House of Representatives

Explanatory Memorandum

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

Glossary

The following abbreviations and acronyms are used throughout this explanatory memorandum.

General outline and financial impact

Taxation Laws Amendment (Superannuation) Bill (No. 2) 2002

The main purpose of this bill is to implement 5 measures designed to enhance the overall attractiveness, accessibility and security of superannuation. In particular, the 5 measures will:

•

require employers to make at least quarterly superannuation contributions on behalf of their employees;

•

reduce the superannuation surcharge rates by one-tenth of their current level over 3 years;

•

allow superannuation contributions to be made on behalf of children who would not otherwise have superannuation;

•

increase the deduction limit for personal superannuation contributions made by the self employed; and

•

increase from 70 to 75 the age up to which working members of superannuation funds can make personal superannuation contributions.

This bill also includes a range of enhancements to the SGAA 1992, and a number of technical amendments to correct legislative oversights arising from the Taxation Laws Amendment (Superannuation) Act (No. 1) 2002 (which enables superannuation to be paid to temporary residents who permanently depart Australia), the TLAA5 2001 (which provides for a CPF to change status to a taxed fund) and the Family Law Legislation Amendment (Superannuation) (Consequential Provisions) Act 2001 (which ensures the appropriate tax treatment is applied to superannuation interests which may be split).

Date of effect: Four of the 5 measures contained in this bill will take effect from 1 July 2002, with the exception being the introduction of the quarterly SG regime which will commence from 1 July 2003.

The technical amendment allowing for an amalgamation of payment summaries will commence on the later of 1 July 2002 or Royal Assent, and all of the other technical amendments will commence on the later of 1 July 2002 or the 28th day following Royal Assent.

Proposal announced: The 5 main measures were foreshadowed in the Governments election policy statement A Better Superannuation System released on 5 November 2001. In line with this statement, the implementation of these measures was announced in the 2002-2003 Federal Budget.

The enhancements to SG and the minor technical amendments have not been previously announced.

Financial impact: The 5 main measures are expected to result in the following revenue impacts:

•

for quarterly SG, a revenue gain of $35 million in 2003-2004, $5 million in 2004-2005 and $6 million in 2005-2006;

•

for the reduction in surcharge rates, a revenue cost of $50 million in 2003-2004, $120 million in 2004-2005 and $200 million in 2005-2006;

•

for child contributions, a revenue cost of $0.2 million in 2002-2003, $0.6 million in 2003-2004, $1 million in 2004-2005 and $1.5 million in 2005-2006;

•

for the increased fully deductible amount for self-employed persons, a revenue cost of $10 million for 2003-2004, $10 million for 2004-2005 and $10 million for 2005-2006; and

•

for allowing personal superannuation contributions up to age 75, there will be a negligible impact on revenue.

Compliance cost impact: Some employers will have additional compliance obligations under a quarterly SG regime. The impact will vary depending on a number of factors including current frequency of payment of contributions. Administrative costs are likely to be incurred in reporting to employees on contributions made on their behalf.

Some public sector superannuation schemes may have additional reporting obligations as a result of the surcharge reduction.

Superannuation Guarantee Charge Amendment Bill 2002

The main purpose of Superannuation Guarantee Charge Amendment Bill 2002 is to provide for the quarterly imposition of the SGC.

Date of effect: These amendments, giving effect to a quarterly SG regime, will commence from 1 July 2003.

Proposal announced: The amendments contained in the Superannuation Guarantee Charge Amendment Bill 2002 derive from the quarterly SG regime proposed in the Governments election policy statement A Better Superannuation System released on 5 November 2001.

Financial impact: The amendments made by the Superannuation Guarantee Charge Amendment Bill 2002 are an integral part of the move to a quarterly SG regime. As the majority of the amendments to enact this measure are contained in the Taxation Laws Amendment (Superannuation) Bill (No. 2) 2002, the financial impact of the measure is discussed under the outline of that bill.

Compliance cost impact: The amendments made by the Superannuation Guarantee Charge Amendment Bill 2002 are an integral part of the move to a quarterly SG regime. As the majority of the amendments to enact this measure are contained in the Taxation Laws Amendment (Superannuation) Bill (No. 2) 2002, the compliance cost impact of the measure is discussed under the outline of that bill.

Summary of regulation impact statement

Regulation impact on business

Impact: The move to a quarterly contribution regime under the SG system will impact on different employers in different ways depending on the regularity of contributions they currently make and whether they become subject to the SGC.

Approximately 85% of all businesses make superannuation contributions for their employees on a quarterly or more frequent basis. Businesses that are not currently contributing on a quarterly basis may incur additional administrative and cash flow costs to move to an appropriate contribution regime.

Some employers may also incur minor administrative costs in reporting the contributions they make to their employees.

The actual effect on total administrative costs of these changes is unclear as the widespread use of computerised payroll packages should minimise the impact.

Some businesses may also make administrative gains through the move from a monthly SG exclusion threshold to a quarterly exclusion threshold.

Main points:

•

A quarterly SG contribution and assessment regime best satisfies the policy objectives of ensuring fairness between employees and encouraging employers to make regular superannuation contributions whilst not placing an onerous compliance burden on business.

•

Some businesses will derive significant benefit from the move from a monthly SG exclusion threshold to a quarterly exclusion threshold.

•

Businesses that inadvertently incur the SGC in a single quarter will have significantly reduced costs compared to the current system.

•

Employees will benefit from more frequent contributions in terms of the additional interest compounded on contributions and from continued death and disability cover.

Chapter 1 - Quarterly superannuation guarantee

Outline of chapter

1.1 Schedule 1 to this bill will amend the SGAA 1992 to provide for a quarterly SG regime. Specifically, the amendments will:

•

allow for the quarterly imposition of the SGC where an employer fails to make quarterly superannuation contributions for its eligible employees;

•

require certain employers to report to their employees the amount and destination for superannuation contributions made to reduce their potential SGC liability;

•

reduce the penalty aspects of the SGC as a consequence of moving to a quarterly regime;

•

adjust the SG salary or wages exclusion threshold, in line with a quarterly regime, from $450 per month to $1,350 per quarter; and

•

provide transitional arrangements under which nominal interest and administration components will not apply to shortfalls arising during the first 2 quarters of 2003-2004.

Context of amendments

1.2 The SGCA 1992 currently imposes the SGC on any employer which has an SG shortfall in a year. The SGAA 1992 permits an employer to make superannuation contributions for its eligible employees up to 28 July following the end of the financial year to reduce any SG shortfall. This allows employers to make a single contribution per year, just prior to 28 July, to meet their obligations and avoid the SGC.

1.3 Some 85% of employers already contribute on a quarterly or more frequent basis. However, a move to a compulsory quarterly regime will provide equity amongst all employees by ensuring no employee is disadvantaged by receiving infrequent superannuation contributions.

1.4 Infrequent superannuation contributions give rise to a number of concerns. For example, the compounding nature of superannuation accounts means employees receiving infrequent contributions will have lower benefits as a result of reduced investment earnings on those contributions. Employees death and disability insurance cover can also lapse due to infrequent contributions.

1.5 Employers making infrequent contributions to the detriment of their employees also gain a cash flow advantage over their competitors who do provide regular superannuation contributions.

Summary of new law

1.6 This bill imposes on employers an obligation to make quarterly superannuation contributions or incur the SGC. Employers will be able to make contributions by the 28th day following the end of a quarter to meet their liabilities for that quarter.

1.7 The SGC will be imposed at the end of each quarter in which an employer failed to make appropriate superannuation contributions for its eligible employees.

1.8 Where an employer has not made the required contributions, the employer will be required to complete an SG statement, and pay its SGC liability, by the 14th day of the second month following the end of a quarter.

1.9 In line with the move to a quarterly contribution and assessment regime, the salary or wages threshold below which SG contributions are not required will be changed to an amount of $1,350 per quarter.

1.10 Similarly the nominal interest component of the SGC will be calculated from the beginning of the quarter in which the liability arose up to the day that the employer lodges its SG statement.

1.11 The administration component of the SGC will be amended to reduce the potential impost on employers. The base amount will be reduced to $0 and the per capita amount (which is paid in respect of each employee for whom there is a shortfall) will be reduced to $20.

1.12 Transitional arrangements will also apply to ensure that employers are given the opportunity to adjust to their new responsibilities under the quarterly regime without the application of penalties.

1.13 The transitional arrangements will apply to the first 2 quarters of the 2003-2004 year. The nominal interest and administration components of the SGC will not be applied to shortfalls in respect of either or both of those periods. To be entitled to this reduction on the normal SGC liability, the employer must pay their SGC by 28 April 2004.

1.14 This bill also introduces the concept of employer reporting. Employers will be required to report to their employees on contributions made to reduce an employers charge percentage under section 23 of the SGAA 1992. Penalties will apply to employers who fail to provide this information or who provide false or misleading information.

Detailed explanation of new law

1.15 The SGCA 1992 imposes the SGC on any SG shortfall of an employer in a year. The SG shortfall is calculated under section 17 of the SGAA 1992 by adding together the total of the employers individual superannuation guarantee shortfalls for the year, the employers nominal interest component for the year, and the employers administration component for the year.

1.16 Under section 19 of the SGAA 1992, an employers individual superannuation guarantee shortfall in respect of an employee is the sum of the employers quarterly shortfalls in respect of that employee for that year.

1.17 The SGAA 1992 currently divides the year into four 3 month periods. Subsection 23(6A) of the SGAA 1992 allows a contribution made during the relevant financial year, or up until the end of the 28th day following the end of the financial year (i.e. 28 July) to be counted towards any of the periods in that year.

1.18 Failure to make the required level of contributions by 28 July means an employer is liable to lodge an SG statement and pay the SGC.

1.19 Section 33 of the SGAA 1992 requires that the SG statement in respect of a year must be lodged by 14 August of the following year or such later day as allowed by the Commissioner.

1.20 Under section 46 of the SGAA 1992, the SGC is payable by 14 August following the end of the relevant year or if an SG statement is lodged after that date, the day on which the statement is lodged.

1.21 The Superannuation Guarantee Charge Amendment Bill 2002 amends sections 5 and 6 of the SGCA 1992 to impose the SGC on any SG shortfall of an employer for a quarter, and to calculate the charge payable for a quarter by reference to the amount of the shortfall. [Schedule 1, items 1 and 2, sections 5 and 6]

1.22 Sections 5 and 5A of the SGAA 1992 are amended by this bill to ensure that the quarterly regime is appropriately applied to the Commonwealth and to Commonwealth Authorities. [Schedule 1, items 1 to 3, sections 5 and 5A]

1.23 Amendments to section 17 of the SGAA 1992 provide that where an employer has one or more individual superannuation guarantee shortfalls for a quarter, its SG shortfall for that quarter is the total of its individual superannuation guarantee shortfalls for the quarter, its nominal interest component for the quarter, and its administration component for the quarter. [Schedule 1, item 46, section 17]

1.24 Similarly subsections 19(1) and 19(2) of the SGAA 1992, which currently deal with determining an annual amount of individual superannuation guarantee shortfall in respect of an employee, are repealed and replaced with a calculation of the amount of an individual superannuation guarantee shortfall in respect of an employee in a quarter. [Schedule 1, item 48, subsections 19(1) and (2)]

1.25 New subsection 19(2) sets the charge percentage at 9% following the repeal of sections 20 and 21. The charge percentage has not been varied (the maximum rate of 9% currently applies from 1 July 2002). This amendment merely removes redundant historical charge percentage data from the SGAA 1992. [Schedule 1, items 48 and 51, sections 20 and 21, subsection 19(2)]

1.26 The removal of the old charge percentage tables from the SGAA 1992 also necessitates the removal of references to the sections in which those tables appeared. [Schedule 1, items 53, 61, 66, 72, 81 and 102, section 23]

1.27 Subsection 19(4) of the SGAA 1992 is amended by this bill to ensure that employees can still elect that their employer should not be liable for the SGC (in respect of themselves). This section currently refers to concepts that will be repealed with the introduction of a quarterly SG regime. [Schedule 1, item 50, subsection 19(4)]

