House of Representatives

Explanatory Memorandum

(Circulated by authority of the Minister for Housing and Assistant Treasurer, the Hon Michael Sukkar MP)

Glossary

The following abbreviations and acronyms are used throughout this Explanatory Memorandum.

General outline and financial impact

Superannuation - employees with multiple employers

Schedule 1 to the Bill amends the SGAA 1992 to allow individuals to avoid unintentionally breaching their concessional contributions cap when they receive superannuation contributions from multiple employers. Instead of receiving contributions into superannuation, an employee may apply to the Commissioner to opt out of the superannuation guarantee regime in respect of an employer and negotiate with the employer to receive additional cash or non-cash remuneration.

The amendments achieve this outcome by allowing certain employees with multiple employers to apply to the Commissioner for an 'employer shortfall exemption certificate', which prevents their employer from having a superannuation guarantee shortfall if they do not make superannuation contributions for a period.

Date of effect: 1 July 2018.

Proposal announced: This Schedule implements the measure 'Superannuation - preventing inadvertent concessional cap breaches by certain employees' from the 2018-19 Budget.

Financial impact: The measure is estimated to result in a gain to revenue of $2 million over the forward estimates period:

- nil

.. not zero but rounded to zero

Human rights implications: This Schedule does not raise any human rights issue. See Statement of Compatibility with Human Rights - Chapter 4.

Compliance cost impact: This Schedule has the following estimated compliance costs:

•

Total one-off implementation cost of $147,213 for individuals relating to learning and education about the changes;

•

Total ongoing total compliance costs following implementation of $5,981 for those individuals who choose to take up the exemption; and

•

Total ongoing compliance costs following implementation for business of $121,404 in relation to record-keeping, systems and procedure for individuals who take up the superannuation guarantee exemption).

Non-arm's length income of superannuation entities

Schedule 2 to the Bill ensures that the non-arm's length income rules for superannuation entities apply in situations where a superannuation entity incurs non arm's length expenses in gaining or producing the income.

Date of effect: 1 July 2018.

Proposal announced: 2017-18 Budget.

Financial impact: The measure is estimated to result in a gain to revenue of $30 million over the forward estimates period, reflecting the additional tax paid by non-arm's length lenders on interest income earned on loans:

- Nil

Human rights implications: This Schedule does not raise any human rights issue. See Statement of Compatibility with Human Rights - Chapter 4.

Compliance cost impact: Estimated one-off compliance cost of $2.8 million. No ongoing compliance cost impact following implementation.

Limited recourse borrowing arrangements

Schedule 3 to the Bill amends the total superannuation balance rules to ensure that, in certain circumstances involving limited recourse borrowing arrangements, the total value of a superannuation fund's assets is taken into account in working out individual members' total superannuation balances.

Date of effect: 1 July 2018.

Proposal announced: This measure was originally announced in the 2017-18 Budget. Following consultation, the scope of the measure as announced was reduced.

Financial impact: The measure is estimated to result in a gain to revenue of $1 million over the forward estimates period:

- Nil

.. not zero but rounded to zero

Human rights implications: This Schedule does not raise any human rights issue. See Statement of Compatibility with Human Rights - Chapter 4.

Compliance cost impact: Estimated one-off compliance cost of $1 million. No ongoing compliance cost impact following implementation.

Chapter 1 - Superannuation - employees with multiple employers

Outline of chapter

1.1 Schedule 1 amends the SGAA 1992 to allow individuals to avoid unintentionally breaching their concessional contributions cap when they receive superannuation contributions from multiple employers. Instead of receiving contributions into superannuation, an employee may apply to the Commissioner to opt out of the SG regime in respect of an employer and negotiate with the employer to receive additional cash or non-cash remuneration.

1.2 The amendments achieve this outcome by allowing certain employees with multiple employers to apply to the Commissioner for an 'employer shortfall exemption certificate', which prevents their employer from having a superannuation guarantee shortfall if they do not make superannuation contributions for a period.

1.3 The amendments provide a framework for the issuing of a certificate, including the conditions which must be satisfied before the Commissioner may issue a certificate.

1.4 All legislative references in this Chapter are to the SGAA 1992 unless otherwise stated.

Context of amendments

1.5 In the 2018-19 Budget, the Government announced that from 1 July 2018, individuals with multiple employers would be able to nominate to opt out of the SG system in respect of their wages from certain employers. The opt-out means that eligible individuals can avoid inadvertently breaching their annual concessional contributions cap as a result of multiple employers making contributions into superannuation on their behalf. The amendments in this Schedule implement this measure by providing a framework for individuals to apply to the Commissioner for an employer shortfall exemption certificate, which prevents their employer from having a SG shortfall if they do not make superannuation contributions for a period.

1.6 The SG rules ensure that employees have a minimum level of superannuation contributions in respect of their employment. The rules achieve this by imposing a tax (the SG charge) on employers who fail to contribute a minimum percentage of their employees' ordinary time earnings into superannuation. Avoiding a liability to this charge provides employers with an incentive to make contributions on behalf of their employees.

1.7 Employers are liable to pay to the Commissioner SG charge equal to their SG shortfall for a quarter. SG shortfall consists of the total of the employer's individual SG shortfalls for each employee, nominal interest component and administration component for the quarter.

1.8 An employer's individual SG shortfall for an employee for a quarter is calculated by reference to a charge percentage and the total salary or wages paid by the employer to the employee for the quarter.

1.9 Contributions that an employer makes in respect of their employees reduce the charge percentage for the employer. This reduces the employer's SG shortfall for a quarter and corresponding liability for SG charge.

1.10 The SG rules include a 'maximum contribution base' beyond which an employer no longer needs to make superannuation contributions for an employee for a quarter to avoid liability for SG charge. This operates as a ceiling, limiting the amount of superannuation support that an employer is required to provide for an employee for a quarter. This is achieved by excluding amounts of salary or wages that exceed the maximum contribution base from the calculation of individual SG shortfall.

1.11 The rules for working out the maximum contribution base for a quarter depend upon the year in which the quarter falls. For a quarter in the 2001-02 financial year, or later years, the maximum contribution base is an amount indexed annually (starting from a base of $27,510 in 2001-02). For a quarter in the 2017-18 financial year or any later year, the maximum contribution base is instead worked out by reference to a charge percentage and the concessional contributions cap if that amount is less than the indexed amount for the quarter. This calculation broadly aims to prevent employer contributions from causing an employee to exceed their annual concessional contributions cap.

1.12 However, the maximum contribution base for an employee applies to each employer. If an employee has multiple employers, each employer must make superannuation contributions on the earnings they pay to the employee up to the maximum contribution base in order to avoid having an SG shortfall. This occurs even where the employee earns less than the maximum contribution base for each of their employers, but their income in total exceeds the maximum contribution base.

