Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)General outline and financial impact
Income Tax deductions: constitutional convention
Amends the Income Tax Assessment Act 1997 to provide for the tax deductibility of expenses incurred in contesting an election for delegates to the Constitutional Convention.
Date of effect: The amendment will apply to expenses incurred in the 1997-98 year of income.
Proposal announced: 1997-98 Budget.
Financial impact: Revenue forgone of up to $400,000 in the 1998-99 year of income is expected from the measure.
Compliance cost impact: The compliance cost will be negligible. People will need to maintain records to claim the deduction up to $1000.
Income Tax deductions: National Nurses' Memorial Trust
Amends the income tax law to allow income tax deductions for gifts made to the National Nurses' Memorial Trust.
Date of effect: The amendment will allow deductibility of gifts to the National Nurses' Memorial Trust (the Trust) made after 3 September 1997 and before 4 September 1999.
Proposal announced: Deductibility for donations to the Trust was announced as part of the 1997-98 Budget on 13 May 1997. The Treasurer announced on 4 September 1997 that donations to the Trust would be deductible for a period of two years.
Financial impact: No significant impact on revenue.
Compliance cost impact: There are no compliance cost impacts.
Sales tax: Malaysian Visiting Force
This measure will exempt certain goods from sales tax so as to give effect to the Status of Forces Agreement between the Government of Australia and the Government of Malaysia which was entered into on 3 February 1997.
Date of effect: Any dealing after the date of the Royal Assent.
Proposal announced: Not previously announced.
Financial impact: Negligible.
Compliance cost impact: The compliance costs will be negligible.
Charitable trusts
Amend Income Tax Assessment Act 1997 to ensure that the rewrite of the income tax law reflects recent changes to the exempt entities provisions.
Date of effect: Applies to income derived on or after 1 July 1997.
Proposal announced: Not previously announced.
Financial impact: Nil.
Compliance cost impact: Nil.
Payments of RPS, PAYE and PPS deductions to Commissioner
Inserts new Division 1AAA to provide for the rationalisation of the withholding arrangements for Pay-As-You-Earn (PAYE), Prescribed Payments (PPS) and Reportable Payments (RPS).
Date of effect: 1 July 1998.
Proposal announced: 1997-98 Budget, 13 May 1997.
Financial Impact: The estimated revenue gain from the measure will be $330 million in 1998-99.
Compliance cost impact: The Compliance Cost Impact Statement is incorporated into the Regulation Impact Statement which appears at the end of Chapter 4 of the Explanatory Memorandum.
Choice of superannuation funds
Amends the Superannuation Guarantee (Administration) Act 1992 (SGAA) to:
- •
- require employers to make superannuation contributions on behalf of an employee to a complying superannuation fund or scheme or retirement savings account (RSA) in compliance with the choice of fund requirements; and
- •
- increase the amount of Superannuation Guarantee Charge (SGC) payable by the employer (if any) where these contributions do not comply with the choice of fund requirements.
Date of effect: The amendments will apply from the date of Royal Assent. To avoid having to pay any increase in SGC, employers will be required to provide superannuation support in compliance with the choice of fund requirements:
- •
- from 1 July 1998 - for all employees who commence employment after this date (ie.new employees); and
- •
- from 1 July 2000 - for all employees who were employed by the employer immediately before 1 July 1998 and who continue to be employed by the employer (ie.existing employees).
Proposal announced : This measure was announced in the 1997/98 Budget as part of a number of changes designed to encourage private saving and improve Australias retirement income system. Enhancements to the original proposal were announced on 25 November 1997. Further amendments to the provisions were made during passage of the Bill through the House of Representatives.
Financial impact: None
Compliance cost impact : The compliance cost impact for groups affected by the measure is set out in the table below:
| Impact Group | Initial Costs ($m) | Recurrent Costs ($m) |
|---|---|---|
| Employers | less than or equal to 21 | less than or equal to 15 |
| Employees | N/A | N/A |
| Fund/RSA providers | 5 | 2 |
The costs for employees are not available due to difficulties in predicting how they will react to the measure.
Technical amendments: quasi-ownership of plant
Technical amendments are being made to provisions of the Income Tax Assessment Act 1997 to ensure that depreciation rules relating to ownership of lessors' fixtures operate appropriately and properly reflect connecting provisions in the Income Tax Assessment Act 1936.
Date of effect: Applies to 1997-98 and later income years.
Proposal announced: Not applicable.
Financial impact: Nil.
Compliance cost impact: Nil.
CGT asset register
Amends the Income Tax Assessment Act 1936 to allow taxpayers to use an asset register instead of source documents for capital gains tax (CGT) record keeping purposes.
Date of effect: The amendments will apply to all assets, whether acquired before or after the commencement of the new rules. The measure will only apply to entries made in an asset register that is certified on or after 1 January 1998.
Proposal announced: Statement by the Prime Minister on 24 March 1997 - the Government's response to the Report of the Small Business Deregulation Taskforce : "More Time for Business" - House of Representatives, Canberra.
Financial impact: The proposed amendments are not expected to have a significant revenue impact.
Compliance cost impact: The Compliance Cost Impact Statement is incorporated into the Regulation Impact Statement which appears at the end of Chapter7 of the Explanatory Memorandum.
Franking of dividends and other distributions
Amends the Income Tax Assessment Act 1936 by introducing a general anti-avoidance provision that applies to franking credit trading and dividend streaming schemes where one of the purposes (other than an incidental purpose) of the scheme is to obtain a franking credit benefit.
The amendments will also prevent dividend streaming by:
- •
- introducing into the Act a specific anti-streaming rule which will apply where a company streams dividends so as to provide franking credit benefits to shareholders who benefit most in preference to others; and
- •
- modifying the definition of what constitutes a class of shares within the dividend imputation provisions.
Date of effect: Subject to the transitional measure below:
- •
- the general anti-avoidance and specific anti-streaming rules will apply to dividends and other distributions paid on or after 7.30 pm AEST, 13 May 1997; and
- •
- the amendment to the definition of what constitutes a class of shares will apply to franking years commencing after 7.30 pm AEST, 13 May 1997.
As a transitional measure, these measures will not apply to dividends declared, but not paid, by publicly listed companies before 7.30 pm AEST on 13 May 1997, and to distributions made after that time that relate to such dividends.
Proposal announced: 1997-98 Budget.
Financial impact: The amendments are part of a package of measures targeting franking credit trading and dividend streaming that will protect the revenue base. In the absence of the measures, to the extent that the revenue base would not be protected, there would be a significant revenue loss. The measures will result in unquantifiable revenue gains to the extent of existing tax minimisation.
Compliance cost impact: There is unlikely to be any significant compliance costs associated with the proposed measures. The general anti-avoidance provision and anti-streaming rule will not affect taxpayers unless they are engaged in franking credit trading schemes or dividend streaming. Some costs may be incurred by companies determining whether shares have substantially the same rights. However, these costs would not be significant and would only be incurred once.
Distributions from private companies
Amends the Income Tax Assessment Act 1936 to ensure that all advances, loans and other credits (unless they come within a defined class of exclusions) by private companies to shareholders and their associates are deemed to be dividends to the extent that there are realised or unrealised profits in the company. Ensures that debts owed by shareholders or their associates which are forgiven by private companies are treated as dividends.
Date of effect: Amendments relating to loan guarantees given by private companies and certain loans by trusts with private company beneficiaries will apply only after 4.00 pm, by legal time in the Australian Capital Territory, on 27 March 1998. All other amendments will apply from 4 December 1997.
Proposal announced: 1997-98 Federal Budget, 13 May 1997. Amendments to the provisions as introduced into the Parliament were announced in Assistant Treasurers Press Releases No. 6 of 9 March 1998 and No. 11 of 27 March 1998.
Financial impact: The amendments are expected to prevent revenue losses of $2 million in 1997-98; $50 million in 1998-99; $30 million in 1999-2000; $30 million in 2000-2001.
Compliance cost impact: The amendments are expected to result in total additional compliance costs of approximately $2 million in 1997-98.
Savings tax offset (Savings rebate)
Inserts new Subdivision 61-A in the Income Tax Assessment Act 1997 to provide a new tax offset (commonly known as the savings rebate ). The offset will apply at a rate of 15% (7.5% in 1998-99 assessments) to undeducted superannuation contributions made by employees and the self-employed and net personal income from savings and investment (including net business income) up to an annual cap of $3,000.
Date of effect: 1 July 1998.
Proposal announced: 1997-98 Budget.
Financial impact: The measure will cost the revenue $350 million in 1998-99, $1370 million in 1999-2000 and $2040 million in 2000-01.
Compliance cost impact: A taxpayer's entitlement to the offset will be calculated by the ATO from information contained in the taxpayer's income tax return. The only additional information required from taxpayers for the purpose of calculating the offset will be details of their undeducted superannuation contributions. Taxpayers will therefore need to either keep records of their personal superannuation contributions or obtain the information from their superannuation funds.
The offset will also be included in the calculation of provisional tax and may be taken into account in the amount of tax instalments deducted from salary or wages income.
- •
- Taxpayers who wish to increase the amount of the offset included in their provisional tax calculation will need to lodge provisional tax variations.
- •
- PAYE taxpayers who wish to have the amount of tax instalments deducted from their salary or wages reduced by their entitlement to the offset will have to complete and lodge a new employment declaration with their employer.
The lodgement of employment declarations imposes costs on employers, who will have to keep extra records, make calculations and modify payroll systems. The estimated total initial cost for all employers with annual group tax remittances of $100,000 and over is $4 million, with the estimated recurrent costs totalling $2 million per annum.
Superannuation funds will also incur costs in responding to requests by taxpayers for details of superannuation contributions received before annual statements are sent to contributors.
Chapter 1 - Income tax deductions
Income tax measures
1.1 This chapter deals with two measures that amend the Income Tax Assessment Act 1997 (the Act). The first measure deals with the deductibility of expenses incurred in seeking election as a delegate to the Constitutional Convention. The second measure deals with the deductibility of donations made to the National Nurses' Memorial Trust.
Part 1: Constitutional convention
Overview
1.2 The amendments will provide for the tax deductibility of election expenses incurred by taxpayers seeking election as delegates to the Constitutional Convention.
Summary of the amendments
1.3 The amendments in Part 1 of Schedule 1 will amend the Act to:
- •
- insert a new provision to provide a one-off deduction for expenses incurred in contesting the election, with a limit of $1000. The provision will be operative for the 1997-98 year of income only; and
- •
- make the new provision subject to the application of section 25-70 of the Act for the purpose of excluding deductions for entertainment expenses incurred in the course of contesting the election.
1.4 The amendments commence on the date of Royal Assent and apply to the 1997-98 year of income only.
Background to the legislation
1.5 In the 1997-98 Budget, the Government announced the introduction of a limited tax deduction for expenses incurred in the course of contesting election to the Constitutional Convention.
1.6 The Constitutional Convention was held in February 1998 for ten days. The Convention comprised 152 delegates of which fifty per cent were elected through a non-compulsory, secret postal, ballot conducted by the Australian Electoral Commission. The other fifty per cent were appointed. The elected delegates were divided between the States and Territories, broadly in line with the composition of the Commonwealth Parliament.
1.7 The contesting delegates will be allowed a tax deduction of up to $1000 for expenses incurred in contesting election to the Constitutional Convention. The deduction will only be available in the 1997-98 year of income.
1.8 Section 25-60 provides a deduction for expenditure incurred by parliamentary candidates in contesting an election. Section 25-70 denies a deduction for expenditure incurred under section 25-60 to the extent to which that expenditure represents the provision of entertainment, except:
- •
- entertainment provided to the public; and
- •
- meal expenses, except where the expense has a purpose of providing entertainment to someone else.
1.9 The combined effect of sections 20-20 and 20-35 provides that the reimbursement of any expense which has been allowed or is allowable as a deduction is to be included in the taxpayer's assessable income in the year the reimbursement is made. For example, if a person claims a deduction for expenses incurred in contesting election to the Constitutional Convention in their 1997-98 income tax return and is reimbursed some of that expenditure in the 1998-99 year that reimbursement will need to be included as assessable income in the person's 1998-99 income tax return.
Explanation of the amendments
1.10 The proposed amendment inserts a new subsection in section 25-60 to provide a one-off deduction of up to $1000 for expenses incurred in contesting the Constitutional Convention. This provision will be operative for the 1997-98 year of income only. [Items 3, 4 and 5]
1.11 The new provision will be subject to section 25-70 (entertainment) and sections 20-20 and 20-35 (reimbursements). These sections are explained in paragraphs 1.8 and 1.9 above.
1.12 The proposed amendment refers to expenses incurred in contesting an election under the Constitutional Convention (Election) Act 1997. [Item 3]
1.13 The table in section 20-30 will be amended to remove its limitation to Commonwealth and State elections for the 1997-98 year. The limitation will be replaced for the 1998 and subsequent years. [Items 1 and 2]
1.14 A commencement provision will be inserted to ensure that the amendment to the Act commences on the date on which these amendments receive the Royal Assent, but with application to the 1997-98 year of income only. [Item 5]
Part 2: Gifts to the National Nurses' Memorial Trust
Overview
1.15 The amendment will provide for the tax deductibility of donations of $2 or more to the National Nurses' Memorial Trust.
Summary of the amendment
1.16 The amendment will insert a reference to the National Nurses' Memorial Trust (the Trust) in the table in subsection 30-50(2) of the Income Tax Assessment Act 1997 (the Act) to provide for income tax deductions for donations to the Trust. Donations of $2 or more to the Trust will be tax deductible. The provision will operate for a period of two years commencing on 4 September 1997.
1.17 The amendment commences on the date of the Royal Assent and will apply to donations made after 3 September 1997 and before 4 September 1999.
Background to the legislation
1.18 The National Nurses' Memorial Trust was founded by the Royal College of Nursing, Australia. The primary object of the Trust is to support the commemoration of nurses and their achievements relevant to the history of Australia. In particular, the Trust has been established to raise moneys to construct an Australian Nurses' National Memorial on Anzac Parade in Canberra. The Memorial will commemorate nurses who have served in war and otherwise in the service of Australia.
1.19 The Treasurer announced in the 1997-98 Budget that income tax deductions would be allowable for donations to the trust once the trust had satisfied the public fund requirements. On 4 September 1997 the Treasurer announced that the trust had satisfied the public fund requirements and that donations of $2 or more will be deductible from that day.
Explanation of the amendment
1.20 The amendment in Part 2 of Schedule 1 will allow income tax deductions for donations of $2 or more to the National Nurses' Memorial Trust. The period for deductibility will be 2 years from 4 September 1997. This will be done by listing the National Nurses' Memorial Trust in the table in subsection 30-50(2) of the Act. [Item 6]
Chapter 2 - Sales Tax (Exemptions and Classifications) Act 1992
Overview
2.1 The amendments will provide exemption from sales tax for certain goods so as to give effect to the Status of Forces Agreement (SOFA) between the Government of Australia and the Government of Malaysia which was entered into on 3 February 1997.
Summary of the amendments
2.2 The amendments to the Actwill provide an exemption from sales tax for certain goods used by a member of the Malaysian Visiting Force or civilian component, or a dependant of such a member.
2.3 The amendments will commence on the day after the date of the Royal Assent. [Item 2]
Background to the legislation
2.4 The SOFA between the Government of Australia and the Government of Malaysia was entered into on 3 February 1997. The SOFA settles formal arrangements covering bilateral defence activities, particularly personnel exchanges, with Malaysia and establishes standard conditions for the presence of Malaysian Visiting Forces on such issues as sales tax, jurisdiction, immigration and customs duty.
Explanation of the amendments
2.5 The amendments to the Act will provide exemption from sales tax on the following imported goods:
- •
- personal effects, furniture and household goods (other than cigarettes, cigars, tobacco and spiritous liquors) imported by a member of the Malaysian Visiting Force or civilian component, or a dependant of such a member; and
- •
- motor vehicles imported for the use of a member of the Visiting Force or civilian component.
[Item 1, new Item 139A(1)]
2.6 The terms "Visiting Force", "civilian component" and "dependant" have the same meaning as provided for in the SOFA between the Government of Australia and the Government of Malaysia. In the SOFA:
- (a)
- "Visiting Force" means any body, contingent, or detachment of any naval, land or air forces of the Sending State when stationed or present in the Receiving State in connection with defence activities mutually arranged between the Parties;
- (b)
- "civilian component" means the civilian personnel accompanying a Visiting Force who are employed in the service of a Visiting Force and who are not stateless persons, nor nationals of, nor ordinarily resident in, the Receiving State;
- (c)
- "dependant" means a person who:
- (i)
- is neither a national of, nor ordinarily resident in, the Receiving State; and
- (ii)
- in relation to a member of a Visiting Force or a civilian component is accompanying such a member and is:
- (A)
- a husband or wife of the member of a Malaysian Visiting Force or civilian component or a spouse of the member of an Australian Visiting Force or civilian component; or
- (B)
- otherwise in the custody, care or charge of the member; or
- (C)
- wholly or mainly maintained by the member; or
- (D)
- part of the family of the member and is residing with that member.
[Item 1, new Item 139A(2)]
Chapter 3 - Charitable trusts
Overview
3.1 The provisions in Schedule 3 of the Bill make amendments to the Income Tax Assessment Act 1997 (the 1997 Act) to reflect the amendments made by Schedule 5 ofthe Taxation Laws Amendment Act (No.4) 1997 (the No.4 Act) to the Income Tax Assessment Act 1936 (the 1936 Act). The No.4 Act received Royal Assent on 21 November 1997.
3.2 There are also three consequential amendments to the 1936 Act because the relevant provisions have not yet been rewritten and incorporated in the 1997 Act.
Summary of the amendments
3.3 The amendments in Schedule 3 will ensure that the rewrite of the income tax laws continues to reflect recent changes to tax legislation.
3.4 Schedule 3 will apply to income derived on or after 1 July 1997.
Background to the legislation
3.5 Schedule 5 of the No.4 Act amended the 1936 Act to address avoidance arrangements which took advantage of the tax exempt status of charitable trusts and closed off the possibility of certain organisations which also enjoyed an income tax exemption from being used for tax avoidance purposes. Additionally, the amendments prevented, in particular circumstances, the transfer of revenue from Australia to a foreign country where Australia gave up its taxing right by providing an income tax exemption for the Australian source income of an offshore organisation but the organisation was not exempt from tax on this income in its home country.
3.6 The 1997 Act contains a rewrite of many parts of the income tax law including the exempt income provisions. As these rewritten exempt income provisions took effect from the commencement of the 1997-98 income year it is now necessary to amend the 1997 Act to "catch-up" the amendments made by the No.4 Actto the 1936 Act.
Explanation of the amendments
Part 1 - Amendment of the Income Tax Assessment Act 1997
3.7 Chapter 5 of the Explanatory Memorandum to the No.4 Act fully deals with the recent measures to address tax avoidance through the use of charitable trusts and certain other exempt bodies distributing funds offshore. Details of the measures, therefore, are not reiterated here. Rather, a brief description only is provided although the commentary on the "special conditions" and the "activity test" has largely been repeated and to some extent expanded. This is because the law concerning tax exempt entities now contains a number of special conditions that must be met in order for a tax exempt entity to retain its tax exempt status.
3.8 The provisions of the 1997 Act which are being amended to bring them into line with the 1936 Act are set out at paragraph 3.9 below.
3.9 The following provisions which currently provide exemptions are to be amended to "catch-up" with the 1936 Act:
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- section 50-5 charity, religion, education and science
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- section 50-10 community service
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- section 50-15 employers and employees
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- section 50-20 finance
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- section 50-30 health
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- section 50-45 sports, culture and recreation.
3.10 Under the 1936 Act, to remain eligible for the exemption from income tax provided by the above mentioned provisions, it is necessary for an organisation or fund to meet an extended set of special conditions.
3.11 The basic rule now provides that for an organisation to be exempt from income tax it must generally have a 'physical presence' in Australia or in some cases be 'located' in Australia. These terms are not defined in the legislation and therefore take their ordinary or everyday meaning.
3.12 In the case of 'physical presence' a broad interpretation has been adopted - all that is required is for an organisation to operate through a division, sub-division or the like in Australia. The structure of the organisation is immaterial as is whether it has its central management and control or principal place of residence in Australia. On the other hand, the term does not apply where an organisation merely operates through an agent based in Australia.
3.13 A much narrower meaning is intended in relation to the term 'located'. A mere physical presence is not sufficient to satisfy this requirement although it is not necessary for an organisation to be a resident for income tax purposes. A separate centre of operations such as a branch falls within the meaning of this term.
3.14 To be exempt from income tax, a charitable trust established on or after 1 July 1997 must pursue its charitable purposes ' solely' in Australia. This does not mean, however, that an incidental activity or pursuit outside Australia will prejudice the exempt status of a charitable trust. An institution, however, generally only has to pursue its objectives 'principally' in Australia. This term is also not defined in the legislation. The dictionary meaning of the word 'principally' is mainly or chiefly. Accordingly, it is not possible to specify a particular percentage but less than 50% would not be considered to meet the 'principally' requirement. Where there is some doubt whether this requirement is satisfied it will be necessary to examine each institution's individual circumstances.
3.15 Voluntary payments of money such as donations, tithes, plate money and the like or transfers of property from one person to another are generally not income in the hands of the recipient. Broadly speaking, these payments or transfers constitute a 'gift' where they are made without legal obligation, by way of benefaction and without any advantage of a material character being received in return. However, a payment or transfer of property may constitute income in the hands of the recipient notwithstanding that it is a gift.
3.16 The test as to whether a gift is income in the ordinary sense of the word is whether it is made in relation to some activity or occupation of the donee of an income producing character. Therefore, the character of the receipt in the hands of the recipient becomes the determinative issue in each particular case in deciding whether the 'gift' constitutes income.
3.17 Accordingly, gifts received by either Australian or offshore entities which are not made in relation to some activity of the entity of an income producing character will not constitute income in the hands of the entity for the purposes of the activity test.
3.18 In addition, for the purposes of the activity test, receipts from fund raising by means of raffles, dinners, auctions, jumble sales and the like by non-commercial or non-business organisations will be treated as amounts "in the nature of gifts". However, where a donor is likely to obtain a tax deduction (eg, for advertising) the material advantage obtained would disqualify the donation as a gift in the hands of the recipient.
3.19 All of these "gifts" will be disregarded when determining whether an organisation incurs its expenditure and pursues its objectives principally in Australia or whether a charitable trust pursues its charitable purposes solely in Australia and, therefore, can be applied overseas without affecting an entity's income tax exempt status. Government grants may also be applied offshore without affecting the tax exempt status of entities.
Alternative exemption conditions for organisations
3.20 An organisation covered by items 1.1 (charitable institutions), 1.2 (religious institutions), 1.3 (scientific institutions), 1.4 (public educational institutions), 1.6 (scientific research funds), 1.7 (science associations), 2.1 (community service bodies), 4.1(friendly societies), 9.1 (sports, culture and recreation bodies) or 9.2 (musical bodies) will also be exempt from income tax if it has tax deductibility status -broadly, if it is referred to in a table in Subdivision 30-B of the 1997 Act.
3.21 If an organisation is located offshore it can also be exempt from tax on a case by case basis if:
- •
- it is exempt from income tax in its country of residence; and
- •
- has been prescribed by the Income Tax Regulations to be an exempt organisation.
3.22 In the case of charitable or religious institution covered by either items1.1 or 1.2, an exemption may also be granted by regulation, on a case by case basis, even if the organisation has a physical presence in Australia but does not incur its expenditure and pursue its objectives onshore. This exemption by regulation process will also be available for members of peak or representative bodies as well as individual organisations, thus permitting a system of self regulation whereby the peak organisation would have the responsibility to monitor its membership and expel any members who did not meet the necessary regulatory requirements.
Alternative exemption conditions for charitable trusts
3.23 A charitable trust that falls within item 1.5B (established on or after 1 July 1997) will also be exempt from income tax if it has tax deductibility status (broadly, if it is referred to in a table in Subdivision 30-B) or if it distributes its funds to a charity that has tax deductibility status.
3.24 Alternatively, if it distributes its funds to another charity that operates solely in Australia it will be exempt. As it would be unreasonable to expect the trustee of a charitable trust to be aware whether the organisation to which it distributes funds was undertaking its work solely in Australia the requirement in the legislation is simply, "to the best of the trustee's knowledge, is located in Australia and pursues its charitable purposes solely in Australia".
3.25 Accordingly, the trustee does not need to undertake a detailed examination of the charity to whom the distribution is to be made. The trustee cannot, however, ignore the fact that a charity is known not to pursue its charitable purposes solely in Australia.
3.26 In order to prevent testamentary trusts from being used as conduits in tax avoidance arrangements, settlements (for example trust distributions, funds or shares) received on or after 1 July 1997 will be subject to the new measures. This is achieved by the legislation providing for a "new trust" and an "old trust" and is fully discussed in the explanatory memorandum for the No.4 Act.
3.27 Because it would be possible for assets in the new trust to be sold or otherwise disposed of and the proceeds then used to purchase other assets which would otherwise be subject to the old rules, thus circumventing the new measures, subsection 50-80 (2) provides that the sale or substitution is to be ignored and the new assets treated as if they were old assets. Of course, the reverse situation is possible and if assets in the old trust are sold or otherwise disposed of, the assets which take their place will still be part of the old trust and thus subject to the old rules.
Part 2 - Amendment of the Income Tax Assessment Act 1936
3.28 These amendments will simply replace references to old provisions in the 1936 Act (concerning exemption from withholding tax for tax exempt bodies and record keeping requirements) to the relevant new provisions in the 1997 Act.
3.29 The amendments to both the 1997 Act and the 1936 Act apply to income derived on or after 1 July 1997 [Items 16 and 20] .
Chapter 4 - Payments of RPS, PAYE and PPS deductions to Commissioner
Overview
4.1 The amendments contained in Parts 1 and 2 of Schedule 4 provide for the rationalisation of the remittance obligations of withholders under RPS, PAYE and PPS.
Summary of the amendments
4.2 The amendments propose to insert new Division 1AAA into PartVI of the Income Tax Assessment Act 1936 (the Act).
4.3 The amendments will apply from 1 July 1998 [item 69, Part 3 of Schedule 4] .
Background to the legislation
4.4 As part of the 1997-98 Budget the Government announced changes to the RPS, PAYE and PPS withholding arrangements to rationalise the remittance obligations of withholders under the three systems. The changes provide compliance cost relief for many small businesses and, at the same time, improve the overall integrity of the tax system.
4.5 The RPS, PAYE and PPS arrangements impact on most Australian businesses. They are paper oriented, resource intensive and time consuming for business. In its report, the Small Business Deregulation Task Force noted that the burden of managing multiple taxation regimes is particularly onerous.
4.6 The proposal will relieve some of the burden that these arrangements place on business and bring the payment of tax deducted by large withholders more in line with modern business practices.
Summary of the essential features
4.7 The remittance obligations of withholders under RPS, PAYE and PPS are being rationalised by combining them under the one set of arrangements. The total of deductions made under each of the three systems is used as the basis for determining the three categories of remitters. The categories are:
- •
- large remitter- those whose total deductions in a previous financial year under the 3 systems was more than $1 million. Large remitters are required to remit by electronic transfer within an average of 7 days;
- •
- medium remitter- those who are not large remitters and whose level of total deductions exceeds $25,000. Medium remitters are required to remit on a monthly basis;
- •
- small remitter - those withholders whose total deductions do not exceed $25,000 remit quarterly.
4.8 The new arrangements are based on the existing remittance provisions in PAYE. The timing of the new arrangements resemble existing provisions in PAYE that apply to early, small and monthly remitters.
4.9 Many of the existing penalties as they relate to the failure of a person to remit deductions to the Commissioner are included in the new Division . It should be noted that the deduction and reporting obligations remain unique to each of the three systems and are not contained in new Division 1AAA .
4.10 Although the new arrangements are based on current PAYE obligations there are the following major differences:
- •
- the thresholds that apply under PAYE to determine remittance status apply to the total deductions made under the 3 systems (but with the $10,000 small remitter threshold increased to $25,000 and with the 'level of remittances' test for early remitters changing to 'the total of deductions made');
- •
- twice monthly remitters (early remitters under PAYE) are required to pay within an average of 7 days of making the deduction. Deductions from payments made on a Saturday, Sunday, Monday or Tuesday are to be remitted by the first following Monday and deductions made on a Wednesday, Thursday or Friday by the first following Thursday. A penalty for failing to use electronic transfer is calculated as an amount equivalent to 7 days interest on the unpaid amount or $500, whichever is the greater;
- •
- those PPS and RPS withholders remaining on a monthly remittance basis under the new arrangements are required to remit within 7 days rather than 14 days from the end of the month;
- •
- all new registrants are quarterly remitters automatically unless they exceed the $25,000 threshold, their quarterly status has been revoked through non-compliance or the Commissioner has exercised his discretion for another reason; this contrasts with the current arrangements where a new registrant is a monthly remitter unless PAYE remittances exceed $1 million or the employer applies for small remitter status.
Explanation of the amendments
4.11 The amendments implementing the new arrangements are contained in Schedule 4 of the Bill and apply for amounts deducted on or after 1 July 1998 [Item 69, Part 3 of Schedule 4].
4.12 These amendments remove the remittance obligations from Divisions 1AA, 2 and 3A and incorporate them in new Division 1AAA . The level of deductions that a person makes in accordance with Divisions 1AA, 2 and 3A is to be used as the basis for determining the rules under which the person will now remit amounts to the Commissioner. As mentioned above there will be three categories of remitters: large, medium and small [new Subdivision A] .
