House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Treasurer, the Hon Wayne Swan MP)

Glossary

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

General outline and financial impact

Exemption of income earned in overseas employment

Schedule 1 amends section 23AG of the Income Tax Assessment Act 1936, to limit its scope to foreign employment income derived by Australian resident individuals only in specific circumstances.

Date of effect : This measure will take effect from 1 July 2009.

Proposal announced : This measure was announced in the Treasurer's Media Release No. 066 of 12 May 2009.

Financial impact : This measure is expected to provide an additional $675 million over the forward estimates period.

Compliance cost impact : Low.

Summary of regulation impact statement

Regulation impact on business

Impact : Low.

Main points :

•

Employers of individuals whose foreign employment income is not exempt will be required to comply with the pay as you go withholding rules.

•

Employers of individuals whose foreign employment income is not exempt will be required to comply with the Fringe Benefits Tax Assessment Act 1986 in relation to any fringe benefits provided to those employees.

Temporary reduction in the Government co-contribution

Schedule 2 to this Bill will temporarily reduce the matching rate and maximum co-contribution that is payable on an individual's eligible personal superannuation contributions.

Date of effect : This measure will take effect for the 2009-10 and later income years.

Proposal announced : This measure was announced in the 2009-10 Budget.

Financial impact : This measure is expected to result in a $1.395 billion fiscal saving over the forward estimates period.

Compliance cost impact : Low.

Reduction in the concessional contributions cap

Schedule 3 to this Bill will reduce the concessional contributions cap to $25,000 per annum (indexed) from the 2009-10 financial year. The reduced cap will apply to all concessional superannuation contributions made in the 2009-10 and later financial years.

Schedule 3 to this Bill will also reduce the transitional concessional contributions cap (applicable to individuals aged 50 and over) to $50,000 per annum (not indexed) for the 2009-10, 2010-11 and 2011-12 financial years.

Date of effect : This measure will take effect from 1 July 2009.

Proposal announced : This measure was announced in the 2009-10 Budget.

Financial impact : This measure is expected to result in a $2.81 billion revenue saving over the forward estimates period.

Compliance cost impact : Low.

Chapter 1 Exemption of income earned in overseas employment

Outline of chapter

1.1 Schedule 1 to this Bill inserts subsection 23AG(1AA) into the Income Tax Assessment Act 1936 (ITAA 1936). All legislative references are to the ITAA 1936 unless otherwise stated.

Context of amendments

1.2 The taxation of income in Australia is principally determined on the basis of whether the entity is an Australian resident or a foreign resident. Generally, Australian residents are taxed on their worldwide income whereas foreign residents are taxed only on income sourced in Australia.

1.3 The definition of 'resident of Australia' for taxation purposes is contained in subsection 6(1). In the case of an individual, a person's nationality or citizenship is not necessarily a determinative factor when considering whether or not the person is a resident of Australia for tax purposes.

1.4 Section 23AG provides an exception to the general rule that Australian residents are taxed on their worldwide income. It provides an exemption from Australian income tax for income earned in overseas employment by an Australian resident individual engaged in continuous foreign service for a period of not less than 91 days. The provision has broad application, in that it is not restricted to foreign employment income derived from specific activities.

1.5 Section 23AG provides a mechanism for the relief of double taxation but it does not contain a requirement that foreign tax is paid in order for the exemption to apply. This can produce non-neutral tax outcomes between individuals working in different countries, with different tax rates, and between individuals working overseas and individuals working in Australia.

1.6 This Schedule will improve the targeting of this exemption while avoiding double taxation.

1.7 Existing rules that can operate to deny the exemption will continue to apply under the new rules.

Summary of new law

1.8 This Schedule amends section 23AG, to limit its scope to foreign employment income derived by Australian resident individuals only in specific circumstances.

1.9 Foreign earnings derived by an Australian resident individual engaged in continuous foreign service for not less than 91 days will only be eligible for exemption from income tax if the foreign service is directly attributable to any of the following:

•

the delivery of Australia's overseas aid program by the individual's employer;

•

the activities of the individual's employer in operating a developing country relief fund or a public disaster relief fund;

•

the activities of the individual's employer being a prescribed institution that is exempt from Australian income tax;

•

the individual's deployment outside Australia by an Australian government (or an authority thereof) as a member of a disciplined force; or

•

an activity of a kind specified in the regulations.

1.10 However, the existing conditions for exemption will continue to apply. In particular, the foreign earnings of individuals engaged in foreign service that are directly attributable to one of the activities referred to in subsection 23AG(1AA) will not be exempt if one of the conditions for non-exemption contained in subsection 23AG(2) applies.