1.13 Individuals with multiple employers may inadvertently exceed their annual concessional contributions cap. Concessional contributions generally provide the most favourable superannuation treatment. When a concessional contribution is made by an employer, the employer can claim a deduction for making the contribution, and the contribution is taxed at the concessional rate of 15 per cent by the superannuation entity that receives it.

1.14 Where an individual's contributions (including those made by their employer) exceed their annual concessional contributions cap, the excess is their 'excess concessional contributions' for the financial year. An individual's excess concessional contributions are included in the individual's assessable income for the year and taxed at marginal rates less a 15 per cent tax offset (representing the tax paid in the superannuation fund). They are also subject to a charge based on the shortfall interest charge to cover the resultant late payment of tax.

1.15 Individuals can choose to retain excess concessional contributions in superannuation as a non-concessional contribution or withdraw 85 per cent of the excess concessional contribution.

Summary of new law

1.16 The amendments allow certain individuals with multiple employers to apply to the Commissioner for an employer shortfall exemption certificate. Such certificates prevent an employer from having an SG shortfall in relation to the employee for a quarter.

1.17 The amendments provide a framework for the issuing of a certificate, including the conditions which must be satisfied before the Commissioner may issue a certificate.

Comparison of key features of new law and current law

Detailed explanation of new law

1.18 The Schedule amends the SGAA 1992 to ensure that an employer covered by an 'employer shortfall exemption certificate' issued by the Commissioner will not be liable for SG charge (or face other consequences under the SGAA 1992) if they do not make contributions on behalf of their employee for a quarter covered by a certificate.

1.19 The amendments insert new provisions in the SGAA 1992 which set out when an individual may apply for an employer shortfall exemption certificate, the conditions that must be satisfied before the Commissioner may issue an employer shortfall exemption certificate and the Commissioner's obligations relating to making a decision to issue or refuse to issue a certificate.

Effect of employer shortfall exemption certificate

1.20 An employer's maximum contribution base for an employee for a quarter is nil if the employer is covered by an employer shortfall exemption certificate issued by the Commissioner in relation to the employee for that quarter. [Schedule 1, item 2, section 19AA]

1.21 This means the total salary or wages paid by the employer to the employee for the quarter is taken to be nil when calculating the employer's individual SG shortfall for the employee for the quarter. The effect of this is that the employer will not be liable for SG charge (or face other consequences under the SGAA 1992) if they do not make contributions on behalf of the employee for the quarter.

1.22 An employer shortfall exemption certificate does not prevent an employer from making contributions into superannuation on behalf of the employee. The effect of the certificate is only to remove the consequences of failing to make any contributions for the quarter covered by the certificate. This means an employer may choose to disregard a certificate and continue to make contributions. For example, this may be relevant where an employee and employer do not reach agreement on the terms of an alternative remuneration package for the relevant quarter, or if there has not been enough time for an employer to adjust payroll or other business software to discontinue contributions for the employee.

1.23 Once an employer shortfall exemption certificate has been issued, the Commissioner may not vary or revoke the certificate. [Schedule 1, item 2, subsection 19AB(8)]

1.24 This provides certainty for employers that if a certificate has been issued for a quarter, the employer will not be liable for SG charge (or face other consequences under the SGAA 1992) if they do not make contributions on behalf of the employee for the quarter. This certainty minimises the administrative costs for employers associated with arranging their affairs in respect of the SG and allows the employer to agree to an alternative remuneration package with their employee on the basis of circumstances that cannot later be withdrawn unilaterally to the employer's disadvantage.

1.25 This does not preclude an employee and employer coming to an agreement to recommence superannuation contributions for the employee at any point during the quarter covered by an employer shortfall exemption certificate. For example, this may be relevant where an employee's circumstances change and they no longer expect to exceed their concessional contributions cap.

1.26 However, as a certificate cannot be varied or revoked once issued, there is no legislative mechanism for an employer to be forced back into the SG framework in respect of the employee for the quarter covered by a certificate. This is appropriate as employees on higher incomes (such as those that are likely to breach their concessional contributions cap through employer contributions) are likely to be in a strong bargaining position with their employers, are able to safeguard their own interests and have voluntarily opted out of SG payments.

Conditions for issuing an employer shortfall exemption certificate

1.27 The Commissioner may issue an employer shortfall exemption certificate in relation to a person that has made an application to the Commissioner (in the approved form) and their employer for a quarter if all of the following conditions are satisfied:

•

the Commissioner considers that, disregarding the effect of issuing the certificate, the person is likely to exceed their concessional contributions cap for the financial year that includes the relevant quarter;

•

the Commissioner is satisfied after issuing the certificate, the employee will have at least one employer that would either have an individual SG shortfall in relation to the employee, or have such a shortfall if they did not make any contributions for the benefit of the employee; and

•

the Commissioner considers that it is appropriate to issue the certificate in the circumstances. [Schedule 1, item 2, section 19AB]

Application from employee

1.28 The Commissioner can only issue an employer shortfall exemption certificate at the request of the person who is the employee to be covered by the certificate. [Schedule 1, item 2, subsection 19AB(1)]

1.29 The Commissioner cannot issue an employer shortfall exemption certificate at the request of the individual's employer or on the Commissioner's own initiative.

1.30 The intent is to provide a mechanism for partially opting out of the SG system, initiated by employees with multiple employers who are likely to breach their annual concessional contributions cap. This allows those employees to instead choose to negotiate with their employer to receive additional cash or non-cash remuneration. There is no requirement to evidence that the foregone contributions have actually been substituted for higher wages. This is on the basis that employees with higher incomes (that is, those who are likely to breach their concessional contributions cap through employer contributions) are likely to be in a strong bargaining position with their employers and have voluntarily opted out of SG payments.

Employee must be likely to have excess concessional contributions

1.31 The Commissioner may only issue an employer shortfall exemption certificate if the Commissioner is satisfied that if the certificate is not issued the employee is likely to have excess concessional contributions for the financial year (whether or not issuing the certificate would prevent that result). [Schedule 1, item 2, paragraph 19AB(3)(a)]

1.32 This requirement ensures that employer shortfall exemption certificates target those employees who are likely to inadvertently breach their concessional contributions cap through employer contributions. In reaching a view on this issue, the Commissioner may rely on any information including past tax return data, single touch payroll reporting data and information provided in the employee's application to make this assessment.

1.33 When considering this matter, the Commissioner must disregard the effect of the certificate under consideration, as the certificate will allow an employer to reduce the contributions they make in respect of the employee. It is not necessary for the Commissioner to be satisfied that issuing the particular certificate will prevent the employee having excess concessional contributions for the financial year.