4.13 A large remitter is a person who has total deductions exceeding $1 million under RPS, PAYE and PPS in a financial year. The new requirements for large remitters are based on the PAYE early remitter provisions (sections 221EC and 221ED) except that they will remit within an average of 7 days. It is envisaged that a person who was an early remitter under PAYE will be a large remitter in accordance with new Division 1AAA .
Who is a large remitter - general
4.14 There are three situations in which a person will be a large remitter:
- •
- where the person has deductions in excess of the threshold;
- •
- where the person is part of a company group for which deductions exceed the threshold; or
- •
- where the Commissioner determines a person to be a large remitter.
4.15 In the first situation a person will be a large remitter if, before the start of that month, the person's total deductions for any financial year ending on or after 30 June 1998 exceeded $1 million [new paragraph 220AAB(1)(c)] .
4.16 The second situation provides that a person will be a large remitter in relation to a month if, before the start of that month, the person was included in a company group (see paragraphs 4.46 to 4.49) and the total deductions of the persons included in that company group at the end of any financial year ending on or after 30 June 1998 exceeded $1 million [new paragraph 220AAB(1)(d)] .
4.17 In the third situation a person will be a large remitter in relation to a month where the person is:
- •
- covered by a notice stating that the Commissioner has determined the person to be a large remitter (refer paragraphs 4.30 to 4.32); and
- •
- not covered by a notice determining the person is not a large remitter (refer paragraphs 4.24 to 4.29) [new paragraph 220AAB(1)(e)] .
4.18 To ensure a person knows under what category they are to remit deductions made on or after 1 July 1998 there are two transitional tests based on the level of deductions for the 1996-97 financial year. A person will be a large remitter:
- •
- where the total of deductions exceeded $1 million for the 1996-97 financial year; or
- •
- where at the end of the 1996-97 financial year the person was included in a company group (refer paragraphs 4.46 to 4.49) and the total of deductions of the persons included in that company group at the end of the year exceeds $1 million [new paragraphs 220AAB(1)(a) and 220AAB(1)(b)] .
4.19 A large remitter who satisfies the above tests will begin remitting electronically from 1 July 1998 for any deductions made on or after that date and will continue to be a large remitter until otherwise determined by the Commissioner.
Not a large remitter before certain times
4.20 While a person may be a large remitter under the tests outlined in new subsection 220AAB(1) , there are circumstances where a person will not be treated as a large remitter. These are:
- •
- a person cannot be a large remitter prior to 1 July 1998. As a consequence, the requirement to pay deductions to the Commissioner electronically will not apply to any deductions made before 1 July 1998 [new paragraph 220AAB(2)(a)] ; and
- •
- where a person first becomes a large remitter they will be given sufficient time to make the necessary administrative and accounting changes so as to be able to comply with the new rules [new paragraphs 220AAB(2)(b) and 220AAB(2)(c)] .
4.21 A person who has total deductions exceeding $1 million for the first time in the 1997-98 financial year and therefore satisfies the test of new paragraphs 220AAB(1)(c) or 220AAB(1)(d) will not be treated as a large remitter in relation to July or August 1998. Such a person will be a large remitter from 1 September and will begin remitting electronically from that time. This will give a person sufficient time to adjust to the new remitting obligations in respect of deductions made after that time [new paragraph 220AAB(2)(b)] .
4.22 Similarly, where a person first becomes a large remitter for any financial year ending on or after 30 June 1999 because total deductions exceeded $1 million the person will not be a large remitter in relation to July or August unless they were a large remitter in the immediately preceding June. The person therefore becomes a large remitter in relation to September of that year and begins remitting electronically from 1 September. As above this provides sufficient time to make the necessary adjustments in order to comply with the new obligations [new paragraph 220AAB(2)(c)] .
Where a person has deductions in excess of $1 million for the first time in the 1998-99 financial year, the person is not a large remitter in relation to June 1999. The person will therefore become a large remitter in relation to deductions made on or after 1 September 1999.
4.23 This rule only applies in the year in which a person first becomes a large remitter. Nor will it apply where a person is a large remitter because the Commissioner has made a determination under new section 220AAC (see paragraphs 4.30 to 4.32).
Commissioner's determination that person not a large remitter
4.24 The Commissioner may, by notice in writing, determine that a person is not a large remitter in relation to:
- •
- any month or months specified in the notice [new subparagraph 220AAB(3)(a)(i)] ; or
- •
- all months after and including the month specified in the notice [new subparagraph 220AAB(3)(a)(ii)] .
4.25 Large remitters so notified by the Commissioner will be freed from the obligations placed on large remitters for the period indicated in the notice.
4.26 In deciding to make a determination under new paragraph 220AAB(3)(a) the Commissioner could consider matters such as:
- •
- the permanency of any change in the number of employees or payees in respect of whom deductions are made and the amount of deductions; and
- •
- the location of the person; and
- •
- any undue costs that would be placed on the person in complying with the law.
4.27 It is not expected the discretion will be exercised, for example, merely because a person only pays salary or wages on a monthly basis or because compliance with the obligations will create a cash flow problem for the person.
4.28 The Commissioner may revoke or vary a determination that a person is not a large remitter [new paragraph 220AAB(3)(b)] . Such a determination can be initiated by the Commissioner or can be in response to the person lodging an application to cease to be a large remitter (see paragraph 4.33). Where a person is determined not to be a large remitter in relation to a month or months the person will generally be a medium remitter [new paragraph 220AAJ(1)(d)] .
4.29 Where the Commissioner issues a notice that the person is not a large remitter the notice will apply from the start of the month following the month in which it is received [new subsection 220AAB(4)] . For example, if a person receives a notice on 27 October that they are not a large remitter, the notice has effect from 1 November and the person can cease remitting electronically from that date.
Who is a large remitter - determination by the Commissioner
4.30 The Commissioner may determine that a person is a large remitter even though the person might not otherwise satisfy the requirements of being a large remitter, for example, where total deductions are less than $1 million (refer paragraph 4.14). Where the Commissioner varies or revokes such a determination he must give notice in writing [new subsection 220AAC(1)] .
4.31 The power given to the Commissioner to require a person to be a large remitter is intended to overcome arrangements entered into in an attempt to avoid the application of new Division 1AAA [new subsection 220AAC(3)] . New subsection 220AAC(3) outlines the matters which the Commissioner might consider in determining a person to be a large remitter. These are:
- •
- arrangements carried out after 15 August 1989 for the purposes of avoiding the application of new section 220AAE or paragraph 221F(5)(a). This might include the moving of employees into a new company that does not already qualify as a large remitter, while retaining only a few or no employees in the company that has qualified as a large remitter. (Note: the reference to avoiding the application of paragraph 221F(5)(a) relates to avoiding arrangements entered into after the announcement of the early remitter legislation on 15 August 1989 [new subsection 220AAC(4)] ;
- •
- the extent to which the person concerned pays any salary or wages or reportable or prescribed payments to persons to whom such amounts were previously paid by another person;
- •
- the amount of deductions the Commissioner thinks the person is likely to make over the next 12 months;
- •
- other matters.
4.32 Large remitters who are so notified will be subject for the period indicated in the notice to all the obligations imposed on large remitters including the requirement to remit electronically. To provide the person with sufficient time to make any necessary changes to be able to comply with obligations for a large remitter, such a determination will not come into effect until the start of the second month following the month in which it is received by the person [new subsection 220AAC(2)] .
A determination that a person is a large remitter received on 12 April will make the person a large remitter from 1 June.
Application to cease to be a large remitter
4.33 A person may apply in writing to the Commissioner to cease to be a large remitter. Where the Commissioner grants such an application he may consider all the factors discussed above at paragraph 4.31. Where a person is found not to be a large remitter they will generally be a medium remitter in accordance with new paragraph 220AAJ(1)(d) [new section 220AAD] .
4.34 Under the new arrangements for paying deductions to the Commissioner a large remitter will remit within an average of 7 days. The table in new subsection 220AAE(1) prescribes the days by which deductions made on particular days must be sent to the Commissioner.
4.35 Where a person pays an amount to the Commissioner it must be sent in sufficient time that in the ordinary course of events the Commissioner will receive the payment on or before the relevant payment day as prescribed [new subsection 220AAE(2)] .
A person who is a large remitter and makes deductions from salary or wages on Friday 30 October must send those deductions so that they are received by the Commissioner on or before Thursday 5 November.
If the person makes deductions from a prescribed payment on Monday 2 November the person must send those deductions so that they are received by the Commissioner on or before Monday 9 November.
4.36 A large remitter who fails to remit deductions by the due date will incur a penalty under new section 220AAV (refer paragraph 4.82). Where a large remitter, other than a Government body, intentionally or recklessly fails to send amounts to the Commissioner they will be committing an offence carrying a maximum penalty of 12 months imprisonment [new subsection 220AAE(3)] . Section 8ZE of the Taxation Administration Act 1953 (TAA) provides for administrative penalties not to be payable for an act or omission for which prosecution action has been instituted.
4.37 A large remitter must pay deductions made under RPS, PAYE and PPS by either a means of electronic transfer [new subsection 220AAF(a)] approved in writing or by some other means [new subsection 220AAF(b)] approved in writing, although a non-electronic payment will attract a penalty (refer paragraph 4.41). The means of electronic transfer approved by the Commissioner will include direct debit and direct credit. It is envisaged that the Commissioner will create an Instrument detailing the above types of electronic transfer methods to be used by large remitters. This will enable the Commissioner to update the list provided in the Instrument should other methods of electronic transfer emerge in the future.
4.38 Direct credit allows a person to remit by instructing their bank to transfer a payment amount from their account to credit the ATO account. This method of payment is the most common arrangement and generally considered the easier of the two.
4.39 Direct debit is a more complex method which requires a person to authorise the ATO to debit their bank account. Currently direct debit transactions for RPS, PAYE and PPS remittances can only be initiated through a tax agent with electronic transfer facilities.
4.40 The Commissioner is aware that changing technology in this area may open up new methods of payment which are more flexible and easier for remitters to use. As these methods develop the Commissioner will examine them for suitability as approved means of electronic transfer.
4.41 A large remitter may pay other than by electronic transfer [new subsection 220AAF(b)] . The provision enables the Commissioner to accept remittances from a large remitter even though the payment was not electronically transferred. However, a large remitter who chooses not to remit electronically will be liable for a penalty (refer paragraph 4.81) [new section 220AAW] .
4.42 A large remitter who does not pay by electronic transfer will be liable for a penalty equal to the greater of 7 days late payment penalty (based on the amount of the unremitted amount) or $500. The Commissioner has a discretion to reduce the penalty. However, the discretion may only be exercised in limited circumstances such as where the non-electronic remittance is due to circumstances beyond a large remitter's control. Examples of situations where the Commissioner may use his discretion would include power failure or equipment breakdown [new section 220AAX] .
4.43 A payment must be accompanied by a statement explaining the details of the payment. The Commissioner may, by notice in writing, require statements to be in a particular form, contain particular information or be given in a particular manner. For example, the Commissioner may require a statement to be sent by means of electronic transmission and contain a break-up of the details of the amounts and type of deductions to which the payment relate. This provision is the same for medium and small remitters [new section 220AAG] .
4.44 The current law provides, broadly, for the Commissioner to vary any of the existing obligations imposed on group employers under the PAYE system. The provision is used to relieve compliance costs or undue burdens placed on taxpayers, not to tighten existing obligations. Under new section 220AAH the Commissioner has a general discretion to vary the requirements of a person, but not to his or her detriment. In cases other than those where the Commissioner extends a person's time to pay, this is achieved by requiring the variations to be with the agreement of the person. The provision is the same for medium and small remitters.
4.45 The Commissioner may use his discretion to vary requirements of a large remitter in the following cases:
- •
- to extend the payment times;
- •
- for large remitters the Commissioner may approve arrangements by reference to the remitters principal payroll payment date and allow small deductions of tax to be grossed up and remitted at the time the regular payroll deductions are paid.;
- •
- where a small or medium remitter changes to a large remitter, there may be instances where the remitter is required to begin remitting electronically from the beginning of the month. However, the large remitter may still have an obligation to remit as a small or medium remitter for the previous month. In these situations the discretion is to operate to relieve the remitter of the two payment obligations and require one payment for the overlapping period;
- •
- to allow a large remitter to remit other than by electronic transfer in exceptional circumstances, for example equipment breakdown or power failure. The penalty that would be imposed for not paying by electronic transfer will be remitted in these unusual circumstances;
- •
- to change the information contained in statements which must accompany each payment or to send the statements in a particular way.
4.46 A person that is part of a company group may be treated as a large remitter notwithstanding that the total amount of deductions made by the person is below $1 million. A company group is defined as consisting of 2 or more companies each of which is a group company in relation to the other [new section 220AAI] .
4.47 A company will be a group company in relation to another company if it satisfies either of the following tests:
- •
- one of the companies is a 100% subsidiary of the other; or
- •
- each of the companies is a 100% subsidiary of the same third company [new subsection 220AAI(2)] .
4.48 A company is taken to be a subsidiary of another company (the holding company) and therefore within the company group if all the shares of the company are beneficially owned by:
- •
- the holding company;
- •
- one or more 100% subsidiaries of the holding company; or
- •
- the holding company and one more subsidiaries of the holding company [new subsection 220AAI(3)] .
4.49 The operation of new subsections 220AAI(1), 220AAI(2) and 220AAI(3) is extended by establishing a group relationship between companies which are part of a wholly-owned chain of subsidiaries of a holding company. Thus, in a corporate structure under which all of the shares in a subsidiary are owned by one or more wholly-owned companies that are interposed between a holding company and the end subsidiary company, a group relationship will be found between them [new subsection 220AAI(4)] .
4.50 Generally a person will be a medium remitter where total deductions under RPS, PAYE and PPS exceeded $25,000 but did not exceed $1 million for a particular year. A person who is a medium remitter will be required to remit on a monthly basis.
Who is a medium remitter - general
4.51 A person will be a medium remitter in relation to a particular month if any of the following apply:
- •
- the total deductions that a person makes under RPS, PAYE and PPS exceeded $18,750 for the period between 1 July 1997 and 31 March 1998 [new paragraph 220AAJ(1)(a)] ;
- •
- the total deductions exceeded $25,000 for any financial year ending on or after 30 June 1998 [new paragraph 220AAJ(1)(b)] ;
- •
- the Commissioner has served a notice on the person under new section 220AAK (refer paragraphs 4.63 and 4.64) requiring the person to be a medium remitter in respect of a particular period [new paragraph 220AAJ(1)(c)] ;
- •
- the Commissioner has determined that the person is not a large remitter under new subsection 220AAB(3) and the Commissioner has not determined that the person is not a medium remitter by virtue of new subsection 220AAJ(3) (refer paragraphs 4.57 to 4.61).
4.52 The purpose of new paragraph 220AAJ(1)(a) is to provide certainty to those persons whose total deductions are likely to exceed $25,000 for the year. By using the level of total deductions from 1 July 1997 to 31 March 1998 a person will know whether or not they will be required to remit on a monthly basis from 1 July 1998. This will also give them sufficient time to make the necessary changes to their systems. The Commissioner will use this figure to identify such persons and provide them with the appropriate stationery before they must start remitting as a medium remitter. The $18,750 figure is based on three quarters of the total deductions made for the financial year, that is $25,000.
Not medium remitter before certain times
4.53 While a person may be a medium remitter because of new subsection 220AAJ(1) , there are circumstances where a person will not be treated as a medium remitter. These are:
- •
- a person cannot be a medium remitter before the new arrangements come into effect on 1 July 1998 [new paragraph 220AAJ(2)(a)] ; and
- •
- where a person does become a medium remitter they will be given sufficient time to make the necessary administrative and accounting changes so as to be able to comply with the new rules [new paragraphs 220AAJ(2)(b) and 220AAJ(2)(c)] .
4.54 New paragraph 220AAJ(2)(b) applies to those persons who did not have total deductions exceeding $18,750 up to 31 March 1998 nor not been determined by the Commissioner to be a medium remitter, but who did have total deductions exceeding $25,000 for the 1997-98 financial year (refer paragraph 4.51). A person in these circumstances will not be treated as a medium remitter in relation to July, August or September 1998. This avoids confusion for those persons who were quarterly remitters in the prior financial year and has the added benefit of providing them time to make the necessary accounting and administrative to begin remitting on a monthly basis.
4.55 Similarly a person will not be a medium remitter in relation to July, August or September in a later financial year unless they were a medium remitter in the immediately preceding June. This will provide a person who first becomes a medium remitter because of the total level of deductions in a prior financial year time to make the necessary changes before having to comply with the medium remitter requirements [new paragraph 220AAJ(2)(c)] .
4.56 This rule only applies in the year in which a person first becomes a medium remitter. This rule does not apply where a person is a medium remitter because the Commissioner has made a determination under new section 220AAK .
In the 1998-99 financial year a person had total deductions in excess of $25,000 for the first time.
Where the person was not a medium remitter in relation to June 1999, the person will become a medium remitter in relation to deductions made on or after 1 October 1999.
Commissioner's determination that person not a medium remitter
4.57 The Commissioner may, by notice in writing, determine that a person is not a medium remitter in relation to;
- •
- any month or months specified in the notice [new subparagraph 220AAJ(3)(a)(i)] ; or
- •
- all months after and including the month specified in the notice [new subparagraph 220AAJ(3)(a)(ii)] .
4.58 Medium remitters so notified will be freed from the obligations placed on medium remitters for the period indicated in the notice.
4.59 In deciding whether to make a determination that a person is not a medium remitter the Commissioner could consider matters such as:
- •
- the permanency of any change in the number of employees or payees in respect of whom deductions are made and in the amount of deductions;
- •
- the location of the person; and
- •
- any undue costs that would be placed on the person in complying with the law.
4.60 As discussed previously, it is not expected the discretion will be exercised, for example, merely because a person only pays salary or wages on a monthly basis or because compliance with the obligations will create a cash flow problem for the person.
4.61 The Commissioner may revoke or vary a determination that a person is not a medium remitter. Such a determination can be initiated by the Commissioner or can be in response to the person lodging an application to cease to be a medium remitter (refer paragraph 4.65) [new paragraph 220AAJ(3)(b)] .
4.62 Where the Commissioner issues a notice that the person is not a medium remitter the notice will apply from the start of the month following the month in which it is received [new subsection 220AAJ(4)] .
Who is a medium remitter - determination by Commissioner
4.63 New section 220AAK operates in much the same as way as the equivalent large remitter provision, new section 220AAC (refer paragraphs 4.30 to 4.32). That is, the Commissioner can determine a person to be a medium remitter even though they might not otherwise meet the requirements. The Commissioner can, by notice in writing, revoke or vary such a determination. To provide the person with time to make any necessary changes in order that they can comply with the obligations for a medium remitter, such a determination will not come into effect until the start of the second month following the month in which it is received by the person [new subsections 220AAK(1) and 220AAK(2)] .
4.64 In deciding to make a determination under new subsection 220AAK(3) the Commissioner may consider the following matters:
- •
- whether the person failed to comply with any obligations such that the Commissioner considers the person should not remain a small remitter and therefore not have the option of paying deductions quarterly;
- •
- whether the person entered into an arrangement after the date of announcement of the new withholding arrangements (13 May 1997) to avoid being a medium remitter;
- •
- the extent to which the person pays salary or wages and prescribed or reportable payments to persons that previously received them from another person;
- •
- the likely amount of deductions to be made by the person in the next 12 months; and
- •
- any other matter.
Application to cease to be a medium remitter
4.65 New section 220AAL operates in the same way as new section 220AAD (refer paragraph 4.33). A person may apply to the Commissioner to cease to be a medium remitter. Where the Commissioner grants an application under this section he may consider all the factors discussed above at paragraph 4.64. Where the Commissioner determines that a person is not a medium remitter the person is a small remitter.
When amounts must be remitted - medium remitters
4.66 Deductions made by a medium remitter must be sent to the Commissioner in sufficient time that in the ordinary course of events the Commissioner will receive them no later than the 7th day after the end of the month in which the deductions were made [new section 220AAM] .
4.67 As for a large remitter, a medium remitter who fails to send deductions to the Commissioner by the due date will commit an offence and be liable for a penalty (refer paragraph 4.36) [new subsection 220AAM(3) and new section 220AAV].
4.68 A medium remitter has the option of paying by either electronic transfer or some other means approved in writing by the Commissioner. A medium remitter will not be subject to a penalty for not remitting electronically as is the case for a large remitter [new section 220AAN] .
4.69 As for large remitters, a payment made by a medium remitter must be accompanied by a statement explaining the details of the payment. The Commissioner may, by notice in writing, require statements to be in a particular form, contain particular information or be given in a particular manner (refer paragraph 4.43) [new section 220AAO] .
4.70 Again, as for large remitters, the Commissioner may vary the requirements imposed on a medium remitter. The Commissioner may use his discretion to extend payment times or, with the agreement of the person, the requirements of how amounts must be paid or of statements to be sent to the Commissioner (refer paragraph 4.44) [new section 220AAP] .
4.71 A person is small remitter where total deductions do not exceed $25,000 for a particular year. The new requirements for small remitters are based around sections 221EDA, 221EDB and 221EDC - small remitters under PAYE.
4.72 A person is a small remitter if they are not a large remitter or a medium remitter [new section 220AAQ] .
When amounts must be remitted - small remitters
4.73 Deductions made by a small remitter must be sent to the Commissioner in sufficient time that in the ordinary course of events the Commissioner will receive them no later than the 7th day after the end of the quarter in which the deductions were made. Quarters end on 31 March, 30 June, 30 September and 31 December. In the same way as a small remitter under current PAYE rules must remit at least quarterly, the new arrangements provide a person with the option to remit more frequently than quarterly if they wish [new section 220AAR] .
4.74 As for large and medium remitters, a small remitter who fails to send deductions to the Commissioner by the due date will commit an offence and be liable for a penalty (refer paragraph 4.36) [new subsection 220AAR(3) and new section 220AAV].
4.75 A small remitter has the option of paying either by a means of electronic transfer or by some other means approved in writing by the Commissioner. A small remitter will not be subject to a penalty for not remitting electronically as is the case for a large remitter [new section 220AAS] .
4.76 As for large and medium remitters, a payment made by a small remitter must be accompanied by a statement explaining the details of the payment. The Commissioner may, by notice in writing, require statements to be in a particular form, contain particular information or be given in a particular manner (refer paragraph 4.43) [new section 220AAT] .
4.77 Again, as for large and medium remitters, the Commissioner may vary the requirements imposed on a small remitter. The Commissioner may use his discretion to extend payment times or, with the agreement of the person, the requirements of how amounts must be paid or of statements to be sent to the Commissioner (refer paragraph 4.44) [new section 220AAU] .
4.78 The penalties existing under current arrangements for failure to remit amounts deducted in accordance with Divisions 1AA, 2 and 3A of Part VI of the Act are retained in new Division 1AAA . However, some minor changes to the offences and penalties in Divisions 1AA, 2 and 3A have been required in order to align them in the new Division .
4.79 The penalty and recovery provisions are contained in new Subdivisions E and F and cover:
- •
- penalties for failure to send deductions as a large, medium or small remitter to the Commissioner as required under new sections 220AAE, 220AAM and 220AAR [new section 220AAV] ;
- •
- failure to send statements to the Commissioner as required under new sections 220AAG, 220AAO and 220AAT [new section 220AAZ] ;
- •
- penalty for non-electronic payment as required under new section 220AAF [new section 220AAW] ;
- •
- provisions to enable the Commissioner to recover amounts payable.
4.80 New section 220AAV imposes a penalty for the failure of a person to send deductions to the Commissioner under new sections 220AAE, 220AAM , and 220AAR . It is based on the civil penalties that were imposed under RPS, PAYE and PPS. The criminal penalty under new sections 220AAE, 220AAM and 220AAR where a remitter acts intentionally or recklessly in failing to send deductions is consistent with the penalty for the failure to send deductions under RPS and PPS. The criminal penalty that was imposed under PAYE for the failure to send deductions has been changed for the purposes of the new Division . Section 8ZE of the TAA provides for administrative penalties not to be payable for an act or omission for which prosecution action is instituted.
4.81 Under new section 220AAW a large remitter, other than a government body, who does not pay by a means of electronic transfer that has been approved by the Commissioner will be liable for a penalty equal to the greater of 7 days late payment penalty (based on the amount of the unremitted amount) or $500 (refer paragraph 4.42).
4.82 New section 220AAX enables the Commissioner to remit penalties imposed under new sections 220AAV or 220AAW for either the failure of a person to send deductions to the Commissioner or the failure of a large remitter to pay by electronic transfer. Currently the Commissioner has the power to remit penalties under RPS, PAYE and PPS for the failure to send deductions (sections 221N, 221YHL and 221AU). The guidelines that currently exist for the remission of penalties are to be retained for the new arrangements.
4.83 It should be noted that in relation to the remission of the penalty imposed for non electronic payment the Commissioner is only able to exercise his discretion in limited circumstances. It is considered that the discretion may be exercised in situations where the non-electronic remission is due to circumstances beyond a remitter's control, for example, a power failure or equipment breakdown.
Reduction of late payment penalty where judgement debt carries interest
4.84 New section 220AAY will ensure that an amount of penalty for late payment under new section 220AAV continues to accrue in respect of unpaid principal amounts notwithstanding that judgment for payment of the principal amount has been given or entered in a court. Where, in such a case, the judgment debt itself carries interest, the penalty tax otherwise payable is to be reduced by the amount of judgment interest that relates to the unpaid principal amount. This new provision replicates provisions that existed under RPS, PAYE and PPS (sections 221NA, 221YHLA and 220AV).
Failure to send statements to Commissioner - offence
4.85 A person who fails to send a statement as required under new sections 220AAG, 220AAO and 220AAT is guilty of an offence [new section 220AAZ] . This does not apply to a person who is a government body for the purposes of new Division 1AAA .
Recovery of amounts of Commissioner
4.86 The machinery provision to enable the collection of amounts payable to the Commissioner are contained in new section 220AAZA . The provisions are based on the RPS recovery provisions. It should be noted that the RPS provisions combine elements of the PAYE and PPS provisions in relation to the acceptable means of providing evidence in a recovery proceeding.
4.87 By paragraph 264(1)(b) of the Act, the Commissioner of Taxation may, by notice in writing, require any person to attend and give evidence concerning the person's, or another person's, income or assessment. The Commissioner may require the person to produce all books, documents or other papers that may be in the person's custody or control. New section 220AAZB will extend the operation of paragraph 264(1)(b) to matters that are relevant to the administration or operation of new Division 1AAA . The new provision replicates similar provisions in Divisions 1AA, 2 and 3A.
4.88 New section 220AAZC makes it clear that forms used for any of the purposes of new Division 1AAA may be required to include a declaration that the content of the form is correct. By this means, a person making a false declaration in respect of information required under this new Division could be guilty of an offence against sections 8K, 8N or 8P of the TAA.
4.89 New section 220AAZD explains the new arrangements in relation to partnerships. Obligations under the new Division imposed on the partnership under the new Division are imposed on each partner and each partner is jointly and severally liable for amounts payable by the partnership. An offence by the partnership is an offence committed by each partner. A partner that was not involved in an act or omission of the partnership is not taken to have committed an offence.
4.90 In the case of unincorporated companies, new section 220AAZE includes special provisions to specify that obligations are imposed on (and offences committed by) the unincorporated company are imposed on (and committed by) each member of the committee of management of the company. It is similar in nature to new section 220AAZD .
4.91 New section 220AAZF provides that a person dissatisfied with a decision made by the Commissioner in regard to the new Division may object against the decision in the manner set out in Part IVC of the TAA. The new provision lists the decisions which a person may object against. A similar provision exists in relation to the RPS, PAYE and PPS provisions although in relation to PAYE it only applies for a small remitter.
4.92 To ensure that the new arrangements cover all persons who are required to deduct and remit under the existing three withholding systems, a definition of person has been inserted in the new Division [new section 220AAZG] . For the purposes of the new Division a person means a company, a partnership, a person in a particular capacity of trustee, a government body or any other person. A government body means the Commonwealth, a State, a Territory or an authority of the Commonwealth, a State or a Territory. In addition, definitions of reportable payment, prescribed payment and salary or wages have also been inserted.
4.93 Part 2 of Schedule 4 in the Bill details the consequential amendments necessary as a result of inserting new Division 1AAA into Part VI. The amendments remove the remittance obligations of the RPS, PAYE and PPS systems and insert them in the new Division [items 8 to 13, items 22 to 26 and items 33 to 35 of Part 2] .
4.94 The remittance obligations include the classification of remitters, the timing of remittance. The associated penalty and remission of penalty provisions have also been removed from Divisions 1AA, 2 and 3A and inserted into the new Division [items 14 to 19, items 27 to 30 and items 36 to 44 of Part 2] .
4.95 New Division 1AAA also contains a provision to enable the Commissioner to recover amounts payable under the new arrangements. Consequential amendments remove the relevant provisions of the recovery provisions in relation to remittance obligations under the three withholding systems [items 20, 21, 31, 32 and items 45 to 47 of Part 2] .
4.96 Sections of Divisions 8 and 9 of the Act that deal with prompt recovery and penalties for directors of non-remitting companies have been amended to include references to new Division 1AAA and the recovery provision under the new arrangements [items 48 to 65 of Part 2] .
