation taxation revenue which would have been payable on SG contributions made on behalf of non-residents.

Option 2: Allow temporary residents who have permanently departed Australia to access their superannuation benefits (preferred option)

1.17 This option would involve amending the existing preservation rules under the Superannuation Industry (Supervision) Act 1993 to require superannuation fund trustees to allow temporary residents to access their superannuation benefits in cash on permanent departure. Similar amendments would apply to the Retirements Savings Account Act 1997.

1.18 Superannuation benefits accessed following departure by temporary residents will be subject to a special tax, which would be withheld by the superannuation fund and remitted to the ATO. The special tax would claw back Australian superannuation tax concessions which have only been made available on the proviso that the funds are used for genuine retirement purposes. An alternative to a special tax would be to tax the temporary resident's benefit at their marginal tax rate (adjusted for contributions tax already paid). However, this approach would be administratively complex as non-residents would be required to claim any excess tax withheld by their superannuation fund through the income tax system, so it has not been considered further. Australian citizens and permanent residents would remain subject to the existing preservation rules as they retain the option of retiring in Australia.

Assessment of impacts

Impact group identification

1.19 Superannuation funds will benefit from reduced ongoing administrative and compliance costs incurred in maintaining accounts for temporary resident members. These costs include complying with the member protection rules, which require that fees charged on accounts with balances below $1,000 and lost member accounts do not exceed any investment gains, and the administrative procedures required to be followed in attempting to contact lost members. Superannuation fund members will benefit to the extent that these lower costs result in lower fees and charges.

1.20 Temporary resident members of superannuation funds who have permanently departed Australia will benefit by reducing the likelihood that they will lose track of their superannuation savings once they have departed Australia. Hence, there will be fewer lost members in the Australian superannuation system.

Assessment of costs

Administrative costs

1.21 A temporary resident member who seeks to access their superannuation benefits would need to provide the fund with verification that they have met the requirements for such access. It is proposed that the Department of Immigration and Multicultural Affairs (DIMA) administer the verification system. A fee could be charged to recover any resultant administrative costs incurred by DIMA. Consideration will also be given to a more streamlined verification process, potentially involving accounts with very low balances.

Compliance costs

1.22 Superannuation funds would face initial compliance costs associated with updating computer systems to reflect the new condition of release and to withhold the special tax levied on superannuation benefits accessed by departed temporary residents.

Government revenue

1.23 Government revenue will increase as withdrawals will be subject to a special tax in order to claw back Australian superannuation tax concessions which have been made available on the proviso that the funds are used for genuine retirement purposes.

Table 1.1: Estimated revenue impact ($ million)

Option 3: Allow temporary residents who have permanently departed Australia to transfer their superannuation benefits overseas

1.24 This option would be similar to option 2 but would require the superannuation benefits of temporary residents to be transferred directly to an overseas pension fund where they would continue to be preserved.

Assessment of impacts

Impact group identification

1.25 This option would be likely to result in inequitable treatment for different individuals from different countries, as some individuals will be able to locate a suitable fund into which their superannuation can be transferred while others will not.

Assessment of costs

Administrative costs

1.26 Given the vast array of differing schemes and funds subject to differing rules (or types of funds or countries in which they operate), it would be a complex, resource intensive and ongoing task to monitor overseas funds to ensure transferred benefits continue to be preserved. If this option was implemented, it would be likely that this task would fall on the Australian Prudential Regulation Authority (APRA).

Compliance costs

1.27 This option would be administratively complex for superannuation funds, who would be required to ensure that the superannuation benefits of temporary residents are transferred directly to an overseas fund where they will continue to be preserved. There would be no formal mechanism for the exchange of information with other countries on the rules governing overseas pension funds that would be required to verify that transferred benefits will continue to be preserved in the overseas fund.

Consultation

1.28 Consultations have been undertaken with industry bodies, including the Australian Chamber of Commerce and Industry, the Association of Superannuation Funds of Australia, Industry Funds Forum, professional organisations including, the Institute of Actuaries of Australia, Certified Practicing Accountants Australia and the Institute of Charted Accountants in Australia, the administrators of Commonwealth and State public sector superannuation schemes and the American Chamber of Commerce in Australia.

1.29 Most groups consulted indicated their in principle support for option 2. A minority indicated their initial preference was for option 1. However, there was also some recognition among these groups that option 1 could lead to labour market distortions and/or tax avoidance opportunities.

1.30 With regard to option 2, DIMA is being consulted on the development of verification requirements for temporary residents who wish to access their superannuation benefits. The ATO has been consulted on the special tax to claw back superannuation tax concessions and APRA has been consulted on modifying the preservation requirements.

Conclusion and recommended option

1.31 Considering the costs and benefits set out above it is recommended that the Government endorse option 2.

1.32 Option 1 would be likely to result in labour market distortions by making temporary residents cheaper to employ than similarly skilled Australians and would reduce Government revenue.

1.33 Option 2 is recommended as it does not impose unnecessary compliance or administration costs, would not affect the hiring decisions of Australian employers and would apply uniformly and consistently to all temporary residents. Additionally, option 2 will increase Government revenue.

1.34 Option 3 involves significant administrative difficulties. While these difficulties are not insurmountable, this option would impose unnecessary costs on APRA and would not apply to all temporary residents. Option 3 may also reduce Government revenue, depending on whether the transferred amount is subject to a claw back of tax concessions.