1.34 The Commissioner should still consider the effect of any other employer shortfall exemption certificates the Commissioner has issued or is proposing to issue in relation to the employee for the financial year. [Schedule 1, item 2, subsection 19AB(4)]

Employee must still be receiving contributions from another employer

1.35 The Commissioner must be satisfied that after issuing the employer shortfall exemption certificate, the employee will have at least one employer that would either have an individual SG shortfall in relation to the employee or have such a shortfall if they did not make any contributions for the benefit of the employee. [Schedule 1, item 2, paragraph 19AB(3)(b)]

1.36 The Commissioner may issue multiple certificates in relation to a single employee, each certificate covering a different employer. However, at least one employer must still be required to make contributions for the benefit of the employee in order to avoid liability for SG charge. This ensures that an employee will still receive a minimum level of contributions for the financial year.

1.37 When considering this matter, the Commissioner must have regard to the effect of any other employer shortfall exemption certificates the Commissioner has issued or is proposing to issue in relation to the employee for the financial year. [Schedule 1, item 2, subsection 19AB(5)]

1.38 This is because if a certificate has been issued in relation to another employer of the employee for the same quarter, that employer will not be required to make contributions for the benefit of the employee in order to avoid liability for SG charge.

Appropriate to issue the employer shortfall exemption certificate

1.39 The Commissioner must consider that it is appropriate to issue the employer shortfall exemption certificate in the circumstances. [Schedule 1, item 2, paragraph 19AB(3)(c)]

1.40 In determining whether it is appropriate to issue an employer shortfall exemption certificate, the Commissioner may have regard to the effect that issuing a certificate is expected to have on an individual's concessional contributions for a financial year, as well as any other matter that the Commissioner considers relevant. [Schedule 1, item 2, subsection 19AB(6)]

1.41 These requirements ensure that the Commissioner has specific regard to whether the combination of certificates the applicant has applied for is the most appropriate (having regard to the likely effect on their concessional contributions). It may be appropriate for the Commissioner to deny an application for an employer shortfall exemption certificate where a person has applied for a certificate that would reduce their contributions by a substantially larger amount than is necessary, relative to another possible certificate or where the Commissioner has already issued a certificate for another quarter in the same financial year. The Commissioner would also have regard to any circumstances in which an individual has engaged in behaviour that artificially enables them to apply for a certificate.

Applying for employer shortfall exemption certificates

1.42 A person may make an application to the Commissioner, requesting that the Commissioner issue an employer shortfall exemption certificate in respect of their employer for a quarter in a financial year. An application may only be made in respect of an employer of the person at the time the application is made. That is, an application cannot be made in respect of a prospective employer. [Schedule 1, item 2, paragraph 19AB(2)(b) and subsection 19AB(1)]

1.43 The application must be lodged with the Commissioner in the approved form. [Schedule 1, item 2, paragraph 19AB(2)(a)]

1.44 The Commissioner may rely on subsection 388-50(2) of Schedule 1 to the TAA 1953 to combine in the same approved form more than one application. This allows employees to request, through a single application, separate certificates for each employer and quarter that they are seeking a certificate in relation to. This minimises administrative costs associated with obtaining certificates.

1.45 Requiring the application to be lodged in the approved form allows the Commissioner to seek evidence of things that the Commissioner needs to be satisfied of, before issuing the certificate (refer above).

1.46 The due date for lodging an application is 60 days before the first day of the quarter to which the application relates. [Schedule 1, item 2, paragraph 19AB(2)(c)]

1.47 However, as the application must be lodged in the approved form, the Commissioner has the discretion to defer to due date for lodging the application under section 388-55 of Schedule 1 to the TAA 1953.

1.48 It is expected that for the first quarter of the 2018-19 financial year, the Commissioner will defer the due date for all applications to allow employees time to apply for an exemption following the commencement of these amendments.

Commissioner's decision to issue or refuse to issue an employer shortfall exemption certificate

1.49 The Commissioner must provide written notice advising of a decision to issue an employer shortfall exemption certificate to:

•

the employee that made the application; and

•

the employer that is covered by the certificate.

[Schedule 1, item 2, subsection 19AC(1)]

1.50 Requiring that the Commissioner notify an employer covered by the certificate (rather than leaving it to an employee) provides greater certainty for employers of the authenticity of the certificate.

1.51 If the Commissioner decides to issue an employer shortfall exemption certificate, the Commissioner must specify in the notice the following matters that are covered by the certificate:

•

the employer;

•

the employee; and

•

the quarter.

[Schedule 1, item 2, subsection 19AC(2)]

1.52 Issuing a certificate involves providing it to the employee. The Commissioner may combine one or more certificates covering the same employer and employee, such that a single certificate covers multiple quarters in a financial year (see section 990-5 of Schedule 1 to the TAA 1953).

1.53 Where the Commissioner refuses to issue a certificate, the Commissioner must still notify the employee of the decision, but is not required to notify their employer. [Schedule 1, item 2, subsection 19AC(3)]

1.54 If the Commissioner fails to notify the employee of the Commissioner's decision within 60 days of the lodgement of the application, the Commissioner will be taken to have refused the application. [Schedule 1, item 2, subsection 19AC(4)]

1.55 A person who is dissatisfied with the Commissioner's decision to issue or refuse to issue an employer shortfall exemption certificate may object to the decision in the manner set out in Part IVC of the TAA 1953. This ensures that the standard objection processes that apply for tax administration matters apply to such decisions. [Schedule 1, item 2, subsection 19AB(7)]

1.56 The amendments also make it clear that an employer shortfall exemption certificate is not a legislative instrument. [Schedule 1, item 2, subsection 19AB(9)]

1.57 This provision is included to assist readers and does not change the general character of an employer shortfall exemption certificate (which is not a legislative instrument within the meaning of subsection 8(1) of the Legislation Act 2003).

1.58 Similarly, a notice that is provided by the Commissioner to issue or refuse to issue an employer shortfall exemption certificate is not a legislative instrument. No further clarification about this position is required as part of these amendments because this is already provided through the existing exemption in item 18 of the table in Subsection 6(1) of the Legislation (Exemption and other Matters) Regulation 2015.

Consequential amendments

1.59 Schedule 1 inserts the definition of 'employer shortfall exemption certificate' into the list of defined terms in subsection 6(1) and inserts a note to assist readers of the legislation. [Schedule 1, items 1 and 2, subsection 6(1) and note to subsection 19AA(2)]

1.60 Schedule 1 also makes an amendment to ensure that the decisions of the Commissioner to issue or refuse to issue an employer shortfall exemption certificate are exempt from the operation of the Administrative Decisions (Judicial Review) Act 1977. [Schedule 1, item 4, paragraph (gae) of Schedule 1 to the Administrative Decisions (Judicial Review) Act 1977]

1.61 This amendment would align the judicial review processes available for a decision to issue or refuse to issue an employer shortfall exemption certificate with those available for other taxation decisions by the Commissioner. Taxpayers are provided with full review rights under Part IVC of the TAA 1953 which is a well-established and comprehensive review scheme for taxation decisions. Part IVC of the TAA 1953 review is equally as accessible and effective as review under the Administrative Decisions (Judicial Review) Act 1977.