4.97 In addition, items 6 and 7 insert "Division 1AAA" into a definition of tax under subsections 216(6) and 218(6B) of Division1 of PartVI for the recovery of tax payable.
4.98 Consequential amendments are required to other Acts administered by the Commissioner namely, Taxation (Interest on Overpayments and Early Payments) Act 1983, Crimes (Taxation Offences) Act 1980 and the Child Support (Registration and Collection) Act 1988. The amendments remove references to sections in RPS, PAYE and PPS that are being repealed and inserts references to the appropriate new sections in new Division 1AAA [items 2 to 5 and items 66 to 68 of Part 2] .
Regulation impact statement
4.99 The Government announced in the 1997-98 Budget its intention to amend the Reportable Payments System (RPS), Pay-As-You-Earn (PAYE) and Prescribed Payment System (PPS) withholding arrangements to simplify the range of withholding tax systems imposed on business by aligning the three systems. To achieve this, the new arrangements propose changes to the timing of remittances and to the thresholds (see below under Implementation for a summary of changes).
4.100 The current withholding arrangements are paper oriented, resource intensive and time consuming for business. The systems lack the flexibility to cater for the increased demand of electronic commerce. Also, some 10% of businesses have obligations in more than one withholding arrangement. These businesses find it difficult to reconcile why obligations are disparate across systems. In its report, the Small Business Deregulation Task Force noted that the burden of managing multiple taxation regimes is particularly onerous, even overwhelming.
4.101 The basis of the existing PAYE remittance legislation is that an employer is required to remit on a monthly basis unless:
- •
- the employer is an early remitter (annual remittances exceed $1 million). These employers remit on the 7th and 21st of each month; or
- •
- the employer is a small remitter (deduction obligations under $10,000 and Commissioner has approved small remitter status). These employers remit quarterly.
That is, an employer is a monthly remitter unless another status applies.
4.102 The new arrangement combines remittance obligations of RPS, PAYE and PPS. A person may remit on a quarterly basis unless:
- •
- the person is a large remitter (annual remittances under RPS, PAYE and PPS combined exceed $1m); or
- •
- the person is a medium remitter (annual remittances under RPS, PAYE and PPS combined exceed $25,000); or
- •
- the person is a non-compliant remitter (their small remitter status has been revoked by the Commissioner).
4.103 The large increase in the quarterly remitter status threshold, as indicated in 1997-98 Budget Paper No. 2, will result in a significant increase (approximately 311,000) in the number of remitters who will come under that new threshold. In excess of 80% of total remitters will now qualify. A small remitter who wishes to remain remitting on a monthly basis can do so without informing the ATO.
4.104 It is not appropriate for those 311,000 remitters who will now be eligible for quarterly remitter status under the new arrangements to apply for that status as is currently required. Consequently, the new provisions will operate on the basis that a remitter has quarterly remitter status unless his or her remittance obligations exceed the $25,000 or the $1 million thresholds. A quarterly remitter will now be called a small remitter, a remitter who exceeds the $1 million threshold a large remitter, while a remitter with withholding obligations in between the two thresholds will be called a medium remitter.
4.105 Remitters who do not comply with their withholding obligations and who otherwise would be small remitters may have that status withdrawn. Such non-compliant remitters would then be required to remit monthly in accordance with the medium remitter obligations. This is consistent with existing provisions.
4.106 The Government is keen to encourage all small remitters to adopt the quarterly payment arrangements to obtain the benefits of reduced cash flow costs. The benefits will be emphasised by the use of advertising as well as educational material such as Payer Books and mail-outs. The ATO will have in place the appropriate enforcement strategies to manage taxpayers on this basis. Taxpayers who have opted for quarterly remittance and do not remit by the required date will be issued with a final notice.
4.107 Revenue brought forward into the 1998-99 year is expected to be $330 million.
4.108 Large or medium remitter status under the new arrangements is generally determined on the basis of remittance obligations during the previous income year. Two or three months are allowed for a remitter to review his or her status and then to operate under the obligations applicable to any new status.
4.109 The new arrangements are to operate from 1 July 1998. In order that a remitter can determine his or her status from that date under the new arrangements, transitional provisions operate as follows:
- •
- a remitter will be a medium remitter from 1 July 1998 where his or her withholding obligations in the period 1 July 1997 to 31 March 1998 exceeded $18,750 (that is, of $25,000); or
- •
- a remitter will be a large remitter from 1 July 1998 where his or her withholding obligations in the 1996-97 income year exceeded $1 million.
4.110 The current small remitter threshold is to be relaxed and this will reduce the compliance costs of approximately 311,000 businesses. These businesses will now be able to make their remittances later than is currently required without any other change in procedures. This will provide the businesses with a cost of funds saving in addition to compliance cost savings. It is not expected that there will be any disincentives for a firm near a threshold to grow, possibly changing remittance obligations.
4.111 The extension of the current PAYE $1 million early remitter threshold to remittance obligations under the 3 withholding systems is estimated to affect only slightly more than 100 businesses. Those businesses, together with the estimated 5,400 businesses already above the threshold, will be required to make remittances within an average of 7 days after amounts have been withheld.
4.112 In most cases, businesses that are above the $1 million threshold would already conduct transactions using electronic funds transfers. The new remittance procedures merely bring the remittance of tax amounts withheld in line with this modern business practice. Businesses with remittance levels lower than $1 million are less likely to have introduced electronic fund transfer procedures and, accordingly, existing arrangements are maintained for those businesses.
4.113 Approximately 15,500 RPS and PPS remitters will be affected by the alignment of payment dates of remittance obligations. The arrangements change the due date for payment for the remaining monthly remitters from the 14th to the 7th of the month. However, these remitters on average have an annual business turnover of $16.5 million.
4.114 All remitters will be given precise details about their obligations under the new arrangements at the time they are provided with the appropriate remittance stationery or electronic procedural information. Such stationery or information is usually provided around April in each income year.
4.115 The possibility of the withdrawal of small remitter status as discussed at paragraph 4.105 above provides small remitters with an incentive to comply with their remittance obligations. The incentive for medium and large remitters is contained mainly in the penalty rgime applicable to all late payments (including those by small remitters). A large remitter who does not remit electronically faces a minimum penalty that compares with the maximum cost of installing electronic transmission equipment.
4.116 The RPS, PAYE and PPS systems impact on about 900,000 Australian businesses. The new arrangements will provide compliance cost benefits for 311,000 businesses and will require earlier payment by some 5,500 businesses. The payment obligations of businesses with obligations under PAYE as well as RPS or PPS are to be aligned to produce compliance cost reductions.
Changes in Administrative Costs
4.117 The administrative cost savings for the ATO are estimated to be $9 million next year and $11 million in subsequent years. These savings result from reducing the number of remitters requiring monthly monitoring and can be transferred to incorporate greater audit and enforcement activities with no overall increase in costs.
4.118 The initial costs of the changes will arise from learning about the new payment arrangements and the acquisition of software by some large remitters to enable them to remit electronically.
4.119 Large remitters will have to pay by electronic means. It is estimated that 95% of these remitters already pay salaries to employees by electronic means. As the cost of paying electronically is less than transaction charges for cheque payments, this is not thought to cause great concern amongst large remitters.
4.120 However, the remaining 5% of large remitters will incur an initial cost in acquiring software needed to facilitate electronic payments. This initial outlay would be between $75 and $440, depending on the financial institution. The initial costs borne by large remitters are considered relatively small.
4.121 The value of the initial costs borne by small remitters is in the order of $5 million, being costs associated with learning about the new payment arrangements. However, there are reduced compliance costs because of the reduction in frequency of remittances for many small remitters, and the benefit of having only one system to understand.
4.122 The recurrent costs are the changes to the number of times a year that taxpayers are obliged to remit RPS, PAYE and PPS deductions and the alignment of remittance dates for these systems.
4.123 Some large taxpayers will have to remit more frequently and will subsequently incur increased costs of compliance. At the most this will involve a doubling of transactions, at a cost of 10 - 20 cents per electronic transaction, which is equivalent to the cost of a cheque payment. The increase in compliance costs will not be substantial and will be countered by the savings in reducing the three systems to one system.
4.124 For many employers and businesses who will be classified as small there will be a significant reduction in the cost of compliance because they will remit quarterly instead of monthly. Due to the large number of remitters in this category the reduction in the costs of compliance is estimated to be $18 million per year.
4.125 Approximately 15,550 medium remitters in RPS and PPS will be required to remit 7 days earlier. While these remitters will incur increased costs of compliance these costs will be relatively small due to the minor nature of the change.
4.126 In addition, businesses who have multiple obligations under the current withholding arrangements will also have compliance costs reduced through alignment of the three systems.
4.127 Large remitters will be required to remit on average every 7 days instead of 14 days as is the case under the current arrangements. As a result large remitters will incur a reduction in cash flow benefits. The after tax cash flow benefits will be approximately halved from around $50 million to around $25 million.
4.128 Approximately 311,000 small remitters will now remit on a quarterly basis rather than once a month. For these taxpayers there will be an increase in cash flow benefits. The after tax cash flow benefits will be approximately doubled from around $5 million to around $10 million.
4.129 The net effect of the changes on small remitters is a saving of $18 million. The initial costs of learning about the new payment arrangements are expected to be offset by the increased cash flow benefits, with the resulting saving coming from remitting quarterly instead of monthly. Medium remitters will not be significantly affected, and the net effect on large remitters is a cost of $25 million, due to reduced cash flow benefits.
4.130 The changes to the withholding arrangements represents an important first step towards reducing the range of withholding tax systems imposed on business with a view to ultimately establishing an efficient, modern interface between the Australian Taxation Office and the business taxpaying community. For large businesses, it brings withholding tax remittance into line with modern commercial practices by replacing the current paper oriented and resource intensive arrangements with a more flexible method reflecting contemporary business customs. For small business, the measure represents a further significant reduction in compliance costs and reduces the frequency of their transactions with the Australian Taxation Office.
4.131 Implementation of this tax measure will remove the present requirement for a person to apply for small remitter status and will deem all remitters to be small remitters unless they are required to remit as a medium or a large remitter. More than 80% of all remitters will fall within the new small remitter category. Application of the new thresholds will be achieved by combining current remittance obligations under the 3 systems into one set of remittance obligations.
4.132 The ATO and Treasury will monitor this measure, as part of the whole taxation system, on an ongoing basis. In addition, the ATO has consultative arrangements in place to obtain feedback from professional associations, small business associations and other taxpayer consultation forums.
Chapter 5 - Choice of superannuation funds
Overview
5.1 Part 1 of Schedule 5 to the Bill will amend the Superannuation Guarantee (Administration) Act 1992 (SGAA) to:
- •
- require employers to make compulsory superannuation contributions to a complying superannuation fund or retirement savings account (RSA) in compliance with the choice of fund requirements; and
- •
- increase the amount of Superannuation Guarantee Charge (SGC) payable by the employer (if any) where these contributions do not comply with the choice of fund requirements.
5.2 Parts 2 and 3 of Schedule 5 to the Bill make amendments to the Retirement Savings Accounts Act 1997 and Superannuation Industry (Supervision) Act 1993 respectively, which are consequential on the amendments made in Part 1 .
Summary of the amendments
5.3 The overall purpose of the amendments is to give employees greater choice as to the superannuation fund or RSA into which superannuation contributions are made.
5.4 Where an employer makes a superannuation contribution which is not in compliance with the choice of fund requirements, the employer may be subject to a higher SGC amount.
5.5 The amendments provide employers with a range of options under which they could comply with their choice of fund requirements.
5.6 The arrangements will increase competition and efficiency in the superannuation industry, leading to improved returns on superannuation savings and placing downward pressure on fund administration charges.
5.7 The amendments will apply from the date of Royal Assent. To avoid having to pay any increase in SGC, employers are required to provide superannuation support in compliance with the choice of fund requirements:
- •
- from 1 July 1998 - for all employees who commence employment after this date (ie. new employees); and
- •
- from 1 July 2000 - for all employees who were employed by the employer immediately before 1 July 1998 and who continue to be employed by the employer (ie. existing employees).
Background to the legislation
5.8 The SGAA prescribes a minimum level of superannuation support which employers should provide for each of their employees. Employers failing to comply with the prescribed minimum standard are subject to a superannuation guarantee charge based on the superannuation shortfall in their superannuation support plus an additional amount for an administrative charge and an interest component.
5.9 Section 19 of the SGAA is used to ascertain whether an employer has a superannuation shortfall in respect of an employee. Under this section, an employer's 'individual superannuation guarantee shortfall' in respect of an employee is the sum of the quarterly shortfalls, calculated in accordance with subsection 19(2).
5.10 In order to determine if an employer has a individual superannuation guarantee shortfall in respect of an employee, it is necessary to determine:
- •
- the percentage level of superannuation support the employer is expected to provide for the employee (the charge percentage which is specified in sections 20 and 21 of the SGAA); and
- •
- the percentage level of superannuation support actually provided for the employee (calculated in accordance with sections 22 and 23 of the SGAA).
5.11 If the actual level of support is equal to or exceeds the legislated level then the charge percentage is reduced to zero and no shortfall arises. If the actual percentage level of superannuation support is less than the legislated level of support, a shortfall will arise. This shortfall is calculated by multiplying the employee's salary and wages for the contribution period by the charge percentage remaining after deducting any reductions for superannuation support provided.
5.12 Currently the SGAA requires an employer to make contributions to any complying superannuation fund or RSA in order to meet their Superannuation Guarantee (SG) obligations.
5.13 The Government announced in the 1997-98 Budget, that it would introduce measures that provide employees with greater choice as to the superannuation fund or RSA to which their superannuation is paid. As a result of extensive consultation with superannuation funds, industry associations and employer and employee representatives, the Government announced on 25 November 1997 a range of enhancements to the original Budget proposal. These enhancements are designed to significantly reduce the administrative burden on employers while ensuring the key objective of providing choice of fund to employees is achieved.
Explanation of the amendments
5.14 The explanation of the amendments is presented under the relevant heading which is in the following table:
| Heading | Paragraph reference |
|---|---|
| 1. Overview | 5.15 - 5.19 |
| 2. Calculating an SGC increase where the choice requirements are not met | 5.20 - 5.39 |
| (a) RSAs and superannuation funds, other than defined benefit schemes | 5.22 - 5.24 |
| (b) Defined benefit schemes | 5.25 - 5.27 |
| (c) No increase where contributions made to certain defined benefit schemes for certain members | 5.28 - 5.39 |
| 3. Complying with the choice requirements - overview | 5.40 - 5.42 |
| 4. Complying with the choice requirements - chosen funds and default funds | 5.43 - 5.72 |
| (a) Chosen funds and default funds | 5.43 - 5.50 |
| (b) Eligible choice funds | 5.51 - 5.55 |
| (c) The choice process | 5.56 - 5.72 |
| 5. Complying with the choice requirements - other | 5.73 - 5.86 |
| (a) AWAs and certified agreements | 5.73 |
| (b) Victorian State agreements | 5.74 5.75 |
| (c) State award employees | 5.76 |
| (d) Contributions under prescribed laws | 5.77 - 5.79 |
| (e) Unfunded public sector schemes | 5.80 - 5.81 |
| (f) Transitional rules - new employees and existing employees | 5.82 - 5.86 |
| 6. Other matters | 5.87 - 5.99 |
| (a) Earnings bases | 5.87 - 5.91 |
| (b) Overriding awards | 5.92 - 5.93 |
| (c) Employer liability | 5.94 - 5.96 |
| (d) Application to Commonwealth Departments | 5.97 - 5.98 |
| (e) Signposting | 5.99 |
| 7. Consequential amendments | 5.100 - 5.124 |
| (a) Retirement Savings Accounts Act 1997 | 5.100 -5.106 |
| (b) Superannuation Industry (Supervision) Act 1993 | 5.107 - 5.124 |
5.15 Broadly, the amendments provide that an employer's quarterly shortfall (if any) may be increased by an amount determined in accordance with new subsections 19(2A) and 19(2B) , where an employer makes a superannuation contribution in respect of an employee that does not comply with the choice of fund requirements. [Items 23 and 24]
5.16 Item 32 inserts new Part 3A into the SGAA which sets out the choice of fund requirements. Essentially, an employer will meet these requirements where they provide superannuation support or make contributions to a fund chosen by the employee in accordance with the provisions. Where there is no employee chosen fund at the time of the contribution, the employer may make a contribution to a default fund in order to satisfy the choice of fund requirements.
5.17 New Part 3A also provides the process to be followed where an employer is required to offer a choice of fund to employees. Employers may offer their employees a choice using a limited choice offer (ie. a minimum of 4 complying superannuation funds and RSAs must be offered) or an unlimited choice offer (ie. employer must accept any complying superannuation fund or RSA nominated by the employee).
5.18 The Bill also sets out the other circumstances where superannuation contributions are made in compliance with the choice of fund requirements, for example, contributions made in accordance with a workplace agreement [item 32; new subsection 32C] , and makes a number of other changes related to the introduction of choice.
5.19 The Bill, in new Part 3A , makes frequent reference to 'a fund'. A fund is defined for these purposes to mean a superannuation fund, a superannuation scheme and an RSA. [Item 32; new section 32CB] The term 'contribution to a fund' used in new section 32C also includes notional contributions to a defined benefit scheme (see new subsection 19(2B) and the note at the end of new section 32C ). Also, a holder of an RSA is taken to be a member [item 32; new subsection 32CB(2)] since the Retirement Savings Accounts Act 1997 refers to the term RSA holders, not members of an RSA. This explanation of the Bill should be read with these points in mind.
2. Calculating an SGC increase where choice requirements are not met
5.20 Item 24 inserts new subsections 19(2A) and 19(2B) into the SGAA. These are the key subsections as they potentially give rise to an increase in the amount of an employer's quarterly shortfall determined under subsection 19(2). New subsection 19(2A) may apply where an employer provides superannuation support for an employee to an RSA or a superannuation fund other than a defined benefit scheme. New subsection 19(2B) may apply where a defined benefit scheme is used.
5.21 It should be noted that an increase in an employer's quarterly shortfall will also lead to an increase in the interest component under subsection 31(1) and potentially an increase in the administration component under section 32.
(a) Increases in quarterly shortfall where contributions are made to an RSA or a superannuation fund other than a defined benefit scheme.
5.22 Where an employer makes a superannuation contribution in respect of an employee to an RSA or a superannuation fund other than a defined benefit scheme, and that contribution is not in compliance with the choice of fund requirements, new subsection 19(2A) may apply to increase the employer's quarterly shortfall. [Item 24; new subsection 19(2A)] The amount of any increase is calculated in accordance with a formula which is 25% of the shortfall that would apply if the contributions had not been paid. As expressed in new subsection 19(2A) the formula is:
25% * (Notional quarterly shortfall - Amount worked out under subsection 19(2))
5.23 The following examples outline the steps an employer will take in determining whether any increase in the quarterly shortfall arises.
5.24 Examples 1 to 4 assume the following information:
- •
- Lucille is the only employee of Roger. Lucille has chosen a superannuation fund in compliance with the choice of fund requirements set out in new Part 3A .
- •
- Lucille's salary is $36,000 (ie. $9,000 per quarter) which is also her notional earnings base.
- •
- The Superannuation Guarantee (SG) charge percentage for the year is 7%.
- •
- For simplicity, only the calculations for a particular quarter have been performed. All contributions are made to complying funds.
Roger does not make any superannuation contributions for the quarter on behalf of Lucille.
Step one: determine quarterly shortfall for employee
Since the prescribed SG charge percentage has not been reduced by any amount, the charge percentage remains at 7% (ie. 7% prescribed less 0% provided). The quarterly shortfall under section 19(2) in respect of Lucille is therefore $630 (7% of $9,000).
Step two: determine any increase in quarterly shortfall
As Roger does not make any contributions in respect of Lucille, new subsection 19(2A) does not apply.
Accordingly, Roger is not subject to any increase in the SGC he must pay under subsection 19(2).
Roger makes a $630 superannuation contribution for the quarter on behalf of Lucille. The contribution is not made to the fund chosen by Lucille.
Step one: determine quarterly shortfall for employee
Since the contribution represents 7% of Lucille's notional earnings base, the charge percentage is reduced to 0 (ie. 7% prescribed less 7% provided). The quarterly shortfall under section 19(2) in respect of Lucille is therefore $0.
Step two: determine any increase in quarterly shortfall
Since the contributions are not made in compliance with the choice of fund requirements, the quarterly shortfall under section 19(2) will be increased using the formula under new subsection 19(2A) (see paragraph 5.20 above). Note that the quarterly shortfalls can be increased from nil under new subsection 19(2D) .
The amount of the increase in SGC is determined as follows:
- •
- the notional quarterly shortfall is what the quarterly shortfall would be had Roger not made the contributions that did not comply with the choice of fund requirements (in this case, if Roger had not made any contributions), that is:
7% * $9,000 = $630 - •
- the amount worked out under subsection (2) is the amount calculated under step one above, that is $0.
- •
- using the formula in
new subsection 19(2A),
the increase in Roger's quarterly shortfall is:
25% * ($630 - $0) =$157.50
Roger makes a $360 superannuation contribution for the quarter to Lucille's chosen fund and $270 to another fund not chosen by Lucille.
Step one: determine quarterly shortfall for employee
The total contribution of $630 is 7% of Lucille's notional earnings base. Therefore, the quarterly shortfall worked out under subsection 19(2) is $0.
Step two: determine any increase in quarterly shortfall
$270 of the contributions (3% of Lucille's notional earnings base) do not comply with the choice of fund requirements. Under new subsection 19(2A) :
- •
- the notional quarterly shortfall is worked out on the basis that this contribution had not been made. If this were the case, the charge percentage would only be reduced to 3%. Therefore, the notional quarterly shortfall is:
3% * $9,000 = $270 - •
- the amount worked out under subsection (2) is $0.
- •
- using the formula in
new subsection 19(2A),
the increase in Roger's quarterly shortfall is:
25% * ($270 - $0) = $67.50
Roger makes a $630 superannuation contribution for the quarter to Lucille's chosen fund and $270 to another fund not chosen by Lucille.
Step one: determine quarterly shortfall for employee
The total contribution of $900 is 10% of Lucille's notional earnings base. Roger's charge percentage is accordingly reduced to 0%. Therefore, the quarterly shortfall worked out under subsection 19(2) is $0.
Step two: determine any increase in quarterly shortfall
$270 of the contributions (3% of Lucille's notional earnings base) do not comply with the choice of fund requirements. However, as Roger has met the required SG with contributions that satisfy the choice of fund requirements, there is no increase in the quarterly shortfall.
That is, using the formula under new subsection 19(2A) :
- •
- the notional quarterly shortfall is worked out on the basis that the $270 contribution had not been made. If this were the case, Roger's charge percentage would still be reduced to 0% as Roger has contributed the prescribed amount to Lucille's chosen fund. Therefore, the notional quarterly shortfall is:
0% * $9,000 = $0 - •
- the amount worked out under subsection (2) is $0;
- •
- using the formula in
new subsection 19(2A),
the increase in Roger's quarterly shortfall is:
25$ * ($0 - $0) = $0
(b) Increases in quarterly shortfall where contributions are made to a defined benefit scheme
5.25 Subject to paragraphs 5.28 to 5.39 below, new subsection 19(2B) may apply where an employer provides superannuation support in respect of an employee through a defined benefit scheme. If an employer currently provides superannuation support on behalf of employees to a defined benefit scheme, there must be a benefit certificate (covering the whole or part of the contribution period) specifying a notional employer contribution rate for a class of employees in the scheme or schemes to which the employer is providing support in order for the employer to meet his or her SG obligations. [Item 24; new subsection 19(2B)]
5.26 Employers who use such schemes are still required to provide superannuation support in compliance with the choice of fund requirements. This is tested by reference to notional contributions to the defined benefit scheme. If on any day in the quarter the notional contributions to the scheme would not have been in accordance with the choice of fund requirements, the employer may be liable to extra SGC, calculated as:
25% * (notional quarterly shortfall - Amount worked out under subsection 19(2)) * (Number of breach of condition days / Relevant days in quarter)
5.27 Examples 5 and 6 assume the following information:
- •
- Ben is an employee of IQ Pty Ltd whose salary and wages for the quarter is $10,000.
- •
- Ben is an employee for the whole of the quarter and the number of days in the quarter is 90 days.
- •
- The charge percentage is 7%.
- •
- IQ provides superannuation support for all of its employees through a defined benefit scheme. IQ has a benefit certificate specifying a notional employer contribution rate of 7% which has effect for the quarter.
- •
- Ben is a member of the defined benefit scheme for the whole of the quarter (ie. 90 days).
- •
- Ben chooses a different fund in compliance with the choice of fund requirements set out in new Part 3A , which becomes Ben's chosen fund 60 days into the quarter (ie. there are 30 days which are in breach of the choice of fund requirements).
Step one: determine quarterly shortfall for employee
Since IQ has a benefit certificate covering the whole of the quarter, the quarterly shortfall worked out under subsection 19(2) is $0.
Step two: determine any increase in quarterly shortfall
Since there is at least one day in the relevant period which is not in accordance with the choice of fund requirements (in actual fact, there are 30 days in breach of the choice of fund requirements), the quarterly shortfall under section 19(2) will be increased using the formula provided at paragraph 5.26 above.
- •
- the notional quarterly shortfall is the amount that would have been worked out under subsection 19(2) if no reduction were made under subsection 22(2) in respect of the scheme. That is, the formula initially assumes that all of the notional contributions to the scheme are not in compliance with the employee's choice of fund. In this case, the charge percentage would remain as 7%, giving a notional quarterly shortfall of $700.
- •
- the number of breach of conditions days is 30 days.
- •
- the number of relevant days in the quarter is 90 days (note, that in this case, the value of B in the formula in subsection 22(2) is1, as the scheme membership period equals the employment period for the quarter)
- •
- using the formula in
new subsection 19(2B),
the increase in IQ's quarterly shortfall is:
25% * ($700 - $0) * (30/90)
25% * $233.33 = $58.33
Assume the same information as in example 5 except:
- •
- Ben commenced employment at the beginning of the quarter, and becomes a member of the defined benefit scheme after 30 days, (and this membership continues for the remainder of the quarter)
- •
- Ben has a chosen fund, in compliance with the choice of fund requirements, 70 days into the quarter (ie. 20 days will be in breach of the choice of fund requirements).
Step one: determine quarterly shortfall for employee
In this case, IQ is not covered by the benefit certificate in respect of Ben for the first 30 days of the quarter and is covered for the remaining 60 days of the quarter. Under subsection 22(2), the employment period (ie. 90 days in the quarter) is greater than the scheme membership period (ie. 60 days), which means the reduction in the charge percentage is:
A * B
= 7% * (60/90) = 4.67%
Therefore, IQ's quarterly shortfall worked out under subsection 19(2), is 2.33% (ie. 7% - 4.67%) multiplied by Ben's quarterly salary and wages ($10,000), which equals $233.33.
Step two: determine any increase in quarterly shortfall
Since there is at least one day in the quarter which is not in accordance with the choice of fund requirements (actually there are 20 days in breach in this case), the quarterly shortfall under section 19(2) will be increased using the formula provided at paragraph 5.26 above.
- •
- the notional quarterly shortfall in this example is $700 (for the same reasons given in example 5, that is, assuming all of the notional contributions to the scheme are not in compliance with the employee's choice of fund. Therefore, the charge percentage would remain as 7%, giving a notional quarterly shortfall of $700).
- •
- the number of breach of conditions days is 20 days.
- •
- the number of relevant days in the quarter is 60 days. (note, that in this case, the value of B in the formula in subsection 22(2) is .333 (see above)).
- •
- using the formula in
new subsection 19(2B),
the increase in IQ's quarterly shortfall is:
25% * ($700 - $233.33) * (20/60)
= 25% * $155.66 = $38.91
(c) No quarterly shortfall increase where contributions made to certain defined benefit schemes for certain members
5.28 New subsection 19(2B) will not apply to increase the quarterly shortfall of an employer, in respect of an employee and a scheme, where new section 19A is satisfied. [Item 24; new paragraph 19(2B)(c) & Item25; new section 19A] There are two circumstances in which new section 19A will apply. These are:
- •
- in respect of existing employees, where a defined benefit scheme is in surplus (see paragraphs 5.31 to 5.37 below); and
- •
- where a defined benefit member of a defined benefit superannuation scheme has achieved their maximum benefit accrual (see paragraphs 5.38 and 5.39 below).
5.29 Item 10 inserts a definition of defined benefit superannuation scheme into the Act.
5.30 Item 11 inserts a definition of defined benefit member into section 6 of the Act. A defined benefit member is a person whose superannuation benefit is defined by reference to either of the following:
- •
- the amount of the persons salary at retirement, at an earlier date or the persons salary as averaged over a period before retirement. An example of the average system is where the salary is taken to be the highest average salary for a year over the last 3 years before retirement; or
- •
- a specified amount.
(i) Defined benefit schemes in surplus
5.31 Where an employee of an employer is a member of a defined benefit scheme the application of the SG law is determined by reference to a benefit certificate provided by an actuary in respect of the scheme. Whether an employer is required to in fact make contributions to the scheme during a period will depend on the solvency of the scheme. The solvency of a scheme is also determined by an actuary. Where the scheme is in surplus (that is, broadly, that the assets of the scheme exceeds its liabilities) and the employer is not required to make contributions for a period, the employer is said to be enjoying a 'contributions holiday'.
5.32 A defined benefit scheme may have a surplus because, for example, additional superannuation contributions have been made by the employer or through the achievement of higher than expected investment returns.