1.28 Sections 22 and 23 of the SGAA 1992 provide employers with the ability to reduce their charge percentage through making appropriate superannuation contributions. Amendments are made to sections 22 and 23 to ensure that the ability of employers to reduce their charge percentage under those sections is unimpeded by the move to a quarterly contribution regime. To that end, many of the formulae and references in sections 22 and 23 are amended to operate on a quarterly basis. [Schedule 1, items 67, 82 to 85, 90 to 93 and 95 to 99, section 23]

1.29 The current ability of employers to make contributions up until the 28th day following the end of a year and count those contributions towards any period within the year will be removed through the repeal of subsection 23(6A). The subsection will be replaced with a provision allowing employers to make contributions up until the 28th day following the end of a quarter. As a consequence of this change subsection 23(6B), which provides the application provisions for subsection 23(6A), is also repealed. [Schedule 1, items 106 and 107, subsections 23(6A) and (6B)]

1.30 The ability of employers to count contributions against a future SG liability will be retained. New subsection 23(6) will ensure that a contribution can be counted against a future quarter providing that it is not made more than 12 months prior to the beginning of that quarter. [Schedule 1, item 106, subsection 23(6)]

1.31 The ability of defined benefit superannuation funds to seek a benefit certificate at the end of the year to certify that their SG obligations have been met is replaced through amendments to section 10 of the SGAA 1992. The amendments to this section will mean that an employer contributing to a defined benefit scheme will need to hold a benefit certificate prior to the 15th day of the second month following the end of the quarter in order to reduce the charge percentage that applies to the employer. This will ensure that employers contributing to defined benefit schemes are treated in a similar way to employers who are contributing to accumulation schemes. [Schedule 1, item 25, subsections 10(4) and (5)]

1.32 Section 24 of the SGAA 1992 currently operates such that certain benefit certificates are presumed to be in relation to a complying superannuation scheme. This section makes reference to contribution periods in determining whether a benefit certificate is presumed to be in relation to a complying scheme. This bill replaces the definition of starting day in section 24 to, amongst other things, remove references to contribution periods and replace them with references to quarters. [Schedule 1, item 123, subsection 24(5)]

1.33 Section 33 of the SGAA 1992 is amended to require an employer to complete and lodge an SG statement for a quarter in which it has an SG shortfall. The statement will be required by the 14th day of the second month following the end of the relevant quarter (or such later day as the Commissioner allows). Amendments are also made to ensure that the matters reported relate to the quarter in which the employer has had a shortfall. [Schedule 1, items 136, 137, 139 and 140, subsections 33(1), (1A), (2) and (4)]

1.34 The first SG statement for a quarter will be taken to be an assessment of the SGC due for that period, in the same way that the first SG statement for a year is taken to be an assessment under the current system. Amendments to section 75 of the SGAA 1992 will ensure that assessments will be taken to have been made on the 14th day of the second month following the end of the quarter, or the date that the SG statement was lodged, whichever is the later. Section 46 is amended to ensure that employers are required to promptly pay the SGC on any quarterly shortfall. [Schedule 1, items 142 to 147 and 150, sections 35 and 46]

1.35 Amendments to section 49 will ensure that GIC is calculated by reference to only those unpaid amounts for the relevant quarter. [Schedule 1, item 151, section 49]

1.36 Amendments to the Commissioners power to issue default assessments will also be made to ensure that the Commissioner can issue default assessments in respect of a quarter. [Schedule 1, item 148, subsection 36(1)]

1.37 Section 30 of the SGAA 1992 currently causes an employer to be liable to an amount of SGC where that employer has entered into arrangements to try to avoid its SG obligations in respect of a year. This bill amends section 30 so that the employer will be liable to pay an amount of SGC in respect of any quarter in which the employer enters into such an arrangement. [Schedule 1, items 129 and 130, section 30]

1.38 Section 59 of the SGAA 1992 will also be amended to allow the Commissioner to seek information in respect of a quarter when no SG statement has been lodged. [Schedule 1, item 141, section 34]

1.39 Section 23A will be inserted into the SGAA 1992 to require employers to report to their employees the amount and destination of any contribution which reduces an employers SGC under section 23 of that Act. [Schedule 1, item 116, section 23A]

1.40 This new provision only requires employers to report contributions that are made to accumulation schemes. Employers who contribute to defined benefit schemes reduce their SG liability on the basis of a notional contribution rate as determined by an actuary. Whilst the calculation determines whether an employer has notionally met its SG obligations, the entitlements of members of such schemes are actually determined when a member exits the scheme.

1.41 The relevant information must be provided to employees within 30 days of the contribution being made. Failure to provide the information gives rise to a penalty. Providing false or misleading information will be punishable under sections 137.1 and 137.2 of the Criminal Code. [Schedule 1, item 116, subsections 23A(3) and (4)]

1.42 This reporting requirement will support the administration of the SG system by allowing early identification of non-compliance amongst employers whilst simultaneously improving employee ownership of their superannuation accounts.

1.43 Section 18 of the SGAA 1992 is repealed to remove the transitional provisions that applied to the calculation of the individual superannuation guarantee shortfall for the 1992-1993 year, the first year of operation of the SG system. References in other parts of the SGAA 1992 to section 18 are also repealed by this bill. [Schedule 1, items 47, 115, 124, 125, 127 and 128, sections 23 and 28]

1.44 Superannuation contributions for employees are capped under the SGAA 1992 by the maximum contribution base. Employers are only required to make contributions on that amount of the employees earnings base that is equal to or less than the maximum contribution base. The maximum contribution base for the 1992-1993 year is specified in section 15 of the SGAA 1992 and provision is made for the indexation of the figure for subsequent years.

1.45 As a consequence of the introduction of a quarterly SG regime the formula for the indexation of the maximum contribution base requires amendment. This bill amends subsection 9(1) and section 15 of the SGAA 1992 to allow for the continued indexation of this figure, and updates the base amount to the maximum contribution base amount that applies for the 2001-2002 year. [Schedule 1, items 21 and 41 to 44, subsections 9(1) and 15(1) to (4)]

1.46 This bill also removes all references to provisions that are repealed due to the changes to the SGAA 1992 to allow for the operation of a quarterly SG regime (such as subsection 23(6A) that previously allowed employers to make contributions by 28 July and then count them against any period in the preceding year). [Schedule 1, items 59, 65, 70, 76, 94 and 100, subsection 23(6A)]

1.47 This bill also makes various minor amendments to the SGAA 1992 to ensure that all annual obligations under, or actions that could or must have been performed under the Act, must now be met or performed quarterly. [Schedule 1, items 45, 154 to 156 and 158, sections 16 and 59]

1.48 Various amendments are made to the definitions contained in the SGAA 1992 to remove concepts that are obsolete under a quarterly regime. For instance, the notion of a half year does not exist under a quarterly regime. Furthermore, some amendments to definitions were made to ensure they continued to operate appropriately under a quarterly regime. [Schedule 1, items 4 to 14, subsection 6(1)]

1.49 Under the quarterly regime, the notion of contribution periods is replaced with the notion of quarters. This bill therefore removes all references to contribution periods from the SGAA 1992 and, where appropriate, replaces them with references to quarters. [Schedule 1, items 16, 26 to 40, 49, 52, 54 to 58, 62 to 64, 68, 69, 71, 73 to 75, 77 to 80, 86 to 89, 90, 101, 103 to 105, 108 to 110, 114 and 117 to 122, sections 23 and 24]

1.50 A number of changes are made to the SGAA 1992 to lessen the impact of this measure. Section 32 of the SGAA 1992 is amended to reduce the amount of the administration component of the SGC, in line with a quarterly assessment and imposition regime. The amount of the administration component will now be calculated as a base amount of $0 plus $20 per employee for whom there has been a shortfall. [Schedule 1, items 132 to 135, section 32]

1.51 The calculation of the nominal interest component of the SGC is also changed so that nominal interest is only calculated from the beginning of the quarter in which there was an SG shortfall (rather than from the beginning of the financial year). [Schedule 1, item 131, section 31]

1.52 To ameliorate the compliance impact on business, the current monthly salary or wages threshold, below which SG contributions are not required, will be amended to $1,350 per quarter. [Schedule 1, item 126, subsection 27(2)]

1.53 An amendment is made to the heading for Part 7 of the SGAA 1992 so that it more accurately reflects the function of the Part (as a number of the sections of the Part were repealed in 2000). [Schedule 1, item 153]

Application and transitional provisions

1.54 This bill provides for transitional arrangements in moving to a quarterly SG regime. Employers who have an individual superannuation guarantee shortfall in either or both of the first two quarters of 2003-2004 will not be subjected to any nominal interest or administration components of the SGC provided that payment of the SGC is made by 28 April 2004. [Schedule 1, item 194]

1.55 The amendments contained within this bill to effect the move to a quarterly SG regime are to take effect from 1 July 2003. The SGAA 1992 continues to apply in relation to the determination of SG shortfalls and related matters for years that end before 1 July 2003 as if the amendments contained in Schedule 1 to this bill had not been made. [Schedule 1, item 193]

1.56 Provision is made to ensure that conversion notices and benefit certificates that were issued prior to 1 July 2003 remain valid when the transition to the quarterly regime occurs. These rules also allow superannuation funds to seek conversion notices and benefit certificates within the timeframes currently allowed under the annual SG regime in respect of the 2002-2003 year, as a transitional provision. [Schedule 1, items 195 and 196]

1.57 The requirement for employers to report to employees contributions made to reduce an employers charge percentage relates to all contributions after 1 July 2003. [Schedule 1, item 197]

Consequential amendments

1.58 This bill amends the Defence Act 1903 to change references in that Act dealing with superannuation entitlements under the Defence Force Retirement and Death Benefits scheme to reflect the quarterly regime being imposed under the SGAA 1992. [Schedule 1, item 169, subsection 52(3A)]

1.59 Amendments are also made to the Superannuation Act 1976 to ensure that references in that Act that refer to obligations under the SGAA 1992 reflect the move to a quarterly contribution regime. [Schedule 1, items 187 and 188, subsections 110SC(3) and 110SE(6)]

1.60 The ITAA 1936 is amended to ensure that amounts of SGC made or payable in respect of a quarter are treated in the same fashion as amounts of SGC that were made or payable in respect of a year, for the purposes of determining a taxpayers entitlement to claim a deduction for non-employer sponsored superannuation contributions. [Schedule 1, items 171 to 181, section 82AAS]

1.61 Amendments are also made to Schedule 2D of the ITAA 1936 to ensure that entities which were previously non-taxable but become taxable retain the same obligations in respect of the SG under a quarterly system as they did under an annual system. [Schedule 1, items 182 to 184, subsections 57-50(6) and (8) of Schedule 2D]

1.62 The ITAA 1997 is amended to clarify the rules that relate to the maximum deduction that can be claimed under the alienation of personal services income provisions. The amendment clarifies that a deduction is available for contributions made to avoid an individual superannuation guarantee shortfall for an associate in respect of each quarter. Schedule 1, items 185 and 186, subsections 85-25(3) and 86-75(2)]

1.63 The SCT Imposition Act 1997 and the CPF Imposition Act 1997 are both amended by this bill. Both of these Acts have a calculation of a surchargeable contributions threshold that references the notion of an employers charge percentage under the SGAA 1992. Currently, the calculation divides the current charge percentage by the previous charge percentage and then multiplies the result by the indexation factor and the previous threshold.

1.64 As the charge percentage is changing from an annual rate, section 6 in both the SCT Imposition Act 1997 and the CPF Imposition Act 1997 are amended so that the calculation relies on the charge percentage as it applied in the quarter beginning on 1 July in the relevant years. [Schedule 1, items 189 to 192, section 6]

1.65 A transitional provision is also included in this bill to provide the basis for the calculation for the year beginning 1 July 2003 as the previous charge percentage will be an annual figure and the current charge percentage will be a quarterly figure. [Schedule 1, item 202]

Regulation impact statement

Background

1.66 Under the SG legislation employers are required to make specified levels of superannuation contributions to a complying superannuation fund or retirement savings account provider on behalf of their employees to avoid the SGC. The required minimum rate of superannuation contributions is 8% of an employees earnings base in the 2001-2002 year, and will increase to a level of 9% for 2002-2003 and subsequent years.