Application provisions

1.62 The amendments apply in relation to quarters starting on or after 1 July 2018. That is, the amendments will allow the Commissioner to issue an employer shortfall exemption certificate covering a quarter starting on or after 1 July 2018 and will alter the maximum contribution base rules for such quarters. [Schedule 1, item 3]

1.63 If the Act commences after 1 July 2018, affected employers and employees will not be disadvantaged, as the measure is voluntary for both parties. An employee may choose to apply for a certificate in relation to their employer. An employer may choose to disregard a certificate and continue to make contributions for their employee (the only consequence of having a certificate is that the employer will not need to make such contributions to avoid liability for SG charge).

Chapter 2 - Non-arm's length income of superannuation entities

Outline of chapter

2.1 The amendments in Schedule 2 ensure that the non-arm's length income rules for superannuation entities apply in situations where a superannuation entity incurs non-arm's length expenses in gaining or producing the income.

2.2 All legislative references in this Chapter are to the ITAA 1997 unless otherwise stated.

Context of amendments

2.3 The purpose of the non-arm's length income provisions is to prevent the inflating of superannuation fund earnings through non-arm's length dealings, for example, schemes involving non-commercial arrangements that stream income to the superannuation fund. The strategy is used by some individuals to increase superannuation savings in a way that is not caught by the concessional contributions cap and non-concessional contributions cap (contribution caps).

2.4 The non-arm's length income provisions contained in section 295-550 are essentially a re-write of the former provisions in section 273 of the ITAA 1936, the purpose of which was stated in the Explanatory Memorandum to the Superannuation Legislation Amendment Act (No.2) 1999:

to prevent income from being unduly diverted into superannuation entities as a means of sheltering that income from the normal rates of tax applying to other entities, particularly the marginal rates applying to individual taxpayers.

2.5 The changes introduced by the Treasury Laws Amendment (Fair and Sustainable Superannuation) Act 2016 lowered the annual contributions cap and threshold at which high income earners pay Division 293 tax on their concessionally taxed contributions. This increases the incentive to engage in arrangements that have the effect of circumventing these restrictions upon the transfer of wealth into superannuation.

Operation of existing law

Summary

2.6 The purpose of the non-arm's length income provisions is to prevent the inflating of superannuation fund earnings through non-arm's length dealings.

2.7 The concept of 'non-arm's length' takes its ordinary meaning. In broad terms, the concept is interpreted as relating to transactions in which individuals or entities are not dealing with each other on a commercial, unrelated party basis. Parties do not have to be related to deal with each other on non-arm's length terms. Benefits they or others receive due to the transaction are considered relevant in determining whether a transaction is on arm's length, unrelated party terms.

2.8 The taxable income of a superannuation entity is generally taxed at 15 per cent. However, the non-arm's length component is taxed at the top marginal rate. This ensures that income derived from a transaction that is not on unrelated party, commercial terms does not receive concessional treatment in superannuation.

2.9 There may be a technical deficiency in the non-arm's length income provisions whereby non-arm's length expenses (including where no expenses are charged) result in income not being treated as non-arm's length income as intended. The amendments seek to remove any ambiguity in this respect and ensure that superannuation entities cannot circumvent the provisions by entering into schemes with non-arm's length expenditure (including where they do not charge expenses).

Detailed explanation

2.10 The taxable income of a complying superannuation fund, complying approved deposit fund or pooled superannuation trust (together, complying superannuation entities as defined in subsection 995-1(1)) is made up of two components - a low tax component which is taxed at 15 per cent and a non-arm's length component which is taxed at the top marginal rate.

2.11 The non-arm's length component for an income year is the amount of the fund's non-arm's length income less any deductions to the extent that they are attributable to that income (subsection 295-545(2)).

2.12 The low tax component of the fund's taxable income is the amount of the fund's taxable income remaining after deducting the non-arm's length component from its total taxable income (subsection 295-545(3)).

Non-arm's length income of superannuation entities

2.13 There are several categories of non-arm's length income, including:

•

ordinary or statutory income derived from a scheme where the parties are not dealing with each other at arm's length and the amount of the income is greater than what it would have been had the parties been dealing at arm's length in relation to the scheme (subsection 295-550(1)).

The other types of non-arm's length income are:

•

private company dividends (including income attributable to such dividends) unless the amount is consistent with an arm's length dealing (subsection 295-550(2)); and

•

trust distributions:

-

income derived as a beneficiary of a trust, other than because of holding a fixed entitlement (that is, discretionary trust distributions) (subsection 295-550(4)); and

-

income derived as a beneficiary of a trust through holding a fixed entitlement to the income of the trust where the fund acquired the entitlement under a scheme, or the income was derived under a scheme, the parties to which were not dealing with each other at arm's length, and the amount of the income is more than what might have been expected to derive if those parties had been dealing with each other at arm's length (subsection 295-550(5)).

Existence of a scheme, parties and dealings

2.14 In order for the non-arm's length income provisions relating to ordinary and statutory income to apply, the non-arm's length income must have been derived from a scheme, in relation to which the parties were not dealing with each other at arm's length.

2.15 A 'scheme' is broadly defined in subsection 995-1(1) to cover a range of transactions and formal or informal arrangements. While a scheme can be undertaken by a single party, the non-arm's length income rules require dealings between at least two parties, or a party acting in more than one capacity, because of the requirement that the parties to a scheme have not dealt with one another on an arm's length basis.

Amount of income

2.16 The legislation requires the identification of a specific amount of ordinary or statutory income that is non-arm's length income. This ensures that the consequences of an amount of income being non-arm's length income are restricted to that amount of income and any related deductions.

2.17 As stated above, non-arm's length income can be ordinary or statutory income. Statutory income includes amounts such as net capital gains or amounts obtained as a refund of franking credits by virtue of the application of the tax offset for imputation credits attaching to franked distributions.

2.18 There may be a technical deficiency in Subdivision 295-H, such that its operation in relation to non-arm's length expenses is ambiguous. These amendments remove any such ambiguity.

2.19 For example, in cases where a superannuation entity acquires assets at less than market value (through a scheme entered into on non-arm's length terms), it may not have been clear whether the ordinary and statutory income from these assets falls within the scope of the Subdivision in all cases.

2.20 Similarly, the application of paragraphs 295-550(1)(b) and 295-550(5)(b) may be ambiguous where expenses incurred by a superannuation entity in respect of an asset are not on arm's length terms, but the amount of ordinary income or statutory income from the scheme is the same as might be expected had the dealing been at arm's length. This may be the case, for example, where real property is acquired under a limited recourse borrowing arrangement and where the rent derived under the scheme is at market rates but the interest paid on the loan is not.