1.11 Subsection 23AG(2) applies, to deny an exemption, if the foreign earnings are exempt from tax in the foreign country only because of one or more of the following reasons:

•

a double tax agreement with Australia or a law giving effect to a double tax agreement;

•

the foreign country does not impose income tax on employment or personal services income, or similar income; or

•

a law of the foreign country or an international agreement to which Australia is a party, which deals with diplomatic or consular privileges and immunities, or privileges and immunities for people connected with international organisations (such as the United Nations).

For example, an exemption may be denied where the foreign earnings are exempt from tax in the foreign country only because of the operation of a double tax agreement.

1.12 However, subsection 23AG(2) does not apply to deny an exemption if the foreign earnings are exempt from tax in the foreign country for a reason other than, or in addition to, those listed above. For example, the income may be exempt in the foreign country because of the application of a double tax agreement and because of an agreement between the government of that country and an international aid organisation. These rules will continue to apply.

1.13 Foreign employment income that is not exempt under the new rules may be subject to Australian income tax. In such cases, taxpayers will be eligible to claim a non-refundable foreign income tax offset (FITO) for foreign income tax paid on that income. This will relieve double taxation for those individuals.

1.14 The FITO rules apply to income years beginning on or after 1 July 2008 and are contained in Division 770 of the Income Tax Assessment Act 1997 (ITAA 1997). The FITO rules replaced the former foreign tax credit system and were designed to provide taxpayers with a simplified way of claiming relief for foreign income taxes paid on amounts included in their assessable income in Australia.

1.15 The new rules do not change the definitions of 'foreign earnings' and 'foreign service' contained in subsection 23AG(7).

Other obligations

1.16 From 1 July 2009, employers of individuals who derive non-exempt foreign employment income will be required to withhold amounts from salaries, wages, allowances, bonuses and commissions paid to their foreign-based employees under the pay as you go (PAYG) withholding rules. Where the income is currently exempt this would not occur because no amount is required to be withheld from payments of exempt income. The PAYG withholding rules are contained in Division 12 of the Taxation Administration Act 1953.

1.17 In addition, fringe benefits tax (FBT) obligations may arise in respect of benefits provided by employers to their foreign-based employees, pursuant to the Fringe Benefits Tax Assessment Act 1986. For FBT purposes, a person is regarded as an employee if the person receives salary and wages, which is in turn defined to include a payment from which an amount is withheld under the PAYG withholding rules. Thus, fringe benefits provided to employees whose foreign employment income is exempt under section 23AG are not subject to FBT, but fringe benefits provided to employees whose foreign employment income is not exempt under section 23AG may be subject to FBT.

Comparison of key features of new law and current law

Detailed explanation of new law

Eligibility for exemption

1.18 Foreign earnings derived by an Australian resident individual from continuous foreign service of not less than 91 days will only be exempt from income tax if the foreign service is directly attributable to any of the following:

•

the delivery of Australian official development assistance by the person's employer;

•

the activities of the person's employer in operating a public fund declared by the Treasurer to be a developing country relief fund; or a public fund established and maintained to provide monetary relief to people in a developing country that has experienced a disaster;

•

the activities of the person's employer, being a prescribed institution that is exempt from Australian income tax;

•

the person's deployment outside Australia as a member of a disciplined force by the Commonwealth, a State or Territory (or an authority of the Commonwealth, a State or a Territory); or

•

an activity of a kind specified in the regulations.

[ Schedule 1, item 1, subsection 23(1AA )]

Australian official development assistance

1.19 Australian official development assistance (ODA) is assistance delivered through the Australian Government's overseas aid program, as administered by the Department of Foreign Affairs and Trade and/or the Australian Agency for International Development (AusAID). Australian ODA aims to reduce poverty and achieve sustainable development in developing countries, in line with Australia's national interest.

1.20 In addition to providing Australian ODA directly, AusAID also competitively contracts aid work to Australian and international entities. Thus, in practice, individuals involved in the delivery of Australian ODA can include both Australian Public Service (APS) employees and non-APS employees.

1.21 For the purposes of subsection 23AG(1AA) the delivery of Australian ODA must be undertaken by the person's employer, which includes AusAID and an entity contracted by AusAID to assist in the delivery of Australian ODA.

Example 1.1

Colin is an APS employee employed by AusAID. He is posted to the Cook Islands, for 120 continuous days, as a project advisor on an Australian ODA project aimed at improving the quality of early childhood education.