5.33 A defined benefit scheme will be considered to be in surplus, for the purpose of effectively exempting an employer from the choice of fund requirements for a quarter, where the following conditions apply:
- •
- an actuary has provided a certificate stating that the employer is not required to make contributions for the quarter; and
- •
- an actuary has provided a certificate stating that at all times from 1 July 2000 until the end of the quarter that the assets of the scheme are, and will be equal to or greater than 110% of the greater of the schemes liability in respect of vested benefits and the schemes accrued liability. This certificate is to be updated at least every 15 months. [Item 25; new subsection 19A(2)]
5.34 The term scheme's liability in respect of vested benefits is defined to mean the value, at a particular time, of benefits payable from the scheme if all the members entitled to those benefits terminated their employment with the employer at that time. The term schemes accrued actuarial liabilities is defined to mean the total value, at a particular time, of the future benefit entitlements of members in respect of their membership up to that time. The calculation of the schemes accrued actuarial liabilities is to be performed by an actuary. [Item 25; new subsection 19A(4)]
5.35 The requirement that an actuary certify that the schemes assets are equal to or greater than 110% of the greater of the schemes liabilities in respect of vested benefits and the schemes accrued actuarial liabilities is designed to provide a buffer against short term decreases in the value of the assets backing the vested benefits and to ensure that the scheme is truly in surplus.
5.36 The effective exemption from the choice of fund provisions only operates in respect of existing employees who are members of a defined benefit scheme immediately before 1 July 2000 and who continue that membership. [Item 25; new paragraphs 19A(2)(a) and (b)] (An existing employee is a person who was an employee of the employer immediately before 1 July 1998 and has not ceased to be an employee of that employer.) This ensures that the exemption only applies in respect of employees who do not have to be offered choice by their employer until 1 July 2000. Employers of new employees (those who commence with the employer on or after 1 July 1998) will not benefit from the exemption even if the new employee subsequently joins a defined benefit scheme that is in surplus.
5.37 Where a scheme is in surplus for all quarters after 1 July 2000 the employer remains exempt from the choice of fund provisions until the schemes surplus is extinguished. Where the surplus ceases to exist the employer will have to offer choice to its employees.
5.38 Where a defined benefit scheme has defined benefit members who have reached their maximum benefit accrual, employers of those members are effectively exempt from making further superannuation contributions for those employees, for the period a benefit certificate (see section 10 of the Act) remains in effect for the scheme. In these circumstances the employer will be exempt from the proposed choice of fund legislation in relation to those employees.
5.39 An employee will be considered to have reached his or her maximum benefit accrual if after the start of the quarter the defined benefit that has accrued to the employee will not increase except as a result of the following changes:
- •
- an increase in the employees remuneration (eg, a pay rise);
- •
- increases in the employees benefit due to investment earnings of the fund;
- •
- increases in the benefit by virtue of indexation;
- •
- any other way that is prescribed.
[Item 25; new subsection 19A(3)]
3. Complying with the choice requirements - overview
5.40 Contributions made by employers for the benefit of employees must be in accordance with the choice of fund requirements for employers to fully meet their SG obligations. [Item 32; new section 32C]
5.41 It should be noted that while new section 32C refers to 'contributions made', it also covers support provided through defined benefit schemes, including unfunded ones. This is because new subsection 19(2B) (see above), which deals with defined benefit schemes, refers to notional contributions to the scheme. It is these notional contributions, as well as actual contributions to superannuation funds, that are referred to in new section 32C (see note at end of new section 32C ).
5.42 The following contributions are made in compliance with the choice of fund requirements:
- (i)
- contributions to a chosen fund [item 32; new paragraph 32C(1)(a)] or a default fund [item 32; new paragraph 32C(1)(b)] ; or
- (ii)
- contributions to unfunded public sector arrangements (other than contributions in respect of 'Commonwealth employees' (defined in subsection 6(1) - see item 7 ) who are members of the Commonwealth Superannuation Scheme ('CSS' - defined in subsection 6(1) - see item 9 ) or the Public Sector Superannuation Scheme ('PSS' - defined in subsection 6(1) - see item 16 ) - see further (viii) below) [item 32; new paragraph 32C(1)(c)] ; or
- (iii)
- contributions made under, or in accordance with, an Australian Workplace Agreement (AWA) or a certified agreement under the Workplace Relations Act 1996, or a certified agreement under the Industrial Relations Act 1988 [item 32; new subsection 32C(2 )] or made under certain Victorian agreements [item 32; new subsection 32C(2A)] ; or
- (iv)
- contributions made in respect of an employee who is employed under a 'State industrial award' (defined in subsection 6(1) - see item 20 ) [item 32; new subsection 32C(3)] ; or
- (v)
- contributions made under prescribed laws [item 32; new subsection 32C(3A)] ; or
- (vi)
- contributions made before 1 July 1998 [item 32; new paragraph 32C(4)(a)] ; or
- (vii)
- contributions made before 1 July 2000 in respect of existing employees as at 1 July 1998 who continue to be employed [item 32; new paragraph 32C(4)(b)] . (The effect of this point and the previous one is that the choice of fund requirements effectively apply to new employees from 1 July 1998, and existing employees from 1 July 2000.); or
- (viii)
- contributions made to the CSS or PSS before 1 July 2000 [item 32; new paragraph 32C(4)(c)] . (Note that contributions made for State and Territory employees who are members of the CSS or PSS would be covered under (ii) above after 1 July 2000.); or
- (ix)
- contributions made in respect of existing employees (see (vii) above) where the employee ceases employment before 1 July 2000 and the contribution is made after the employee ceases employment but is in respect of the employment [item 32; new subsection 32C(5)] .
4. Complying with the choice requirements - chosen funds and default funds
(a) Chosen funds and default funds
5.43 Generally speaking, leaving aside:
- •
- employees who are covered by workplace agreements;
- •
- employees who are members of an 'unfunded public sector scheme' (defined in subsection 6(1) - see item 22 );
- •
- employees who are employed under a State award;
- •
- contributions for the benefit of an employee to a particular fund under a prescribed law; and
- •
- transitional issues.
an employer will need to make contributions on behalf of an employee to either a chosen fund or a default fund. If superannuation support is provided at a time when there is neither a chosen fund nor a default fund for the employee, the employer will face an extra SGC liability.
5.44 The Bill sets out what the chosen fund of an employee will be [item 32; new sections 32D and 32E] and when a fund ceases to be a chosen fund [item 32; new section 32F] .
5.45 The key rules about chosen funds are:
- •
- only eligible choice funds may become chosen funds of an employee (see paragraphs 5.51 to 5.55);
- •
- a fund is a chosen fund if the employee has selected the fund in accordance with the choice process set out in new Division 5 (see paragraphs 5.56 to 5.72); [Item 32; new subsection 32D(1)]
- •
- a fund becomes a chosen fund 2 months after the employee provides the employer with written notice in accordance with new section 32Q . [Item 32; new subsection 32D(2)] However, an employer may agree for a chosen fund to start earlier than this time;
- •
- a fund becomes a chosen fund 2 months after an employer has accepted a written nomination from an employee for a particular fund to become the employee's chosen fund. [Item 32; new subsection 32E(2)] However, an employer may agree for a chosen fund to start earlier than this time;
- •
- a fund ceases to be a chosen fund if there is another fund that is a chosen fund for the employee and the employee has given the employer written notice stating that the old fund is no longer a chosen fund; [Item 32; new subsection 32F(1)]
- •
- a fund ceases to be a chosen fund if the employee requests the employer to offer choice, and the employer does not do so by the specified time; [Item 32; new subsection 32F(2)]
- •
- a fund ceases to be a chosen fund where the employer can no longer contribute to a chosen fund; [Item 32; new subsection 32F(3)]
- •
- a fund ceases to be a chosen fund if the fund ceases to be an eligible choice fund for the employer (see paragraphs 5.54 and 5.55). [Item 32; new subsection 32F(4)]
5.46 The Bill also sets out the times when there will be a default fund for an employee. [Item 32; new section 32G] In broad terms, these are:
- •
- during such times as are reasonable to allow the choice process to occur and the employee to choose a fund; and [Item 32; new subsections 32G(1), (2), (4) and (5)]
- •
- when an employee does not have a chosen fund and does not choose one when given the chance. [Item 32; new subsection 32G(3)]
5.47 Having established the times when an employee has a default fund, the Bill sets out the particular fund or funds that are or can be the default funds of the employee. These are either:
- •
- the last fund or funds (which are eligible choice funds for the employer) to which the employer contributed in compliance with the choice of fund requirements and to which the employer is still able to contribute on behalf of the employee, not being such a fund to which the employer contributed before the last chosen fund of the employee. [Item 32; new subsections 32H(1) and (4)] This can include defined benefit schemes. For existing employees, this rule will generally set the default fund as the fund to which the employer currently contributes for the employee; or
- •
- if the first point does not apply, any eligible choice fund selected by the employer and set out in the offer of choice to the employee. [Item 32; new subsection 32H(2)]
5.48 A fund that is a default fund of the employee under new section 32H will cease to be a default fund if the employer is no longer able to contribute to the fund on behalf of the employee [item 32; new subsection 32H(3)] or if the fund ceases to be an eligible choice fund [Item 32; new subsection 32H(3A)] . In these cases, the employee still has a default fund under new subsection 32G(5) for a period that allows the employer time to offer that employee a choice (see also new subsection 32K(4) ). The particular fund or funds that are default funds during this period are determined by the rules in paragraph 5.47 above.
5.49 It may be noted from the above that a chosen fund for an employee may become a default fund. This could occur, for example, where a chosen fund ceases under new subsection 32F(2) (ie. the employer did not give the employee an offer on time). The chosen fund becomes the default fund because it is the last fund to which the employer contributed in accordance with the choice requirements (see paragraph 5.47 above). This mechanism ensures an employer cannot alter the fund to which contributions are made in compliance with the choice requirements without the consent of the employee.
5.50 It may also be noted that the chosen fund and default fund provisions complement each other. For example:
- •
- as a chosen fund does not commence until 2 months after the employee chooses it [item 32; new subsections 32D(2) and 32E(2)] , there is a default fund for that period [item 32; new subsections 32G(2) and 32G(4)] ;
- •
- when a chosen fund ceases without there being another chosen fund [item 32; new subsections 32F(2), (3) and (4)] , there is a default fund if the employer offers choice within the required times [item 32; new subsections 32G(2) and 32G(5)] . While a chosen fund ceases under new subsection 32F(3) when it is impossible for the employer to contribute to it on behalf of the employee, a default fund does not commence under new subsection 32G(5) until the employer becomes aware the chosen fund has ceased (which may be a later time). That 'gap' represents a period when the employer is not aware there is not a chosen fund, so that there is no need for a default fund (the employer should not be trying to contribute to any fund other than the chosen one).
- •
- On 1 July 1999, Paula starts employment with MagpieCo.
- •
- On 24 July 1999, MagpieCo makes a limited choice offer (see paragraphs 5.63 and 5.64 below) to Paula.
- •
- On 10 August 1999, Paula advises MagpieCo in writing that she wishes to choose Lavender Superannuation Fund, one of the funds nominated by MagpieCo.
- •
- The default fund is Tulip Superannuation Fund.
| Period | Is there a fund that complies with choice? | Type of fund | Name of fund | See new... |
|---|---|---|---|---|
| 1 Jul 1999-23 Jul 1999 | Yes | Default | Tulip | subsection 32G(1) |
| 24 Jul 1999-9 Aug 1999 | Yes | Default | Tulip | subparagraph 32G(2)(b)(i) |
| 10 Aug 1999- 9 Oct 1999 | Yes | Default* | Tulip | subparagraph 32G(2)(b)(ii) |
| 10 Oct 1999- | Yes | Chosen | Lavender | section 32D |
| * It may be noted that Lavender may become the chosen fund before 10 October 1999 if MagpieCo so chooses. | ||||
- •
- On 1 February 2000, Paula requests MagpieCo to offer her another choice of fund. MagpieCo ignores this request.
| Period | Is there a fund that complies with choice? | Type of fund | Name of fund | See new... |
|---|---|---|---|---|
| 1 Feb 2000 - | Yes | Chosen | Lavender | subsection 32K(2) |
In these circumstances, MagpieCo did not have to offer a choice of fund on Paula's request, as Paula had been offered a choice within the previous 12 months - see new subsection 32K(2) . As long as MagpieCo continues to contribute to Lavender, they will be complying with the choice of fund requirements. New subsection 32F(2) does not operate to cease the chosen fund, as the request is taken, under new subsection 32K(2) , never to have been made.
- •
- On 30 July 2000, Paula again requests MagpieCo to offer her a choice of fund.
- •
- As of 26 August 2000, MagpieCo has not made Paula an offer.
| Period | Is there a fund that complies with choice? | Type of fund | Name of fund | See new... |
|---|---|---|---|---|
| 30 Jul 2000-27 Aug 2000 | Yes | Chosen | Lavender | subsection 32F(2) |
| 27 Aug 2000- | No | - | - | subsection 32F(2) |
This time, Paula's request is over 12 months since the previous offer. Under new subsection 32K(2), MagpieCo must offer a choice within 28 days of Paula's request. New subsection 32F(2) provides that there is no longer a chosen fund when those 28 days pass without an offer from MagpieCo. As there is no default fund in these circumstances, any contribution made by MagpieCo in respect of the period after 27 August 2000 will not be made in accordance with the choice requirements.
- •
- On 1 September 2000, MagpieCo offers Paula an unlimited choice.
- •
- On 12 September 2000, Paula chooses Jasmine Superannuation Fund.
| Period | Is there a fund that complies with choice? | Type of fund | Name of fund | See new... |
|---|---|---|---|---|
| 1 Sept 2000-12 Nov 2000 | Yes | Default | Lavender | subsections 32G(2) & 32H(1) |
| 12 Nov 2000- | Yes | Chosen | Jasmine | section 32D |
Lavender is the default fund after the offer is made and in the two month period after Paula makes her choice because MagpieCo previously contributed to that fund in compliance with the choice of fund requirements. Assuming it is still possible for MagpieCo to contribute to Lavender for Paula, new subsection 32H(1) provides that it is the default fund. (b) Eligible choice funds
5.51 A fund is an eligible choice fund at a particular time if:
- •
- it is a complying superannuation fund at that time; or
- •
- it is a complying superannuation scheme at that time; or
- •
- it is an RSA; or
- •
- at that time a benefit certificate is conclusively presumed under section 24 of the Act to be a certificate in relation to a complying superannuation scheme (see paragraph 5.53 below); or
- •
- contributions made by the employer to the fund at that time are conclusively presumed under section 25 of the Act to be contributions to a complying superannuation scheme (see paragraph 5.53 below).
5.52 Only eligible choice funds may become chosen funds of an employee. [Item 32; new section 32QA, new subsection 32N(1) and new paragraph 32P(1)(a)] Similarly, only eligible choice funds may be default funds. [Item 32; new paragraph 32H(1)(a) and subsection 32H(2)]
5.53 If an employer is unsure about the status of a fund selected by an employee under an unlimited choice offer the employer may seek from the employee a statement provided by the trustee of the kind referred to in section 24 and 25 of the SGAA. These statements broadly attest that the scheme:
- •
- is a resident regulated superannuation fund; and
- •
- is not subject to a direction by the Insurance and Superannuation Commissioner not to accept contributions by an employer-sponsor (see section 63 of the Superannuation Industry (Supervision) Act 1993 (SIS Act)).
5.54 If the employee does not provide the statement within 28 days then the fund selected by the employee ceases to be an eligible choice fund. [Item 32; new subsection 32CA(2)] The employer is then able to contribute to a default fund for the employee to satisfy the choice of fund requirements. [Item 32; new subsection 32G(6)]
5.55 More broadly, a fund ceases to be a chosen fund or a default fund if the fund ceases to be an eligible choice fund. [Item 32; new subsections 32F(4) and 32H(3A)] An employer must offer a choice of funds to an employee within 28 days of becoming aware that a fund has ceased to be an eligible choice fund, except where the fund ceases to be a chosen fund because of new subsection 32CA(2) (see paragraph 5.54 above). [Item 32; new subsections 32K(3) and (4)] New subsection 32G(5) creates a default fund for 28 days after the employer becomes aware a fund is not an eligible choice fund, to give the employer time to make the offer.
When does an employer have to offer a choice?
5.56 The rules outlined above about the times when there is a chosen fund or a default fund effectively dictate when an employer must make an offer of choice to an employee. These times are summarised in new section 32K . The requirements set out in this section are obligations for employers only in the sense that they set out what must be done by the employer to avoid having a period when there is neither a chosen fund nor a default fund for an employee. [Item 32; new section 32J] If an employer makes a contribution during such a period, the employer may be liable to pay extra SGC.
5.57 The rules about when an employer must offer an employee choice correspond with the rules about when there is a chosen fund or a default fund:
- •
- the requirement to offer choice within 28 days of an employee first commencing employment [item 32; new subsection 32K(1)] corresponds with there being a default fund during that 28 day period [item 32; new subsection 32G(1)] ;
- •
- the requirement to offer choice within 28 days of an employee request [item 32; new subsection 32K(2)] corresponds with when a chosen fund ceases and when a default fund ceases because of a request made by the employee [item 32; new subsections 32F(2) and 32G(3)] . Note that an employer is not required to offer a choice where an employee's request is made within 12 months from the time of the last offer made by the employer or from the time the employee and employer entered into an informal agreement under new paragraph 32E(1) [item 32; new subsection 32K(2)] ;
- •
- the requirement to offer choice within 28 days of an employer becoming aware that he or she can no longer contribute to a chosen fund [item 32; new paragraph 32K(3)(a)] corresponds with when a chosen fund ceases for this reason [item 32; new subsection 32F(3)] (see also paragraph 5.50 above);
- •
- the requirement to offer choice within 28 days of an employer becoming aware that a fund ceases to be an eligible choice fund [item 32; new paragraph 32K(3)(b)] corresponds with when a chosen fund ceases for this reason [item 32; new subsection 32F(4)] ;
- •
- the requirement to offer choice within 28 days of the employer becoming aware that he or she can no longer contribute to a default fund [item 32; new paragraph 32K(4)(a)] corresponds with when a default fund ceases for this reason [item 32; new subsection 32H(3)] ; and
- •
- the requirement to offer choice within 28 days of the employer becoming aware that he or she can no longer contribute to a default fund [item 32; new paragraph 32K(4)(b)] corresponds with when a default fund ceases for this reason [item 32; new subsection 32H(3A] .
5.58 In addition to these requirements, an employer may also offer a choice of funds at any time. [Item 32; new subsection 32K(5)] This allows, for example, an employer to offer choice of funds to existing employees in preparation for 1 July 2000.
5.59 When an employer is required to offer an employee a choice of funds, the next step is to decide how that choice must be offered. Employers may use one of two options to do this: a limited choice offer or an unlimited choice offer . The relevant provisions are contained in new sections 32L to 32QA .
5.60 It may be noted that at any time an employee may propose a fund as a chosen fund and the employer may accept that fund as a chosen fund for the employee. [Item 32; new section 32E] Where this occurs, there will be no need for the employer to proceed with an offer.
5.61 It may also be noted that the choice an employer has between a limited choice offer and an unlimited choice offer applies in respect of each employee. An employer may use the one method for all employees, or one method for some and another method for others.
5.62 Further, the choice of fund requirements must be met separately by each employer of an employee. Therefore, a choice made by an employee under an offer made by one employer will not be the chosen fund for that employee in respect of another employer. [Item 32; new section 32R]
5.63 Under this option, an employee may select a chosen fund from a choice of at least four eligible choice funds. [Item 32; new section 32M and new subsection 32QA(1)] Each fund or RSA offered must represent a separate fund or RSA and the employee must be entitled to become a member of each of them. There must be included in the offer:
- •
- at least one 'public offer superannuation fund' (defined in subsection 6(1) - see item 17); [Item 32; new subsection 32N(3)]
- •
- at least one RSA or 'capital guaranteed fund' (defined in subsection 6(1) - see item 6 ); [Item 32; new subsection 32N(4)]
- •
- if there is one or more of the following kinds of funds at least one of those funds must be offered:
- -
- a 'standard employer-sponsored fund' (defined in subsection 6(1) - see item 19 ) of which the employer is a 'standard employer sponsor' (defined in subsection 6(1) - see item 18) and of which the employee is eligible to be a member; or
- -
- an 'exempt public sector superannuation scheme' (defined in subsection 6(1) - see item 13 ) of which the employee is eligible to be a member as a result of the employee's employment with the employer.
- [Item 32; new subsection 32Q(5)]
- •
- if there is one or more 'industry-based superannuation funds' (defined in subsection 6(1) - see item 15 ) of which the employee is eligible to be a member - at least one of those. [Item 32; new subsection 32Q(6)]
5.64 If a particular fund or RSA falls into more than one of the above categories, it may be used to satisfy any one of those categories. The employer may choose which. [Item 32; new subsection 32N(7)]
5.65 Under this option, an employee may select any eligible choice fund as his or her chosen fund. [Item 32; new section 32P and new subsection 32QA(2)]
5.66 It may be noted that if an employer is unsure about the status of a fund selected by an employee under an unlimited choice offer, the employer may seek from the employee a statement provided by the fund trustee of the kind referred to in section 24 and 25 of the SGAA. (See paragraphs 5.53 and 5.54 which deal with these requirements.)
What information must be included in an offer?
5.67 An offer must be in writing and include certain information depending on the option chosen by the employer. The requirements are set out in new section 32M for a limited choice offer and new section 32P for an unlimited choice offer.
5.68 Regulations will be made to specify the detailed information about funds to be included in offers to employees (eg. key feature statements). In addition, the regulations may provide that additional information be made available to employees, in which case the offer must state when and where the information may be accessed by the employee. [ Item 32; new paragraph 32M(1)(e) and new subsection 32M(2) for limited choice offers, new paragraph 32P(1)(e) and new subsection 32P(2) for unlimited choice offers]
When and how must an employee respond to an offer?
5.69 Employees are provided with 28 days to make a choice. The choice must be in writing. Choices made after 28 days are not effective unless the employer agrees to accept it. [Item 32; new section 32Q]
5.70 Where an employee receives a limited choice offer, the fund chosen must be one of the funds offered. [Item 32; new subsection 32QA(1)]
5.71 Where an employee receives an unlimited choice offer, the fund chosen must be an eligible choice fund for the employer at the time the choice is made. [Item 32; new subsection 32QA(2)]
5.72 If the employer requests from an employee a statement of the kind referred to in section 24 and 25 of the SGAA, the employee will need to approach the trustee of the fund to obtain the statement. If the employee does not provide the employer with the statement within 28 days, the fund selected by the employee ceases to be an eligible choice fund. [Item 32; new subsection 32CA(2) and new section 32QB] The employer is then able to contribute to a default fund for the employee to satisfy the choice of fund requirements. [Item 32; new subsection 32G(6)]
5. Complying with the choice requirements - other
(a) AWAs and certified agreements
5.73 Where an employer makes contributions under, or in accordance with, an Australian Workplace Agreement (AWA) or a certified agreement, new subsection 32C(2) 4 provides that those contributions are made in compliance with the choice of fund requirements. [Item 32; new subsection 32C(2)] The AWA must be made under the Workplace Relations Act 1996, and the certified agreement must be made under either the Workplace Relations Act 1996 or the Industrial Relations Act 1988.
(b) Victorian State agreements
5.74 There are a number of Victorian State individual and workplace agreements that were in force prior to the referral of Victoria's industrial relations power to the Commonwealth. These agreements are now preserved under the Commonwealth's Workplace Relations Act 1996, and are in essence no different to other workplace agreements made under that Act.
5.75 Contributions by an employer to a fund will satisfy the choice of fund requirements where that contribution is made under or in accordance with an employment agreement that was in force under the Employee Relations Act 1992 (Vic) and which continues by virtue of section 515 of the Workplace Relations Act 1996. [Item 32; new subsection 32C(2A)]
5.76 Contributions made by an employer in respect of employees employed under a State industrial award (defined in subsection 6(1) - see generally items 8, 14, 20 and 21 ) are made in compliance with the choice of fund requirements. [Item 32; new subsection 32C(3)] These employers may be required to comply with any relevant State choice of fund requirements.
(d) Contributions under prescribed laws
5.77 In some cases an employer is obliged under a law to make contributions for the benefit of an employee to a particular superannuation fund. In these cases, the employer's contributions may be taken to be made in compliance with the choice of fund requirements because the fund to which the contributions are made is an unfunded public sector scheme ( new paragraph 32C(1)(c) ) or the employee is employed under a State industrial award ( new subsection 32C(3) ).
5.78 However, if the relevant scheme is not an unfunded public sector scheme and the employee is not employed under a State award, the employer faces the problem of having to satisfy both the choice of fund requirements and the terms of the relevant law. This could mean that the employer would need to contribute twice the minimum level of superannuation contributions in order to avoid any SGC.
5.79 Regulations will be made which prescribe laws which cause this kind of difficulty for employers. Contributions made under a prescribed law will be taken to be made in compliance with the choice of fund requirements. The use of regulations allows a flexible approach under which each case where a law potentially causes difficulties may be considered on its merits, and be prescribed if appropriate. [Item 32; new subsection 32C(3A]
(e) Unfunded public sector schemes
5.80 Generally, where employers provide superannuation support on behalf of employees through unfunded public sector schemes (defined in subsection 6(1) - see item 22 ), any contributions made (or notionally made - refer to paragraph 1.44) are in compliance with the choice of fund requirements. However, this rule does not apply in respect of Commonwealth employees who are members of the CSS or the PSS. [Item 32; new paragraph 32C(1)(c)]
5.81 Contributions made to the CSS or PSS before 1 July 2000 are also in compliance with the choice of fund requirements. [Item 32; new paragraph 32C(4)(c)] This means that choice must be offered to Commonwealth members of the CSS and the PSS from 1 July 2000. However, contributions made for Territory employee members of the CSS or PSS would continue to be in compliance with the choice of fund requirements under new paragraph 32C(1)(c) (see paragraph 5.80 above).
(f) Transitional rules - new employees and existing employees
5.82 Contributions made to a fund before 1 July 1999 are in compliance with the choice of fund requirements. [Item 32; new paragraph 32C(4)(a)]
5.83 Contributions made in respect of employees who commence employment on or after 1 July 1999 (ie. new employees) must be made in compliance with the choice of fund requirements, as set out in new Part 3A .
5.84 For employees who were employed by an employer immediately before 1 July 1999 and who have not ceased to be employed, contributions made to a fund before 1 July 2000 are also made in compliance with the choice of fund requirements. [Item 32; new paragraph 32C(4)(b)] This means that employers will need to act before 1 July 2000 to ensure there is a chosen fund or a default fund for these employees at that time.
5.85 Contributions made for employees who were employed before 1 July 1999 but who cease to be employed before 1 July 2000 will also be made in compliance with the choice of fund requirements if the contribution is made before the employee ceases employment. [Item 32; new paragraph 32C(4)(b)]
5.86 If a contribution is made after the employee ceased employment but is nevertheless made in respect of the employment, the contribution is taken to be made immediately before the employee ceased employment, and so could be in compliance with the choice of fund requirements under new paragraph 32C(6)(b) . [Item 32; new subsection 32C(5)]
5.87 The minimum level of contributions required under the SGAA is calculated as a percentage of each employee's notional earnings base. Generally, an employee's notional earnings base will be one of the following figures:
- •
- ordinary time earnings (OTE), which is basically the employee's earnings for their ordinary hours of work; or
- •
- a measure of the employee's earnings used in an applicable authority (this is defined under subsection 13(5) of the SGAA as an award, a law, an occupational superannuation agreement or a superannuation scheme) under which the employer's superannuation obligation is determined. This earnings base is only available where the employer was contributing for an employee in accordance with the award, or under a like authority since before 21 August 1991; or
- •
- if the employer provides superannuation support in accordance with an award, then the award earnings base.
5.88 Compliance with the choice of fund requirements could mean that an employer faces a higher notional earnings base in respect of an employee, and accordingly a higher cost in meeting their SG obligations. This would occur, for example, where an employer currently contributes on behalf of an employee under an award to a particular fund named in the award, but under choice is required to contribute for the employee to another fund that the employee chooses.
5.89 To prevent this occurring, the Bill allows an employer to use an existing notional earnings base for an employee where it is reasonable to assume, if the choice of fund requirements did not apply, the employer would instead have contributed to another fund which gives rise to the existing notional earnings base. [Item 32; new section 32T]
5.90 For example, where an employer currently contributes for an employee to a particular fund in accordance with an award, it would be reasonable to assume the employer would have continued to contribute to that fund in the absence of the choice of fund requirements. It would also be reasonable to assume the employer would have contributed in accordance with the award for a new employee, where that employer would have been required to make contributions to a particular fund on behalf of that employee in accordance with the award.
5.91 The 'other fund' in respect of which it is reasonable to assume contributions would have been made, or support provided, if the choice of fund requirements did not apply, may be either a superannuation fund that is not a defined benefit scheme [item 32; new subsection 32T(1)] or a defined benefit scheme [item 32; new subsection 32T(2)] . The preserved notional earnings bases are, however, only used where an employer is contributing on behalf of an employee to a superannuation fund that is not a defined benefit scheme, since it is only in these cases that the notional earnings base is directly used in reducing the SG charge percentage. [Item 32; new subsections 32T(3) and (4)] The section only applies if the employer is contributing to a chosen fund or a default fund. It does not apply if contributions are made under a workplace agreement.