2.21 Finally, the current law may not apply to net capital gains in line with the policy intent of Subdivision 295-H. For example, a fund acquires an asset at less than its market value through non-arm's length dealings and then disposes of the asset for market value consideration. The resulting net capital gain may arguably be the same as the gain that would have resulted had the parties been dealing with each other at arm's length when the asset was acquired, due to the operation of the cost base market value substitution rules in section 112-20. This means that the current non-arm's length income rules may have no effect, even though the transaction diverts more wealth into the concessionally taxed superannuation entity than would have been possible had the relevant dealings been at arm's length.

Summary of new law

2.22 This Bill clarifies the operation of Subdivision 295-H to ensure that complying superannuation entities cannot circumvent the non-arm's length income rules by entering into schemes involving non-arm's length expenditure (including where expenses are not incurred).

2.23 The framework for the new non-arm's length income rules remains broadly the same:

•

there must be a scheme; and

•

the parties to the scheme must incur less (or nil) expenditure than would otherwise be expected if the parties were dealing with each other on an arm's length basis in relation to the scheme.

2.24 Expenses may be of a revenue or capital nature, in the same way that non-arm's length income may be statutory or ordinary income.

Comparison of key features of new law and current law

Detailed explanation of new law

Non-arm's length expenses of superannuation entities

2.25 The amendments remove any ambiguity about how Subdivision 295-H applies to income derived from schemes where the superannuation entity has incurred non-arm's length expenditure.

2.26 A new provision is added to ensure that a superannuation entity's non-arm's length income includes income where expenditure incurred in gaining or producing it was not an arm's length expense. This includes where no expense was incurred (but might be expected to have been incurred if the transaction were on arm's length terms). [Schedule 2, item 1, paragraphs 295-550(1)(b) and (c)]

2.27 While subsection 295-550(1) has been restructured as part of the amendments, the restructure does not affect the application of the provision to income that would have been captured as non-arm's length income prior to the amendments.

2.28 Specifically, the scheme requirement formerly located in paragraph 295-550(1)(a) is now included in the chapeau to the subsection, and the former requirement that an amount is non-arm's length income if it is more than the amount the entity might have derived on an arm's length basis in paragraph 295-550(1)(b) is now contained in paragraph 295-550(1)(a). [Schedule 2, item 1, paragraph 295-550(1)(a)]

Example 2.1 - non-arm's length expenses of a superannuation entity

An SMSF acquired a commercial property from a third party at its market value of $1,000,000 on 1 July 2015.

The SMSF derives rental income of $1,500 per week from the property ($78,000 per annum).

The SMSF financed the purchase of the property under limited recourse borrowing arrangements from a related party on terms consistent with section 67A of the SIS Act.

The limited recourse borrowing arrangements were entered into on terms that include no interest, no repayments until the end of the 25 year term and borrowing of the full purchase price of the commercial real property (i.e. 100 per cent gearing).

The SMSF was in a financial position to enter into limited recourse borrowing arrangements on commercial terms with an interest rate of approximately 5.8 per cent.

The SMSF has not incurred expenses that it might have been expected to incur in an arm's length dealing in deriving the rental income. As such, the income that it derived from the non-arm's length scheme is non-arm's length income. The rental income of $78,000 (less deductions attributable to the income) therefore forms part of the SMSF's non-arm's length component and is taxed at the highest marginal rate. However, there will be no deduction for interest, which under the scheme was nil.

Non-arm's length interest on borrowings to acquire an asset will result in any eventual capital gain on disposal of the rental property being treated as non-arm's length income.

Expenses relating to a superannuation entity as beneficiary of a trust

2.29 When a superannuation entity holds a fixed entitlement to the income of a trust and derives income as a beneficiary of that trust, non-arm's length expenses incurred in acquiring the entitlement or in gaining or producing the income result in the income forming part of the superannuation entity's non-arm's length component. [Schedule 2, item 2, paragraphs 295-550(5)(b) and (c)]

2.30 These changes ensure that the amendments apply consistently between the general non-arm's length income rules for the income directly derived by a superannuation entity and where the superannuation entity derives income through its fixed entitlement to the income of a trust.

Example 2.2 - unit trust

A retail superannuation fund trustee acquires units in a unit trust as a beneficiary with a fixed entitlement, but pays a substantially lower amount for the units than stated in the promotional material for the unit trust due to a scheme the fund has entered into with the broker.

In acquiring the entitlement to a share of the unit trust's earnings, the retail superannuation fund trustee did not incur expenditure it might have been expected to incur if dealing at arm's length with the broker in purchasing the units.

The income derived from the units would have been the same whether or not they were acquired under an arm's length transaction.

The amount earned is non-arm's length income of the retail superannuation fund.

Any net capital gain made on disposal of the units may also be non-arm's length income due to the amendments to subsection 295-550(1).

Non-arm's length schemes and internal arrangements

2.31 For the non-arm's length income rules to apply to a scheme, it is necessary that the parties to the scheme were not dealing with each other at arm's length. [Schedule 2, items 1 and 2, subsections 295-550(1) and (5)]

2.32 As noted above, the term 'scheme' is defined by subsection 995-1(1) and the concept of 'non-arm's length' takes its ordinary meaning.

2.33 The requirement that parties not be dealing with each other at arm's length means that the non-arm's length income rules do not apply in respect of a superannuation entity's arrangements that are purely internal. This is because an entity's internal functions are not undertaken with another party on any terms, non-arm's length or otherwise.

2.34 For example, an SMSF trustee may undertake book keeping activities for no charge in performing their trustee duties. Such internal arrangements are outside of the scope of the non-arm's length income rules as they do not constitute a scheme between parties dealing with one another on a non-arm's length basis.

2.35 In certain cases, the trustee of a fund may undertake particular activities in performing its duties or choose to outsource those functions to third parties (for example, if the fund had a real estate portfolio, the trustee may be able to manage the properties or contract the services of a real estate agent). The question of whether the non-arm's length income rules apply in respect of services or functions that are undertaken by the trustee depends on the capacity in which the trustee undertakes those activities.

2.36 As a general rule, the trustee of an SMSF is prevented from charging for the services or functions that it undertakes in its capacity as trustee by paragraph 17A(1)(f) of the SIS Act. Services of this kind do not involve a scheme between parties as they fundamentally relate to the trustee's obligations in respect of the fund.

2.37 If the trustee is not acting as a trustee but is instead providing services that are procured as a third-party, the non-arm's length income rules are intended to apply. Provided that the amount charged for any such services is not less than that which would be expected to be charged between parties dealing at arm's length, the dealings will not be subject to the non-arm's length income rules. In such cases, the trustee of an SMSF may also be prevented from charging any more than the arm's length price because of the regulatory requirements in the SIS Act (see section 17B of the SIS Act, which permits a trustee to charge up to an arm's length amount for duties or services performed other than in the capacity as trustee).