Colin's foreign service is directly attributable to the delivery of Australian ODA by his employer and his foreign earnings are therefore eligible for exemption pursuant to section 23AG, subject to the conditions contained in subsection 23AG(2).

Example 1.2

Robert is an APS employee employed by the Commonwealth Department of Climate Change. He is posted to Tokelau for 150 continuous days, to work on a project aimed at minimising the impacts of rising sea levels in Tokelau.

Robert is not an AusAID employee but the project is classified as Australian ODA by AusAID. Robert's foreign service is directly attributable to the delivery of Australian ODA by his employer and his foreign earnings are therefore eligible for exemption pursuant to section 23AG, subject to the conditions contained in subsection 23AG(2).

Example 1.3

Eli is a motor mechanic employed by Emu Engineering Pty Ltd, a private company contracted by AusAID to provide vocational training in Vanuatu. He is posted to Vanuatu for 180 continuous days.

Eli's foreign service is directly attributable to the delivery of Australian ODA by his employer and his foreign earnings are therefore eligible for exemption pursuant to section 23AG, subject to the conditions contained in subsection 23AG(2).

1.22 Foreign service directly attributable to the delivery of Australian ODA does not include diplomatic or consular duties carried out by Australian residents.

Employer operating a public fund

1.23 A person's foreign earnings will be eligible for exemption if they are directly attributable to their employer's activities in operating a public fund covered by item 9.1.1 or 9.1.2 of the table in subsection 30-80(1) of the ITAA 1997. [ Schedule 1, item 1, paragraph 23AG(1AA)(b )]

1.24 Item 9.1.1 of subsection 30-80(1) of the ITAA 1997 applies to a public fund declared by the Treasurer to be a developing country relief fund. Item 9.1.2 of subsection 30-80(1) applies to a public fund operated by a public benevolent institution solely to provide relief to people of a developing country who are in distress as a result of a disaster (a public disaster relief fund). Gifts or donations made to these public funds are tax deductible for income tax purposes to the donor.

1.25 A developing country relief fund is a fund established by an organisation solely for the purpose of providing relief to people of a developing country. The organisation must be an approved organisation as declared by the Minister for Foreign Affairs and the country must be a developing country as declared by the Minister for Foreign Affairs. These conditions are contained in paragraphs 30-85(2)(a) and (b) of the ITAA 1997 respectively.

1.26 A public disaster relief fund is a fund established and operated by a public benevolent institution in response to an event recognised as a disaster by the Minister for Foreign Affairs. The recognition requirement is contained in section 30-86 of the ITAA 1997.

1.27 Paragraph 23AG(1AA)(b) ensures that employees of recognised organisations that undertake aid or charitable activities, that do not form part of Australian ODA, are eligible for exemption on their relevant foreign employment income.

Example 1.4

Kate is a social worker employed by a charitable organisation that operates a fund approved as a developing country relief fund by the Treasurer.

Kate is posted to Nigeria for 120 days to help provide relief to people in distress.

Kate's foreign earnings are eligible for exemption pursuant to section 23AG, subject to the conditions contained in subsection 23AG(2).

Employer is an exempt institution for income tax purposes

1.28 A person's foreign earnings will be eligible for exemption if the foreign service is directly attributable to their employer's activities as an institution covered by paragraph (c) or (d) of section 50-50 of the ITAA 1997. [ Schedule 1, item 1, paragraph 23AG(1AA)(c )]

1.29 These paragraphs apply to a prescribed charitable or religious institution that is exempt from Australian income tax pursuant to item 1.1 or 1.2 of section 50-5 of the ITAA 1997. Such organisations are either located outside Australia or have a physical presence in Australia but incur their expenditure and pursue their objectives principally outside Australia.

1.30 Paragraph 23AG(1AA)(c) ensures that employees of recognised organisations that undertake aid or charitable activities, that do not form part of Australian ODA, are eligible for exemption on their relevant foreign employment income.

Foreign deployment as a member of a disciplined force

1.31 A person's foreign earnings will be eligible for exemption if the foreign service is directly attributable to that person's deployment outside Australia as a member of a disciplined force by an Australian government, or an authority thereof. A disciplined force is intended to refer to a defence force, including a peacekeeping force, and a police force.