1.67 If an employer does not make the required level of contributions on behalf of its eligible employees within 28 days of the end of the relevant financial year (i.e. 28 July), they incur the SGC. The SGC is made up of a number of components:

•

the superannuation contribution shortfall;

•

the nominal interest component of 10% per annum (calculated from 1 July of the previous income year) on the shortfall; and

•

the administration component (being a flat $50 plus $30 per employee for whom there has been a shortfall).

1.68 This measure was announced in the Governments election policy statement A Better Superannuation System, released on 5 November 2001. To ensure fairness between employees and to encourage employers to make regular superannuation contributions, it would require all employers to make at least quarterly superannuation contributions on behalf of their employees.

Issues

1.69 A number of concerns currently exist in relation to the operation of the SG legislation. These concerns include issues around:

•

the risk of employers becoming bankrupt or insolvent without having made superannuation contributions;

•

problems with recoveries because liability only arises annually;

•

the loss of death and disability insurance from infrequent contributions;

•

lower earnings on superannuation accounts for fund members who receive only annual contributions (through lack of compounding); and

•

the growth in unclaimed superannuation entitlements.

Policy objective

1.70 The objectives are to make superannuation safer, ensure fairness between employees and encourage employers to make regular contributions by improving the application, efficiency and effectiveness of the SG system, whilst not imposing significant additional costs on employers.

Identification of options

1.71 There were 4 options considered in respect of meeting this objective.

Option (i) - retain existing arrangements

1.72 There would be no change to the existing arrangements for employers to contribute superannuation amounts pursuant to the SG legislation. Currently, an employer has until 28 July to contribute on behalf of its employees in relation to the previous financial year.

Suboption (i)(a) - education campaign

1.73 Continuation of the existing arrangements supplemented by an education campaign to inform employers of their obligations to determine SG shortfalls on a quarterly basis, and the benefits to their employees of more frequent contributions.

Option (ii) - monthly SG contribution

1.74 Employers would be required to remit employees superannuation contributions within 28 days of the end of the previous month to avoid the SGC. An SG statement would be required from all employers liable to the SGC.

Option (iii) - quarterly contribution, quarterly charge

1.75 Employers would be required to make quarterly superannuation contributions. The SGC will apply from the beginning of the relevant quarter only if the employer fails to make the required superannuation contributions by the due date (28 days after the end of the quarter). Defaulting employers would report their liability to the SGC on a quarterly basis on an SG statement.

1.76 This will be supported by a requirement for employers to report to employees the quantum and destination of superannuation contributions. It is also proposed to change the monthly SG exemption threshold from $450 per month to a quarterly figure of $1,350.

Option (iv) - quarterly contribution, annual charge

1.77 Employers would be required to make quarterly superannuation contributions. The SGC would be levied annually, as it is now, if the employer has failed to make the appropriate superannuation contributions for any quarter.

1.78 Defaulting employers would report their liability to the SGC on an annual SG statement. This will be supported by a requirement for employers to report to employees the quantum and destination of superannuation contributions.

1.79 It is also proposed to change the monthly SG exemption threshold from $450 per month to a quarterly figure of $1,350.

Assessment of impacts

Impact group identification

1.80 The following key stakeholders will be affected by the proposed changes:

•

certain groups of employers, differentiated between small business and business generally - the impact varies depending on the size of the business and whether or not the business is generally complying with the SG legislation;

•

employees of affected employers;

•

superannuation providers;

•

the Government; and

•

the ATO.

Option (i) - retain existing arrangements

1.81 This option is to retain the present arrangements.

Costs

Employers

1.82 No additional costs will be incurred as the SG reporting requirements will not have changed from the current requirements.

Employees

1.83 The obvious cost to employees is the loss of a legal employment entitlement (i.e. superannuation) if a company goes into liquidation or bankruptcy. This is particularly relevant for part-time and casual employees who frequently do not accrue much in the way of superannuation benefits. This would lead to a reduction in the retirement benefit the employee would be able to accumulate to provide an adequate standard of living in retirement.

1.84 For some employees, the absence of regular contributions means they receive lower returns on those contributions due to reduced compounding of earnings.

1.85 A further cost to employees is the loss of death and disability cover linked to their superannuation entitlement, which is likely to lapse if regular contributions are not made to the fund. This is a significant risk, as has been highlighted by a few instances where the member has died and not been covered due to annual contributions.

Superannuation providers

1.86 If current SG arrangements were retained, superannuation providers would continue to be subject to administration costs associated with lost members and corrupt superannuation deposit details. These situations would be reduced if superannuation contributions were due on a more regular basis. This is because employee details provided by an employer to the fund would be more current. Essentially, this gives superannuation providers a greater opportunity to match individuals with their superannuation entitlements or obtain valid employee details from the employer.

1.87 In situations where the trust deed or some other obligation requires more frequent contributions the trustee will still be subject to the costs of attempting to obtain contributions as they are due.

Government

1.88 There may be a cost to government in dispelling a perception in the community that compulsory superannuation is not as important as other employee entitlements or business tax obligations.

1.89 This is particularly relevant where employees lose their superannuation entitlements due to business failures. If a business goes into liquidation at the start of the financial year it is approximately 12 months before the SGC is crystallised and recoverable. However, other employee entitlements, such as unpaid wages and annual leave, may be paid out as part of the liquidation or through the Employee Entitlement Support Scheme.

ATO

1.90 Retention of the existing arrangements would mean no decrease in reporting of lost members from funds to the Lost Member Register. It would also result in the continued use of the SHAR for small amounts of superannuation that have incomplete or corrupt deposit details. This will impact on the ATO by requiring the reallocation of resources to administer these programs that could be more appropriately used in strategic or compliance operations.

1.91 The Commissioner will also continue to be restricted in his ability to recover SG shortfalls on behalf of employees. This is because an SG debt does not crystallise until 14 August of the following financial year, and on occasions the debts from a company in liquidation may have been finalised before the SGC is raised.

Benefits

Employers

1.92 Employers would not be required to retrain staff or implement new procedures and systems if the SG contribution frequency remains the same. The cash flow of the business would not be impacted.

Employees

1.93 Not applicable.

Superannuation providers

1.94 There would be no benefits for superannuation providers from retaining the existing arrangements.

Government

1.95 The existing level of support and general acceptance of SG is likely to be maintained without the need for the Government to incur additional costs.

ATO

1.96 There would be no change to the ATOs current work allocation.

Suboption (i)(a) - education campaign

1.97 This option retains the existing arrangements, but supplements them through an education campaign informing employers of their obligations and of the benefits to their employees of more frequent contributions.

Costs

Employers

1.98 Some businesses not currently making regular contributions, or even meeting their obligations, will incur costs if they change administrative and system procedures to provide for more frequent payment of employees superannuation entitlements.

Employees

1.99 In situations where an employer does not change its behaviour, as there is no legal obligation for them to do so, the costs to employees remains the same as in option 1.

Superannuation providers

1.100 There may be a slight increase in enquiries to superannuation providers from employers and employees as the result of an education campaign.

Government

1.101 To be effective a broad education campaign informing employers of their obligations under the SG legislation is estimated to cost approximately $22.9 million in the start-up year, and $2.1 million in recurrent costs.

1.102 A substantial campaign would be required, as there is the need to change employer behaviour to do something, which has no immediate benefit to their bottom line. Recurrent spending is required to track the effectiveness of the campaign and to provide reminders to small business.

ATO

1.103 An education campaign would be likely to increase the workload within the ATO from enquiries and complaints. This cost is included as part of the cost to Government for the education campaign.

Benefits

Employers

1.104 An education campaign should improve employers understanding of their superannuation obligations, and of the benefits for employees in relation to more frequent superannuation contributions. This should reduce the incidence of employers becoming subject to the SGC.

Employees

1.105 An education campaign may produce increased SG compliance by employers, thereby leading to greater benefits for employees, as well as facilitating employees understanding of their superannuation entitlements under the law.

Superannuation providers

1.106 Superannuation providers would benefit from any improvement in employers meeting their SG obligations, as they would have fewer amounts to recover from employers or the ATO.

1.107 However, there would not necessarily be a benefit for those funds which have entered into a contract to receive contributions more frequently than annually. Many superannuation funds in this situation tend to undertake their own compliance activity to ensure that the contracts that employers have entered into with them are fulfilled.

Government

1.108 An education campaign may prompt some employers to analyse their present compliance levels and take action to rectify any problems. The Government would benefit from an increased level of compliance as people would accumulate more benefits for their retirement and lesser amounts may be lost from the superannuation system due to business failure.

ATO

1.109 To the extent that there is increased employer compliance with SG obligations, there will be a lessening in administrative workload for the ATO, though this lessening will not offset the increased workloads created by greater community awareness of SG obligations.

Option (ii) - monthly superannuation contribution

1.110 This option involves amending the SG legislation to provide that all employers make superannuation contributions 28 days after the end of each month or pay the SGC to the ATO at that time.

Costs

Employers

1.111 Smaller businesses will generally be more affected by this measure and may incur significant additional administrative costs in making monthly SG contributions. There may also be impacts on the cash flow of some businesses irrespective of size.

1.112 Employers in rural and regional areas could experience difficulties in complying as access to technology and other services may currently be limited. For small businesses, the SG requirements may require more frequent reporting than their other tax obligations.

1.113 Employers which determine their level of contributions on a set and forget basis may be subject to multiple SGC if their liability has increased over time. Therefore, businesses would be required to examine the SG obligations on a more regular basis, increasing their administration costs.

Employees

1.114 Not applicable.

Superannuation providers

1.115 There may be an increase in enquiries and transactions, as businesses paying less frequently than monthly increase their contributions.

Government

1.116 There would be costs of approximately $17.5 million in the start-up phase (to enhance information technology capability), and $10.5 million ongoing, to fund the administration of the arrangements (e.g. interpretive and other help services and compliance activities) and an employer education campaign.

ATO

1.117 This would incur additional costs for the ATO (included in the figures in paragraphs 1.95) to rebuild the computer system (so that it was capable of handling the monthly imposition and calculation of the SGC) and implement an extensive education campaign. It would be difficult for the ATO to effectively monitor and ensure compliance to the level of community expectations without a substantial increase in resources. Without increased compliance activity, negative comments on monthly compliance with SG may undermine confidence and encourage further non-compliance from employers.

Benefits

Employers

1.118 This may bring SG requirements into line with the timeframe for payment of other employee remuneration and PAYG related obligations for larger employers thus simplifying administration.

Employees

1.119 This would achieve the objective of protecting employee entitlements in the event of bankruptcy or insolvency of the employer. The benefits of regular contributions such as insurance cover and increased earnings will be obtained. Generally, this will lead to an increase in retirement savings.

Superannuation providers

1.120 Superannuation providers will benefit by receiving data in a more timely manner increasing the likelihood that the information is correct or missing details can be obtained. The superannuation providers will also have funds to invest on behalf of their members at an earlier time.

1.121 This would also support trustees in obtaining payments within the timeframes as specified in their trust deeds.

Government

1.122 This would have a positive impact on the level of compulsory superannuation savings and as a consequence the potential retirement income of individuals, thereby potentially reducing the government outlays on age pensions.

1.123 This would be viewed as a popular measure by employees and may improve the level of confidence people have in the SG system and superannuation saving generally.

ATO

1.124 Not applicable.

Option (iii) - quarterly contributions, quarterly charge

1.125 This proposal involves amending the SG legislation to move from an annual contribution regime to a quarterly regime, with quarterly determination of SG shortfall and a quarterly SGC for non-compliant employers. It should be noted the legislation currently requires employers to ascertain their individual shortfalls in relation to an employee on a per quarter basis, but to contribute annually, or pay an annual SGC where a shortfall exists for the year. The quarterly contribution regime will be supported by a reporting requirement whereby employers are required to report to employees the quantum and destination of superannuation contributions.

Costs

Employers

1.126 The proposal will impact on various employers in different ways depending on the regularity of contributions they make at the moment and whether the employer will be subject to the SGC.