Attributing non-arm's length expenses to particular amounts of income

2.38 Where there is a scheme that produced non-arm's length income by applying non-arm's length expenses, there must also be a sufficient nexus between the expense/s and the income, that is, the expenditure must have been incurred 'in' gaining or producing the relevant income. This reflects the analysis that must be undertaken in determining whether an expense is deductible under section 8-1, or can be included in the entity's cost base for the transaction if the expense is of a capital nature (see below).

2.39 For example, where the non-arm's length expense is an interest payment, identifying the relevant amount of income should be relatively straightforward. That is because a superannuation entity can only borrow under limited recourse borrowing arrangements, which means that the borrowed funds must be used to acquire a single, separately identifiable asset (subsection 67A(1) of the SIS Act). Where such an asset is used in deriving assessable income (including any capital gain on disposal), the income so derived will be non-arm's length income (see the rental income in Example 2.1 above). However, income derived from other assets that the superannuation entity holds - for example, dividend income from publicly listed shares - would not be non-arm's length income merely because the superannuation entity incurred a non-arm's length interest expense under the limited recourse borrowing arrangements.

2.40 To calculate a superannuation entity's non-arm's length component (that is, the amount of taxable income that is taxed at the highest marginal rate), it is also necessary to identify any other deductions that are attributable to non-arm's length income. Those deductions may include the non-arm's length expense that caused an amount of an income to be non-arm's length income (in the foregoing example, interest expenses).

Non-arm's length capital expenditure that results in non-arm's length income

2.41 In some circumstances, non-arm's length capital expenditure can result in a superannuation entity earning non-arm's length income. Where a fund acquires an asset for less than market value through non-arm's length dealings, the revenue generated by that asset may be non-arm's length income, as well as any statutory income (that is, net capital gains) resulting from the disposal of that asset. [Schedule 2, item 1, paragraph 295-550(1)(b); item 3, subsection 295-550(7)]

2.42 This ensures that trustees of funds do not have an incentive to acquire assets at less than market value for the purpose of generating potentially significant ongoing amounts of income which would be sheltered from marginal rates of tax. It further ensures that such income cannot escape taxation entirely where the assets are held in the retirement phase (that is, the income would no longer be treated as exempt current pension income).

2.43 Section 66 of the SIS Act specifically prohibits the acquisition of assets by the trustee of a fund from related parties. However, there is no prohibition against a trustee of a fund acquiring business real property and listed securities from related parties at market value.

2.44 As such, if the trustee of a fund were to acquire an asset from a related party on non-arm's length terms (even when in contravention of section 66 of the SIS Act), any income that is generated from the asset would also be non-arm's length income.

2.45 A superannuation fund may acquire an asset by purchasing an asset or by way of an in-specie contribution. Where a superannuation fund purchases an asset at less than market value or reports the in-specie contribution at less than market value, then the acquisition may form part of a non-arm's length scheme such that any ordinary or statutory income derived from the asset and the disposal of the asset will be treated as non-arm's length income.

2.46 The market value substitution rules in section 112-20 may apply in respect of an asset that is acquired by a superannuation fund under a scheme that is subject to the non-arm's length income rules. The market value substitution rules adjust the first element of the cost base and reduced cost base of a CGT asset that is acquired by an entity to the market value of the asset.

2.47 The non-arm's length income rules continue to apply to an asset that has its cost base increased by the market substitution rule. This approach reflects that both sets of rules may apply as a consequence of an asset being acquired at a non-arm's length price.

2.48 For example, where real property is acquired (not as a contribution) by the fund for less than market value as part of a scheme where the parties were not dealing at arm's length, any income generated from that asset (for example, rental income) will be non-arm's length income. When the property is ultimately disposed of, the resulting capital gain will also be non-arm's length income. However, in calculating the resulting capital gain, the market value substitution rule may apply such that any capital gain on the disposal of the asset is reduced as a result of the asset's increased cost base to the market value at the time of acquisition.

Range of transactions may be on arm's length terms

2.49 It can be difficult to determine an exact price that is 'non-arm's length'. An 'arm's length' price may be accepted to fall within a range of commercial prices. For example, loans may be available at different interest rates based on a range of factors. Accordingly, an SMSF may be able to apply an acceptable commercial rate of interest to a loan within a band of rates available to it on an arm's length basis.

2.50 In other circumstances, parties may enter into arrangements that result in discounted prices or favourable terms. This could occur where a party operates on simple cost-recovery basis for particular services but is able to justify doing so in commercial terms because of the economies of scale it achieves within its business by providing other services. For example, where services are provided to a large APRA fund either by the trustee acting in a separate capacity or by a related third party.

2.51 Transactions that are on arm's length terms, for example, borrowing arrangements financed by Authorised Deposit-taking Institutions and other commercial lenders or that meet the safe harbour terms in ATO Practical Compliance Guideline PCG 2016/5 are not impacted by these amendments.

Application and transitional provisions

2.52 The amendments made by this Schedule apply in relation to income derived in the 2018-19 income year and later income years, regardless of whether the scheme was entered into before 1 July 2018. [Schedule 2, item 4]

Chapter 3 - Limited recourse borrowing arrangements

Outline of chapter

3.1 The amendments in Schedule 3 amend the total superannuation balance rules that were enacted through the Treasury Laws Amendment (Fair and Sustainable Superannuation) Act 2016.

3.2 The changes support the operation and integrity of the total superannuation balance rules to ensure that, in certain circumstances involving limited recourse borrowing arrangements, the total value of a superannuation fund's assets is taken into account in working out individual members' total superannuation balances.

3.3 All legislative references in this Chapter are to the ITAA 1997 unless otherwise stated.

Context of amendments

3.4 The Treasury Laws Amendment (Fair and Sustainable Superannuation) Act 2016 (the Amending Act) enacted the Government's superannuation reform package that was announced in the 2016-17 Budget.

3.5 The amendments contained in Schedule 3 relate to the definition of total superannuation balance that was included in that package.

Total superannuation balance

3.6 The concept of 'total superannuation balance' was introduced by the Amending Act. The term is defined by section 307-230 and, with some modifications, is designed to reflect the total value of all interests that an individual has in the superannuation system.

3.7 To determine an individual's total superannuation balance, the following amounts are added together:

•

the accumulation phase value of all superannuation interests that are not in the retirement phase;

•

the transfer balance in their transfer balance account, subject to certain modifications (but not where the balance is less than nil); and

•

the amount of each roll-over superannuation benefit that is not reflected in the individual's accumulation phase or transfer balance.

3.8 The total superannuation balance is used by the non-concessional contribution cap rules, the unused concessional cap carry forward rules, the definition of disregarded small fund asset rules (which is relevant for determining whether a fund can use the segregated method in calculating its exempt current pension income), and in the spouse tax offset.