1.32 In a defence force context, the exemption would apply to a person's deployment outside Australia as part of a non-warlike operation. In a police force context, the exemption would apply to Australian Federal Police employees deployed on an International Deployment Group mission who are subject to Commanders Orders to achieve operational policing outcomes. [ Schedule 1, item 1, paragraph 23AG(1AA)(d )]

Other specified activities

1.33 The new rules will permit the making of regulations to include other specified activities within the scope of subsection 23AG(1AA). [ Schedule 1, item 1, paragraph 23AG(1AA)(e )]

1.34 This will enable the scope of the exemption to be broadened, if necessary, beyond the specific categories listed.

Continuous period of foreign service must be directly attributable to certain activities

1.35 Subsection 23AG(1AA) will apply where an individual undertakes a continuous period of foreign service of 91 days or more and the foreign service relates to more than one of the activities listed in paragraphs (a) to (e).

Example 1.5

Lisa is an APS employee employed by AusAID. On 1 July 2009 Lisa is posted to Tonga for 45 days, as a project advisor on an Australian ODA project.

At the end of the 45 day posting, Lisa resigns from AusAID and takes up a position as an aid worker in Tonga, employed by a prescribed charitable institution covered by paragraph 23AG(1AA)(c). Lisa remains in her new position for another 100 days.

Lisa's continuous period of foreign service for the purpose of subsection 23AG(1AA) is 145 days and her foreign earnings are eligible for exemption pursuant to section 23AG, subject to the conditions contained in subsection 23AG(2).

Example 1.6

As in the above example, Lisa resigns from AusAID at the end of her 45 day posting. However, rather than commencing work as an aid worker, Lisa takes up permanent employment with a bank in Tonga.

Lisa's continuous period of foreign service in Tonga exceeds 91 days but none of her foreign earnings are eligible for exemption because she did not attain 91 days of continuous foreign service in relation to an activity covered by subsection 23AG(1AA).

Application and transitional provisions

1.36 The new rules apply to foreign earnings derived on or after 1 July 2009 from foreign service performed on or after 1 July 2009. Foreign earnings derived on or before 30 June 2009 will remain eligible for exemption under the existing rules and foreign service performed on or after 1 July 2009 will be included in the calculation of the period of continuous foreign service, even where the foreign earnings derived on or after 1 July 2009 are no longer exempt. [ Schedule 1, item 2, paragraphs 2(a) and (b) and subitem 3 ]

Example 1.7

Wallace is an Australian resident employed by a Thai company to work in Bangkok from 1 June 2009 to 30 September 2009. His foreign earnings are not directly attributable to any of the activities covered by new subsection 23AG(1AA).

Wallace's foreign earnings derived after 1 July 2009 will not be eligible for exemption under the new rules. However, Wallace's foreign earnings in respect of foreign service performed before 1 July 2009 will remain eligible for exemption because his total foreign service from 1 June to 30 September exceeded 91 consecutive days.

1.37 Foreign earnings paid to an individual on or after 1 July 2009 in respect of foreign service performed before 1 July 2009 will remain eligible for exemption under the existing rules.

Example 1.8

Jennelle has been engaged in continuous foreign service since 1 February 2009. Her foreign earnings are not directly attributable to any of the activities covered by new subsection 23AG(1AA).

On 1 July 2009 Jennelle is paid in respect of foreign service performed during the month of June 2009. Her foreign earnings for the month of June 2009 remain eligible for exemption notwithstanding the fact that they were paid on 1 July 2009.

However, Jennelle's foreign earnings derived in respect of foreign service performed on or after 1 July 2009 are not eligible for exemption because they are not directly attributable to any of the activities covered by new subsection 23AG(1AA).

Consequential amendments

1.38 There are no consequential amendments arising from Schedule 1.

Regulation impact statement

Policy objective

1.39 The objective of the proposed amendment to section 23AG is to minimise the potential for inequity between individuals working in different countries, with different tax rates, and between individuals working overseas and individuals working in Australia.

1.40 This is consistent with the general principle that individuals who are Australian residents for tax purposes should pay tax on their worldwide income.

Implementation options

1.41 Only one option was examined in detail - to limit the scope of the current tax exemption to only apply to individuals engaged in a narrow range of employment activities, namely any of the following:

•

the delivery of Australia's overseas aid program by the individual's employer;

•

the activities of the individual's employer in operating a developing country relief fund or a public disaster relief fund;

•

the activities of the individual's employer being a prescribed tax-exempt institution;

•

the individual's deployment outside Australia by an Australian government (or an authority thereof) as a member of a disciplined force; or

•

an activity of a kind specified in the regulations.

Assessment of impacts

Impact group identification

1.42 The proposed amendments will affect Australian resident individuals who derive foreign employment income, which will no longer be exempt under the new rules. They may also impose withholding and reporting obligations on the Australian employers of those individuals.