5.92 The Bill makes a requirement in a Federal award to make contributions on behalf of an employee to a superannuation fund unenforceable to the extent that the employer instead makes the contributions to another fund in compliance with the choice of fund requirements. [Item 32; new section 32U] Employers of employees under Federal awards are accordingly free to comply with the choice of fund requirements without facing action for non-compliance with an award (note that employees under State awards are effectively excluded from the choice of fund requirements - see paragraph 5.42).
5.93 The provision overrides Federal awards only to the extent a contribution is made to another fund that is a chosen fund or a default fund. Accordingly, if an award requires contributions of 6% of salary to a particular fund, and contributions equivalent to 4% of salary are instead made to a chosen fund of the employee, the award remains enforceable in respect of the remaining 2% of salary payable as superannuation contributions.
5.94 The Bill protects employers from liability to compensate any person for loss or damage arising from anything done by the employer in complying with the choice of fund requirements. [Item 32; new section 32V]
5.95 Accordingly, if an employee selects a fund from material provided by the trustee or RSA provider through his or her employer in compliance with the choice of fund requirements, and the fund subsequently performs badly, the employer would not be liable to compensate the employee.
5.96 It should be noted the protection does not extend to things done by the employer which are not undertaken in complying with the choice of fund requirements.
(d) Application to Commonwealth Departments
5.97 The Commonwealth as an employer currently has overall responsibility for ensuring that individual departments and certain authorities meet their SG obligations. The Bill contains amendments which have the effect of treating individual Commonwealth Departments as separate employers. [Items 1 to 5] The provisions, as amended, will be similar to those in the Fringe Benefits (Application to the Commonwealth) Act 1986 .
5.98 This means that individual departments and certain authorities will be responsible for satisfying their SG obligations, including the choice of fund requirements.
5.99 A number of signposts have been inserted in the SGAA in order to guide readers from existing provisions to new Part 3A . [Items 26 to 31]
(a) Retirement Savings Accounts Act 1997
5.100 Part 2 of Schedule 1 of the Bill amends the Retirement Savings Accounts Act 1997 (the RSA Act) to give effect to the choice of fund requirements in relation to retirement savings accounts (RSAs).
5.101 Section 52 of the RSA Act currently requires employers to provide employees with a choice of alternative superannuation vehicles before making an application for an RSA on behalf of the employee.
5.102 The effect of the amendments to be made to the SGAA by Part 1 of Schedule 5 to the Bill (which imposes obligations on employers in relation to choice of fund) will mean that section 52 is no longer necessary. Section 52 is therefore repealed and references in the RSA Act to section 52 are omitted. [Items 33 and 35]
5.103 Subsection 53(3) of the RSA Act, which provides that an RSA institution does not have to provide information to a prospective RSA holder where the employer is applying to open the RSA on the employee's behalf, is omitted. This subsection is omitted because it is inconsistent with the choice of fund policy that all employees be given prospective information to enable an informed choice to be made. [Item 34]
5.104 Subsection 62(1) of the RSA Act is amended in order to clarify the operation of the cooling-off period. At present, section 62 provides that, where an RSA is opened or issued as a result of an application by an employer on the employee s behalf, the employee may request the RSA provider to close the RSA and transfer the balance to another superannuation vehicle within 14 days after receipt of specified documentation.
5.105 This is inconsistent with the primary choice of fund provisions in Part 1 of Schedule 5 of the Bill as the employee is provided with 28 days in which to make a decision as to whether he or she wishes to have compulsory employer contributions made to the RSA. Inconsistency also arises as, under the choice of fund provisions, if an employee chooses to close the RSA during the 14 day period, the employer does not have to agree to that employee's request to change the superannuation vehicle to which compulsory employer contributions are made within 12 months of the employee making his or her choice. Employees may also be confused by believing a choice has to again be made within 14 days.
5.106 To overcome these inconsistencies, subsection 62(1) of the RSA Act is amended to provide that the cooling-off period will not apply where the RSA is chosen as a result of the exercising of choice under Part 3A of the SGAA (as inserted by Part 1 of Schedule 5 of the Bill). [Item 36]
(b) Superannuation Industry (Supervision) Act 1993
5.107 Part 3 of Schedule 5 to the Bill amends the Superannuation Industry (Supervision) Act 1993 (the SIS Act) to give effect to the choice of fund requirements in relation to superannuation funds.
5.108 The main objective of these amendments is to ensure that provisions in the SIS Act, which require information to be provided to prospective members and employer sponsors and prohibit false and misleading conduct in relation to the issuing of regulated documents, apply to all regulated superannuation funds. These provisions currently apply only to public offer superannuation funds.
Definitions and cross references
5.109 The definitions of regulated document, reviewable decision and stop order in section 10 of the SIS Act are amended because of the amendments made by item 50 . [Items 37 to 40]
5.110 Subsection 323 of the SIS Act, which provides relief from civil liability for contravention of certain provisions, is amended to make reference to subsection 148B(2) rather than subsection 162(2). This is necessary because of the amendments made by item 50 . [Item 56]
5.111 The SIS Act is amended to require all regulated superannuation funds to provide information to prospective members and employer-sponsors.
5.112 Currently, Subdivision 3A of Part 19 of the SIS Act requires prospective information to be provided only by public offer superannuation funds. This is inconsistent, however, with the choice of fund provisions in Part 1 of Schedule 5 to the Bill which require an employer to provide information about a regulated superannuation fund to employees to enable an informed choice to be made.
5.113 Therefore, to enable the implementation of a consistent disclosure regime for all regulated superannuation funds, regardless of whether the fund is a public offer superannuation fund or a non-public offer superannuation fund (eg, industry or corporate fund), the SIS Act is amended to transfer the requirements to provide prospective information from Part 19 of the SIS Act to Part 14 of the SIS Act and to replace all references to public offer entity in these requirements with superannuation entity. [Items 41 and 42, 58, 60 to 62, 64]
Prohibited conduct in relation to superannuation interests and regulated documents
5.114 Part 18 of the SIS Act is being amended by items 43 to 50 to provide that the prohibitions in this Part covering false and misleading conduct in relation to superannuation interests also apply to regulated documents. These provisions are a means of ensuring that persons do not make a decision to join a superannuation fund based on false or misleading information.
5.115 These amendments will insert new sections 148A and 148B into the SIS Act, to impose criminal and civil liabilities on the trustee of a superannuation entity where the trustee issues, or authorises the issue of, a regulated document in which there is a false or misleading statement or a material omission. [Item 50]
5.116 The amendments also insert new section 148C into the SIS Act, which provides that the trustee of a superannuation entity must not intentionally or recklessly issue a regulated document which includes a statement made by, or based on a statement of, an expert, unless the written consent of the expert to the inclusion of that statement has been obtained and not withdrawn prior to the issue of the document. [Item 50]
5.117 New sections 148D, 148E, 148F and 148G provide the Insurance and Superannuation Commissioner with the power to issue a stop order. Such an order will prevent the trustee from issuing superannuation interests where a regulated document is issued which contains a false or misleading statement. [Item 50]
5.118 New sections 148A to 148G are presently set out in Part 19 of the SIS Act. Under Part 19, they apply only in relation to regulated documents issued by trustees of public offer superannuation funds. The amendments transfer these provisions to Part 18 so that they will apply to trustees of all superannuation entities issuing regulated documents.
5.119 This is necessary because amendments to be made to the SIS Act by items 41 and 42, 58, 60 to 62, 64 and to the Superannuation Industry (Supervision) Regulations will require trustees of all regulated superannuation funds to provide up-front information (ie, a regulated document) to prospective members to enable them to make a choice about the superannuation vehicle into which their employer is to direct SG contributions.
5.120 The amendments also repeal Division 3 and Division 4 of Part 19 of the SIS Act which have been moved to Divisions 2 and 3 of Part 18 (false and misleading documents and stop orders) and Division 2 of Part 14 (information to prospective beneficiaries), as described above [items 53 to 55] . Paragraph 150(2)(b) of the SIS Act has been amended to reflect these amendments. [Item 52]
5.121 Subsection 171(2) of the SIS Act is amended to clarify the operation of the 14 day cooling-off period. The amendment will provide that the 14 day cooling-off period will not commence until after the member has been notified of the cooling-off period rather than when he or she becomes a member of the fund. The notification will occur after the person becomes a member of the fund.
5.122 This amendment will ensure that the commencement of the cooling-off period is consistent between life insurance products and RSAs, and will provide new members with more time before the 14 day cooling-off period commences. [Item 54]
5.123 The definitions of modifiable provision and temporarily modifiable provision in section 327 of the SIS Act will be amended because of the amendments made by items 42 and 50 of the Bill. These amendments will maintain the Insurance and Superannuation Commissioner's power to modify the provisions of Part 19 of the SIS Act which have been moved to Parts 14 and 18. [Items 57 to 64] Application
5.124 The amendments made by this Part will apply to acts and omissions after the commencement of item 65 .
Regulation Impact Statement
5.125 The policy objective of the choice of fund proposal is to provide employees with greater choice as to which complying superannuation fund or retirement savings account (RSA) will receive compulsory superannuation contributions made on their behalf by the employer. Greater competition and better returns will benefit all persons with superannuation and will reduce, over time, pressure on the age pension system.
5.126 This measure is expected to increase competition, efficiency and performance within the superannuation industry and result in reductions in fees and charges for persons with superannuation.
5.127 The choice of fund proposal was announced in the 1997-98 Budget. It is one of a number of measures announced in that Budget designed to encourage private saving and enhance Australia's retirement income system.
Options subject to workplace agreements
5.128 All of the options discussed below would be subject to the terms of workplace agreements which provide employees with a choice of superannuation fund for their employer contributions. It would be inconsistent with recent workplace relations reforms for the terms of a workplace agreement to be overridden by the choice of fund requirements.
5.129 Groups affected by the measure will familiarise themselves with the changes using assistance provided by the Australian Taxation Office (ATO) and the Insurance and Superannuation Commission (ISC).
5.130 The ATO will provide employers and employees with information in a number of forms. In particular, the ATO will provide information through:
- •
- new pamphlets directed specifically at an impact group (eg. employers or employees), which sets out the information in a 'question and answer' style;
- •
- the ATO's existing internet facilities; and
- •
- the ATO's existing telephone help lines.
5.131 Under some of the options outlined below, fund/RSA providers will be required to prepare key feature statements (KFSs) for the fund or RSA. These statements will be prepared in accordance with guidelines set out by the ISC.
5.132 The private sector may also contribute to the education of affected groups.
5.133 Under this option:
- •
- an employee would be able to choose any complying superannuation fund or RSA into which their employer superannuation contributions would be deposited, however their choice would be subject to the approval of their employer. This amounts to an informal workplace agreement between the employee and their employer.
5.134 Under this option:
- •
- an employee would be able to choose any complying superannuation fund or RSA into which their employer superannuation contributions would be deposited.
- •
- where employer contributions are being made to a defined benefit fund, the employer would need to advise an employee of the consequences of a choice that would reduce contributions or other specific entitlements (eg. death and disability insurance).
- •
- that choice would need to be made within a specified time, ie., for new employees on or after 1 July 1999, 28 days from the commencement of employment, and for existing employees at 1 July 1999, before 1 July 2000.
- •
- after making their initial choice, all employees would be able to make a further choice at least every 12 months thereafter.
- •
- the employer would contribute to a default fund if the employee failed to make a choice within the specified time.
- •
- employers would be subject to financial penalties under existing Superannuation Guarantee arrangements if they fail to give effect to valid employee choices.
5.135 Under this option:
- •
- an employee would be able to choose from at least four complying superannuation funds or RSAs offered by their employer. The choice offered would need to include an RSA, a public offer fund, and, where available, an industry fund and an in-house superannuation fund.
- •
- key feature statements (KFSs) for each of the funds nominated by the employer would need to be provided or made available to each employee by the employer. KFSs would be prepared by the fund or RSA provider.
- •
- where employer contributions are being made to a defined benefit fund, the employer would need to advise an employee of the consequences of a choice that would reduce contributions or other specific entitlements (eg. death and disability insurance).
- •
- that choice would need to be made within a specified time, ie., within 28 days of being provided with the KFSs by the employer.
- •
- after making their initial choice, employees would be able to make a further choice at least every 12 months thereafter.
- •
- the employer would contribute to a default fund if the employee failed to make a choice within the requisite time.
- •
- employers would be subject to financial penalties under existing Superannuation Guarantee arrangements if they fail to give effect to valid employee choices.
5.136 Under this option:
- •
- employers can choose to use one of option 1, 2 or 3.
Assessment of impacts (costs and benefits) of each option
- •
- Employers (approximately 654,000 will be affected)
- •
- Employees (approximately 4,065,030 will be affected)
- •
- Superannuation funds, RSA providers (140,000 will be affected)
- •
- Professional advisers, eg., investment and tax advisers
- •
- ATO
- •
- ISC
Analysis of the costs of the implementation options
5.137 Both employers and employees may incur some cost in negotiating a workplace agreement. This is only likely to be significant where the primary purpose of that agreement is to provide employees with a choice of superannuation fund. Costs will only be marginal where the provision of a choice of superannuation fund is part of a general workplace agreement.
5.138 The affected groups will incur the following compliance and administrative costs under option 1:
- •
- All impact groups will need to familiarise themselves with the change. The ATO and the ISC will need to devote additional resources in providing information support to the other impact groups.
Employers and fund/RSA providers
- •
- Larger employers and fund/RSA providers may need to update their technology. This may not be significant, as the employer will be able to vet the decision of the employee and continue to contribute to existing funds or RSAs.
- •
- Employees will face costs in choosing a fund, as they have an unlimited choice and will likely need to seek information from alternative funds.
- •
- Employees will also face costs in negotiating with employers in order to agree on a fund or RSA.
- •
- There will also be additional record keeping requirements. Employees will need to keep track of what choices they agreed to.
- •
- Employers will face costs in assessing whether to accept an employee's nominated fund.
- •
- Employers will also face costs in negotiating with employees in order to agree on a fund or RSA. These costs are likely to be more significant for larger employers, who have a greater number of employees.
- •
- Employers may make their contributions to a greater number of funds than at present. However the impact of this cost is likely to be reduced by the ability of employers to override the choice of employees. Larger employers will have a greater relative capacity to absorb these costs.
- •
- There will also be additional record keeping requirements. Employers will need to keep track of what choices they agreed to.
5.139 There are no estimates of the costs involved with this option. The costs are likely to be slightly lower than the costs involved with options 2 and 3, as this option imposes less of a burden on employers.
5.140 The affected groups will incur the following compliance and administrative costs under option 2:
- •
- All impact groups will need to familiarise themselves with the change. The ATO and the ISC will need to devote additional resources in providing information support to the other impact groups.
- •
- Larger employers will need to update their technology in order to satisfy their obligations. These costs for employers will be greater than under option 1, as the employer will not be able to vet the decision of the employee and will therefore be contributing to a greater number of funds or RSAs.
- •
- Fund/RSA providers will need to update their technology, as they may be receiving contributions from a wider range of employers.
- •
- Fund/RSA providers may also need to produce key feature statements (KFSs) for employers to provide to employees where the fund or RSA is the default fund.
- •
- Employees will incur costs in choosing a fund, as they will have an unlimited choice and will likely need to seek information from alternative funds.
- •
- Employers will incur some costs in selecting the default fund that is to be used where an employee fails to make a choice. These costs are likely to be relatively more significant for smaller employers.
- •
- Employers will also need to provide employees with a key features statement (KFS) for the fund or RSA that is the default fund.
- •
- Employers will be required to make contributions to a greater number of funds and RSAs than at present. Larger employers will have a greater relative capacity to absorb these additional costs, particularly those employers who contribute to funds by electronic means. On the other hand, contributions will be made to more funds and RSAs where an employer has a large number of employees.
- •
- Employers will be required to provide advice to employees where that employer's contributions are currently being made to a defined benefit fund.
- •
- There will also be additional record keeping requirements. Employers will need to keep track of what choices were made, and when they were made. These costs will rise according to the number of employees, and will therefore be higher for larger employers.
- •
- Employers will have reporting and remitting obligations under the Superannuation Guarantee regime where they do not satisfy their obligations.
- •
- The default fund provider will be required to distribute their KFS to employers, who will then provide the statement to employees.
- •
- Reporting and remitting obligations imposed on employers will result in a complementary increase in workflows for the ATO.
5.141 Total compliance costs (costs incurred by employers, employees and fund/RSA providers) are set out in the table below:
| Impact Group | Initial Costs ($m) | Recurrent Costs ($m) |
|---|---|---|
| Employers | 21 | 15 |
| Employees | N/A | N/A |
| Fund/RSA providers | 5 | 2 |
5.142 The costs for employees are not available due to difficulties in predicting how they will react to the measure. Employee costs are likely to be higher under this option than under option 3 as employees can choose any complying superannuation fund or RSA and will likely need to seek information from alternative funds.
5.143 The costs of implementing and administering the measure would be similar to option 3 (see below).
5.144 The affected groups will incur the following compliance and administrative costs under option 3:
- •
- All impact groups, particularly employers, will need to familiarise themselves with the change. This cost will be greater for employers under this option, because they will be required to comply with a wider range of obligations. The ATO and the ISC will need to devote additional resources in providing information support to the other impact groups.
- •
- Larger employers will need to update their technology in order to satisfy their obligations. These costs may be less than under option 2, as there is a reduced number of potential funds or RSAs to which the employer may be required to make contributions.
- •
- Fund/RSA providers will need to update their technology. These costs may be less than under option 2, as there is a reduced number of potential funds or RSAs to which the employer may be required to make contributions.
- •
- Fund/RSA providers who presently are not required to furnish KFSs will need to produce this information for employers to distribute to employees.
- •
- Employees will incur costs in choosing a fund from the suite nominated by the employer. These costs will be lower under this option than under options 1 and 2 because of the limited choices and the provision of KFSs for the nominated funds.
- •
- There will also be additional record keeping requirements. Employees will need to keep track of what choices were offered and made, and when they were offered and made.
- •
- Employers may be required to make their contributions to a greater number of funds than at present. These costs may be less than under option 2, due to the reduced number of potential funds or RSAs to which the employer may be required to make contributions. Larger employers will have a greater relative capacity to absorb these additional costs, particularly those employers who contribute to funds by electronic means.
- •
- Employers will be required to distribute KFSs for nominated funds/RSAs to employees. These costs are likely to be higher than under option 2 because there will be a greater number of KFSs to distribute.
- •
- Employers will be required to provide advice to employees where that employer's contributions are currently being made to a defined benefit fund.
- •
- Employers will face costs in nominating a suite of funds and RSAs. These costs will be higher than under other options as employers are required to nominate at least 4 funds or RSAs under this option. An employer's costs may be reduced by dealing with one provider who offers a range of products constituting the mix of funds and RSAs that must be nominated under this option. The costs will be more significant for smaller employers.
- •
- There will also be additional record keeping requirements. Employers will need to keep track of what choices were offered and made, and when they were offered and made.
- •
- Employers will have reporting and remitting obligations under the Superannuation Guarantee scheme where they do not satisfy their obligations.
- •
- Nominated fund/RSA providers will be required to distribute KFSs to employers, who will provide the statements to employees. These costs are likely to be higher than under option 2 because there will be a greater number of KFSs to distribute.
- •
- Reporting and remitting obligations imposed on employers will result in a complementary increase in workflows for the ATO.
5.145 Total compliance costs (costs incurred by employers, employees and fund/RSA providers) are set out in the table below:
| Impact Group | Initial Costs ($m) | Recurrent Costs ($m) |
|---|---|---|
| Employers | 36 | 15 |
| Employees | N/A | N/A |
| Fund/RSA providers | 5 | 2 |
5.146 The costs for employees are not available due to difficulties in predicting how they will react to the measure. Employee costs are likely to be lower than under option 2 as employees can choose from a limited number of complying superannuation funds or RSAs and will be provided with key information by employers which will assist them in making that choice.
5.147 The costs of implementing and administering the measure are set out in the table below:
| 1997-98 | 1998-99 | 1999-00 | 2000-01 | Later years (per year) |
|---|---|---|---|---|
| $2.0m | $4.3m | $3.4m | $2.3m | $1.3m |
5.148 This option allows employers to choose one of options 1, 2 or 3.
5.149 This will enable an employer to choose the option which minimises their costs. As outlined above, the costs of those options varies according to the size and set up of the employer.
5.150 Total compliance costs (costs incurred by employers, employees and fund/RSA providers) are set out in the table below:
| Impact Group | Initial Costs ($m) | Recurrent Costs ($m) |
|---|---|---|
| Employers | less than or equal to 21 | less than or equal to 15 |
| Employees | N/A | N/A |
| Fund/RSA providers | 5 | 2 |
5.151 Employer costs are no more than under option 2. This is on the basis that, under options 2 and 3, the employer costs are average costs. However, each employer's cost will depend on their circumstances, so that option 3 may be less costly for a particular employer than option 2. This suggests that overall, employer costs will be no greater than those in option 2, and are likely to be lower. However, the extent to which costs will be lower is difficult to quantify.
5.152 The costs for employees are not available due to difficulties in predicting how they will react to the measure. Employee costs are likely to be lower where the employer chooses limited choice as employees will only have a limited number of complying superannuation funds or RSAs to choose from and will be provided with key information by employers which will assist them in making that choice.
5.153 The costs of implementing and administering the measure are similar to those set out in option 3 above.
Analysis of the benefits of the implementation options
5.154 While employees are not limited in their choice of fund or RSA, the degree of control they will have over their superannuation savings will be less than that provided under other options, because of the need for their employer to approve the choice. The choice employees make will be without the assistance of the information that must be provided under option 3.
5.155 There will still be increased competition between fund and RSA providers, however the extent of that increase will be limited by the need for employers to approve the employee's choice. For cost reasons, employers will probably have a strong preference to retain the existing fund or RSA.
5.156 Employees will have unlimited control and choice over their superannuation savings, however they will likely need to seek information from alternative funds.
5.157 Employers will avoid the cost of providing information, as they must under option 3, but will probably face additional costs due to contributing to more funds than at present.
5.158 There will be increased competition between fund and RSA providers. Under this option, fund and RSA providers would focus their advertising on employees.
5.159 Although having a limited choice, employees will have greater control and choice over their superannuation savings than at present. They will be provided with information to assist them in making an informed choice.
5.160 Employers may avoid the costs involved in contributing to a large number of funds, but will face additional costs in nominating funds and providing information to employees about those funds.
5.161 There will be increased competition between fund and RSA providers. These providers will compete to be nominated by employers. Nominated providers will then compete for the choice of employees. This will bring more fund and RSA providers into the market, and create additional benefits for employees.
5.162 The major benefit of this option is that employers have the flexibility to select the approach which minimises their costs, given their individual circumstances. The benefits of the various options that can be chosen by employers have been outlined above.
5.163 The Government has engaged in consultation with a wide range of interested parties, including the superannuation industry (in particular the Association of Superannuation Funds of Australia (ASFA) and the Life, Investment and Superannuation Association (LISA)), employer groups (in particular the Australian Chamber of Commerce and Industry (ACCI)), small business and those representing employee interests. As a result of those consultations, a number of enhancements to the original announcement were made particularly by reducing the burden of choice on employers while ensuring the key objective of greater choice of fund is preserved
Conclusion and recommended option
5.164 After careful consideration, the Government considers option 4 to be the most appropriate.
5.165 Providing choice of fund will necessarily increase costs for some employers. The Government believes the benefits of choice to employees and the community more generally, outweigh these costs.
5.166 The Government's preferred option allows an employer to elect the most cost-effective way of implementing the measure, depending on that employer's circumstances. This establishes a balance between giving individuals control over their superannuation savings and limiting costs to affected parties.
5.167 Option 4 therefore provides the greatest flexibility, potentially accessing the benefits under all options while keeping costs to a minimum. Excluding employers and employees who are expected to be covered by workplace agreements, employers would face an estimated average cost of $30 per annum under this option, or less than $8 per employee per annum.
5.168 Option 1 is likely to involve lower costs than any of the other options. However, the need for employer approval for an employee's choice of fund or RSA is likely to nullify the objectives of the proposal. Under this option, it may be the case that employee's have no real control over their superannuation savings.
Chapter 6 - Technical amendments
Overview
6.1 Schedule 6 of the Bill will amend Division 42 of the Income Tax Assessment Act 1997 (the 1997 Act) to make minor technical corrections to depreciation rules relating to lessors' fixtures.
Background to legislation
6.2 Provisions from the Income Tax Assessment Act 1936 (the 1936 Act) which give lessors of plant entitlement to taxation depreciation allowances in respect of leased chattels that become a fixture on another's land were translated into the 1997 Act by Act No 174 of 1997.
6.3 Minor technical amendments are required to some of those provisions of the 1997 Act.
6.4 The amendments will apply to assessments for the 1997-98 income year and later income years.
Explanation of the amendments
6.5 The first amendment corrects a duplication of numbers in the items in section 42-65 of the 1997 Act which specifies how to work out the cost of plant. The second item 12 in the table is being re-numbered item 12A.
6.6 Table Item 10B in section 42-205 (which specifies how to work out the termination value when plant is disposed of) makes reference to the termination value of 'disposals' under paragraphs 42-313(a), (b) and (c). The paragraphs specify certain circumstances where the lessor ceases to be treated as the quasi-owner of leased fixtures. In order to accurately link item 10B to paragraphs 42-313(a), (b) and (c), the reference to 'disposal' in Item 10B is being replaced with a reference to the 'event' mentioned in those paragraphs.
Termination Value of Plant - Part disposal
6.7 A new item (item 10D) is being inserted into the table in section 42-205 which will specify a termination value where there is a partial disposal of a lessor's interest in leased fixtures. This is to clarify the position in relation to a partial disposal of quasi-ownership of lessors fixtures. It is not clear which of the existing table items would apply to a partial disposal of quasi-ownership.
Chapter 7 - CGT asset register
Overview
7.1 The amendments in Schedule 7 of the Bill will amend the capital gains tax (CGT) record keeping requirements contained in section160ZZU of the Income Tax Assessment Act 1936 (the Act).
7.2 The amendments will allow taxpayers to transfer some or all of the information contained in the records they must keep for CGT purposes records to an 'asset register'.
Summary of the amendments
7.3 The amendments will give all CGT taxpayers more flexibility in how they keep the records necessary to work out their CGT liability. Taxpayers will, from 1 January 1998, be able to transfer some or all of the information contained in records held for CGT purposes into an asset register.
7.4 The amendments will allow taxpayers who transfer information contained in records required to be kept under the current law to dispose of the documents containing that information 5 years after the entry is certified by a third party (ie. a registered tax agent or other person approved by the Commissioner).
7.5 The amendments will apply to all assets, whether acquired before or after the commencement of the new rules. The new rules will only apply to entries in asset registers that are certified on or after 1 January 1998.
Background to the legislation
7.6 The CGT record keeping requirements are contained in section 160ZZU of the Act. Broadly, taxpayers must keep sufficient records to be able to work out when the asset was acquired and, if the asset has not been disposed of, any amount that would have formed part of the cost base of the asset if it had been disposed of.
7.7 When the asset is disposed of, taxpayers must also keep records about the date of disposal, any amount that formed part of the cost base and the consideration in respect of the disposal.
7.8 The records must be in English. For most assets records must be kept for five years after the asset has been disposed of (paragraph160ZZU(6)(a)). A taxpayer who fails to keep or retain these records for the required time may be liable for an offence punishable with a maximum penalty of up to 30 penalty units. A penalty unit is currently $110 (see subsection 4AA(1) of the Crimes Act 1914).
7.9 In November 1996 the Report of the Small Business Deregulation Taskforce ("Time For Business") recommended the introduction of a CGT asset register to allow small businesses to record details of assets potentially liable for CGT.
7.10 On 24 March 1997 the Government announced that it would allow the use of asset registers for CGT purposes.
Explanation of the amendments
7.11 Subsections 160ZZU(6) and (6C) set out the periods records needed for CGT purposes must be retained. Generally, records must be kept for 5 years from the date of disposal of an asset. However, special rules exist to require records relating to group companies and rollover assets and mergers of qualifying superannuation funds (see subsections 160ZZU(3), (6A) and (6B)).
7.12 Both subsections 160ZZU(6) and (6C) will be amended so that the current requirement to retain records is expanded so that a person required to keep records will be able to:
- •
- keep records in the same way they do now;
- •
- make asset register entries for those records containing all the information required to be contained in those records by subsections 160ZZU(6) or (6C); or
- •
- keep a combination of both records and asset register entries. [Items 1 to 4 - amended subsection 160ZZU(6) and subsection 160ZZU(6C)]
What is an asset register entry?
7.13 An asset register entry is defined in new subsection 160ZZU(9) .
7.14 An entry is a valid asset register entry if:
- •
- the person (record keeper) making the entry is required by subsections 160ZZU(1), (3), (6A) or (6B) to keep records containing particular information; [Item 5 - new paragraph 160ZZU(9)(a)]
- •
- the record keeper makes an entry in a register setting out some or all of the information contained in those records. The information in the record must not be changed when it is entered in the register. The asset register must contain the same information as the document. Entries in the register must be in English; [Item 5 - new paragraph 160ZZU(9)(b)]
- •
- a registered tax agent (within the meaning of section 251A of the Act) or other person approved by the Commissioner certifies that the information in the register is the same as the information in the record. The record keeper cannot certify their own asset register entries; and [Item 5 - new paragraph 160ZZU(9)(c)]
- •
- the records that contain the information entered in the asset register are kept for at least 5 years after the entry is certified. [Item 5 - new paragraph 160ZZU(9)(d)]
What information can be entered into the asset register?