Limited recourse borrowing arrangements

3.9 'Limited recourse borrowing arrangements' (limited recourse borrowing arrangements) are an exception to the general prohibition on borrowing that applies to the trustees of regulated superannuation funds contained in subsection 67(1) of the SIS Act.

3.10 The exceptions for limited recourse borrowing arrangements are provided by sections 67A and 67B of the SIS Act. Section 67A relates to borrowing arrangements that the trustee of a registered superannuation fund uses to acquire an 'acquirable asset' and section 67B extends the exception to replacement assets.

3.11 The term, 'acquirable asset' is defined by subsection 67A(2) as a single asset that is not money and that is not prohibited from being acquired under any Act. Subsection 67A(3) also extends sections 67A and 67B so that they apply to a collection of identical assets in the same way as they apply to a single asset (for example, a collection of shares of the same class in a single company).

3.12 In addition to the requirement about the rights and interest that a trustee has in an acquirable asset, subsection 67A(1) contains conditions about limiting any rights against the trustee for a default on the arrangement to rights in respect of the acquirable asset.

Summary of new law

3.13 Schedule 3 amends the total superannuation balance test so that, in certain circumstances, it takes into account the outstanding balance of a limited recourse borrowing arrangements that is entered into by the trustee of a regulated superannuation fund that is an SMSF or that has less than five members.

3.14 As a result of these changes, an individual member's total superannuation balance may be increased by the share of the outstanding balance of a limited recourse borrowing arrangement, commenced after 1 July 2018, related to the assets that support their superannuation interests. However, the increase only applies to members who have satisfied a condition of release with a nil cashing restriction, or those whose interests are supported by assets that are subject to a limited recourse borrowing arrangement between the superannuation fund and its associate.

Detailed explanation of new law

3.15 An individual's total superannuation balance may be increased by an amount if an asset that supports one or more of their superannuation interests are subject to limited recourse borrowing arrangements. [Schedule 3, items 1 and 2, paragraph 307-230(1)(d) and subsection 307-231(1)]

3.16 The amount by which an individual's total superannuation balance is increased is equal to a proportion of the outstanding balance of the limited recourse borrowing arrangements. This proportion is based on the individual's share of the total superannuation interests that are supported by the asset that is subject to limited recourse borrowing arrangements. [Schedule 3, item 2, subsections 307-231(2) and (3)]

3.17 This increase to an individual member's total superannuation balance ensures that it more accurately reflects the overall values of the assets in a superannuation fund that support the individual's superannuation interests.

3.18 The addition to the total superannuation balance identifies a limited recourse borrowing arrangement that a fund has by reference to a borrowing under an arrangement that is entered into by a regulated superannuation fund and which is covered by the exception in subsection 67A(1) of the SIS Act. [Schedule 3, item 2, paragraph 307-231(1)(a)]

3.19 These increases only apply in respect of limited recourse borrowing arrangements commenced after 1 July 2018 where:

•

a member whose superannuation interests are supported by assets to which the limited recourse borrowing arrangements relate has satisfied a condition of release specified in paragraph 307-80(2)(c) (that is, a condition of release with a nil cashing restriction); or

•

the limited recourse borrowing arrangements are between the fund and one of its associates.

[Schedule 3, item 2, paragraph 307-231(1)(e)]

3.20 Further, the increase to an individual's total superannuation balance can only occur where the limited recourse borrowing arrangements were entered into by a superannuation provider of a regulated fund that is an SMSF or that has less than five members. [Schedule 3, item 2, paragraph 307-231(1)(d) and subsection 307-231(4)]

3.21 For the increase to apply to an individual's total superannuation balance, a regulated superannuation fund must have used the borrowing to acquire one or more assets, and any such assets must support the superannuation interests of an individual at the time at which the total superannuation balance is determined.

3.22 The connection between an asset of a fund and an individual member's superannuation interests relates to the way in which the fund has allocated its assets to meet its current and future liabilities in relation to the member's interests. The test requires a fund to determine which of its limited recourse borrowing arrangements assets support which members' interests, as well as the extent to which those interests are supported. This assessment builds on the framework that already exists for funds in tracking the way in which income from its assets is allocated between the interests of its members.

3.23 Although an individual's total superannuation balance can generally be measured 'at a time', it is only relevant at the end of a particular income year. This is because the non-concessional contribution cap rules, the unused concessional cap carry forward rules, the disregarded small fund asset rule and the spouse tax offset rule test an individual's total superannuation balance either 'just before' or 'immediately before' the start of the income year (see paragraphs 290-230(4A)(b), 291-20(3)(b), 292-85(2)(b) and 295-387(2)(c)). This means that the outstanding balance of a limited recourse borrowing arrangement only needs to be identified at the end of an income year for the purposes of adding a share of that outstanding balance to an individual's total superannuation balance.

3.24 It should also be noted that artificially manipulating the allocation of assets that are subject to limited recourse borrowing arrangements against particular superannuation interests at a particular time may be subject to the general anti-avoidance rules in Part IVA of the ITAA 1936 where such allocations formed part of a scheme that had the dominant purpose of obtaining a tax benefit.

3.25 The outstanding balance of the limited recourse borrowing arrangements is the amount still owing under the limited recourse borrowing arrangements. Where an individual has a superannuation interest that is supported by an asset that is subject to limited recourse borrowing arrangements, the increase to their total superannuation balance is based on their share of this outstanding balance.

3.26 Including this proportion of the outstanding balance in a member's total superannuation balance prevents double counting of the outstanding balance from occurring where more than one member has an interest supported by an asset that was acquired through limited recourse borrowing arrangements.

3.27 Where only one member's interests are supported by an asset, the proportion will be equal to 1, meaning that an amount equal to the outstanding balance is added to the member's total superannuation balance.

Members with a nil condition of release

3.28 Applying the amendment in the case of limited recourse borrowing arrangements that involves a member that has satisfied a nil condition of release addresses the risk of using limited recourse borrowing arrangements to facilitate a re-contribution strategy. In this context, a member who does not wish to exceed one of the total superannuation balance tests could withdraw an amount of their interests from superannuation and then, in their capacity as trustee, arrange for the fund to borrow an equivalent amount under limited recourse borrowing arrangements.

3.29 The SIS Act and SIS Regs contain the rules that determine when an individual can voluntarily withdraw amounts from superannuation. Specifically, regulations 6.18, 6.19 and 6.20 of the SIS Regs provides that a member's benefits in a superannuation fund may be cashed on or after the member satisfies a condition of release, subject to any cashing restriction as to the amount or form of the payment (in this context, a 'nil' cashing restriction means there are no restrictions on the amount that can be released to a member). The conditions of release and their related cashing restrictions are contained in the table in Schedule 1 to the SIS Regs.