Analysis of costs/benefits

Individuals

1.43 Some Australian resident individuals will no longer be entitled to an exemption in respect of their foreign employment income. Such income will be taxable in Australia in accordance with the principle that Australian residents should pay Australian tax on their worldwide income.

Employers

1.44 Employers of those individuals who will no longer be exempt from 1 July 2009 will be required to comply with the PAYG withholding rules. That is, those employers, as payers, will be required to withhold amounts from the payments they make to their employees, in accordance with Division 12 of the Taxation Administration Act 1953, and remit those amounts to the Commissioner of Taxation. No PAYG withholding obligations exist in relation to payments of exempt income.

1.45 Employers of those individuals who are no longer exempt from 1 July 2009 will be required to comply with the Fringe Benefits Tax Assessment Act 1986 in relation to any fringe benefits provided to those employees. No FBT liability arises in relation to payments of exempt income.

1.46 These obligations would arise as a direct consequence of the loss of the tax exemption for the employees. Australian Taxation Office

1.47 The proposed amendments are expected to lower administrative costs for the Australian Taxation Office in the long term.

1.48 The Australian Taxation Office currently devotes significant resources to providing interpretive advice on the operation of section 23AG. While this is likely to continue upon implementation of the new rules, the number of individuals who will be eligible for an exemption from 1 July 2009 will decrease over time, thereby resulting in fewer requests for interpretive advice.

Consultation

1.49 The proposed amendments were announced by the Treasurer on 12 May 2009, as part of the 2009-10 Budget. Public consultation was undertaken but the consultation period was necessarily short so as to facilitate the introduction of this Bill into Parliament in the 2009 Winter Parliamentary sitting.

Conclusion and recommended option

1.50 Limiting the scope of the tax exemption provided by section 23AG, as proposed, will help maintain the integrity of the tax system by ensuring that most Australian resident individuals face the same tax burden in relation to their worldwide income.

Chapter 2 Temporary reduction in the Government co-contribution

Outline of chapter

2.1 Schedule 2 to this Bill amends the Superannuation (Government Co-contribution for Low Income Earners) Act 2003 (Co-contribution Act) to reduce the matching rate and maximum co-contribution for eligible personal superannuation contributions made in the 2009-10, 2010-11, 2011-12, 2012-13 and 2013-14 income years.

Context of amendments

2.2 The co-contribution matches eligible personal superannuation contributions made by low to middle income earners. Since 1 July 2004, the matching rate and maximum co-contribution payable have been 150 per cent and $1,500, reduced by 5 cents for each dollar by which the individual's total income for the income year exceeds the lower co-contribution income threshold in the relevant year. The lower income threshold is $31,920 for 2009-10.

2.3 In the 2009-10 Budget, the Government announced a temporary reduction in the matching rate and maximum Government co-contribution payable for eligible personal superannuation contributions. The matching rate and maximum co-contribution will revert back to the levels of the 2008-09 income year in the 2014-15 income year and for later income years.

Summary of new law

2.4 The Government will reduce the matching rate and maximum co-contribution that is payable on an individual's eligible personal superannuation contributions made in the 2009-10, 2010-11, 2011-12, 2012-13 and 2013-14 income years.

Comparison of key features of new law and current law

Detailed explanation of new law

2.5 The co-contribution is payable for eligible individuals who make personal undeducted contributions into superannuation. The maximum co-contribution is payable for individuals whose income is at or below the lower income threshold. The co-contribution phases out for individuals whose income is up to the upper income threshold ($61,920 in 2009-10).

2.6 Subsection 9(1) of the Co-contribution Act sets out the basic rule for the matching of eligible personal superannuation contributions by the Government co-contribution.

2.7 Section 10 of the Co-contribution Act sets out the maximum amount of the Government co-contribution payable for an individual for an income year, and the rate at which this amount reduces where an individual's income is above the lower income threshold.

2.8 Subsection 9(1) and section 10 will be amended to provide for a temporary reduction in the co-contribution matching rate and maximum co-contribution. A corresponding amendment will provide for the rate at which the maximum co-contribution is reduced where an individual's income is above the lower income threshold.