1.127 The ATO understands that approximately 85% of all businesses pay superannuation on behalf of their employees on a quarterly or more regular basis. The ATO also understands that approximately 83% of small businesses are currently making superannuation contributions on a quarterly or more regular basis. On the basis of these figures 15% of all businesses would be required to change their current payment frequency. Further, this option would impact on approximately 17% of small businesses.

1.128 Businesses not contributing on at least a quarterly basis may incur additional administrative and cash flow costs. It is believed that of those businesses likely to be affected by the introduction of a quarterly SG regime, most will be smaller businesses (i.e. less than 10 employees).

1.129 The effect on administrative costs is unclear as the widespread use of software payroll packages, already adopted by small businesses to deal with quarterly reporting and payment requirements under the new tax system, should minimise the impact.

1.130 The impacts on cash flow may be an issue for businesses currently contributing superannuation on behalf of their employees on an annual basis. Businesses in these circumstances may have to utilise through year cash flows to meet more frequent superannuation payments under a quarterly regime. However, it is possible that requiring more frequent superannuation contributions might better align payments with business income, particularly for seasonal businesses.

1.131 Some employers may incur some minimal costs in relation to the requirement to report contributions to employees. It is believed that most employers could meet these obligations through minimal changes to information provided on payslips and hence will not incur significant costs in meeting this requirement.

Employees

1.132 Some employees will be disadvantaged by the change in the exemption threshold from $450 per month to $1,350 per quarter. This will particularly be the case with low-income casual workers.

Superannuation providers

1.133 There may be an increase in enquiries and transactions, as businesses paying less frequently than monthly increase their contributions.

Government

1.134 There would need to be an education campaign aimed at employers to inform them of the new quarterly arrangements. Such a campaign may produce a spin-off in increased compliance by employers with SG. An education campaign, even one confined to a move to a quarterly regime, may prompt some employers to analyse their present compliance levels and take action to rectify any problems.

1.135 The costs to Government of implementing this option are estimated at $17.5 million in the start-up phase, with recurrent costs of approximately $10.5 million a year. These figures include the costs of a targeted education campaign estimated to cost $4.1 million initially. There would also be recurrent costs estimated at $10.5 million to maintain education and help services and conduct compliance activities for a quarterly SG contribution regime.

1.136 Interpretative and other help services costs would increase if exemptions to a quarterly regime were allowed to certain employers. Currently, there are no exemptions being entertained but some employer groups have previously indicated that, if a quarterly SG system is implemented, their particular industry should be exempted.

ATO

1.137 A move to a quarterly regime will increase ATO costs involved in administering the SG arrangements. Extra resources to deal more regularly with non-compliers, payment of the SGC and its disbursement to employees may be necessary. Interpretative and other help services costs would increase, particularly if exemptions to a quarterly regime where allowed to certain employers. There would need to be changes made to the ATO computer system handling SG. These costs have been included in the costs to Government.

Benefits

Employers

1.138 Businesses that have an SG shortfall in one quarter will in many circumstances have a smaller shortfall amount to pay than under an annual system. Further, interest will only apply from the beginning of the quarter for that quarter, rather than the beginning of the year for the whole year, thus resulting in an interest saving.

1.139 A quarterly contribution and assessment regime will alert some businesses to problems in the level of their contributions at an earlier stage and enable them to take action to rectify the problem more quickly, reducing the amount of SGC payable over the year, and ensuring future compliance.

1.140 It could also be argued that making more frequent contributions is a prudent business practice for the small business sector of the community and avoids large end of year outlays.

1.141 Some businesses will gain from the introduction of a quarterly SG exemption threshold as some employees who had been previously entitled to SG contributions will no longer be entitled.

Employees

1.142 A quarterly contribution scheme will limit the amount of superannuation contributions at risk if an employer becomes insolvent or bankrupt. At the moment, because the SGC only becomes a debt to the Commonwealth on 14 August of the year after the financial year in question, employers who have gone into liquidation before that date do not have a provable SG debt prior to that date. There is thus no requirement to pay the amount. Therefore, employees can lose the whole annual contribution that should have been made on their behalf (or the equivalent SGC) if those contributions were not made. An effective quarterly regime will only place at risk that quarters contributions or SGC, rather than a full years contributions or SGC as at present.

1.143 Further, more regular payment may improve the coverage of death and disability insurance offered by superannuation providers to fund members. New employees would generally not receive coverage until contributions are made on their behalf. If contributions are only made annually these employees are arguably at risk for up to 12 months. For existing employees there is a risk that cover will lapse between contributions.

1.144 Reporting of contributions will increase employee interest in and knowledge of their superannuation entitlements.

Superannuation providers

1.145 Superannuation providers will benefit by receiving data in a more timely manner, increasing the likelihood that the information is correct or any missing details can still be obtained. This could stem the growth in lost and unclaimed superannuation accounts. Superannuation providers will also have the benefit of receiving funds at an earlier time to invest. This should also reduce complaints and disputes with regard to lapses in death and disability insurance coverage.

Government

1.146 A move to a quarterly regime is likely to enhance compliance rates among employers with SG obligations, presuming an education campaign is undertaken.

1.147 There is an expected increase in revenue, through the bring forward of the SGC of an estimated $35 million in the 2003-2004 year under this option.

1.148 The proposal may reduce future Government pension outlays through an increase in the size of the end benefits of affected employees. It is not possible to quantify the effect, although it is likely to be minimal. The minimal nature of any increase is because the end benefits of employees will only increase by the amount of interest accrued on contributions made during (rather than at the end of) a year.

1.149 Increased self-regulation by employers is likely as employees become more interested and knowledgable about their superannuation with ongoing employer reporting.

ATO

1.150 A quarterly regime would allow for the most effective monitoring of trends and compliance by the ATO. The ATO would also be in a position to respond more promptly to recover employee entitlements in the event of insolvency or bankruptcy.

1.151 Increased employee awareness (through the reporting requirements) would also lead to earlier notification of non-compliance and increased self-regulation amongst employers.

Option (iv) - quarterly contributions, annual charge

1.152 This proposal involves amending the SG legislation to move from an annual contribution scheme to a quarterly one, but with a quarterly determination of SG shortfall and an annual imposition of the SGC. It should be noted the legislation currently requires employers to ascertain their individual shortfalls in relation to an employee on a per quarter basis, but to make only annual payments or incur an annual SGC. The quarterly contribution regime will be supported by a reporting requirement whereby employers are required to report to employees the quantum and destination of superannuation contributions.

Costs

Employers

1.153 The proposal will impact on various employers in different ways depending on the regularity of contributions they make at the moment and whether the employer will be subject to the SGC.

1.154 Businesses that do not contribute on at least a quarterly basis may incur additional costs.

1.155 There is additional cost to employers when compared to the status quo as employers will no longer be able to make a reconciliation payment by 28 July following the end of the financial year if they have had a shortfall in any of the first 3 quarters. Currently employers can make a payment by 28 July so if an end of year reconciliation uncovers a shortfall there is an opportunity to fix the error. Under this option, once 28 days after the end of a quarter have passed, there is no opportunity to make further contributions and the employer will have to pay the SGC.

1.156 As failure to make payment by the relevant date following the end of the quarter will not be able to be rectified, employers will not be encouraged to reconcile their SG contributions before the end of the financial year.

1.157 There is also a potential cost to employers if this option were implemented in that employers may overlook the requirement to make quarterly contributions if the SGC is not raised on a quarterly basis thus facing significantly greater expense when paying the SGC following the end of the relevant financial year.

1.158 Some employers may incur some minimal costs in relation to the requirement to report contributions to employees. It is believed that most employers could meet these obligations through minimal changes to information provided on payslips and hence will not incur significant costs in meeting this requirement.

Employees

1.159 This option will not address the issue of employers who become insolvent during the year, as the SGC will still only crystallise on 14 August following the end of the year. This option could therefore potentially cost employees their entitlements as the ATO will still be unable to seek the SGC prior to 14 August following the end of the relevant year. It does not meet the Governments election policy goal of making super safer.

1.160 Some employees will be disadvantaged by the change in the exemption threshold from $450 per month to $1,350 per quarter. This will particularly be the case with low-income casual workers.

Government

1.161 There would need to be an education campaign aimed at employers to inform them of the new quarterly regime. Such a campaign may produce a spin-off in increased compliance by employers with SG obligations. An education campaign, even one confined to a move to a quarterly regime, may prompt some employers to analyse their present compliance levels and take action to rectify any problems.

ATO

1.162 The ATO will incur some additional administration costs around the end of each quarter in responding to enquiries about SG obligations.

Benefits

Employers

1.163 Businesses that have identified a shortfall in one quarter should, in many circumstances, have a smaller shortfall amount to pay than under an annual system. Further, interest will only apply for a quarters shortfall from the beginning of the relevant quarter to 14 August following the end of the financial year. This is a reduction compared to a situation whereby interest is calculated for all shortfall amounts from 1 July in the relevant year through to 14 August in the following financial year. Thus there will be a small interest savings.

1.164 Employers who have failed to meet their full obligations will also benefit under this regime (compared to a quarterly contributions, quarterly charge regime) by being able to defer payment of under-contributed SG until 14 August following the end of the relevant financial year.

1.165 It could also be argued that making more frequent contributions is a prudent business practice for the small business sector of the community and would avoid large end of year outlays.

1.166 Some businesses will gain from the introduction of a quarterly SG exemption threshold as some employees who had been previously entitled to SG contributions will no longer be entitled.

Employees

1.167 Where more regular payment occurs, this may improve the coverage of death and disability insurance offered by superannuation providers to fund members. New employees would generally not receive coverage until contributions are made on their behalf. If contributions are only made annually these employees are arguably at risk for up to 12 months. For existing employees there is a risk that cover will lapse between contributions.

1.168 Reporting of contributions will increase employee interest in and knowledge of their superannuation entitlements.

Superannuation providers

1.169 Superannuation providers will benefit by receiving data in a more timely manner, meaning that it will be more likely that the information is correct or any missing details can still be obtained. This could stem the growth in lost and unclaimed superannuation accounts. Superannuation providers will also have the benefit of receiving funds at an earlier time to invest. This should also reduce complaints and disputes with regard to lapses in death and disability insurance coverage.

Government

1.170 A move to a quarterly scheme is likely to enhance compliance rates among employers with SG obligations, presuming an education campaign is undertaken. The costs of an education campaign, mainly targeted at employers who are currently not remitting SG contributions on a quarterly or better basis, is estimated to cost $4.1 million initially. There would also be recurrent costs estimated at $10.5 million to maintain education, help services and compliance activities for a quarterly SG contribution regime (these figures are included in the figures outlined in paragraph 1.135.)

1.171 The proposal may reduce future Government pension outlays through an increase in the size of the end benefits of affected employees. It is not possible to quantify the effect, although it is likely to be minimal.

1.172 Increased self-regulation by employers is likely as employees become more interested and knowledgable about their superannuation with ongoing employer reporting. This may also result in reductions in future Government outlay on pensions.

ATO

1.173 There are no benefits for the ATO in the implementation of this option.

Consultation

1.174 Other Government agencies and a number of representative industry organisations were consulted on the majority of the aspects of this proposal. The proposed requirement for the reporting of contributions was not part of the proposal that was originally the focus of consultation.

Industry views

1.175 The introduction of a quarterly SG regime would be the most acceptable change, for more frequent contributions, to the business community and would be accepted as a positive move to protect employee entitlements. There would also be support from the superannuation industry.

1.176 There has been a call from industry and relevant stakeholders that quarterly superannuation contributions should be implemented. For example, The ICAA has called for the implementation of a more frequent SG contribution regime. The ICAA believes that a more frequent SG contribution regime provides for a more secure method for employees to receive the SG entitlements.

1.177 At the Senate Select Committee on Superannuation and Financial Services hearings, industry groups such as the Association of Superannuation Funds of Australia and the Financial Services Consumer Policy Centre, supported a more frequent superannuation contribution regime. However, they believed that a monthly, not a quarterly superannuation contribution regime, should be implemented initially.