7.15 Any information required to be kept under subsections 160ZZU(1), (3), (6A) or (6B) may be transferred into an asset register. All entries must be in English.
How long must the records and register be retained?
7.16 The records containing the information entered into the asset register must be retained for 5 years after the entry has been certified. If the original document is discarded before the end of the 5 year time limit, the record keeper may not have satisfied the requirements of subsections 160ZZU(6) or (6C) as the case may be.
7.17 An asset register entry is to be retained for the same period all records for CGT purposes are to be retained. Generally, this will be 5 years after the disposal of the asset to which the information relates.
7.18 A registered tax agent may certify an asset register entry. The Commissioner has the discretion to allow other persons to certify asset register entries.
7.19 The amendments will apply to all assets, whether acquired before or after the commencement of the new rules. The new rules will only apply to entries in asset registers that are certified on or after 1 January 1998.
7.20 Taxpayers may make entries in an asset register before 1 January 1998. However, the new rules will only apply to entries which are certified (see Item 5 - new subsection 160ZZU(9) ) on or after 1 January 1998. [Item 6]
Regulation Impact Statement
7.21 To implement the Government's response to recommendation 4 of the Small Business Deregulation Task Force Report in relation to the use of an asset register for capital gains tax (CGT) record keeping purposes. The asset register proposal is designed to minimise the record keeping requirements of taxpayers with CGT obligations.
7.22 The record keeping provisions of the CGT legislation are contained in section 160ZZU of the Income Tax Assessment Act 1936 (the Act). Broadly, subsection 160ZZU(1) requires a taxpayer to keep such records in the English language as are necessary to ascertain the date on which the person acquired the asset and, if the asset has not been disposed of, any amount that would have formed part of the cost base of the asset if it had been disposed of.
7.23 When the asset is disposed of a taxpayer is also required to keep records in relation to the date of disposal, any amount that formed part of the cost base and the consideration in respect of the disposal. For most assets records will need to be kept for five years after the asset has been disposed of (s.160ZZU(6)(a)).
7.24 The Small Business Deregulation Task Force recommended the introduction of an asset register, appropriately certified for correctness by a third party, which could hold all asset details without the need to maintain source documents. Where an asset has been entered into the register, source documents would only need to be retained for five years, as is the case with other business records kept for taxation purposes.
7.25 The Task Force suggested that under the current record keeping provisions, taxpayers are required to keep CGT records for long periods of time, creating the risk of loss or damage and administrative costs in storage and tracking.
7.26 In its response to the recommendation of the Task Force, the Government agreed to implement the asset register proposal, and asked the ATO to consult with small business groups, professional bodies and other affected parties.
7.27 The implementation of the Government's asset register proposal would require amendment of the CGT record keeping provisions in order to allow taxpayers to maintain an asset register. The asset register would be an alternative and not a mandatory system of record keeping.
7.28 The amendments set out the effect of keeping an asset register.
7.29 Taxpayers will be able to use an asset register for CGT record keeping purposes from 1 January 1998. Information about any asset taken to have been acquired by a taxpayer after 19 September 1985 may be recorded in an asset register.
Assessment of impacts (costs and benefits)
7.30 This measure will affect taxpayers who need to maintain records for CGT purposes. In particular, the implementation of the asset register proposal will minimise the record keeping requirements of small businesses.
7.31 Taxpayers who choose to maintain an asset register in preference to the usual record keeping requirements will still have to retain the register itself for a significant period of time. There may be some additional compliance costs incurred by taxpayers. These costs, associated with accounting fees and the certification process, etc would be offset by savings in the costs of retaining receipts etc for long periods.
7.32 The impact on Commonwealth tax revenue of this measure is unknown at this stage. It is expected that there will however be some impact due to the additional costs to taxpayers outlined above, where these are allowable as deductions or included in the cost of the asset.
7.33 The measure will have significant benefits for taxpayers with CGT record keeping obligations. Taxpayers should no longer have to keep source documents for unreasonable periods of time, but will instead only need to retain source documents for five years after the details have been entered into the asset register and certified.
7.34 Small businesses, professional bodies and other affected parties have been consulted in the preparation of this proposal. On 23 May 1997 the ATO released an issues paper for public comment.
7.35 A wide range of comments were received. Comments received from the public on that paper have been taken into account in developing this proposal.
7.36 It is anticipated that the Commissioner of Taxation will issue a Taxation Ruling on the practical administration of the asset register rules. In the normal course of events, this would give taxpayers a further opportunity to give comments on the administration aspects of the new arrangements.
7.37 This measure will give taxpayers the option of using an asset register for CGT record keeping purposes from 1 January 1998, with respect to assets acquired both before and after that date. The significant benefits taxpayers are expected to derive from using the asset register will outweigh any additional compliance costs that may be incurred as a result of establishing and maintaining the asset register.
Chapter 8 - Franking of dividends and other distributions
Overview
8.1 Schedule8 of the Bill will amend Part IVA and Part IIIAA of the Income Tax Assessment Act 1936 (the Act) to prevent franking credit trading and dividend streaming. The amendments will:
- •
- introduce a general anti-avoidance provision which targets franking credit trading and dividend streaming schemes where one of the purposes (other than an incidental purpose) of the scheme is to obtain a franking credit benefit;
- •
- introduce a specific anti-streaming rule which will apply where a company streams dividends so as to provide franking credit benefits to shareholders who benefit most in preference to others; and
- •
- modify the definition of what constitutes a class of shares in PartIIIAA of the Act by:
- -
- providing that a class of shares includes all shares having substantially the same rights; and
- -
- deeming interests held in a corporate limited partnership to constitute the same class of shares for the purposes of the dividend imputation provisions.
Summary of the amendments
8.2 The purpose of the amendments is to protect the revenue by introducing a general anti-avoidance rule and anti-streaming measures to curb the unintended usage of franking credits through dividend streaming and franking credit trading schemes.
8.3 Subject to the transitional measure explained below and at paragraphs 8.34 and 8.102:
- •
- the general anti-avoidance and specific anti-streaming rules will apply to dividends and other distributions paid on or after 7.30 pm AEST, 13 May 1997, including those relating to schemes and arrangements entered into before this time; and [Subitems 9(1), 26(1) and 26(2)]
- •
- the amendment to the definition of what constitutes a class of shares will apply to franking years commencing after 7.30 pm AEST, 13 May 1997, irrespective of whether the shares or partnership interests were issued before or after that time. [Subitem 9(2)]
8.4 As a transitional measure, the amendments will not apply to dividends declared, but not paid, by publicly listed companies before 7.30 pm AEST on 13 May 1997, and to distributions made after that time that relate to such dividends. [Subitems 9(3), 9(4), 26(3) and 26(4)]
Background to the legislation
8.5 Two of the underlying principles of the imputation system are, firstly, that the benefits of imputation should only be available to the true economic owners of shares, and only to the extent that those taxpayers are able to use the franking credits themselves and, secondly, that tax paid at the company level is in broad terms imputed to shareholders proportionately to their shareholdings.
8.6 Franking credit trading schemes allow franking credits to be inappropriately transferred by, for example, allowing the full value of franking credits to be accessed without bearing the economic risk of holding the shares. These schemes undermine the first principle.
8.7 Companies can also engage in dividend streaming (i.e. the distribution of franking credits to select shareholders), which undermines the second principle by attributing tax paid on behalf of all shareholders to only some of them. Generally this entails the streaming of franking credits to taxable residents and away from non-residents and tax-exempts.
8.8 The Bill introduces a general anti-avoidance rule and anti-streaming measures to restore these underlying principles of the imputation system.
Explanation of the amendments relating to the anti-streaming measures
8.9 Part 1 of Schedule 8 of the Bill will amend Part IIIAA of the Act by inserting a specific anti-streaming rule. The rule will apply where a company streams the payment of dividends, or streams the payment of dividends and the giving of other benefits, to its shareholders in such a way as to give shareholders who benefit most from franking credits a greater franking credit benefit than those who would not benefit to the same degree. [Item5; new subsection 160AQCBA(2)]
8.10 The rule will apply irrespective of whether a company streams dividends within a single franking year or between different franking years.
What is a franking credit benefit?
8.11 For the purposes of determining whether the specific anti-streaming rule applies, a shareholder will be considered to receive a franking credit benefit if:
- •
- the shareholder is a company and a franking credit of the company would arise under section 160APP of the Act; [Item 5; new subparagraph 160AQCBA(16)(a)(i)]
- •
- the shareholder is a private company and the company would be entitled to a rebate of tax under section 46 or 46A of the Act as a result of the operation of section 46F for the reason that the dividend is franked; [Item 5; new subparagraph 160AQCBA(16)(a)(ii)]
- •
- the shareholder is a trust or partnership and would include an amount in its assessable income under section 160AQT of the Act; [Item 5; new paragraph 160AQCBA(16)(b)]
- •
- the shareholder is entitled to a franking rebate under section 160AQU or 160AQY of the Act; [Item 5; new paragraph 160AQCBA(16)(c)]
- •
- the shareholder would be entitled to an exemption from withholding tax under paragraph 128B(3)(ga) of the Act but for the operation of the new specific anti-streaming rule; or [Item 5; new paragraph 160AQCBA(16)(d)]
8.12 If a shareholder is entitled to any one or more of the above benefits because of the streaming of a dividend, the rule can apply.
What other benefits can a company give to its shareholders?
8.13 The specific anti-streaming rule will apply where a company streams the payment of dividends only (e.g. where it pays franked dividends to some shareholders and unfranked dividends to others). The rule will also apply in circumstances where a company streams the payment of franked dividends to certain shareholders and provides other benefits to other shareholders. This will ensure that distributions that are not capable of being franked cannot be used as a mechanism to stream unfranked dividends to certain shareholders who cannot benefit from franking credits while preserving franking credits for shareholders who can. [Item 5; new subsection 160AQCBA(2)]
8.14 In determining whether a company has provided other benefits to shareholders, other benefits include, but are not limited to:
- •
- the issue to the shareholder of bonus shares in the company; [Item 5; new paragraph 160AQCBA(15)(a)]
- •
- the return to the shareholder of capital paid on shares in the company; [Item 5; new paragraph 160AQCBA(15)(b)]
- •
- the forgiveness of a debt owed by the shareholder to the company; [Item 5; new paragraph 160AQCBA(15)(c)]
- •
- the making of a payment of any kind, including the giving of property, to or on behalf of the shareholder, whether made by the company or another person. [Item 5; new paragraph 160AQCBA(15)(d)]
8.15 The making of a payment on behalf of the shareholder would include, for example, circumstances where a shareholder receives, in lieu of a franked dividend, a benefit in the form of the payment of superannuation contributions by the company on behalf of the shareholder.
8.16 The streaming of other benefits would also include circumstances where a benefit is paid to a shareholder by someone other than the company. For example, if a company pays a franked dividend to a particular shareholder and that shareholder passes on a related amount to another shareholder (without the franking credits).
When will a shareholder receive a greater benefit from franking credits?
8.17 In determining whether a shareholder would derive a greater benefit from franking credits than another shareholder in relation to franked dividends, among other relevant factors, regard will be had to:
- •
- the residency of the shareholders (non-residents cannot fully use franking credits); [Item 5; new paragraph 160AQCBA(17)(a)]
- •
- whether the amount of tax (if any) payable on the dividend or distribution would be less than the franking rebate; [Item 5; new paragraph 160AQCBA(17)(b)]
- •
- if one of the shareholders is a company, whether it would be unable to pay a franked dividend to its shareholders because it has insufficient profits; [Item 5; new paragraph 160AQCBA(17)(c)]
- •
- if one of the shareholders is a company, whether it would not be entitled to franking credits (e.g. if it is a mutual company or it is effectively wholly owned by non-residents or tax-exempts) or would be less able to use franking credits than other companies (e.g. co-operatives and credit unions). [Item 5; new paragraph 160AQCBA(17)(d)]
8.18 Where the specific anti-streaming rule applies, the Commissioner may make a determination that either:
- •
- the streaming company will incur an additional franking debit in respect of each dividend paid or other benefit received by a shareholder; or [Items 5 and 6; new paragraph 160AQCBA(3)(a) and new section 160AQCNA]
- •
- no franking credit benefit is to arise in respect of any streamed dividends paid to a shareholder. [Item 5; new paragraph 160AQCBA(3)(b)]
8.19 The determination made by the Commissioner can be revoked or varied and can be made at any time after the streaming has occurred.
8.20 To give effect to the determination, the Commissioner will be required to serve notice of the determination in writing on the taxpayer to which it relates. The notice may be included in a notice of assessment or served separately. [Item 5; new subsection 160AQCBA(4)]
8.21 Where the Commissioner makes a determination under new paragraph 160AQCBA(3)(b) and the determination applies in respect of a dividend paid by a listed public company (as defined in subitem 9(4) ), the Commissioner will be able to satisfy the requirement of serving the notice of determination in writing on the taxpayer by publishing the notice in an Australian national newspaper. The notice is taken to have been served on the day that it is published. [Item 5; new subsection 160AQCBA(5)]
8.22 New subsection 160AQCBA(7) enables the machinery provisions of the Act concerning the review of assessments and appeals against decisions of the Commissioner to apply in relation to determinations made by the Commissioner under new subsection 160AQCBA(3) . A taxpayer dissatisfied with a determination will have the same rights of review and appeal as if the determination were an assessment. [Item 5; new subsection 160AQCBA(7)]
8.23 To ensure that a determination carries its own rights of appeal a determination will not form part of an assessment. [Item 5; new subsection 160AQCBA(3)]
8.24 New subsection 160AQCBA(6) specifies the evidentiary value of certain documents and copies of documents issued or given, or purporting to be issued or given, under the hand of the Commissioner, a Second Commissioner or a Deputy Commissioner. The production of a notice of a determination or document purporting to be a copy of such a notice is to be conclusive evidence of the due making of the determination and that the determination is correct, except in proceedings relating to an appeal against the determination. [Item 5; new subsection 160AQCBA(6)]
How is the additional franking debit calculated?
8.25 Where the Commissioner determines that the streaming company is to incur an additional franking debit, new subsection 160AQCBA(8) sets out how the additional franking debit is to be calculated. [Item 5; new subsection 160AQCBA(8)]
8.26 Where the streaming involves the payment of dividends only, the additional franking debit is equal to the difference between:
- •
- the franked amount (if any) of the dividend paid to those shareholders who do not derive as great a franking credit benefit as others; and
- •
- the amount that would have been the franked amount if the dividend had been franked to the same extent as the streamed dividend paid to shareholders who benefit most from franking credits. [Item 5; new subsections 160AQCBA(9) and 160AQCBA(10)]
8.27 If the streaming arrangement involves the streaming of more than one dividend to the shareholders who benefit most from franking credits, it is the extent to which the maximum franked dividend is franked that is relevant in determining the additional franking debit. For example, if a company streams two franked dividends to a shareholder, one of which is franked to the extent of fifty per cent and the other franked to the extent of eighty per cent, and one unfranked dividend to another shareholder, the additional franking debit that could arise is the amount of the franking debit that would have arisen if the unfranked dividend had been franked to eighty per cent.
8.28 Where the streaming involves the payment of dividends and the giving of another benefit in the form of bonus shares from a share premium account, the additional franking debit is equal to the franking debit that would have arisen if a dividend equal to the amount of the debit to the share premium account had been franked to the same extent as the streamed dividend. [Item 5; new subsection 160AQCBA(11)]
8.29 Where the streaming involves the payment of dividends and the giving of another benefit, the additional franking debit is equal to the franking debit that would have arisen if a dividend equal to the value of the benefit provided had been franked to the same extent as the streamed dividend. [Item 5; new subsection 160AQCBA(12)]
8.30 In determining the amount of the franking debit arising under new subsection 160AQCBA(12) the value of the benefit provided is used, not the value of any underlying property. Therefore, if a company provides a benefit by buying back a shareholder's shares for $100 but the market value of those shares is $50, the franking debit is calculated by reference to the $100.
8.31 If a franking debit arises under the existing dividend streaming provisions contained in section 160AQCB of the Act no further franking debit is to arise under the amendments introduced by Part 1 of Schedule 8 of the Bill. [Item 5; new subsection 160AQCBA(13)]
How are franking credit benefits denied?
8.32 Where the Commissioner determines that it would not be appropriate to impose an additional franking debit on a streaming company, the Commissioner can alternatively make a determination that no franking credit benefit is to arise in respect of any streamed dividends paid to shareholders. [Item 5; new paragraph 160AQCBA(3)(b)]
8.33 As a result, Part 1 of Schedule 8 of the Bill will amend:
- •
- section 160APP of the Act so that no franking credits arise upon the receipt of franked dividends where a determination to deny franking credit benefits is made; [Item 4; new subsection 160APP(1C)]
- •
- section 160AQT of the Act so that no gross-up is made upon the receipt of franked dividend where a determination to deny franking credit benefits is made; [Item 7; new subsection 160AQT(1D)]
- •
- subsection 46F(2) of the Act so that, for the purposes of determining whether private companies will be entitled to the intercorporate dividend rebate, the dividend will be treated as if it were unfranked where a determination to deny franking credit benefits is made; [Item 1; amended subsection 46F(2)]
- •
- section 160AQY of the Act so that no franking rebate arises in respect of a trust or partnership amount on which a trustee is liable to be assessed where a determination to deny franking credit benefits is made; and [Item 8; new subsection 160AQY(2)]
- •
- paragraph 128B(3)(ga) of the Act so that a shareholder will not be entitled to an exemption from withholding tax on a dividend that has been franked where a determination to deny franking credit benefits is made. [Item 2; amended paragraph 128B(3)(ga)]
Transitional measure: dividends declared by public companies before the Budget
8.34 The specific anti-streaming rule will not apply to dividends declared, but not paid, by publicly listed companies before 7.30 pm AEST on 13 May 1997, and to distributions made after that time that relate to such dividends. [Subitems 9(3) and 9(4)]
8.35 An example of where a distribution would relate to a dividend would be where, under a stapled stock scheme, the declaration of a dividend in one company provides a shareholder in the company with the right to a distribution from another entity: both the distribution from the other entity, and any distribution to that entity necessary to support the distribution, will be related to the original declared dividend.
What constitutes a class of shares?
8.36 To prevent inconsequential differences in share rights being used to classify shares into different classes, Part 1 of Schedule 8 of the Bill will amend the definition of what constitutes a class of shares to provide that a class of shares includes all shares having substantially the same rights. [Item 3; new subsection 160APE(1)]
8.37 For example, where rights are substantially the same but there is merely a difference in par values or voting rights, those shares would now be considered to constitute the same class.
8.38 Part 1 of Schedule 8 of the Bill will also amend the definition of what constitutes a class of shares by deeming partners in a corporate limited partnership to hold a single class of shares. [Item 3; new subsection 160APE(2)]
Explanation of amendments relating to the general anti-avoidance rule
8.39 The general anti-avoidance rule applies to schemes to obtain a tax advantage in relation to franking credits (franking credit schemes). Franking credit schemes involve the disposition of shares or an interest in shares where the elements described in new subsection 177EA(3) exist. [Item 25; new subsection 177EA(3)]
8.40 Where both the company and the person receiving the dividend or distribution are parties to the scheme the Commissioner has a choice as to whether to post a debit to the company's franking account or deny the franking credit benefit to the recipient of the dividend or distribution. [Item 25; new subsection 177EA(5)]
8.41 Where there are numerous shareholders, it will generally be appropriate to debit the company's franking account. In some cases, however (for example where the company has very substantial surplus credits), posting debits to the company's franking account will not effectively counteract the scheme; in these cases, it would be more appropriate to deny the shareholders the franking credit benefit directly.
8.42 The amount of the debit to the franking account will be such amount as the Commissioner considers reasonable in the circumstances, not being an amount larger than the debit to the franking account occasioned by the payment of the dividend. [Item 25; new paragraph 177EA(10)(b)]
8.43 In some cases it may be appropriate to debit an amount which is less than the franked amount of the relevant dividend. This is because only part of the dividend may really represent a franking credit benefit under a scheme. For example, where the scheme involves the receipt of a franked dividend and an associated offsetting deduction or capital loss, the real benefit of the scheme may be limited to so much of the franked dividend which is offset by the deduction or loss; while the rest of the franking credit benefit merely serves to reduce tax payable on the dividend or distribution. In such a case, it may be appropriate for the Commissioner to debit the company's franking account only by an amount which represents the real benefit to the shareholders under the scheme.
8.44 Similarly, where the determination applies to a recipient of a dividend or distribution, the Commissioner may decide to deny the franking credit benefit to a specified extent only.
8.45 To give effect to the determination, the Commissioner will be required to serve notice of the determination in writing on the taxpayer to which it relates. The determination made by the Commissioner can be revoked or varied and can be made at any time after the scheme has been entered into. [Item 25; new subsection 177EA(6)]
8.46 Where the Commissioner makes a determination under new paragraph 177EA(5)(b) and the determination applies in respect of a dividend paid by a listed public company (as defined in subitem 26(4) ), the Commissioner will be able to satisfy the requirement of serving the notice of determination in writing on the taxpayer by publishing the notice in an Australian national newspaper. [Item 25; new subsection 177EA(7)]
8.47 New subsection 177EA(9) enables the machinery provisions of the Act concerning the review of assessments and appeals against decisions of the Commissioner to apply in relation to determinations made by the Commissioner under new subsection 177EA(5) . A taxpayer dissatisfied with a determination will have the same rights of review and appeal as if the determination were an assessment. [Item 25; new subsection 177EA(9)]
8.48 To ensure that a determination carries its own rights of appeal a determination will not form part of an assessment. [Item 25; new subsection 177EA(5)]
8.49 New subsection 177EA(8) specifies the evidentiary value of certain documents and copies of documents issued or given, or purporting to be issued or given, under the hand of the Commissioner, a Second Commissioner or a Deputy Commissioner. The production of a notice of a determination or document purporting to be a copy of such a notice is to be conclusive evidence of the due making of the determination and that the determination is correct, except in proceedings relating to an appeal against the determination. [Item 25; new subsection 177EA(8)]
If the Commissioner makes a determination to debit the franking account of a company, what is the maximum amount or extent of the debit?
8.50 If the Commissioner determines that a company (which was a party to the scheme) should incur a franking debit, the maximum amount of the debit is the same as the debit which arises under section 160AQB when the company pays the relevant franked dividend (i.e. the dividend received directly or indirectly by the relevant taxpayer). [Item 25; new subsection 177EA(10)]
8.51 The debit arises on the day on which notice in writing of the determination is served on the company. [Item 15; new section160AQCNB]
8.52 For example, if the Commissioner makes a determination that a company should incur the maximum franking debit in respect of a class C franked dividend of $1 million, the total amount of the class C franking debit would be $2 million. This is because the company would be required to post the debit which arises under section 160AQB and an additional debit of the same amount.
What is the effect of the Commissioner making a determination to deny franking credits on dividends?
8.53 Where the Commissioner determines that it would not be appropriate to impose an additional franking debit on a company, the Commissioner can alternatively make a determination that no franking credit benefit is to arise in respect of dividends paid to the relevant taxpayer.
8.54 As a result, Part 2 of Schedule 8 of the Bill will amend:
- •
- section 160APP of the Act so that no franking credits arise upon the receipt of franked dividends to the extent that a determination to deny franking credit benefits is made; [Item 13; new subsections 160APP(1D) and (1E)]
- •
- section 160APQ of the Act so that no franking credit arises in respect of a trust or partnership amount included in a taxpayer's assessable income to the extent that a determination to deny franking credit benefits is made; [Item 14; new subsections 160APQ(4) and (5)]
- •
- section 160AQT of the Act so that no gross-up is made upon the receipt of a franked dividend to the extent that a determination to deny franking credit benefits is made; [Item 16; new subsections 160AQT(1E) and (1F)]
- •
- subsection 46F(2) of the Act so that, for the purposes of determining whether private companies will be entitled to the intercorporate dividend rebate, the dividend will be treated as if it were unfranked where a determination to deny franking credit benefits is made; [Item11; amended subsection 46F(2)]
- •
- section 45Z of the Act so that, for the purposes of determining whether private company beneficiaries or partners will be entitled to the intercorporate dividend rebate, if a determination to deny franking credit benefits is made, the trust or partnership distribution will not carry the right to an intercorporate dividend rebate if, had the dividend been paid directly to the private company and it had been unfranked, the company would not have been entitled to the rebate; [Item 10; new subsection 45Z(6)]
- •
- sections 160AQX, 160AQY, 160AQYA, 160AQZ and 160AQZA of the Act so that no franking rebate arises in respect of a trust or partnership amount included in a taxpayer's assessable income to the extent that a determination to deny franking credit benefits is made; and [Items 17 to 21; amended sections 160AQX, 160AQY, 160AQYA, 160AQZ and 160AQZA]
- •
- paragraph 128B(3)(ga) of the Act so that a shareholder will not be entitled to an exemption from withholding tax on a dividend that has been franked where a determination to deny franking credit benefits is made. [Item 12; amended paragraph 128B(3)(ga)]
8.55 For example, if the Commissioner makes a determination to deny the franking benefits on a dividend paid to a natural person shareholder, the shareholder will not gross-up the dividend (section 160AQT) and therefore cannot claim the franking rebate (section 160AQU). Similarly, a private company receiving a franked dividend to which the rule applies, is not entitled to credit its franking account (section 160APP) and, unless it is a dividend paid within a wholly-owned company group, cannot claim the intercorporate dividend rebate (section 46F).
Adjustments in relation to 160AQT amounts
8.56 The above amendments to sections 160AQX, 160AQY, 160AQYA, 160AQZ and 160AQZA will prevent a beneficiary or partner gaining franking credit benefits from a trust or partnership distribution in respect of which a determination to deny franking credit benefits is made.
8.57 However, as a result of the section 160AQT gross-up to the assessable income of the trust or partnership, their share in the net income of the trust or partnership would, but for a consequential amendment, be inappropriately increased.
8.58 This problem currently arises for company beneficiaries and partners because, although they are assessed by reference to the grossed-up amount of the dividend received by the trust or partnership, companies do not receive a franking rebate for the grossed-up amount. To cater for this, section 160AR of the Act currently allows company beneficiaries and partners to receive a tax deduction equal to the potential rebate amount (i.e. the amount of the franking rebate they would have received had they been an individual shareholder entitled to the rebate).
8.59 Consistent with this tax treatment, Part 2 of Schedule 8 of the Bill will provide a tax deduction for a trust or partnership amount included in a taxpayer's assessable income in respect of which a determination to deny franking credit benefits is made. The amount of the deduction is to be the same as the amount currently allowed under section 160AR, i.e. the potential rebate amount. [Items 22 to 24; amended section 160AR, and new section 160ARAA]
What is a scheme for the disposition of shares or an interest in shares?
8.60 The definition of scheme in subsection 177A(1) of the Act includes any agreement, arrangement, understanding, promise or undertaking (whether express or implied and whether legally enforceable or not), and any plan, proposal, course of action or course of conduct.
8.61 An example of a scheme for the disposition of shares or an interest in shares which would attract the rule would be the issue of a dividend access share or an interest in a discretionary trust for the purpose of streaming franking credits to a particular shareholder or beneficiary.
8.62 An example of a sale of shares which would attract the rule would be a securities lending arrangement under which a shareholder who cannot fully use franking credits (typically a non-resident) lends shares to a taxpayer over a dividend period so that the dividend, and attached franking credits, is paid to the borrower (legally, the transaction constitutes a disposal and reacquisition rather than a loan but is generally not treated as such for tax purposes). The general anti-avoidance rule would apply to this transaction because there is a scheme for the disposal of shares by the lender and a purpose (other than an incidental purpose) of the scheme was to give the borrower a franking credit benefit.
8.63 For the rule to apply there does not need to be a legal disposition of shares or an interest in shares. This is because a scheme for the disposition of shares or interest in shares includes de facto sales or dispositions as well as the other transactions listed in new subsection 177EA(14) . For example, there will be a disposition for the purposes of the rule if a taxpayer transfers the right to receive income from shares to another taxpayer and that other taxpayer assumes the risks of share price fluctuation, even if there is no change in the legal ownership of the shares. [Item 25; new subsection 177EA(14)]
8.64 The mere acquisition of shares or units in a unit trust where the shares or units are to be held at risk in the ordinary way, will not, in the absence of further features, attract the rule, even though the shares or units are expected to pay franked dividends or distributions. [Item 25; new subsection177EA(4)]
What is a share or an interest in shares for the purposes of the rule?
8.65 A share includes the interest of a partner in a corporate limited partnership and membership of a company which does not have share capital (e.g. companies limited by guarantee). If a person is a shareholder in a company, whatever asset the person holds that makes that person a shareholder will be a share for the purposes of the rule. [Item 25; new subsection 177EA(12)]
8.66 New subsection 177EA(13) provides a definition of an interest in shares so that a partner in a partnership that holds shares (directly or indirectly) or a beneficiary of a trust holding shares (directly or indirectly) has an interest in shares. Therefore, beneficiaries of discretionary trusts hold an interest in shares of the trust if they can benefit from those shares (e.g. because the trustee can distribute dividend income to them). [Item25; new subsection 177EA(13)]
Special rules for life assurance companies
8.67 Life assurance companies can be taxed as a single taxpayer but they have insurance funds which are taxed differently from the general fund of the company (for example, franked dividends paid on shares included in the insurance funds of a life assurance company give rise to franking rebates for the company, whereas franked dividends paid on shares in the general fund give rise to franking credits only). They therefore have the capacity to move shares between their insurance and general funds and thereby affect the taxation treatment of the dividends paid on shares.