2.9 For the 2004-05, 2005-06, 2006-07, 2007-08 and 2008-09 income years, the Government co-contribution will continue to be equal to 150 per cent of the eligible personal superannuation contributions made by an individual during those years. [ Schedule 2, item 1, paragraph 9(1)(b )]

2.10 The maximum Government co-contribution remains at $1,500 for eligible personal superannuation contributions made in the 2004-05, 2005-06, 2006-07, 2007-08 and 2008-09 income years by individuals with incomes under the lower income threshold. The maximum co-contribution in those years will continue to be reduced by 5 cents for each dollar by which the individual's total income exceeds the lower income threshold in the relevant year. [ Schedule 2, item 4, subsection 10(1A )]

Example 2.1

Kristen and her sister Elicia work for their mother Robyn's company.

In 2009-10 Kristen makes a $1,000 personal contribution to superannuation and does not claim a deduction for this contribution. Her assessable income for that year is less than the lower income co-contribution threshold. The Commissioner of Taxation determines that Kristen is eligible for a Government co-contribution and pays $1,500 into Kristen's superannuation account.

Elicia also makes a $1,000 personal contribution for which she does not claim a deduction. Her assessable income ($56,920) in that year is $25,000 greater than the lower income threshold. The Commissioner of Taxation determines that Elicia is also eligible for a reduced co-contribution of $250 and pays this amount into Elicia's superannuation account.

2.11 For the 2009-10, 2010-11 or 2011-12 income years, the Government co-contribution matching rate will be equal to 100 per cent of the eligible personal superannuation contributions made by an individual during those years. [ Schedule 2, item 3, paragraph 9(1)(c )]

2.12 For eligible personal superannuation contributions made in the 2009-10, 2010-11 or 2011-12 income years the maximum Government co-contribution will be $1,000 for individuals with incomes below the lower income threshold. The maximum co-contribution will be reduced by 3.333 cents for each dollar by which the individual's total income exceeds the lower income threshold in the relevant year. [ Schedule 2, item 5, subsection 10(1B )]

2.13 For the 2012-13 or 2013-14 income years, the Government co-contribution matching rate will be equal to 125 per cent of the eligible personal superannuation contributions made by an individual during those years. [ Schedule 2, item 3, paragraph 9(1)(d )]

2.14 For eligible personal superannuation contributions made in the 2012-13 or 2013-14 income years the maximum Government co-contribution will be $1,250 for individuals with incomes below the lower income threshold. The maximum co-contribution will be reduced by 4.167 cents for each dollar by which the individual's total income exceeds the lower income threshold in the relevant year. [ Schedule 2, item 5, subsection 10(1C )]

2.15 For the 2014-15 and later income years, the Government co-contribution matching rate will be equal to 150 per cent of the eligible personal superannuation contributions made by an individual during those years. [ Schedule 2, item 3, paragraph 9(1)(e )]

2.16 For eligible personal superannuation contributions made in the 2014-15 and later income years the maximum Government co-contribution will be $1,500 for individuals with incomes below the lower income threshold. The maximum co-contribution payable will be reduced by 5 cents for each dollar by which the individual's total income exceeds the lower income threshold in the relevant year. [ Schedule 2, item 5, subsection 10(1D )]

Example 2.2

Following on from Example 2.1, Kristen and Elicia continue to make $1,000 personal contributions in subsequent years.

Assuming that Kristen's income is always less than or equal to the lower income threshold and Elicia's income is always $25,000 greater than the lower income threshold, the following table sets out the co-contribution that will be payable to Kristen and Elicia as a result of the amendments in this Bill.

	2008-09	2009-10	2010-11	2011-12	2012-13	2013-14	2014-15
Kristen's co-contribution	$1,500	$1,000	$1,000	$1,000	$1,250	$1,250	$1,500
Elicia's co-contribution	$250	$168	$168	$168	$209	$209	$250

2.17 Consistent with the current Co-contribution Act these new provisions will have effect subject to :

•

increases in the lower and higher income threshold (existing section 10A);

•

the payment of a minimum co-contribution (existing section 11); and

•

the treatment of late and under-paid co-contribution payments (existing sections 12, 21, 22 and 23);

[ Schedule 2, item 6, subsection 10(2 )]

Application and transitional provisions

2.19 The amendments made by Schedule 1 will apply to contributions made in the 2009-10 and later income years. [ Schedule 2, item 7 ]

Chapter 3 Reduction in the concessional contributions cap

Outline of chapter

3.1 Schedule 3 to this Bill amends the Income Tax Assessment Act 1997 (ITAA 1997) and the Income Tax (Transitional Provisions) Act 1997 to reduce the cap on concessional superannuation contributions.

3.2 Schedule 3 also amends the ITAA 1997 to make consequential amendments to the level of the non-concessional contributions cap.