1.178 CPA Australia was also supportive of a more frequent superannuation contribution regime. It believed quarterly superannuation will not impose further costs on small business. However, CPA Australia also stated that going to a monthly superannuation contribution regime would be fiercely opposed by small business.

1.179 The COSBOA in its submission to the Senate Select Committee asked that there be no recommendation from the inquiry that adds to the compliance and administration costs of small business. COSBOA has concerns with employers being required to make superannuation contributions, on behalf of their employees, on a monthly basis (e.g. under awards).

1.180 The National Farmers Federation was originally supportive of this proposal but has since indicated it is reconsidering its position following a survey of the rural industrys fund, Australian Primary, which indicated that a larger than expected percentage of contributors to that fund only contributed on an annual basis.

1.181 The Australian Chamber of Commerce and Industry in its publication The Policies of the ACCI 2000, stated that moving to a more frequent SG contribution regime, such as quarterly, may provide greater security for employees entitlements, as well as reducing some of the administration costs on employers.

1.182 Consultations with other business organisations have indicated general support for the concept of a quarterly SG payment and compliance regime, particularly in aligning the measure to other tax obligations. It was also seen as good business practice to make frequent superannuation contributions. Concern was expressed, however, that there should be no additional compliance burden on the majority of businesses which are complying or substantially complying with their SG obligations.

Recommendation

1.183 Of the above options, it is option (iii) that satisfies the objectives by providing a strengthening of employees superannuation entitlements, whilst not placing an onerous compliance burden on business.

1.184 Option (i) does not achieve the objective of providing protection of employees superannuation entitlements.

1.185 Option (i)(a) may assist in reducing non-compliance in some circumstances, however, it does not sufficiently protect employees superannuation entitlements when businesses become bankrupt or insolvent.

1.186 Option (ii) would impose an additional burden on small businesses through the imposition of onerous monthly reporting requirements. As a consequence, this will lead to a more complex and costly system for small business due to increased compliance obligations.

1.187 Option (iii) means an employee is less likely to lose all or some of their superannuation entitlements when a business becomes bankrupt or insolvent, as businesses will be required to contribute on a more frequent basis, but not excessively so. This option also provides the most efficient and effective outcome for the ATO in relation to the administration and application of the SG system.

1.188 Option (iv), whilst being superficially similar to option (iii) is hampered by an annual imposition of the SGC. The annual imposition of the SGC doesnt address many of the issues that have prompted consideration of there proposals. Fully non-compliant employers could still not be pursued until 14 August, leaving at risk an entire years SG contributions. Similarly death and disability insurance can lapse and the superannuation funds do not have use of the contributions. It is unlikely that this option could be a viable alternative without the introduction of additional penalties which would undoubtedly add considerable complexity to the legislation.

Implementation and review

1.189 Even though a significant proportion of businesses are already paying superannuation on a quarterly or better basis, implementation of quarterly superannuation contributions should only occur after an appropriate lead in time. During this time an education campaign informing employers of their obligations and employees of their superannuation entitlements would be conducted.

1.190 The Government has announced that the quarterly superannuation contributions measure will commence from 1 July 2003. This will allow businesses, particularly small businesses, the necessary time to implement administration procedures and system upgrades to deal with a quarterly superannuation contribution regime.

1.191 Transitional arrangements will also allow for a period of education and adjustment in the first 2 quarters following the commencement of a quarterly SG regime. This will assist business in meeting its obligations whilst encouraging compliance with the new regime.

1.192 The transitional arrangements will only require an employer to pay the amount of unpaid superannuation to the ATO, without the imposition of the nominal interest or administration components that generally make up part of the SGC. Depending on the size of the shortfall and the number of employees involved this could result in significant savings for employers during the transitional period.

1.193 A substantial review of the effect of any change adopted - including the costs on business - would be conducted by the ATO 3 years after its introduction. It should be noted that the ATO is currently developing mechanisms to identify levels of current non-compliance with SG obligations. Adoption of any one of the options and its effect on business would be monitored in that context as well.

Chapter 2 - Miscellaneous superannuation guarantee amendments

Outline of chapter

2.1 Schedule 1 to this bill incorporates a number of amendments to the SGAA 1992 which will enhance the operation of the SG regime. The amendments will:

•

adjust the order of allocation of payments of SGC received by the ATO, such that amounts due to employees are paid before administrative components and penalties;

•

allow the Commissioner to deposit SG vouchers directly into a superannuation account of an employee without the need for an account to be nominated by the employee;

•

allow the Commissioner to make direct payments of SGC received for persons aged 65 years or over;

•

allow sub-plans within a master trust to seek conversion notices without requiring the master trust to seek the notice (and consequentially force all sub-plans within the fund to comply with the notice);

•

remove the requirement for an employer to report their annual national payroll for any financial year after the 1996 financial year;

•

cause the nominal interest component of the SGC to be calculated up until the day that a default SG assessment is issued;

•

replace references to repealed paragraph 13(1)(ab);

•

remove incorrect and outdated references to the Insurance and Superannuation Commissioner; and

•

replace fixed dollar penalties with references to penalty units.

Context of amendments

Order of allocation of payments of the SGC

2.2 Currently, the SGAA 1992 requires that in distributing any SGC payments received from an employer, payment is first allocated to the administration component of the SGC and then to penalties. These amounts contribute to Government revenue rather than employee entitlements.

2.3 The current construction of the Act can result in employees receiving less than their full entitlement, particularly in the case of partial recoveries from insolvent companies.

Depositing SG vouchers

2.4 Where the ATO recovers SGC amounts from an employer it sends information to each relevant employee advising them that they can place the amount recovered into a complying superannuation fund or RSA of their choice. Attached to this advice is a voucher which the employee can present to the fund or RSA, which is then forwarded to the ATO for payment.

2.5 A significant problem with the current system is the reliance placed on the employee to present the voucher to a complying superannuation fund or RSA. The ATO has issued a significant number of SG vouchers that have not been presented. By not presenting their vouchers, employees are forgoing the benefits of these entitlements.

Payments to individuals aged 65 years or over

2.6 People aged 65 years or over may have trouble accessing any benefit held for them in the SG system since superannuation funds are not required to accept a transfer of contributions in respect of persons aged 65 years or over.

Conversion notices

2.7 Under the SGAA 1992 a superannuation fund can seek a conversion notice, allowing the fund to be treated as a defined benefit fund for the purposes of the Act.

2.8 The legislation contemplates that a superannuation fund would provide notice of its intention for the entire fund to be treated as a defined benefit fund and is framed accordingly.

2.9 The advent of retail superannuation funds offering employers the opportunity to establish individual sub-plans within a master trust structure has meant that the current legislative rules regarding conversion notices no longer operate satisfactorily.

2.10 Currently sub-plans of master trusts are prevented from providing a conversion notice in respect of their particular sub-plan because of the particular terminology used in section 6B of the SGAA 1992.

Requirement to report annual national payroll

2.11 Paragraph 33(2)(f) of the SGAA 1992 requires defaulting employers to calculate their annual national payroll in their base year and report this figure in their SG statements if it did not exceed $1 million.

2.12 The annual national payroll was relevant in the early years of the SG scheme as different charge percentages applied depending upon whether a businesses payroll was $1 million or less or exceeded $1 million.

2.13 This figure is irrelevant for all years after the 1996 financial year, when the SGC percentage merged for both large and small employers.

Date of imposition of GIC

2.14 The SGAA 1992 currently deems a default assessment issued by the Commissioner to have become payable on 14 August in the financial year following the end of the year in which the shortfall arose. The non-deductible nominal interest component is calculated to the date the assessment becomes payable. GIC is then imposed on any unpaid amount from the date on which the SGC is payable until the assessment is paid. GIC is tax deductible.

2.15 An unforseen effect of this arrangement is that, due to the deductible nature of GIC, there may be some benefit for an employer in waiting to receive a default assessment if a substantial amount of time has passed since the 14 August deadline, compared to voluntarily lodging an SG statement.

Minor technical amendments

References to paragraph 13(1)(ab)

2.16 Subsections 23(2) and 23(9) of the SGAA 1992 refer to paragraph 13(1)(ab). That paragraph has been repealed, but the references in the above subsections have not been amended.

Reference to Commissioner of Insurance and Superannuation

2.17 Section 6B requires a trustee of a fund that wishes to be treated as a defined benefit fund to provide notice to the Commissioner of Insurance and Superannuation. This is an incorrect reference to a position that no longer exists following the repeal of the Insurance and Superannuation Commissioner Act 1987.

Monetary penalties

2.18 Section 80 of the SGAA 1992 currently allows the making of certain regulations for the purposes of the Act. That section also allows the regulations to prescribe penalties for offences against the regulations. The amount of penalty is limited to $500.

2.19 Under the unified penalty regime, penalties are expressed in terms of penalty units. A single penalty unit is currently equivalent to $110. This reference in the SGAA 1992 needs to be modernised.

Summary of new law

Order of allocation of payments of the SGC

2.20 Amounts of SGC paid to the ATO will be distributed firstly to employees, and only after all employee entitlements have been met (including any GIC) will any amount be counted against the administration component or additional SGC.

2.21 Where there is a single employee, that employee will receive all amounts paid to the ATO until their entitlements have been met in full. If there are multiple employees affected payments will be apportioned between employees on the basis of the amount owed to each individual.

Depositing SG vouchers

2.22 This bill will provide increased flexibility to the Commissioner regarding the payment of employee entitlements. The Commissioner will have the ability to deposit SGC amounts directly into an employees superannuation account where the Commissioner is satisfied the account belongs to the particular employee.

2.23 No nomination will need to be received from the employee, and the Commissioner may undertake this action before or after attempting to seek the nomination of a relevant fund from the employee.

Payments to individuals aged 65 years or over

2.24 This bill will also allow the Commissioner to pay amounts of SGC directly to persons aged 65 years or over. The amounts paid out in this manner will be treated as ETPs.

Conversion notices

2.25 The provision covering conversion notices will be amended to allow sub-plans of a master trust to provide a conversion notice in respect of the particular sub-plan rather than require the entire fund to be covered by the notice.

Requirement to report annual national payroll

2.26 The requirement to report the base year annual national payroll when completing an SG statement will be removed.

Date of imposition of GIC

2.27 Where a default assessment of SGC is generated, nominal interest will be calculated up until the day of assessment rather than merely until 14 August following the end of the financial year to which the assessment relates.

Minor technical amendments

References to paragraph 13(1)(ab)

2.28 References to the repealed paragraph 13(1)(ab) will be replaced with a direct reference to a law of the Commonwealth, a State or Territory.

Reference to Commissioner of Insurance and Superannuation

2.29 The reference to the Commissioner of Insurance and Superannuation in section 6B will be removed and replaced with a reference to the Commissioner of Taxation. This will mean that all future lodgments of a conversion notice will be to the Commissioner of Taxation.

Monetary penalties

2.30 The reference to the ability to prescribe penalties for offences against the regulations will be amended from a maximum penalty of $500 to a maximum of 5 penalty units.

Detailed explanation of new law

Order of allocation of payments of the SGC

2.31 This bill repeals sections 63 and 64 and substitutes new sections 63A, 63B, 64A and 64B to provide the framework for the payment of SGC amounts received by the ATO. Payments received in full or partial satisfaction of an SGC liability will be set against amounts due to employees first, and only subsequently to the administration component and penalty charge amounts. [Schedule 1, items 160 and 161, sections 63A, 63B, 64A and 64B]

2.32 The change to the method of calculation of the amount due to an employee will be reflected in the title to Part 8 of the SGAA 1992, which contains the sections inserted by these amendments. It will be amended to refer to payments of amounts of shortfall components for the benefit of employees. [Schedule 1, item 159]

2.33 Where only one employee is affected, the amount of SGC received will be paid against any amount of outstanding employee entitlement. [Schedule 1, item 161, section 64A]

Example 2.1

Jennifer is employed by Ethan. During the quarter beginning 1 January 2004 Ethan fails to make the appropriate level of superannuation contributions for Jennifer. In early May 2004 Ethan realises he has not made the appropriate contributions and completes and lodges an SG statement on 14 May.