8.68 To prevent exploitation of the different tax treatment depending on the fund in which the shares are held, transfers between the general fund of a life assurance company and the insurance funds will be treated as if they were transfers between different taxpayers for the purposes of the rule. Accordingly, there is a disposition for the purposes of the rule if assets cease to be included, or commence to be included, in the insurance funds of a life assurance company. [Item 25; new paragraph 177EA(14)(f)]
When is a distribution payable or expected to be payable?
8.69 A distribution on an interest in shares for the purposes of the rule is a trust or partnership amount (as defined in section 160APA of the Act) which is included in, or allowed as a deduction from, a taxpayer's assessable income. Therefore, a distribution will be payable or expected to be payable on an interest in shares if it is expected that a trust or partnership amount will be included in the taxpayer's assessable income. [Item 25; new subsection 177EA(15)]
8.70 In determining whether a trust or partnership amount is included in, or allowed as a deduction from, a taxpayer's assessable income, certain provisions are to be disregarded. [Item 25: new subsection 177EA(17)]
What is a franked dividend or distribution?
8.71 A franked dividend is defined in section 160APA as a dividend which has been franked in accordance with section 160AQF. It can be a class A, class B or class C franked dividend.
8.72 A franked distribution is a trust or partnership amount (as defined in section 160APA) in relation to which there is a class A, B or C flow-on franking amount. For example, a beneficiary of a trust who is presently entitled to franked dividend income of the trust will receive a franked distribution for the purposes of the rule because there would be a flow-on franking amount in relation to the trust amount included in the beneficiary's assessable income. [Item 25; new subsection 177EA(16)]
What is a franking credit benefit for the purposes of these rules?
8.73 A franking credit benefit is defined in new subsection 177EA(18) . If a taxpayer is entitled to any one or more of the benefits described in the subsection, the rule can apply. [Item 25; new subsection 177EA(18)]
8.74 The test of purpose under new section 177EA is a test of objective purpose. The question posed by the rule is whether, objectively, it would be concluded that a person who entered into or carried out the scheme under which the disposition of shares occurs, did so for the purpose of obtaining a tax advantage relating to franking credits. In determining the purpose of the scheme, the purpose of one of the persons who entered into or carried out the scheme (whether or not that person is the person receiving the franking credit benefit) will be sufficient to attract the rule. [Item 25: new paragraph 177EA(3)(e)]
8.75 For example, if a taxpayer enters into a scheme involving a disposition of shares with another taxpayer for the purpose of enabling either of the taxpayers to obtain a franking credit benefit, the fact that the second taxpayer does not share that purpose will not prevent the rule from applying. Also, if a taxpayer enters into such a scheme with two or more purposes, neither of which is merely incidental, the fact that one purpose is not that of obtaining a tax advantage relating to franking credits will not prevent the section from applying.
8.76 A purpose is an incidental purpose when it occurs fortuitously or in subordinate conjunction with another purpose, or merely follows another purpose as its natural incident. For example, when a taxpayer holds shares in the ordinary way to obtain the benefit of any increase in their share price and the dividend income flowing from the shares, a franking credit benefit is generally no more than a natural incident of holding the shares, and generally the purpose of obtaining the benefit simply follows incidentally a purpose of obtaining the shares: it is therefore merely an incidental purpose.
8.77 On the other hand, if a taxpayer, being a company, entered into a scheme involving the disposition of shares for the immediate purpose of obtaining a tax advantage for itself (for example, one deriving from an allowable deduction and the inter-corporate dividend rebate) and another, substantial, purpose of obtaining franking credits (which will ultimately benefit its shareholders), the fact that the taxpayer may regard the immediate benefit of the first tax advantage as more important than the deferred benefit of obtaining the franking credits does not mean that the second purpose is merely incidental to the first.
8.78 In determining whether it would be concluded that a person entered into or carried out a scheme involving the disposition of shares or an interest in shares for a purpose, not being merely an incidental purpose, of enabling a taxpayer to obtain a tax advantage in relation to franking, regard must be had to the terms of the disposition and the relevant circumstances.
8.79 Circumstances which are relevant in determining whether any person has the requisite purpose include, but are not limited to, the factors listed in new subsection 177EA(19) . These factors include the eight factors which are used to determine purpose under the existing section 177D in relation to schemes which omit assessable income or create allowable deductions. To give further guidance to the operation of the new measures, other matters more specifically relevant to schemes to trade or stream franking credits are also included. These are listed below.
8.80 The extent to which the person receiving a dividend is exposed to the risks and opportunities of owning shares or an interest in shares, or another person is so exposed, is a relevant factor. [Item 25; new paragraph 177EA(19)(a)]
8.81 For example, a taxpayer who buys a put option on shares (which provides the right but not the obligation to sell for a stipulated price on or before a specific date) will have diminished risk with respect to the shares because the taxpayer will have guaranteed the sale price of the shares and will be indifferent to falls in the market price of the shares.
8.82 The incidence of risk is a strong pointer to where real ownership of the shares lies. The risks and opportunities of share ownership may be removed or altered, among other ways, by entering into a derivative (for example, a futures contract or an option). For example, where the value of a derivative contract of a shareholder varies inversely with the value of the shareholder's shares, to the extent of the inverse variation, the effect is to pass the risks and opportunities of holding the share to the counterparty under the contract. By using derivatives the risks and opportunities of share ownership can be reduced to nothing, or to any fraction of the ordinary exposure (or even increased). Generally, the greater the risk borne by the taxpayer receiving the franking credit benefit, the less likely it is that the requisite purpose is present.
8.83 Apart from the taxpayer receiving the franking credit benefit, it is relevant to look to see whether some other person (or associated persons) held the shares or the interest in shares (or their economic equivalent) before and after the period in which the relevant taxpayer became entitled to the franking credit benefit, or had the risks and opportunities of share ownership during the period when legally the shares belonged to the relevant taxpayer, or some combination of both. Generally, the greater the risks and opportunities of a person other than the taxpayer receiving the dividends, the greater the likelihood that there is present the requisite purpose. This is especially likely to be so if the same person had those risks before, during and after the period in which the relevant taxpayer became entitled to the franking credit benefit.
The length of the period for which the shares were held
8.84 The length of time in which the shares or the interest in the shares were held, or the length of the period in which the holder was exposed to the risks and opportunities of holding the shares or the interest, is another relevant circumstance. The longer the period for which the shares were held at risk by the person obtaining the franking credit benefit, the less likely it is that the requisite purpose is present. [Item 25; new paragraphs 177EA(19)(a) and 177EA(19)(h)]
The tax profiles of the parties to the scheme
8.85 It is relevant to enquire whether the taxpayer would gain a greater benefit from franking credits than other persons who hold shares or interests in shares in the company, or the other parties to the scheme. [Item 25; new paragraph 177EA(19)(b)]
8.86 It is also relevant to enquire whether, as a result of the scheme, maximum value is derived from the franking credits and wastage is avoided (i.e. the franking credits end up in the hands of taxpayers who can make most use of them and are not wasted by being distributed to taxpayers who would not gain the same benefit, or by remaining undistributed in the company's franking account). If the relevant taxpayer derives no additional advantage over anyone else from franking credits it is less likely that the requisite purpose is present; conversely, if the taxpayer does obtain such an advantage, that may point to the existence of the requisite purpose. [Item 25; new paragraph 177EA(19)(c)]
8.87 In determining whether a person would derive a greater benefit from franking credits than another person in relation to a franked dividend or distribution, among other relevant factors, regard will be had to:
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- the residency of the persons (non-residents cannot fully use franking credits);
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- whether the amount of tax (if any) payable on the dividend or distribution would be less than the franking rebate;
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- if one of the persons is a company, whether it would be unable to pay a franked dividend to its shareholders because it had insufficient profits; and
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- if one of the persons is a company, whether it would not be entitled to franking credits (e.g. it is a mutual life company or is effectively wholly owned by non-residents or tax-exempts) or would be less able to use franking credits than other companies (e.g. cooperatives and credit unions). [Item 25; new paragraph 177EA(20)]
The consideration paid by or to the relevant taxpayer
8.88 It is relevant to note the extent to which consideration paid or provided by the relevant taxpayer represents the value of franking. Where consideration paid by or to, or provided by, the relevant taxpayer is calculated, wholly or in part, by reference to the franking credit benefit, that may indicate the presence of the requisite purpose. For example, in a securities lending arrangement compensation may be paid to the lender for the dividend foregone and for the franking credit benefit obtained by the borrower. [Item 25; new paragraph 177EA(19)(e)]
Associated deductions or losses
8.89 In some schemes the franking credit benefit is captured by matching the franked dividend or distribution with an associated allowable deduction or capital loss. The deduction or loss in effect relieves the dividend or distribution from tax, enabling the franking rebate or franking credit to be used to shelter other income from tax. Accordingly, it is relevant to note whether there is an associated allowable deduction or capital loss under the scheme. [Item 25; new paragraph 177EA(19)(f)]
8.90 Some dispositions of shares or an interest in shares may cause the character of a dividend or distribution to be equivalent for the relevant taxpayer to interest or a like amount. In these cases, a franking credit benefit is often being provided to allow another party to obtain tax-effective finance. [Item 25; new paragraph 177EA(19)(g)]
8.91 Other relevant factors include whether the parties to the scheme are associated; whether they are acting at arm's length; and whether fair value is paid or provided for any shares, other property, or contractual obligations involved in the scheme. It may also be relevant to note whether dealings are in the ordinary course of business, or are conducted on or off market.
Examples of application of the test
8.92 Smith, an individual, acquires shares, which have a history of paying franked dividends, on the Stock Exchange from his broker for the prevailing market price. Shortly after acquiring them, he becomes concerned at a downturn in the market and buys a market traded put option. This entitles him to sell the shares at a fixed price. The likelihood of the option being exercised when it is bought by Smith is about 50% (technically, it has a delta of -0.5). The put option reduces most of the risks of owning the shares, but not the opportunities. During this time Smith derives a franked dividend. Later on, the market picks up, and Smith closes out the option. He continues to hold the share. Smith has a low marginal rate of tax and a small amount of interest income, and he finds the after-tax rate of return on his share investment attractive, among other reasons, because he can fully use the franking rebate.
8.93 Buying a put option over shares can be a disposition of shares for the purposes of the rule. However, consideration of the relevant circumstances shows that no person connected with the scheme has the requisite purpose so the rule will not apply:
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- the shares are held for a substantial period;
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- over time, most of the risks (and all of the opportunities) of share ownership lie with Smith;
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- the reduction in risk for a period is fully explained as insurance against a market downturn;
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- there is no association between Smith, the seller of the shares, or the seller of the share option;
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- there is no other party to the scheme who might otherwise obtain franking credits who is less able to use them than Smith;
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- more generally, all dealings are at arm's length and for market prices; the form and substance of the scheme appear to be the same; and all transactions are carried out in a commercial manner.
8.94 The mere fact that Smith finds the return from the shares attractive because he can fully use the franking rebate does not mean, objectively, that he entered into a scheme for a purpose (not being an incidental purpose) of conferring a franking credit benefit upon himself.
8.95 The same result would follow if the trustee of an imputation trust bought shares and Smith bought units in the trust.
8.96 A trust is established with a nominal capital and units are issued to investors. One class of units, A class units, entitles the holder, at the discretion of the trustee, to receive the franked dividend income of the trust up to a specified rate: this rate is calculated by taking the prevailing rate of interest and reducing it to the cash amount of dividends which, grossed up for franking, provide the equivalent after-tax return. (There is also a collateral guarantee of payment.) The A class unitholders may redeem their units at face value after 5 years. Another class of units, B class units, is entitled to any excess over the amounts paid to the A class unitholders. The A class units are acquired by persons who can benefit from franking; B class units are acquired by a single investor associated with the trustee, who cannot benefit from franking, as it has extensive tax losses from interest deductions.
8.97 With the money provided by the A class unitholders, and some additional funds from the B class unitholder, the trustee buys shares on which franked dividends are expected to be paid; it is anticipated that those dividends will suffice to pay the A class holders the agreed rate.
8.98 This arrangement is a scheme involving the disposition of an interest in shares. The units in the trust are issued with a view to the beneficiaries obtaining an interest in shares. For the purposes of new section 177EA the discretionary beneficiaries are taken to have an interest in the shares because they will form part of the trust estate.
8.99 The A class unit holders are not entitled to receive any capital growth from the shares, nor are they exposed to any consequences of a fall in share prices. From their perspective their trust investment behaves like an interest bearing bond, where the lower rate of interest is compensated for by the benefit of franking. They do not have the risks and opportunities associated with share ownership; the B class holder has all those risks. However, it is expected that they will receive a franking credit benefit from distributions from the trust.
8.100 In this case, consideration of the relevant circumstances indicates that there is a purpose (other than an incidental purpose) of obtaining a tax advantage from franking. The incidence of the risks and opportunities of holding the shares points to the B class unitholder as the effective owner of the shares, and to a purpose of the scheme being to confer a tax advantage in relation to franking on the A class unitholders in order to obtain a cheaper cost of funds for the B class unit holder. This is because the subscription of the funds by the A class unitholders is effectively a loan to the B class unitholder, and the disposition of the shares upon the trusts described above is intended to be a means of paying the equivalent of interest in a tax advantaged way through the use of franking credits.
8.101 In this case it would be appropriate to cancel the benefit of franking by denying the A class unitholders a franking rebate or franking credit, as there is no evidence that the company paying the dividend is a party to the scheme.
Transitional measure: dividends declared by public companies before the Budget
8.102 The general anti-avoidance rule will not apply to dividends declared, but not paid, by publicly listed companies before 7.30 pm AEST on 13 May 1997, and to distributions made after that time that relate to such dividends. [Subitem 26(3)]
8.103 An example of where a distribution would relate to a dividend would be where, under a stapled stock scheme, the declaration of a dividend in one company provides a shareholder in the company with the right to a distribution from another entity: both the distribution from the other entity, and any distribution (for example, a dividend) to that entity necessary to support the distribution, will be related to the original declared dividend.
Regulation Impact Statement: anti-streaming measures
Specification of policy objective
8.104 The policy objective is to prevent the unintended use of franking credits through dividend streaming arrangements, which involve a company disproportionately directing franked dividends to select shareholders who benefit most in preference to others. This measure will involve amendments to the Income Tax Assessment Act 1936 (the Act).
Identification of implementation options
8.105 One of the underlying principles of the imputation system as introduced in 1987 is that tax paid at the company level is, in broad terms, imputed to shareholders in proportion to their shareholdings. Dividend streaming (i.e. the distribution of franking credits to select shareholders) undermines this principle by attributing tax paid on behalf of all shareholders to only some of them. Generally this entails the streaming of franking credits to taxable residents and away from non-residents and tax-exempts.
8.106 The Act contains a number of provisions designed to limit dividend streaming. However, these rules have proved to be ineffective in preventing all streaming and the Government announced further measures in the 1997-98 Budget to limit streaming opportunities.
8.107 To prevent companies exploiting the current definition of share class by using artificial and inconsequential differences between share classes to facilitate dividend streaming an amendment to the definition of class of share in the Act is to be made so that a class of shares includes all shares having substantially the same rights.
8.108 A general anti-streaming rule targeting dividend streaming was also announced in the recent Budget. This rule will apply to arrangements whereby a company streams dividends so as to provide franking credits to shareholders who benefit most in preference to others.
Assessment of impacts (costs and benefits) of each implementation option
8.109 The proposed general anti-streaming provision will only impact on those companies entering into dividend streaming arrangements as defined. Therefore, only those companies that enter into such arrangements, and their tax advisers (e.g. members of the legal and accounting professions), need to put their mind to the operation of the general anti-streaming rule.
8.110 The proposed rule may also impact on the ATO in administering the rule.
8.111 Publicly-listed companies will generally not be affected by the amendment to the definition of share class because these companies tend to have only one class of ordinary shares. Private companies often have different classes of shares and therefore may be affected by this measure.
Analysis of the costs and benefits associated with each implementation option
Strengthening existing provisions
8.112 The advantages of strengthening the existing provisions are simplicity, certainty and a lack of added complexity. This is because, by amending the definition of share class, opportunities for streaming are limited within the framework of the current law. Therefore, companies will not incur significant costs associated with understanding the operation of the proposed amendments. Some cost may be incurred in determining whether shares have substantially the same rights. However, this cost would not be significant and would only be incurred once.
8.113 A disadvantage of this approach by itself is that it is narrowly targeted and lends itself to circumvention by carefully constructed schemes. Therefore, the strengthening of the existing provisions by itself would not be sufficient to prevent dividend streaming. Accordingly, a general anti-streaming rule targeting dividend streaming is required.
8.114 The most significant advantage of the general anti-streaming rule approach is that the legislation implementing it will not be complex. Furthermore, the approach will only affect companies that enter into dividend streaming arrangements. These two advantages will ensure that companies' compliance costs are kept to a minimum.
8.115 The general anti-streaming rule also has advantages in that marketing/educational costs will be low.
8.116 A disadvantage of the general anti-streaming rule is that there could be less certainty for companies because of the need to determine whether streaming is occurring, albeit on the basis of objective criteria. This may also have a further undesired outcome of increasing ATO administration costs because of the requirement to apply the provision on a case by case basis. However, this uncertainty will reduce over time as companies become more familiar with the provisions and as a result of ATO rulings.
8.117 The extent of the administrative costs which will be incurred by the ATO and the compliance costs which will be incurred by taxpayers will vary depending on the circumstances and facts of particular cases. Accordingly, the amount of these costs is unquantifiable. Any costs that do arise for the ATO are not expected to be high and would be met within the ATO's existing budget allocation.
8.118 The general anti-streaming rule will protect the revenue base used for the forward estimates, by removing opportunities for significant future expansion of dividend streaming practices. In the absence of the measure, to the extent that the revenue base would not be protected, there would be a significant revenue loss compared to the forward estimates. The general anti-streaming rule will assist in preventing this loss to the revenue. The amount by which this revenue loss would be reduced is unquantifiable.
8.119 The ATO and Treasury held consultations with peak bodies representing taxpayers and the investment community (including bodies representing the tax profession, merchant banks, superannuation and investment funds) shortly after the Budget announcement on matters relating to franking credit trading. Dividend streaming issues were also raised at these consultations which enabled the ATO to clarify the operation of the general anti-streaming rule. These issues concerned the interpretation and operation of parts of the rule.
8.120 The above amendments have the objective of ensuring that companies and their shareholders gain no undue tax benefit by streaming franking credits to particular shareholders through dividend streaming.
8.121 They implement this policy objective in a way that minimises compliance costs by amending existing provisions while protecting the revenue with a general anti-streaming rule.
8.122 The ATO will closely monitor developments to detect any emerging possibility of significant revenue loss/deferral or unreasonable compliance costs arising with the general anti-streaming rule. In addition, the ATO has consultative arrangements in place to obtain feedback from professional associations and the business community and through other taxpayer consultation forums.
Regulation Impact Statement: general anti-avoidance rule
Specification of policy objective
8.123 The policy objective is a general anti-avoidance rule to address trading in franking credits and dividend streaming, and thereby protect the Government revenue. This measure will involve amendments to the Income Tax Assessment Act 1936 (the Act).
Identification of implementation options
8.124 One of the underlying principles of the dividend imputation system is that the benefits of imputation should only be available to the true economic owners of shares, and only to the extent that those taxpayers are able to use the franking credits themselves. Franking credit trading, which broadly is the process of transferring franking credits on a dividend from investors who cannot fully use them (such as non-residents and tax-exempts) to others who can fully use them, undermines this principle. Similarly, dividend streaming (i.e. the streaming of franking credits to select shareholders) undermines the principle that, broadly speaking, tax paid at the company level is imputed to shareholders proportionately to their shareholdings.
8.125 The Government announced in the 1997 Budget various amendments to the Act to combat franking credit trading and misuse of the intercorporate dividend rebate. These amendments include the introduction of a holding period for shares so that shares or interests in shares have to be held at risk for more than 45 days (90 days for preference shares) before franking credits and the intercorporate dividend rebate are available on dividends paid to the holders of the shares or interests in shares, and a measure denying franking credits and the inter-corporate dividend rebate on dividends where the taxpayer (or an associate) is under an obligation to make related payments with respect to positions in substantially similar or related property.
8.126 Specifically targeted anti-avoidance provisions of the kind explained above are vulnerable to franking credit trading arrangements designed to fall outside their ambit. More sophisticated franking credit trading schemes would therefore circumvent the specific provisions. As a result, the Government also announced a general anti-avoidance rule targeting franking credit trading which applies to arrangements where one of the purposes (other than an incidental purpose) is to obtain a tax advantage in relation to franking credits. This rule will also limit dividend streaming opportunities.
8.127 The general anti-avoidance rule is the only option for implementing the government's policy objective.
Assessment of impacts (costs and benefits) of the implementation option
8.128 The proposed general anti-avoidance provision will only impact on those taxpayers entering into arrangements for the purpose (being more than an incidental purpose) of obtaining a franking credit advantage. Therefore, only those taxpayers that enter into such arrangements, and their tax advisers (e.g. members of the legal and accounting professions), need to put their mind to the operation of the general anti-avoidance provision. The proposed provision may also impact on the ATO in administering the provision.
Analysis of the costs and benefits associated with the implementation option
8.129 The most significant advantage of the general anti-avoidance rule is that the legislation implementing it will not be complex. Furthermore, the rule will only apply to taxpayers who enter into arrangements having a purpose of franking credit trading or dividend streaming. These two advantages will ensure that there will be minimal impact on genuine commercial transactions and taxpayers' compliance costs will be kept to a minimum. Accordingly, the general anti-avoidance rule should not impose high compliance costs on taxpayers.
8.130 The general anti-avoidance rule also has advantages in that marketing/educational costs will be low.
8.131 A disadvantage of the general anti-avoidance rule is that there could be less certainty for taxpayers because of the need to determine purpose, albeit on the basis of objective criteria. This may also have a further undesired outcome of increasing ATO administration costs because of the requirement to apply the provision on a case by case basis. However, this uncertainty will reduce over time as taxpayers become more familiar with the provision and as a result of ATO rulings.
8.132 The extent of the administrative costs which will be incurred by the ATO and the compliance costs which will be incurred by taxpayers will vary depending on the circumstances and facts of particular cases. Accordingly, the amount of these costs is unquantifiable. Any costs that do arise for the ATO are not expected to be high and would be met within the ATO's existing budget allocation.
8.133 The general anti-avoidance rule will protect the revenue base used for the forward estimates, by removing opportunities for significant future expansion of franking credit trading and dividend streaming practices. In the absence of the measure, to the extent that the revenue base would not be protected, there would be a significant revenue loss compared to the forward estimates. The general anti-avoidance rule will assist in preventing this loss to the revenue. The amount by which this revenue loss would be reduced is unquantifiable.
8.134 The ATO and Treasury held consultations with peak bodies representing taxpayers and the investment community (including bodies representing the tax profession, merchant banks, superannuation and investment finds) shortly after the Budget announcement on matters relating to the introduction of the holding period for shares and interests in shares. Issues were also raised at these consultations concerning the general anti-avoidance rule which enabled the ATO to clarify its operation. These issues concerned the interpretation and operation of parts of the rule.
8.135 The general anti-avoidance rule is an important element of the measures ensuring that taxpayers gain no undue tax benefit from entering into franking credit trading and dividend streaming arrangements.
8.136 It is required to ensure that the specific provisions cannot be circumvented by carefully constructed schemes.
8.137 The ATO will closely monitor developments to detect any emerging possibility of significant revenue loss/deferral or unreasonable compliance costs arising from the general anti-avoidance rule. In addition, the ATO has consultative arrangements in place to obtain feedback from professional associations and the business community and through other taxpayer consultation forums.
Chapter 9 - Distributions from private companies
Overview
9.1 Part 1 of Schedule 9 of the Bill will insert new Division 7A , of the Income Tax Assessment Act 1936 (the Act) to ensure that all advances, loans, and other credits (unless they come within specified exclusions) by private companies to shareholders (and their associates), are treated as assessable dividends to the extent that there are realised or unrealised profits in the company. In addition, debts owed by shareholders (or associates) which are forgiven by private companies are treated as dividends.
Summary of the amendments
9.2 The purpose of the amendments is to ensure that private companies will no longer be able to make tax-free distributions of profits to shareholders (and their associates) in the form of payments or loans.
9.3 The amendments will apply (with certain exceptions) to all payments or loans made on or after 4 December 1997, the day the legislation was introduced into the Parliament (the introduction day) [subitem 7(1)] . Thenew measures will also apply to debts forgiven on or after the introduction day, regardless of when the debts were created [subitem 7(1)] . Where the terms of existing loans are varied on or after 4 December 1997, the amendments will deem such loans to be new loans from the day the terms are varied [subitem 7(2)] .
9.4 Certain amendments will apply only after 4.00 pm, by legal time in the Australian Capital Territory, on 27 March 1998. They are amendments that provide for:
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- the treatment, as a loan by a private company, of a loan by a trustee of a trust estate to a shareholder (or associate) of a private company when that company is, or has been, presently entitled to income of the trust estate which has not been paid to the company by the trustee;
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- the treatment of a presently existing liability incurred by a private company as a result of providing a guarantee or security for a loan made by an entity to a shareholder (orassociate) as a payment by the company to the shareholder (orassociate);
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- the conferring on the Commissioner of Taxation of the power to disregard the treatment of a loan guaranteed or secured by a private company as a payment by the company to a shareholder (or associate) if to do so would cause undue hardship for the shareholder (or associate); and
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- the treatment of a loan guaranteed or secured by a private company as a payment by that company to a shareholder (or associate) to the extent that a payment or loan made to a shareholder (or associate) by an interposed private company exceeds that interposed companys distributable surplus.
[Subitem 7(3)]
9.5 The amendments inserting a reference to new Division 7A into subsections 160AEA(1) and 160APA apply for the year of income in which the introduction day occurs, and later years of income. New section 160AQCNC, which provides for a company's franking account to be debited in relation to amounts treated as dividends under new Division 7A, also applies for the year of income in which the introduction day occurs, and later years of income. [Item 8]
9.6 New paragraph 268-40(5)(d) , which ensures that amounts taken to be dividends are properly attributed for the purpose of the trust loss measures, applies to dividends taken to be paid under new Division 7A on or after the introduction day. [Item 9]
9.7 The amendment removing amounts treated as dividends under new Division 7A from the application of the fringe benefits tax law applies from the year of tax in which the introduction day occurs and later years of tax. [Item 12]
Background to the legislation
9.8 Section 108 of the Act is an anti-avoidance provision intended to prevent private companies distributing profits to shareholders and their associates tax free, in the form of loans or other advances. The section also operates to capture amounts paid or credited on behalf of an associated person, while transfers of property are treated as if they were payments of amounts equal to the value of the property.
9.9 Such an amount is deemed to be a dividend and included in assessable income by virtue of subsection 44(1). Paragraph 44(1)(a) includes in the assessable income of a shareholder in a company, 'dividends paid to him by the company out of profits derived by it from any source'. The deemed dividend is not subject to dividend withholding tax (payable on dividends to non-residents) and is unfrankable (that is, it cannot carry imputation credits to allow a rebate to the recipient for company tax paid).
9.10 The existing provision dealing with private company loans etc, section 108, operates only when the Commissioner forms the opinion that the amount loaned, paid or otherwise credited, represents a distribution of profits. In order to be in a position to form this opinion, the Commissioner needs to consider many factors and analyse much information, which usually will not be available unless the Commissioner conducts an audit. Consequently, many loans which should be taxable as dividends are not so taxed.
9.11 The Treasurer in the 1997-98 Federal Budget announced on 13May 1997 that the new measures will operate automatically to deem advances, loans and amounts otherwise credited by private companies to shareholders (and their associates) to be assessable dividends to the extent that there are realised or unrealised profits in the company. The new provisions will not affect loans that are specifically excluded.
9.12 The Assistant Treasurer, by press releases issued on 9 and 27 March 1998, announced changes to the amendments to improve certainty in the application of the provisions and to prevent unintended consequences that might have otherwise occurred. Also announced were certain amendments intended to prevent Division 7A being circumvented.
Explanation of the amendments
9.13 Item 1 inserts new subsection 108(2AA) to ensure that section 108 of the Act does not apply to amounts paid or credited by a private company that are treated as dividends under the new Division 7A . Section108 may have application to loans which were in existence at the date of introduction of the new legislation. The section may also apply to loans made to a shareholder which is a company, other than in its capacity as a corporate trustee, or to loans made in the ordinary course of the private company's business on arm's length terms.
Subdivision A - Overview of this Division
9.14 The Division treats three kinds of amounts as dividends paid by a private company. As explained in new Subdivision B, these include payments made to a shareholder or shareholder's associate [new section 109C] , loans to a shareholder or associate [new section 109D] , and debts owed by a shareholder or associate that are forgiven by the company [new section 109F] .
9.15 The amendments will ensure that all amounts lent or paid and amounts of debts forgiven by private companies, are treated as dividends and are assessable income of the shareholder or associate under section 44 of the Act. The amounts treated as dividends will not be frankable, but will result in a debit to the company's franking account, to discourage dividend streaming. However, not all amounts paid or lent or debts forgiven are treated as dividends. This is explained in new Subdivisions C and D .