Context of amendments

3.3 Since 1 July 2007, concessional and non-concessional superannuation contributions have been subject to annual limits.

3.4 Concessional contributions are generally those which are included in the assessable income of a superannuation fund and include employer contributions (including superannuation guarantee and salary sacrifice contributions) and tax deductible personal contributions. Non-concessional contributions are generally those for which a deduction is not claimed.

3.5 For contributions made in 2007-08 and 2008-09 financial years, the concessional contributions cap was $50,000. In addition there is currently a transitional cap in place for those aged 50 and over, which allows them to make concessionally taxed contributions of up to $100,000 annually until 30 June 2012.

3.6 The non-concessional contributions cap is currently set at three times the concessional contributions cap.

3.7 In the 2009-10 Budget the Government announced that the concessional contributions cap will be reduced to $25,000 (indexed) for contributions made in 2009-10 and later financial years. The transitional cap (not indexed) will also be reduced to $50,000 for contributions made in the 2009-10, 2010-11 and 2011-12 financial years. These new limits are designed to ensure that superannuation taxation concessions are targeted appropriately.

3.8 The non-concessional contributions cap for the 2009-10 and later financial years will be six times the concessional contributions cap and will therefore be $150,000 in 2009-10. The non-concessional contributions cap was also $150,000 in the 2007-08 and 2008-09 financial years.

Summary of new law

3.9 The ITAA 1997 will be amended to reduce the concessional contributions cap from $50,000 to $25,000 (indexed) for concessional contributions made in the 2009-10 and later financial years.

3.10 This new contributions cap will be indexed annually to average weekly ordinary time earnings (AWOTE), rounded down to the nearest multiple of $5,000.

3.11 The transitional cap will be reduced from $100,000 to $50,000 and no indexation will apply. (The transitional cap is not currently indexed).

3.12 The non-concessional contributions cap will be six times the new concessional contributions cap.

Comparison of key features of new law and current law

Detailed explanation of new law

3.13 Since 1 July 2007 superannuation contributions have been subject to annual caps. Contributions in excess of the relevant caps are subject to an additional tax. This tax is imposed on the individual.

Concessional contributions cap

3.14 For the 2007-08 and 2008-09 financial years a cap of $50,000 per person per year continues to apply to concessional contributions made in those years. [ Schedule 3, item 1, paragraphs 292-20(2)(a) and (b) of the ITAA 1997 ]

3.15 For the 2009-10 financial year the cap will be $25,000. [ Schedule 3, item 1, paragraph 292-20(2)(c) of the ITAA 1997 ]

3.16 For the 2010-11 financial year or later financial years the cap will be worked out by annually indexing the 2009-10 financial year cap (that is, $25,000). [ Schedule 3, item 1, paragraph 292-20(2)(d) of the ITAA 1997 ]

3.17 The indexation factor will be the proportional change in AWOTE from the middle month of the December 2008 quarter to the middle month of the December quarter just before the relevant financial year. [ Schedule 3, item 7, subsection 960-285(3A) of the ITAA 1997 ]

3.18 The index number for a quarter will continue to be AWOTE. Thresholds will continue to be rounded down to the nearest multiple of $5,000 to ensure the thresholds remain in round figures.

Transitional arrangements for concessional contributions

3.19 A transitional concessional contributions cap currently applies to contributions made by individuals aged 50 or over any time between the financial years 2007-08 and 2011-12.

3.20 For the 2007-08 and 2008-09 financial years the cap will continue to be $100,000. [ Schedule 3, item 11, paragraphs 292-20(2)(a) and (b) of the Income Tax (Transitional Provisions) Act 1997 ]

3.21 The Income Tax (Transitional Provisions) Act 1997 will be amended so that for the 2009-10, 2010-11 and 2011-2012 financial years the transitional concessional contributions cap will be $50,000 [ Schedule 3, item 11, paragraphs 292-20(2)(c) to (e) of the Income Tax (Transitional Provisions) Act 1997 ]. This amount is not indexed.

Example 3.1

Garry is 55. His ordinary time earnings in the 2007-08 and 2008-09 financial years are $250,000. His employer makes superannuation guarantee contributions of $13,745 in 2008-09. In preparation for retirement Garry has been topping up his employer's compulsory superannuation guarantee contributions with additional salary sacrifice amounts up to the transitional concessional contributions cap which in the 2007-08 and 2008-09 financial years is $100,000.

In 2008-09 Garry's salary sacrifice contributions are $86,255.