Ethan is liable to pay an SGC of $434.75, comprising of $400 shortfall, $14.75 nominal interest and $20 administration component. When he lodges his SG statement Ethan forwards a cheque for $200.

The new section 63B requires the Commissioner to pay Jennifer an amount worked out under section 64A. The amount that the Commissioner must pay to Jennifer is called the shortfall component. The shortfall component is calculated as the lesser of the amount of payment received or the amount of the employee entitlement.

The employee entitlement is, at any particular time, the sum of the individual SG shortfall for the employee for the quarter; any GIC in respect of non-payment of the SGC; and any nominal interest component, reduced by any payments already received.

Jennifers employee entitlement on 14 May (when the first payment is received) is $414.75, comprising of $400 shortfall and $14.75 nominal interest.

The Commissioner must therefore pay Jennifer the $200 received from Ethan.

When the next payment is received from Ethan, Jennifers employee entitlement will be reduced by the amounts already paid to her, but increased by any GIC due on the unpaid amounts.

The $20 administration component will not be recovered by the Commissioner until the full amount of Jennifers employee entitlement has been paid.

2.34 In the situation where a payment of SGC is in relation to more than one employee, the amount received will be apportioned between all of the affected employees on the basis of the amount of shortfall that relates to each employee. [Schedule 1, item 161, section 64B]

Example 2.2

On 1 July 2004 Ethans business expands and he takes on a new employee, Kristen. During the quarter beginning 1 July 2004, Ethan once again fails to make sufficient superannuation contributions for both Jennifer and Kristen. In early November Ethan realises that he has not made the appropriate contributions and completes and lodges an SG statement on 14 December following an enquiry from the ATO.

Ethan determines that he is liable to pay an SGC of $510.53, comprising of $450 shortfall, $20.53 nominal interest and $40 administration component. When he lodges his SG statement Ethan forwards a cheque for $200. The Commissioner also determines that Ethan must pay additional SGC of $51.05 as he had not reported his shortfall by the due date (14 November) and he had previously incurred an SG shortfall.

As the SGC relates to more than one employee, new section 63B requires the Commissioner to pay Jennifer and Kristen each an amount worked out under section 64B. The amount that the Commissioner must pay to them is also termed the shortfall componentas it is in section 64A.

The shortfall component in respect of a particular employee is the employees proportion of the lesser of the amount of payment received or the amount of the total employee entitlement.

The total employee entitlement is calculated, at any particular time, as the sum of the individual SG shortfalls for the employer for the quarter; any GIC in respect of non-payment of the SGC; and any nominal interest component, reduced by any payments already received.

The employees proportion of an amount is determined by dividing the individual SG shortfall for the employee for the quarter by the total of the employers individual SG shortfalls for the quarter.

If we assume that $150 of the shortfall belongs to Kristen then her employees proportion would be determined by dividing 150 by 450, giving us an employees proportion of one-third. The employees shortfall for Jennifer would similarly be 300 divided by 450, resulting in an employees proportion of two-thirds.

A payment of $200 would be split one-third to Kristen and two-thirds to Jennifer entitling them to $66.67 and $133.33 respectively.

The $40 administration component, and the $51.05 additional SGC will not be recovered by the Commissioner until the full amount of the total employee entitlement has been paid.

2.35 New section 50 also provides that any amount owing to employees which is attributable to the nominal interest component will be paid before amounts attributable to individual shortfalls or GIC. The nominal interest component does not attract GIC if it remains unpaid after the due date. Consequently, employees are disadvantaged the longer the component goes unpaid. [Schedule 1, item 152, section 50]

2.36 Subsections 65(2) and (3) of the SGAA 1992 currently deal with the circumstances where a payment of SGC in respect of an employee is made to a superannuation fund or RSA respectively. These subsections deem the payment to have been made to a complying superannuation fund or RSA. New sections 63A, 63B, 64A and 64B (which are about the calculation of amounts due to employees) introduce new terminology in respect of payments by the Commissioner under the SGAA 1992. Subsections 65(2) and (3) are therefore amended to reflect the new terminology. [Schedule 1, items 163 and 164, subsections 65(2) and (3)]

2.37 This bill also inserts new subsection 65(6) to overcome a potential problem with the wording of various provisions in other Acts which refer to payments made to a complying fund under section 65 of the SGAA 1992. Subsection 65(6) will provide the legislative basis for deeming contributions to a particular account under paragraph 65(1)(a) to be payments to a complying fund. [Schedule 1, item 165, subsection 65(6)]

Depositing SG vouchers

2.38 This bill will amend section 65 of the SGAA 1992 to allow the Commissioner to make payments of the amount of the shortfall component recovered directly into superannuation accounts identified as belonging to the relevant employees. This mechanism is available where the Commissioner is satisfied that the account belongs to the relevant employee. Payment will be able to be made without any communication from the employee. The Commissioner will still be able to utilise the current systems for dealing with SG amounts that belong to employees. [Schedule 1, item 162, subsection 65(1)]

2.39 It is expected that the ability to deposit monies directly with complying funds and RSAs will significantly reduce the number of unclaimed SG vouchers that have been issued by the ATO.

Payments to individuals aged 65 years or over

2.40 Currently under the SGAA 1992, the Commissioner must either:

•

pay the amount of SG collected for an employee into an RSA, complying superannuation fund or ADF;

•

make arrangements to pay it into such a fund or RSA; or

•

pay it into a SHAR.

2.41 These limited options can provide some difficulties for older recipients of the SGC. Superannuation funds are not required to accept a transfer of contributions on behalf of retirees over age 64. Therefore this bill inserts section 65A to allow the Commissioner to make a payment directly to an employee who is aged 65 years or over. This is similar to the ability of the Commissioner to make payments from the SHAR to people who have turned 65 years of age. [Schedule 1, item 166, section 65A]

Conversion notices

2.42 This bill will amend section 6B of the SGAA 1992 to allow a trustee of a superannuation fund to provide a conversion notice in respect of a sub-plan of the fund, so that the particular sub-plan can be treated as a defined benefit superannuation fund for the purposes of the Act. [Schedule 1, items 15, 17, 18 and 20 to 23, sections 6A and 6B]

2.43 Currently section 6B provides that the trustee of a superannuation fund gives a conversion notice which then causes the fund to be treated as a defined benefit fund for the purposes of the SGAA 1992. The current construction of this section forces the entire fund to adopt this approach. In a master trust situation this is an inequitable and unworkable result as it is unlikely that all sub-plans will wish to be treated as defined benefit schemes.

2.44 As a consequence of the amendments to section 6B to allow sub-plans to seek conversion notices, various references to reductions in an employers charge percentage for notional contributions to defined benefit superannuation funds need to be expanded to ensure they include references to superannuation schemes (which is the terminology being used to capture sub-plans which provide conversion notices). [Schedule 1, items 111 and 112, subsection 23(8A)]

Requirement to report annual national payroll

2.45 Paragraph 33(2)(f) requires that an employer must include in an SG statement the employers base year annual national payroll if it was less than $1 million. This bill repeals paragraph 33(2)(f), removing the reporting requirement, as this figure was only relevant up until 1 July 1996 when the SG rates merged at 6% for both large and small employers. [Schedule 1, item 138, paragraph 33(2)(f)]

2.46 Sections 79 and 59 respectively impose general record keeping requirements and record keeping requirements for employers who have incurred the SGC. Those record keeping requirements relating to the base year annual national payroll are also repealed by this bill. [Schedule 1, items 157 and 167, subsection 79(2), subparagraph 59(2)(a)(i)]

Date of imposition of GIC

2.47 This bill amends the SGAA 1992 to reinstate the incentive for employers to voluntarily report to the Commissioner their SG shortfalls. Currently, the Act provides for the calculation of nominal interest component for default assessments only up until 14 August following the end of the financial year to which the assessment relates. If the assessment remains unpaid after that date, then GIC applies until the outstanding amounts are paid.

2.48 Where a significant period of time has elapsed since the employer incurred a shortfall, it is in the employers favour to have a default assessment issue rather than notifying the Commissioner of the shortfall. This is because the SGC, of which the nominal interest component is a part, is not tax deductible. The GIC on the other hand does attract a tax deduction. If an employer lodges an SG statement it will pay non-deductible nominal interest up until the date the statement is lodged. However, if they receive a default assessment nominal interest is only payable until 14 August and tax deductible GIC is payable thereafter.

2.49 Amendments to section 36 will ensure that nominal interest is calculated until the day that a default assessment is issued, thus restoring the incentive to advise the Commissioner when a shortfall is detected. This will crystallise the debt earlier and attract GIC from that date. [Schedule 1, item 149, subsection 36(3)]

Minor technical amendments

References to paragraph 13(1)(ab)

2.50 This bill amends subsections 23(2) and 23(9) of the SGAA 1992 to replace references to repealed paragraph 13(1)(ab) with direct references to a law of the Commonwealth, a State or Territory. The operation of subsections 23(2) and 23(9) is unchanged by this amendment as paragraph 13(1)(ab) previously made a similar reference to a law of the Commonwealth, a State or Territory. [Schedule 1, items 60 and 113, subsection 23(9), paragraph 23(2)(a)]

Reference to Commissioner of Insurance and Superannuation

2.51 Section 6B currently requires that the conversion notice be provided to the Commissioner of Insurance and Superannuation. The statutory position to which this provision was intended to refer no longer exists. In the time since the relevant Act was repealed, APRA has continued to accept the lodgement of conversion notices. The section will be amended to require future conversion notices to be lodged with the Commissioner of Taxation and to validate lodgement of such notices with APRA between the time that the Insurance and Superannuation Commissioner ceased to exist and when the Commissioner of Taxation takes responsibility for this role. [Schedule 1, item 19, subsection 6B(2)]

Monetary penalties

2.52 This bill corrects section 80 of the SGAA 1992 by replacing the current monetary limit on the level of penalties that can be imposed for offences under the regulations with a reference to penalty units. The current amount of $500 will be replaced by 5 penalty units (1 penalty unit is equal to $110). [Schedule 1, item 168, section 80]

2.53 This amendment does not actually increase the level of penalties that are able to be applied. Section 4AB of the Crimes Act 1914 allows for the conversion of pre-existing penalty amounts into penalty units by dividing the penalty involved by $100 and rounding up to the nearest whole number. Section 4AA of the Crimes Act 1914 then operates so as to convert the penalty units into a dollar amount at the current rate of $110 per penalty unit.

2.54 This change is therefore for the purposes of legislative consistency only, and is in line with the Attorney-Generals Departments policy to amend provisions as the opportunity arises so as to express penalties in terms of penalty units.

Application and transitional provisions

2.55 This bill operates to ensure amendments that repeal the requirements to record and report an employers base year annual national payroll apply to all assessments that relate to periods that begin on 1 July 1996 or later. [Schedule 1, item 200]

2.56 Provision is made in this bill to ensure that current Regulations made in respect of subsection 65(1) of the SGAA 1992 (which is amended to allow the Commissioner to deposit amounts directly into an employees superannuation account) are not affected by the amendments to section 65 and continue to operate as they did immediately prior to the commencement of those amendments. [Schedule 1, item 201]

2.57 The amendment applying the calculation of GIC only from the day of the default assessment (rather than from the 14th day of the second month following the end of the quarter in which the liability arose) will apply to all default assessments issued after 1 July 2003. The Commissioners ability to deposit amounts directly into an employees superannuation account, and to pay amounts directly to employees aged 65 years or over, will commence also from 1 July 2003. [Schedule 1, items 198 and 199]

Consequential amendments

2.58 This bill amends subsection 27A(1) the ITAA 1936 to insert into paragraph (fe) of the definition of ETP, a reference to new section 65A of the SGAA 1992 to ensure that SG payments that are made directly to people 65 years or over are treated as ETPs for taxation purposes. [Schedule 1, item 170, subsection 27A(1)]

Chapter 3 - Reduction of the superannuation surcharge

Outline of chapter

3.1 Part 1 of Schedule 2 to this bill will amend the SCT Imposition Act 1997, the CPF Imposition Act 1997 and the TPT Imposition Act 1997 to reduce the superannuation contributions and the termination payments surcharge rates by 1/10th of their current levels in each of the 3 income years commencing from 1 July 2002.