3.30 The conditions with nil cashing restrictions that are covered by these amendments through the reference to paragraph 307-80(2)(c) are those referred to in items 101 (retirement), 102A (terminal medical condition), 103 (permanent incapacity), and 106 (attaining age 65).

3.31 Where the increase applies solely because one or more members have satisfied a nil condition of release, the increase is only applied in respect of those members. This means that the increase does not apply to other members who have not satisfied such a condition, despite the fact that their interests may be supported by the same assets to which the limited recourse borrowing arrangements relates.

3.32 However, if a member has satisfied a condition of release with a nil cashing restriction, they are required to take into account each limited recourse borrowing arrangement that their superannuation fund has in respect of assets that support their superannuation interests. [Schedule 3, item 2, paragraph 307-231(2)(a)]

Limited recourse borrowing arrangements with associates

3.33 Applying the amendments in the case of limited recourse borrowing arrangements that is with an associate of the superannuation fund ensures that the additional amount is included in a member's total superannuation balance where there is an increased risk that the terms of the limited recourse borrowing arrangements are inconsistent with those that would have been entered into between independent parties. This approach supplements the broader changes to the non-arm's length income rules discussed in the previous chapter.

3.34 In working out whether the limited recourse borrowing arrangements are with an associate of the superannuation fund, the definition of associate as it relates to a trustee in subsection 318(3) of the ITAA 1936 applies. This definition covers any entity that benefits under a trust (for example, the members of a superannuation fund), as well as the associates of those entities.

3.35 Where the adjustment applies because the limited recourse borrowing arrangements are with an associate, all members whose interests are supported by the assets to which the limited recourse borrowing arrangements relate will have their total superannuation balance adjusted.

3.36 In contrast, a member who has not satisfied a condition of release only needs to count the outstanding balance of limited recourse borrowing arrangements that are entered into between their fund and its associates. [Schedule 3, item 2, paragraph 307-231(2)(b)]

Example 3.1 - total superannuation balance where there is more than one member

Sue and Peter are the only members of their SMSF. The value of Peter's superannuation interests in the fund is $1.2 million. The value of Sue's superannuation interests is $1.8 million. All of the assets of the fund that support their interests are cash.

Sue and Peter have both retired and therefore satisfy a condition of a release with a nil cashing restriction.

The SMSF acquires a $3.5 million property. The SMSF purchases the property using $1.5 million of its own cash and borrows an additional $2 million using limited recourse borrowing arrangements.

The SMSF now holds assets worth $5 million (being the sum of the $1.5 million in cash and the $3.5 million property). The fund also has a liability of $2 million under the limited recourse borrowing arrangements.

Of its own cash that it used, 40 per cent ($600,000) was supporting Peter's superannuation interests and the other 60 per cent ($900,000) was supporting Sue's interests. These percentages also reflect the extent to which the asset supports Peter and Sue's superannuation interests.

Peter's total superannuation balance is $2 million. This is comprised of the $600,000 of cash that still supports his superannuation interest, the 40 per cent share of the net value of the property (being $600,000), and the 40 per cent share of the outstanding balance of the limited recourse borrowing arrangements (being $800,000).

Sue's total superannuation balance is $3 million. This is comprised of the $900,000 of cash that still supports her superannuation interest, the 60 per cent share of the net value of the property (being $900,000), and the 60 per cent share of the outstanding balance of the limited recourse borrowing arrangements (being $1.2 million).

Reporting the outstanding balance of limited recourse borrowing arrangements

3.37 The amendments also extend the matters that may be included in information that is reported by the trustee of a superannuation fund to the Commissioner to include limited recourse borrowing arrangements amount that relates to an individual's total superannuation balance. [Schedule 3, item 3, paragraph 390-5(9)(e) in Schedule 1 to the TAA]

3.38 Although the matters covered by subsection 390-5(9) in Schedule 1 to the TAA do not limit the information that the Commissioner of Taxation can request, this amendment makes it clear that this will be information that a fund will be required to report.

3.39 Because the information relates to the liabilities that a fund has in respect of its assets, the outstanding balance of the limited recourse borrowing arrangements is information that will be already known by the trustee of a regulated superannuation fund. However, although this information will now need to be identified on a member basis, trustees will only have to do so in respect of the end of a particular income year.

Application and transitional provisions

3.40 The changes to the total superannuation balance test apply to borrowings arising under contracts entered into on or after 1 July 2018. They do not apply to the refinancing of the outstanding balance of borrowings arising under contracts entered into prior to 1 July 2018, or to borrowings arising under a contract that was entered into prior to 1 July 2018. [Schedule 3, item 4]

3.41 The changes in respect of matters that may be included in information that is reported by the trustee of a superannuation fund do not have a specific application provision and therefore apply from commencement. However, as the information that must be reported is the amount of a member's 'limited recourse borrowing arrangements amount', there will be nothing for a fund to report until members begin to have limited recourse borrowing arrangements amounts (that is, in respect of periods that commence on or after 1 July 2018).

Chapter 4 - Statement of Compatibility with Human Rights

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Schedule 1 - Superannuation - employees with multiple employers

4.1 This Schedule is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

4.2 Schedule 1 amends the Superannuation Guarantee (Administration) Act 1992 to allow individuals to avoid unintentionally breaching their concessional contributions cap when they receive superannuation contributions from multiple employers. Instead of receiving contributions into superannuation, an employee may apply to the Commissioner to opt out of the superannuation guarantee regime in respect of an employer and negotiate with the employer to receive additional cash or non-cash remuneration.

4.3 The amendments achieve this outcome by allowing certain employees with multiple employers to apply to the Commissioner for an 'employer shortfall exemption certificate', which prevents their employer from having a superannuation guarantee shortfall if they do not make superannuation contributions for a period.

Human rights implications

4.4 This Schedule does not engage any of the applicable rights or freedoms.

Conclusion

4.5 This Schedule is compatible with human rights as it does not raise any human rights issues.

Schedule 2 - Non-arm's length income of superannuation entities

4.6 Schedule 2 is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

4.7 This Schedule ensures that the non-arm's length income rules for superannuation entities apply in situations where a superannuation entity incurs non-arm's length expenses in gaining or producing the income.

Human rights implications

4.8 This Schedule does not engage any of the applicable rights or freedoms.

Conclusion

4.9 Schedule 2 is compatible with human rights as it does not raise any human rights issues.

Schedule 3 - Limited recourse borrowing arrangements

4.10 Schedule 3 is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

4.11 This Schedule amends the total superannuation balance rules to ensure that, in certain circumstances involving limited recourse borrowing arrangements, the total value of a superannuation fund's assets is taken into account in working out individual members' total superannuation balances.

Human rights implications

4.12 This Schedule does not engage any of the applicable rights or freedoms.

Conclusion

4.13 Schedule 3 is compatible with human rights as it does not raise any human rights issues.