Example 3.2

Using the information from Example 3.1, in the 2009-10 financial year Garry will be subject to the reduced transitional concessional contributions cap of $50,000. During this year, his employer makes superannuation guarantee contributions. To avoid an excess contributions tax liability, Garry will need to reduce his salary sacrifice contribution by at least $50,000.

Example 3.3

In 2009-10 Lola earns $55,000, all of which is ordinary time earnings. Lola is 42. Her employer makes $4,950 of compulsory superannuation contributions to a complying fund.

Lola's concessional contributions cap in 2009-10 is $25,000.

If Lola was to enter into an effective salary sacrifice agreement with her employer, Lola could make additional contributions of $20,050 into her superannuation fund and not breach the concessional contributions cap.

Concessional contributions to a defined benefit interest

3.22 There is a separate arrangement for calculating concessional contributions in relation to defined benefit interests. This is because employer contributions into these interests are not always attributable to individual members.

3.23 The amounts that are counted towards the concessional contributions cap in relation to a defined benefit interest are referred to as notional taxed contributions.

3.24 Special arrangements will apply to certain members with a defined benefit interest on 12 May 2009 where notional taxed contributions for that interest exceed the concessional contributions cap in the 2009-10 or later financial years. In this case, the notional taxed contributions for that interest will be taken to be at the maximum level of the person's cap. [ Schedule 3, item 4, subsection 292-170(8) of the ITAA 1997 ]

3.25 Similar arrangements for defined benefit members applied when the caps were first introduced in 2007.

3.26 This arrangement will be subject to the conditions (if any) set out in the regulations and will only apply to notional taxed contributions reported for the 2009-10 or later financial years. [ Schedule 3, item 4, paragraph 292-170(8)(d) of the ITAA 1997 ]

3.27 The arrangement will continue to apply if the defined benefit interest is transferred to a successor superannuation fund that retains equivalent rights for members. [ Schedule 3, item 4, subsection 292-170(9) of the ITAA 1997 ]

Example 3.4

Donna is 45 and has had an interest in a defined benefit fund since 1 July 2006. In the 2007-08 and 2008-09 financial years Donna had notional taxed contributions of $30,000. The grandfathering provisions in these years did not need to be activated as Donna's notional contributions were below the concessional contributions cap of $50,000.

During these financial years Donna also made salary sacrificed contributions of $20,000 (the difference between the concessional contributions cap and her notional taxed contributions).

In the 2009-10 financial year Donna's notional taxed contributions are $30,000 and therefore in excess of the concessional contributions cap. However, as Donna was a member of the fund on 12 May 2009 the grandfathering provisions will provide that her notional taxed contributions will be taken to be equal to the cap in that year and future financial years provided that the defined benefit interest meets and continues to meet the necessary conditions set out in the regulations. If this is the case, Donna's notional taxed contributions ($30,000 in 2009-10) will be taken to equal $25,000 meaning that Donna will not breach the concessional contributions cap as a result of these contributions.

However, Donna will no longer be able to make salary sacrifice contributions without exceeding the cap.

Non-concessional contributions cap

3.28 For the 2007-08 and 2008-09 financial years the non-concessional contributions cap will continue to be three times the concessional contributions cap for the year. [ Schedule 3, item 2, paragraphs 292-85(2)(a) and (b) of the ITAA 1997 ]

3.29 For the 2009-10 and later financial years the non-concessional contributions cap will be set at six times the new (indexed) concessional contributions cap [ Schedule 3, item 2, paragraph 292-85(2)(b) of the ITAA 1997 ]. This will mean the non-concessional cap for the 2009-10 financial year will be $150,000, the same as the current level for the 2007-08 and 2008-09 financial years.

3.30 The existing provisions which allow an individual to bring forward two years worth of non-concessional contributions will remain unchanged.

3.31 Together with no change to the non-concessional contributions cap for the 2007-08 and 2008-09 financial years, this means that where an individual has triggered the bring-forward provisions in a financial year prior to the 2009-10 financial year, the non-concessional cap as determined in the first year will continue to apply even where the bring-forward period includes the 2009-10 or 2010-11 financial years.

Example 3.5

Rebecca aged 55, makes non-concessional contributions totalling $200,000 in the 2008-09 financial year. Having not already triggered the bring-forward in the previous two years, a bring-forward is triggered.

Rebecca can make additional non-concessional contributions of $250,000 over the following two financial years (2009-10 and 2010-11) without having excess contributions.

Index

Schedule 1: Exemption of income derived from foreign service

Schedule 2: Government Co-contribution for Low Income Earners

Schedule 3: Excess contributions tax