3.2 Part 2 of Schedule 2 to this bill will amend the provisions which impose a limit on the maximum amount of surcharge payable by members of CPFs and the maximum reduction of benefits of members of certain unfunded defined benefits superannuation schemes. These limits reflect the current maximum surcharge rates, which will be reduced under this measure.

3.3 Part 3 of Schedule 2 to this bill sets out the application of the amendments in Parts 1 and 2.

Context of amendments

3.4 On 5 November 2001, in the election policy document A Better Superannuation System, the Government foreshadowed a number of measures designed to enhance the overall attractiveness, accessibility and security of superannuation.

3.5 In line with the foreshadowed measures, the Government announced in the 2002-2003 Federal Budget the implementation of the commitment to reduce the superannuation and termination payments surcharge rates by 1/10th of their current levels for the next 3 income years commencing from 1 July 2002. As a consequence, the maximum surcharge rates will be reduced to 13.5% for 2002-2003, 12% for 2003-2004 and 10.5% for 2004-2005.

3.6 The reduction in the surcharge rates is intended to ensure that superannuation remains attractive and encourages all employees to save for their retirement. The amendments in this Schedule will have a beneficial impact on people whose superannuation contributions are subject to the surcharge.

3.7 A related issue arising from the reduction of the surcharge rates is the consequences for the limits that apply to the amount of surcharge payable by members of CPFs and the amount of reduction of benefits for members of certain unfunded defined benefits superannuation schemes. The limits reflect the current maximum surcharge rates which will be reduced under this measure.

Summary of new law

3.8 The maximum surcharge rates and the method of calculating rates within the upper and lower thresholds will be amended so that all rates will be reduced by 1/10th of their current levels for each of the next 3 income years commencing on 1 July 2002.

3.9 Where a limit of 15% applies in relation to the surcharge liability of members of CPFs and the reduction of benefits of members of certain unfunded defined benefits superannuation schemes, the limit will be amended to reflect the reducing maximum surcharge rates.

Detailed explanation of new law

Reduction in the surcharge rates

3.10 The superannuation contributions surcharge is determined under the SCT Imposition Act 1997 in relation to superannuation contributions other than contributions to CPFs. Superannuation contributions surcharge in relation to contributions to CPFs is determined under the CPF Imposition Act 1997. The termination payments surcharge is determined under the TPT Imposition Act 1997.

Application of maximum surcharge rate

3.11 Subsection 5(2) of the SCT Imposition Act 1997, subsection 5(3) of the CPF Imposition Act 1997 and subsection 5(2) of the TPT Imposition Act 1997 provide that the maximum surcharge rate of 15% applies where a members adjusted taxable income for a financial year is $85,000 (as indexed) or a higher amount. Adjusted taxable income is determined under section 7A or 7B of the SCT Act 1997. In general terms, the Commissioner determines a persons adjusted taxable income by adding to a persons taxable income, surchargeable superannuation contributions and reportable fringe benefits.

3.12 Under paragraphs 5(3)(c), (d) and (f) of the SCT Imposition Act 1997 and paragraphs 5(4)(c), (d) and (f) of the CPF Imposition Act 1997, in certain circumstances where a members TFN is not known, a 15% surcharge rate may apply in relation to the superannuation contributions of the member.

3.13 The references to 15% in the SCT Imposition Act 1997, the CPF Imposition Act 1997 and the TPT Imposition Act 1997 reflect current maximum surcharge rates which will be reduced over the 3 income years commencing from 1 July 2002. The references to 15% will be replaced by the term maximum surcharge percentage, which will be defined as:

(a)

for the 2002-2003 financial year - 13.5%;

(b)

for the 2003-2003 financial year - 12%; and

(c)

for each later financial year - 10.5%.

[Schedule 2, Part 1, items 1, 5, 6, 9, 13, 14, 17 and 21]

Formulae to calculate surcharge rates

3.14 In addition to reducing the maximum surcharge rates by 1/10th of their current levels for each of the 3 income years commencing from 1 July 2002, each formula for determining the applicable rate between the lower and upper surcharge thresholds will be replaced with a new formula.

3.15 Subsection 5(1) of the SCT Imposition Act 1997, the CPF Imposition Act1997 and the TPT Imposition Act 1997 will be amended to insert new formulae to calculate surcharge rates so that the rate calculated will be 1/10th of their current levels for each of the 3 income years from 1 July 2002. [Schedule 2, Part 1, items 3, 11 and 19]

3.16 Definitions of the terms higher income amount and lower income amount will be included in the SCT Imposition Act 1997. Higher income amount is defined as $103,507 for the 2001-2002 financial year and that amount as indexed for later financial years. Lower income amount is defined as $85,242 for the 2001-2002 financial year, and that amount as indexed for later financial years. [Schedule 2, Part 1, items 1, 9 and 17]

3.17 The terms higher income amount and lower income amount are used in the new formulae and also replace references in the Acts to the original threshold amounts of $70,000 and $85,000. [Schedule 2, Part 1, items 2, 4, 10, 12, 18 and 20]

3.18 For the 2002-2003 financial year and later financial years the higher and lower income amounts will be indexed in line with average weekly ordinary time earnings under the indexation provisions. These provisions are section 7 of the SCT Imposition Act 1997, section 7 of the CPF Imposition Act 1997 and section 6 of the TPT Imposition Act 1997. [Schedule 2, Part 1, items 7, 8, 15, 16, 22 and 23]

Reduction of the surcharge cap, etc.

3.19 The CPF Act 1997 imposes superannuation contributions surcharge on members of CPFs. Surcharge assessed each year for each CPF member, plus interest, accumulates in a surcharge debt account maintained by the Commissioner. Under subsections 15(6), 15(6A) (inserted by TLAA5 2001) and 15(6A) (included in the Family Law Amendment Act 2001) of the CPF Act 1997 when a benefit becomes payable to a CPF member or when a CPF ceases to be a CPF, the CPF member is liable to pay the surcharge. CPF members surcharge liability is the lesser of the amount by which their surcharge debt account is in debit or 15% of the employer-financed component of that part of the benefits payable to the member that accrued after 20 August 1996.

3.20 The references to 15% in subsection 15(6) and both of the subsections 15(6A) of the CPF Act 1997 reflect the current maximum surcharge rates. As a result of the proposed reduction in the surcharge rates over each of the 3 income years commencing from 1 July 2002, the references to 15% will be amended to reflect the proposed reduction in the maximum surcharge rates. Subsection 15(6A) inserted into the CPF Act 1997 by the Family Law Amendment Act 2001, which has not yet commenced, applies where a superannuation interest in a CPF has been split and subsequently becomes payable. Schedule 6 to this bill will rename subsection 15(6A) as subsection (15(6AA). [Schedule 2, Part 2, items 29 to 31]

3.21 The Cth Reduction Act 1997 allows trustees of certain unfunded defined benefit superannuation schemes to reduce the benefits payable to members of such funds by no more than 15% of the employer financed component of that part of the benefits payable to the member that accrued after 20 August 1996. The reference to 15% in subsection 4(1) of the Cth Reduction Act 1997 reflects the current maximum surcharge rate and will be amended to reflect the proposed reduction in the maximum rates over each of the 3 income years commencing from 1 July 2002. [Schedule 2, Part 2, items 27 and 28]

3.22 The Superannuation Act 1976 provides for an occupational superannuation scheme, known as the CSS, for people employed by the Commonwealth and for certain other people. The payment of the surcharge liability in respect of CSS members surchargeable contributions is deferred until a benefit is paid. When a benefit becomes payable, the CSS Board is liable to pay the deferred surcharge liability plus accumulated interest.

3.23 Under subsection 80A(3) of the Superannuation Act 1976 the CSS Board may not reduce the benefits of a member by more than 15% of the employer financed component of that part of the benefits payable to the member that accrued after 20 August 1996. The reference to 15% reflects the current maximum surcharge rate and will be amended to reflect the proposed reduction in the maximum rates over each of the 3 income years commencing from 1 July 2002. [Schedule 2, Part 2, item 26]

3.24 The Parliamentary Contributory Act 1948 provides for an occupational superannuation scheme for Commonwealth Members of Parliament. The payment of the surcharge liability in respect of surchargeable contributions of Members of Parliament is deferred until a benefit is paid. When a benefit becomes payable the Parliamentary Retiring Allowances Trust is liable to pay the deferred surcharge liability plus accumulated interest.

3.25 Under subsection 4E(3) of the Parliamentary Contributory Act 1948 the Parliamentary Retiring Allowances Trust may not reduce the benefits of a member by more than 15% of the employer financed component of that part of the benefits payable to the member that accrued after 20 August 1996. The reference to 15% reflects the current maximum surcharge rates and will be amended to reflect the reduction in the maximum rates over each of the 3 income years commencing from 1 July 2002. [Schedule 2, Part 2, item 25]

3.26 The DFRDB Act 1973 generally provides for the payment of retirement benefits to certain defence force employees. The payment of the surcharge liability in respect of such employees superannuation contributions is deferred until a benefit is paid. When a benefit becomes payable the trustee of the fund is liable to pay the deferred surcharge liability plus accumulated interest.

3.27 Under subsection 6C(3) of the DFRDB Act 1973 the trustee may not reduce the benefits of a member by more than 15% of the employer financed component of that part of the benefits payable to the member that accrued after 20 August 1996. The reference to 15% reflects the current maximum surcharge rates and will be amended to reflect the proposed reduction in the maximum rates over each of the 3 income years commencing from 1 July 2002. [Schedule 2, Part 2, item 24]

Application and transitional provisions

3.28 The measure to reduce the surcharge rates will apply in relation to surcharge liability arising in respect of the 2002-2003 financial year and later financial years. [Schedule 2, Part 3, item 32]

3.29 The amendments to reduce the limit applying to CPF members (other than where a CPF ceases to be a CPF) and certain unfunded defined benefit superannuation schemes will apply to benefits that become payable on or after 1 July 2002. Where a CPF ceases to be a CPF and a member becomes liable to pay the surcharge, the amendments will apply where a CPF ceases to be a CPF after 1 July 2002. Where a superannuation interest in a CPF has been split and subsequently becomes payable, the amendment to reduce the limit applying to CPF members will apply to the payment of benefits after the commencement of the Family Law Amendment Act 2001. [Schedule 2, Part 3, items 33 to 35]

Consequential amendments

3.30 There are no consequential amendments relating to this measure.

Chapter 4 - Deductions for contributions to complying superannuation funds or RSAs

Outline of chapter

4.1 Schedule 3 to this bill will amend the ITAA 1936 and the ITAA 1997. The amendments will limit when a contribution to a complying superannuation fund or RSA will be an allowable tax deduction.

Context of amendments

4.2 This measure was foreshadowed in the Governments election policy statement A Better Superannuation System released on 5 November 2001. It recognises that some people choose to work past the age of 70 and still wish to save for their retirement. The Government announced the implementation of this commitment in the 2002-2003 Federal Budget.

Summary of new law

4.3 The ITAA 1997 will be amended so that a tax deduction will not generally be available where the contribution is in respect of a person aged 70 years or more, except where the contribution is required under an industrial award or to meet an SG obligation.

4.4 A contribution to a complying superannuation fund or RSA will continue to be an allowable tax deduction if it has been made in accordance with section 82AAC or section 82AAT of the ITAA 1936 for people aged less than 70 years.

Detailed explanation of new law

4.5 The Government foreshadowed in its election policy statement A Better Superannuation System its intention to increase from 70 years to 75 years the age up to which working members of superannuation funds could make personal superannuation contributions. Changes to the Superannuation Industry (Supervision) Regulations 1994 will be made to implement this policy.

4.6 While such contributions will be allowed it is generally not intended that these contributions be deductible to the taxpayer. This is because a member having turned 70 years has already satisfied all the relevant conditions of release and can have their superannuation benefits paid from the superannuation fund. To allow a tax deduction for a person over 70 years would open the opportunity for individuals to exploit the concessionality of the superannuation system by churning their contributions. That is, a member could make a contribution, have the benefits immediately paid from the superannuation fund, and then re-contribute the same amount. This could be done a number of times with the view to maximise the tax deduction. Such behaviour is not consistent with the purpose of the Governments retirement income policy.

4.7 In essence, the amendments to the ITAA 1997 prescribe that a tax deduction for a contribution to a complying superannuation fund or RSA will only be available where it is made in accordance with section 82AAC or section 82AAT of the ITAA 1936, and the working member of the fund is less than 70 years of age. An explanation of these provisions and the exceptions to the general rule are set out in paragraph 4.10 to 4.17.

4.8 Section 82AAC of the ITAA 1936 details the circumstance in which a taxpayer may claim a tax deduction (and the amount of the tax deduction) in relation to another person. Simply, a taxpayer (usually an employer) may claim a tax deduction for a superannuation contribution paid in respect of an eligible employee in the year of income the contribution is made. The amount of the deduction is also determined by reference to the particular employees age in that year of income.

4.9 Similarly, section 82AAT of the ITAA 1936 prescribes the circumstance in which a taxpayer may claim a tax deduction (and the amount of the deduction) for a personal contribution to a complying superannuation fund or RSA. The maximum amount of the tax deduction is also determined by reference to the persons age in the year of income the contribution is made.

4.10 The amendments to the ITAA 1997 will now mean that a taxpayer wishing to claim a tax deduction for a personal superannuation contribution must continue to meet the rules outlined under section 82AAT of the ITAA 1936, and the contribution must have been made within 28 days of the end of the month in which the taxpayer turned 70 years old. [Schedule 3, item 3, subsection 26-80(3)]

4.11 In relation to an employer claiming a tax deduction for superannuation contributions made in respect of employees, the taxpayer must continue to be entitled to a tax deduction under section 82AAC of the ITAA 1936 and the contribution must have been made within 28 days of the end of the month in which the employee turned 70 years old. [Schedule 3, item 3, subsection 26-80(2)]

4.12 For example, if an employee turned 70 years old on 31 December, and all other conditions were satisfied, an employer would be eligible to claim a deduction for any superannuation contributions made in respect of that employee between 1 July and 28 January. Subject to the exceptions outlined below, the employer would not be able to claim a tax deduction for any superannuation contributions made after 28 January in respect of that particular employee.

4.13 There are 2 exceptions to this rule. The first relates to contributions required to meet an SG obligation; the second relates to contributions made under an industrial award.

4.14 A tax deduction will still be allowed if the contribution is made as a consequence of an SG obligation. The amount of the tax deduction available is limited to 9% (from 1 July 2002) of the employees SG earnings base. [Schedule 3, item 3, subsection 26-80(5)]

4.15 Superannuation contributions required by an industrial award or determination in force under an Australian law will also continue to be an allowable tax deduction. To deny a tax deduction for a contribution required under a legal obligation would result in an unfair burden on employers. The tax deduction is limited, however, to the amount that must be paid as a superannuation contribution under that industrial award or determination. [Schedule 3, item 3, subsection 26-80(4)]

4.16 It should be noted that this amendment clearly specifies that only industrial awards or determinations which are in force under an Australian law will be eligible for a tax deduction. An industrial agreement, such as an Australian Workplace Agreement or a Certified Agreement, is not considered to be an award or determination for the purposes of this amendment. This is because a person could enter into an agreement for a salary sacrifice arrangement that could be an allowable deduction to the employer. This could provide scope to avoid the limitations on deductibility imposed by the amendments. [Schedule 3, item 3, paragraph 26-80(4)(c)]

4.17 For the sake of clarity, where a tax deduction is available because an employee is eligible for a superannuation contribution as a result of a SG entitlement and an industrial award, the taxpayer may choose the most appropriate provision under which to claim the tax deduction. [Schedule 3, item 3, subsection 26-80(6)]

4.18 It should be noted that in some circumstances, section 82AAD of the ITAA 1936 deems certain amounts paid to a non-complying superannuation fund to be paid to a complying superannuation fund for the purposes of section 82AAC. In addition, section 82AADA also deems an amount paid as a contribution to an RSA to be paid to a complying superannuation fund for the purposes of section 82AAC. These sections are unchanged.

4.19 Section 82AAF of the ITAA 1936 allows a deduction up to $1,200 for a deposit made for an eligible employee under the Small Superannuation Accounts Act 1995. This Act established the SHAR to provide a place for employers to deposit small amounts where they could not find a superannuation fund or RSA willing to accept the contribution (generally because the amount was seen to be too small). Before using SHAR, an employer must attempt to find a superannuation fund or RSA.

4.20 Section 28 of the Small Superannuation Accounts Act 1995 ensures that a deposit can only be made instead of a superannuation contribution and the deposit must be equal to the contribution. As a result of section 30, SHAR may only accept deposits in respect of a person less than 70 years, during the period of employment to which the deposit relates.

4.21 Finally, the amendments do not extend the application of SG arrangements for employees. SG continues to only be payable in respect of employees until they turn 70 years of age.

Application and transitional provisions

4.22 The measure will apply to assessments made on or after 1 July 2002.

Consequential amendments

4.23 There are no consequential amendments for this measure.

Chapter 5 - Taxable contributions paid for the benefit of children under 18

Outline of chapter

5.1 Schedule 4 to this bill will amend the ITAA 1936 to provide that superannuation contributions made on behalf of persons under 18 years of age (other than by an employer) will not form part of the taxable income of a complying superannuation fund or a RSA provider.

Context of amendment

5.2 This measure was foreshadowed in the Governments election policy statement A Better Superannuation System released on 5 November 2001 a proposal to ensure superannuation is seen as a lifetime strategy with superannuation savings commencing at the earliest possible age.

5.3 In line with the foreshadowed measure, the Government announced in the 2002-2003 Federal Budget the implementation of the commitment to allow parents, relatives and friends to make superannuation contributions of up to $3,000 per 3 year period for the benefit of a person under the age of 18 years.

5.4 This measure will be given effect through amendments to the Superannuation Industry (Supervision) Regulations and Retirement Savings Accounts Regulations, permitting regulated superannuation funds and RSA institutions to accept such contributions. Contributions made by parents, relatives and friends on behalf of a child will not be tax deductible.

Summary of new law

5.5 This measure will ensure that superannuation contributions made on behalf of a person under the age of 18 years (other than by or on behalf of an employer) are not taxable contributions and are therefore excluded from the income of the complying superannuation fund or RSA provider.

Detailed explanation of new law

Taxable contributions

5.6 Part IX of the ITAA 1936 provides, in sections 281 and 299B, that taxable contributions are included in the income of a complying superannuation fund or RSA provider.

5.7 Taxable contributions (as defined in section 274 of the ITAA 1936) generally include contributions made for the purposes of providing superannuation benefits for another person. There are a number of exclusions from what are deemed taxable contributions, including contributions made on behalf of an eligible spouse within the meaning of section 159T of the ITAA 1936.

5.8 Superannuation contributions made by parents, relatives and friends on behalf of a person under the age of 18 years, other than contributions made by or on behalf of an employer, will also be excluded from being a taxable contribution in the hands of a complying superannuation fund or RSA provider. [Schedule 4, items 1 and 2]

Treatment of end benefits

5.9 The contribution made on behalf of a child under the age of 18 years, except contributions from any employer, are undeducted contributions defined in subsection 27A(1) of the ITAA 1936. Broadly, undeducted contributions are contributions for which a deduction has not been allowed to the taxpayer or another person. The undeducted contributions component of an ETP is not included in a taxpayers assessable income and is therefore tax free.

Application and transitional provisions

5.10 The measure will apply to relevant contributions made on or after 1 July 2002.

Consequential amendments

5.12 There are no consequential amendments relating to this measure.

Chapter 6 - Increase the amount of personal superannuation contributions that are fully deductible

Outline of chapter

6.1 Schedule 5 to this bill will amend the ITAA 1936 to increase the deduction available to the self-employed for personal superannuation contributions.

Context of amendments

6.2 This measure was foreshadowed in the Governments election policy statement A Better Superannuation System released on 5 November 2001, to improve the operation of the incentives scheme that supports the voluntary contribution pillar of the Governments retirement incomes policy. The Government announced the implementation of this commitment in the 2002-2003 Federal Budget.

Summary of new law

6.3 The measure will increase the fully tax deductible amount for eligible persons who make superannuation contributions, from $3,000 to $5,000. [Schedule 5, item 1, subparagraphs 82AAT(2)(a)(i) and (ii)]

6.4 The definition of eligible person in section 82AAS of the ITAA 1936 includes self-employed and substantially self-employed persons.

Application and transitional provisions

6.5 This amendment will apply from 1 July 2002.

Consequential amendments

6.6 There are no consequential amendments relating to this measure.

Chapter 7 - Other amendments

Outline of chapter

7.1 Schedule 6 to this bill makes a number of technical amendments to correct legislative oversights arising from the Taxation Laws Amendment (Superannuation) Act (No. 1) 2002 (which enables superannuation to be paid to temporary residents who permanently depart Australia), the TLAA5 2001 (which provides for a CPF to change status to a taxed fund) and the Family Law Amendment Act 2001 (which ensures the appropriate tax treatment is applied to superannuation interests which may be split).

7.2 Schedule 6 to this bill also introduces an amendment to the Bankruptcy Act 1966 to ensure that the SGC and any related GIC have a priority in bankruptcy equal to that afforded to salary or wages.

Detailed explanation of new law

7.3 Subsection 16-170(3) of Schedule 1 to the TAA 1953 is amended to ensure that existing provisions allowing a withholding payment summary to consist of multiple statements covering different types of payments also apply in relation to payment summaries dealing with superannuation paid to temporary residents who have permanently departed Australia. [Schedule 6, items 10 and 11]

7.4 Subsection 16-175(1) of Schedule 1 to the TAA 1953 is amended to provide a penalty of 20 penalty units for entities that fail to meet obligations to provide payment summaries to recipients when making withholding payments under Subdivision 16-C of that Act. This same penalty previously applied under this subsection but was inadvertently omitted under previous legislation. The penalty will also apply for failure to provide a payment summary where superannuation is being paid to a temporary resident who has permanently departed Australia. [Schedule 6, items 12 to 14]

7.5 Drafting oversights have been identified in the TLAA5 2001 and the Family Law Amendment Act 2001. In particular, TLAA5 2001 failed to include a reference to subsection 15(6A) in subsection 15(7) of the CPF Act 1997. The subsection 15(6A) inserted by TLAA5 2001 covers the payment of surcharge where a CPF changes status to a taxed fund. In the absence of the reference in subsection 15(7), the Commissioner is not required to issue a notice of liability to the member. [Schedule 6, item 8]

7.6 In addition, the Family Law Amendment Act 2001 which has received Royal Assent but has not yet commenced also inserted a new subsection 15(6A) into the CPF Act 1997. The Family Law Amendment Act 2001 will be amended to change subsection 15(6A) to subsection 15(6AA) and to make the necessary cross reference changes. [Schedule 6, items 3 to 7]

7.7 The SGAA 1992 currently provides in section 52 for priority of the SGC in liquidation. An amendment will be made to insert a new provision into the Bankruptcy Act 1966 to ensure that the SGC (and any related GIC) has an appropriate priority in bankruptcy. [Schedule 6, item 1, subsection 109(1C)]

7.8 The SGC will have the same priority as unpaid salary or wages in bankruptcy administrations.

7.9 The SGAA 1992 will be amended to reflect the fact that rules are provided in the Bankruptcy Act 1966 for the treatment of outstanding SGC in bankruptcy. [Schedule 6, item 9, section 52]

Application and transitional provisions

7.10 Items 10 and 11 of Schedule 6 commences on the later of 1 July 2002 and Royal Assent. Items 12 to 14 of Schedule 6 commence on the later of 1 July 2002 and 28 days after Royal Assent.

7.11 Items 3 to 8 commence on Royal Assent.

7.12 Items 1, 2 and 9 will commence on the day that item 77 of the Bankruptcy Legislation Amendment Bill 2002 commences.

Consequential amendments

7.13 There are no consequential amendments relating to this measure.