9.16 New Subdivision E explains when an amount paid or lent by one or more interposed entities to a shareholder or shareholder's associate will be treated as a dividend paid by the private company to the shareholder or associate.
9.17 New Subdivision F deals with the general rules applying to amounts treated as dividends. A loan can be deemed to be a dividend only to the extent of the distributable surplus (as calculated under new subsection 109Y(2) ) of the company. [New section 109Y]
9.18 New Subdivision G lists defined terms used in the Division.
Subdivision B - Private company payments, loans and debt forgiveness are treated as dividends
9.19 Generally, all payments made by a private company to a shareholder or associate are treated as dividends at the end of the private company's year of income [new subsection 109C(1)] . The shareholder or associate need not be a shareholder or associate at the time the payment is treated as a dividend if the amount was paid because the entity was a shareholder or associate.
9.20 A payment is defined in new subsection 109C(3) as:
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- a payment to the extent that it is made to a shareholder or associate; or
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- a payment to the extent that it is made on behalf of a shareholder or associate; or
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- a payment to the extent that it is for the benefit of a shareholder or associate; or
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- an amount to the extent that it is credited to a shareholder or associate; or
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- an amount to the extent that it is credited on behalf of a shareholder or associate; or
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- an amount to the extent that it is credited for the benefit of a shareholder or associate; or
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- a transfer of property to a shareholder or associate.
9.21 An amount which comes within the definition of loan in new subsection 109D(3) is expressly excluded from the meaning of payment [new subsection 109C(3A)].
9.22 The amount of the payment that is taken to be a dividend is the amount paid, subject to there being a distributable surplus in the company at the time. [New subsection 109C(2)]
9.23 The amount that is treated as a dividend where property is transferred is equal to the difference between the arm's length value of the property and any consideration that may have been given by the transferee in respect of the transfer. [New subsection 109C(4)]
When are loans treated as dividends?
9.24 Generally, loans made by private companies to shareholders or their associates will be treated as dividends, with some exceptions that are explained in new Subdivision D .
9.25 A loan is defined by new subsection 109D(3) to include:
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- an advance of money;
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- a provision of credit or any other form of financial accommodation;
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- an amount paid for, on account of, on behalf of, or at the request of, a shareholder or shareholder's associate, if there is an express or implied obligation to repay the amount;
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- a transaction that in substance effects a loan of money.
9.26 A loan is taken to have been made in the year of income in which a private company pays or credits an amount to the shareholder or associate by way of loan. [New subsection 109D(4)]
9.27 New section 109D explains the circumstances in which a loan will be treated as a dividend. Where a private company makes a loan to a shareholder or associate in a year of income (other than a loan made in the course of the winding-up of a company) and the loan is not fully repaid by the end of that income year, the loan will be treated as a dividend, provided new Subdivision D does not apply. Where a loan is made in the course of the winding-up of a company, the loan will be treated as a dividend if the loan is not repaid by the end of the year of income immediately following the year of income in which the loan is made [new subsection 109D(1A)] . Further, when the loan is made, the recipient must be either a shareholder in the private company or an associate of such a shareholder, or has been a shareholder or associate at some time and the loan is made because of that fact.
9.28 The amount that is treated as a dividend is the amount of the loan that has not been repaid at the end of the year in which it is made or, in the case of a winding-up loan, at the end of the year immediately following the year of income in which it is made, subject to there being a distributable surplus in the company. [New subsection 109D(2)]
9.29 As a general rule, existing loans will not be affected by the new rules. However, where a loan in existence at 4 December 1997 is varied on or after that day, either by extending the term of the loan or increasing the amount of the loan, new subsection 109D(5) will treat the loan as if it were a new loan entered into on the day it is varied.
9.30 Loans (other than winding-up loans for the purposes of new subsection 109D(1A) ) which have the same maximum term (for the purposes of new section 109N ) made during the same year of income which are not treated as dividends at the end of that year are brought together to form a single amalgamated loan at the end of that year. In the second and subsequent years, it will then be necessary to make a minimum yearly repayment in respect of this amalgamated loan. Repayments made towards any of the constituent loans that make up the amalgamated loan will be treated as a repayment of the amalgamated loan. [New subsection 109E(4)]
9.31 If:
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- the amalgamated loan is not fully repaid; and
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- the minimum yearly repayment required under new subsection 109E(5) has not been made towards the amalgamated loan; and
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- the Commissioner has not exercised his/her power to disregard the failure to make the minimum yearly repayment [new section 109Q] ,
then the total sum outstanding at the end of the year of income in which the minimum yearly repayment is not made is treated as a dividend in that year of income [new subsections 109E(1) and (2)] , provided the company has a distributable surplus.
9.32 Amalgamated loans made to a shareholder or associate are not treated as dividends in the year in which the amalgamation occurs. [New section 109P]
9.33 The minimum yearly repayment is worked out using the formula at new subsection 109E(6) . This formula may be altered by way of regulation.
9.34 The formula for the minimum yearly repayment calculates the annual repayment of principal and interest required to repay the amalgamated loan over the maximum term for amalgamated loans of that type. For example, if the amount of the amalgamated loan is $100,000, the term of the loan is five years, the remaining term of the loan is also 5 years and the benchmark interest rate is 8%, the minimum yearly repayment in the year immediately after the year in which the amalgamated loan comes into existence is calculated as follows:
(100,000 * 0.08) / (1 - ((1/(1+0.08))^5)) = $25,045
9.35 The term of the amalgamated loan is the longest term of any of the loans which make up the amalgamated loan. The remaining term of the loan is the difference between the number of years in the term of the loan less the number of years the loan has already been in existence. If the result is not a whole number then it is rounded up.
9.36 In order to calculate the minimum yearly repayment for the second or subsequent year, the borrower has to know how much of the repayment made in the first year is attributable to interest and how much is applied to reduce the principal. To calculate this the borrower may apply the relevant benchmark interest rate to the amounts outstanding from time to time in the year [new subsection 109E(7)] . The amount of the loan repaid during a year is obtained by deducting the amount of interest calculated under this formula from the actual repayment made during the year. The opening balance for the next year is the difference between the opening balance at the beginning of the previous year less the principal repaid during that year.
Forgiven debts treated as dividends
9.37 New section 109F contains the provisions that deal with debt forgiveness in relation to all shareholders and their associates. These provisions deal with the forgiveness of loans by private companies that have not been treated as dividends. The section will apply to debts forgiven on or after 4 December 1997, regardless of when the debts arose.
9.38 If a private company forgives, wholly or partly, a debt owed to it by a shareholder or associate, the amount forgiven will be treated as a dividend at the end of the private company's year of income, provided there is a distributable surplus in the company for that year of income [newsubsection 109F(2)] . New section 109F can apply where the shareholder or associate is not a shareholder or associate at the time when the debt is forgiven [new subsection 109F(1)] .
9.39 A debt is forgiven for the purposes of this Subdivision when the amount would be forgiven under section 245-35 (except subsection 245-35(4)) of Schedule 2C of the Act [new subsection 109F(3)] . It is important to also note that a reference to a debt includes part of a debt (subsection 245-245(1)).
9.40 Essentially, a debt is forgiven when:
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- the debtor's obligation to pay the debt is released, waived or otherwise extinguished (subsection 245-35(1)). "Extinguished" is defined in subsection 245-245(1) to exclude debts fully paid in cash. For the purposes of this Subdivision "extinguished" also excludes debts fully paid in property when the arm's length market value of the property is equal to or greater than the amount of the loan.
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- a creditor loses its right to sue the debtor for the recovery of the debt, due to the operation of a statute of limitations. In such cases, the debt will be treated as forgiven at that time. (subsection 245-35(2))
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- a debtor is effectively released from the obligation to pay the debt notwithstanding the existence of arrangements which imply that the debt remains on foot (subsection 245-35(3)). Under some arrangements, the debtor's obligation to pay the debt may not cease immediately but at some time in the future. Nevertheless, the debt will be treated as forgiven immediately if the debtor and creditor are not acting at arm's length and they agree either that the debtor will not have to pay any consideration for the concessions granted by the creditor, or will be required to pay merely a token amount. The agreement or arrangement need not be legally enforceable. Note also that a debt which is treated as forgiven because of such an arrangement would not be subject to the debt forgiveness provisions again when the debt is actually forgiven. To have the provisions apply upon actual forgiveness would result in double taxing of the debtor on the same amount.
9.41 If the same debt is taken to be forgiven under more than one provision, new section 109F only applies to the first forgiveness [new subsection 109F(8)] . For example, a debt could have been forgiven under new subsection 109F(6) because a reasonable person would conclude that payment was not going to be required, and forgiven again under new subsection 109F(3) because a statute of limitations came into effect, preventing recovery of the amount. In that case, only the first forgiveness under new subsection 109F(6) would be treated as a dividend.
Debt forgiveness by debt parking
9.42 A debt will also be deemed to be forgiven if the debtor enters into a "debt parking" arrangement [new subsection 109F(4)] . Essentially, debt parking refers to circumstances where:
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- the private company assigns its rights under a debt to a third party (the new creditor) without the debtor's obligations under the debt being forgiven and
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- the new creditor is an associate of the debtor; or
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- is a party to an arrangement with the debtor in relation to the assignment; and
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- a reasonable person would conclude (having regard to all the circumstances) that the new creditor will not exercise the assigned right.
9.43 When this type of debt parking arrangement occurs, the debt forgiveness provisions of Division 7A apply as if the debt had been forgiven.
Subdivision C - Forgiven debts that are not treated as dividends
9.44 Where a debt owed by a company is forgiven, it will not be treated as a dividend unless the company owed the debt in its capacity as a trustee. [New subsection 109G(1)]
9.45 Where a debt is forgiven because the shareholder or the shareholder's associate has either become bankrupt or has entered into a Part X deed of arrangement, deed of assignment, or a composition under the Bankruptcy Act 1966, the amount forgiven will not be treated as a dividend. [New subsection 109G(2)]
9.46 If a loan which has been treated as a dividend under new sections 109D or 109E or existing subsection 108(1) in the current year or a previous year is forgiven, that forgiveness will not be treated as a dividend. [New subsection 109G(3)]
Commissioner may treat forgiveness as not giving rise to dividend
9.47 The Commissioner has a power to exclude a forgiven debt from the operation of this Division where the Commissioner is satisfied that the shareholder or associate would suffer undue hardship. In exercising his power, the Commissioner will take into account the ability of the shareholder or associate to repay the loan at the time it was granted, at the time it was forgiven and at any foreseeable future time. The Commissioner will only exercise his power if he is satisfied that the shareholder had the ability to pay at the time of receipt of the loan and lost the ability to pay, permanently, through no fault of his or her own.
Subdivision D - Payments and loans that are not treated as dividends
9.48 This Subdivision sets out rules for determining when payments and loans are not treated as dividends, and when repayments are not taken into account. [New section 109H]
9.49 An amount paid to discharge a pecuniary obligation owed by a private company to a shareholder or associate will not be treated as a dividend to the extent that the payment is not more than the amount the pecuniary obligation would have been if the private company and shareholder or associate had been dealing with each other at arm's length [new section 109J] . This section ensures that such commercial dealings are not unfairly taxed and that, for example, disguised distributions are not made by inflating the amount of a debt owed to a shareholder or associate by a private company.
9.50 A payment or loan made to another company (other than a company acting in the capacity of a trustee) is not treated as a dividend for the purposes of new sections 109C and 109D [new section 109K] . However, if the recipient company pays or loans an amount to a shareholder or associate of the company which makes a payment or loan, that payment or loan would generally be treated as a dividend [new SubdivisionF] .
9.51 If a private company makes a loan in the ordinary course of its business on the usual terms which it applies to arm's length loans of a similar type, that loan is not treated as a dividend. [New section 109M]
9.52 To the extent that a payment or loan made by a private company to a shareholder or associate forms part of the assessable income of the shareholder or the associate by virtue of some other provision of the Act, the payment or loan is not treated as a dividend [new subsection 109L(1)] . Also, a payment or loan made by a private company to a shareholder or associate is not treated as a dividend to the extent that the payment or loan is specifically excluded from the assessable income of the shareholder or the associate by a provision of the income tax law (other than the new Division 7A) [new subsection 109L(2)] .
9.53 Liquidators distributions and loans made in the course of the winding-up of a private company that are repaid by the end of the companys year of income following the year in which the loan is made are not treated as dividends. [New section 109NA] .
9.54 A loan to a shareholder (or associate of a shareholder) madeby a private company solely for the purpose of allowing the shareholder or associate to acquire qualifying shares or qualifying rights in the company under an employee share scheme to which existing Division 13A of Part III of the Income Tax Assessment Act 1936 would apply is not treated as a dividend. [New section 109NB]
Loans meeting criteria for minimum interest rate, maximum term and minimum repayment not treated as dividends
9.55 New section 109N specifies the criteria that allow certain loans not to be treated as dividends for the purposes of this Division. For this exception to be available, new subsection 109N(1) requires that:
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- the loan be made under a written agreement (a transitional rule will apply for the 1997-98 year of income which will permit taxpayers to satisfy this requirement by have a written loan agreement in place by 30 June 1998 [item 10] );
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- the rate of interest payable on the loan for years of income after the year in which the loan is made is equal to or exceeds the Indicator Lending Rates - Bank variable housing loan interest rate last published by the Reserve Bank of Australia before the start of the year of income [new subsection 109N(2)] . This rate is published monthly in the Reserve Bank of Australia Bulletin. This may be altered by regulation.
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- the maximum term for a secured loan be no more than 25 years and, for all other loans, no more than 7 years [new subsection 109N(3)] . For a secured loan, the amount of the loan cannot exceed 91% of the value of the property over which security is provided (less any other liabilities in respect of which the property also provides security). This loan must be secured by way of registered mortgage. The maximum term of a loan may be altered by regulation.
An unsecured loan for 2 years (that is, a maximum term of less than 7 years) to a shareholder during the companys 1997-98 year of income (ending 30 June 1998) will not be treated as a dividend under new section 109D , if it is made under a written agreement which specifies that:
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- the rate of interest payable for the 1998-99 year of income equals or exceeds the benchmark interest rate, the Indicator Lending Rates Bank variable housing loan interest rate last published by the Reserve Bank before 1 July 1998; and
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- the rate of interest payable for the 1999-2000 year of income equals or exceeds the benchmark interest rate, the Indicator Lending Rates Bank variable housing loan interest rate last published by the Reserve Bank before 1 July 1999.
There is no legislative requirement that interest be paid or payable under the loan in respect of the year of income in which the loan is first made.
When may the Commissioner allow amalgamated loans not to be treated as dividends?
9.56 The Commissioner has a power to disregard the failure to make a minimum yearly repayment if the failure was caused by circumstances beyond the control of the shareholder or associate, and the inclusion of a dividend in the assessable income of the shareholder or associate would cause undue hardship to the shareholder or associate [newsubsection 109Q(1)] . In deciding whether to exercise this power, the Commissioner must have regard to the following factors:
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- whether the shareholder or associate had the capacity to repay the loan at the time it was granted;
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- any circumstances that reduced the capacity of the shareholder or associate to repay in the particular year of income;
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- whether the shareholder or associate has made a genuine attempt during that year to make the minimum yearly repayment; and
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- whether the shareholder or associate has made the later year's minimum yearly repayment and has also paid the amount outstanding from the previous year [new subsection 109Q(2)] .
9.57 This power might be exercised if a shareholder or associate is in severe financial distress; for example, where the shareholder or associate has been involuntarily retrenched from his or her employment.
9.58 A request for the exercise of the Commissioner's power to disregard the requirement to make a minimum yearly repayment may be lodged with the Commissioner at any time. However, depending on the circumstances, the Commissioner may not exercise the power in favour of the taxpayer. Therefore, prior to the exercise of the power, any return lodged in respect of a year in which the minimum yearly repayment was not made would have to be prepared on the basis that the amalgamated loan is treated as a dividend.
Repayments with the intention of reborrowing
9.59 Certain repayments which might otherwise be taken into account in determining whether a loan has been repaid in whole or in part in the year in which it was made, or in determining whether a minimum yearly repayment has been made, will be disregarded. [New subsection 109R]
9.60 Repayments will be disregarded if a reasonable person would conclude, on the basis of all relevant circumstances, that the shareholder or associate objectively intended to reborrow a similar or larger sum from the same private company [new subsection 109R(2)] . This provision is intended to prevent shareholders or associates from avoiding the operation of the Division by temporarily repaying a loan.
9.61 A repayment will be taken into account in determining whether a loan has been repaid in whole or in part in the year in which it was made, or in determining whether a minimum yearly repayment has been made, even if there is an intention to reborrow, to the extent that the loan is offset by:
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- payments sourced from a dividend payable to the shareholder by the private company
- •
- payments sourced from the PAYE earnings of the borrower (eg.salary and bonus etc.)
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- the difference between the arm's length value of property transferred to the private company and any consideration provided by the company for the property. [New subsection 109R(3)]
9.62 A payment made to the private company by a third party on behalf of a shareholder or associate will be treated as a repayment, provided the amount is owed by the third party to the shareholder or associate, and would be included in the assessable income of the shareholder or associate. [New subsection 109R(4)]
Subdivision E - Payments and loans through interposed entities
9.63 New Subdivision E applies to back-to-back arrangements under which a private company pays or loans an amount to an interposed entity on the understanding that the interposed entity or another interposed entity will pay or loan an amount to a shareholder of the private company or an associate of the shareholder. In such cases, the private company will be treated as having directly paid or loaned an amount to the shareholder or associate. The amount of the payment or loan will be determined by the Commissioner having regard to certain specified conditions.
Payments through interposed entities
9.64 A payment or loan from a private company will be treated as being made directly to a shareholder or associate if the following conditions are met:
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- the private company makes a payment or loan to another entity that is interposed between the private company and a shareholder or a shareholder's associate;
- •
- it is reasonable for a person to conclude that the sole or main purpose of the private company in making the payment or loan to the interposed entity was to enable an amount to be paid or loaned to a shareholder of the private company or a shareholder's associate; and
- •
- either the interposed entity or another entity interposed between the private company and the shareholder or shareholder's associate makes a payment or loan to the shareholder or shareholder's associate. [New subsection 109T(1)]
9.65 New subsection 109T(1) will apply regardless of whether the payment or loan from the interposed entity to the shareholder or shareholder's associate is made before, after, or at the same time as the payment or loan is made from the private company to the first interposed entity. [New paragraph 109T(2)(a)]
9.66 It is also irrelevant whether the amount paid or lent to the shareholder or shareholder's associate is different to the amount paid or lent from the private company to the first interposed entity. [Newparagraph 109T(2)(b)]
9.67 An amount will not be taken to be a dividend under new Subdivision E if the amount is otherwise taxable under new SubdivisionB [new subsection 109T(3)] . For example, an amount might be paid or lent to a shareholder or associate through an interposed entity which is also a shareholder or associate. In that case, the amount could be taxable to the interposed entity in its own right under new Subdivision B .
Payments and loans through interposed entities relying on guarantees
9.68 A guarantee of a loan will be treated as a payment for the purposes of new section 109T if a loan or payment is provided to a private company shareholder (or associate) by an interposed company that does not have a distributable surplus or has a distributable surplus less than the amount paid or lent to the shareholder (or associate) [new section 109U] .
9.69 If a guarantee is given by a private company (the first entity) as part of an arrangement involving, either directly or indirectly, a payment or loan to a shareholder (or associate) of that company by another company (the interposed company), some or all of that payment or loan may be treated as a payment by the first entity directly to the shareholder (or associate). Such an amount will generally be treated as a deemed dividend.
9.70 Without this rule, the intended effect of new Division 7A could be circumvented by structuring a loan to a shareholder (or associate) through a company which has no distributable surplus, the repayment of which is guaranteed or secured by a company with distributable profits. Under such an arrangement the loan or payment by the interposed company would not be treated as a dividend under new Division 7A because the company making the loan does not have a distributable surplus.
9.71 A similar result could also be achieved by using an interposed company with a distributable surplus that is less than the payment or loan made to the shareholder (or associate) of the first entity.
9.72 The amounts treated as paid by the private company to the shareholder under new section 109U will be determined by the Commissioner in accordance with new section 109V . The amount treated as a payment by the private company to the shareholder (or associate) is then reduced by the amount of the interposed companys distributable surplus (if any) adjusted to allow for any other loans, payments or debts forgiven by the interposed company that are treated (other than by this section) as dividends for the year of income [new subsections 109U(2) and (3)].
9.73 New section 109C will then apply to the resulting amount to treat it as a dividend paid by the private company to the shareholder (or associate).
9.74 The payment or loan by the interposed company, to the extent of the interposed companys distributable surplus, would be treated as a payment or loan by that company and, as such, may also be treated as a dividend according to new sections 109C or 109D .
9.75 New section 109U operates irrespective of whether the loan or payment by the interposed company occurred before or after the first entity provided the guarantee or security for a loan, and irrespective of whether the amount of the loan or payment by the interposed company is greater or less than the amount that has been guaranteed. [New subsection 109U(4)]
Certain liabilities under guarantees treated as payments
9.76 Other than in the circumstances to which new section 109U applies, a guarantee given by a private company for a loan by a third party to a shareholder (or their associate) is treated as a payment by the company directly to the shareholder (or associate) only where a liability (other than a contingent liability) is actually incurred by the private company as a result of providing the guarantee or security. [New section 109UA]
9.77 New section 109UA , in conjunction with new sections 109T , 109V , and 109C , will treat as a dividend the amount of any liability (other than a contingent liability) incurred by the company as a result of providing a guarantee or security for a loan made directly or indirectly to a shareholder (ortheir associate). The deemed dividend will arise in the year of income in which the private company which provided the guarantee first has a non-contingent liability under the guarantee. Normally, such a liability will result from a default by the borrower under the loan agreement in respect of which the guarantee was given.
9.78 An amount treated as paid by a private company to an entity under new subsection 109UA(1) will be determined by the Commissioner in accordance with new section 109V . Such an amount is then reduced by the amount (if any) treated as a dividend as a result of the operation of new section 109U [newsubsection 109UA(2)] .
9.79 New subsection 109UA(3) will provide a power to the Commissioner to disregard, for the purposes of new subsection 109UA(1) , a liability incurred by the company under a guarantee or security for a loan. Inexercising this power the Commissioner must have regard to the following criteria:
- •
- the inclusion of the amount treated as a dividend in the shareholders or associates assessable income would cause undue hardship; and
- •
- the shareholder or associate had the capacity to repay the loan when it was made.
9.80 This will give the Commissioner a power in circumstances where a shareholder (or associate) is financially unable to meet the payments through no fault of their own: for example, where a shareholder has been involuntarily retrenched from his or her employment. The power may also be exercised in the following situation.
A private company guarantees a loan that a bank makes to a shareholder in the private company and that shareholder technically defaults under the loan agreement by failing to make a repayment by the due date. The shareholder makes the necessary repayment to the bank shortly after the due date, out of the shareholder's own funds. The bank does not call upon the company to meet is obligation under the guarantee and no payment is actually made by the company (or any of its associates) to the bank in respect of that guarantee.
9.81 To avoid any doubt, new subsection 109UA(4) provides that new section 109UA does not limit the operation of new section 109T , the general rule about payments and loans by a private company to an entity through one or more interposed entities.
Certain trust amounts treated as loans
9.82 New section 109UB will apply if a private company, as a beneficiary of a trust estate, is or has been presently entitled to some or all of the net trust income which has not actually been paid. In such a situation the amount to which the company is presently entitled is held on a secondary trust for the benefit of the company. The provision applies to any subsequent loan by the trustee to a shareholder (or associate) of the company.
9.83 The loan from the trustee is treated as a loan by the private company to the shareholder (or associate) of an amount not exceeding the amount of income held on trust for the company, reduced by any amounts previously treated as a loan by new section 109UB in relation to the trust amount. [Newsubsection 109UB(2)]
Amount of a payment through an interposed entity
9.84 A private company is taken to have made a payment to a shareholder or associate when the interposed entity makes a payment to a shareholder or associate. [New subsection 109V(1)]
9.85 The Commissioner will determine the amount of the payment made by the private company to the shareholder or associate having regard to:
- •
- the amount the interposed entity paid to the shareholder or the shareholder's associate; and
- •
- how much of that amount the Commissioner believes represented consideration (valued at arm's length) payable to the shareholder or the shareholder's associate or any of the interposed entities. [New subsection 109V(2)]
9.86 This provision allows the Commissioner to take into account such things as a payment from the interposed entity which was, in whole or in part, the arm's length consideration for the sale of goods or the provision of services to the interposed entity by the shareholder or associate.
Amount of a loan through an interposed entity
9.87 A private company is taken to have made a loan to a shareholder or an associate when the shareholder or associate receives a loan from an interposed entity. The amount lent by the private company to the shareholder or associate is referred to as the notional loan . [Newsubsection 109W(1)]
9.88 The Commissioner will determine the amount of the notional loan having regard to:
- •
- the amount the interposed entity lent to the shareholder or associate;
- •
- how much of that amount the Commissioner believes represents the arm's length consideration payable by the private company to the shareholder or associate or any of the interposed entities for the provision of goods or services. [New subsection 109W(2)]
9.89 When valuing the amount of the notional loan that is treated as a dividend under section 109D, any repayments made by the shareholder to the interposed entity are taken into account. Repayments of the notional loan are calculated as a proportion of the total loan repayment made to the interposed entity which is referable to the notional loan [new subsection 109W(3)] . An example is provided below:
- The private company lends $100 to interposed entity B
- Interposed entity B lends $150 to shareholder C
- The Commissioner concludes that $100 of the $150 lent by entity B is the notional loan
- A repayment of $21 is made by shareholder C to interposed entity B
-
$21 [repayment] * ($100 [notional loan amount] / $150 [actual amount lent]) - Notional repayment = $14
9.90 A private company may be taken to have paid a dividend to a shareholder or associate even if:
- •
- the private company has made a payment or loan to another company which happens to be interposed between the private company and the shareholder or a shareholder's associate; or
- •
- some or all of the amount paid or lent by the private company to an entity interposed between the private company and the shareholder or a shareholder's associate is included in the interposed entity's assessable income for a year of income. [New subsection 109X(1)]
9.91 A notional loan cannot be: an excluded loan under new section 109N ; a part of the amalgamated loan for the purposes of new section 109E ; or treated as a loan made in the ordinary course of business under new section 109M . [New subsection 109X(2)]
Subdivision F - General rules applying to all amounts treated as dividends
9.92 New Subdivision F :
- •
- restricts the value of amounts taken to be dividends under new Division 7A to the company's distributable surplus [new section 109Y] ;
- •
- treats such amounts as being paid from company profits to the entity in its capacity as a shareholder [new section 109Z] ;
- •
- prevents the collection of withholding tax on such amounts [newsection 109ZA] ;
- •
- ensures that new Division 7A applies to such amounts in priority to fringe benefits tax (FBT), except in relation to payments to a shareholder (or associate) in their capacity as an employee or associate of an employee [new section 109ZB] ; and
- •
- deals with the taxation of dividends which are offset against amounts already taxed under the Division [new section 109ZC] .
Proportional reduction of dividends so that they do not exceed distributable surplus
9.93 Distributable surplus is the maximum amount that can be treated as dividends paid by the company under new Division 7A . If the value of amounts otherwise treated as dividends is greater than the company's distributable surplus, the taxable value of each dividend is recalculated to reflect the value of the distributable surplus [new subsection 109Y(1)] .
9.94 The calculation of a private company's distributable surplus at the end of its year of income is provided by new subsection 109Y(2) as:
- net assets, being the amount (if any) by which the company's assets (as calculated in the companys books of account) exceed the sum of the present legal obligations owed by the company and the following provisions (as shown in the companys accounting records):
- •
- provision for depreciation;
- •
- provisions for annual leave and long service leave;
- •
- provision for amortisation of intellectual property and trademarks;
- •
- other provisions that may be prescribed in regulations;
- less
- loans which remain outstanding in the companys accounting records at the end of the year that have been treated as dividends in earlier years of income under new sections 109D or 109E or existing section 108;
- less
- the sum of the company's paid-up share capital and paid-up share premium account;
- less
- the total amount of repayments to the company of loans or amounts set off against loans that previously have been taken to be dividends under new sections 109D or 109E or existing section 108. This does not include amounts set off as a result of a dividend, to the extent that the amounts have not been franked under section 160AQF, where those amounts are not treated as dividends by subsection 108(2) or new section 109ZC . Amounts set off as a result of a loan, or part of a loan, being forgiven by the company are also not included.
9.95 If the Commissioner considers that the company's assets are significantly undervalued, or its provisions significantly overvalued, in the accounting records of the company, the Commissioner may substitute an appropriate value [new subsection 109Y(2)] .
9.96 If a company's distributable surplus is less than the amount it would otherwise be taken to have paid as dividends, the reduced amount of each dividend the company is taken to have paid is calculated by using the formula in new subsection 109Y(3) .
9.97 The formula divides the company's distributable surplus by the total value of dividends the company would otherwise have been taken to pay in the year of income (called the total of provisional dividends). The resulting fraction is applied to each dividend (provisional dividend) to calculate the taxable value. An example is provided below.
9.98 A private company has a distributable surplus of $90. The value of dividends it would otherwise be taken to pay is $100. Shareholder A was paid $50 which was taken to be a dividend under new section 109D . The amount on which shareholder A is liable to tax is calculated as:
$50 * (90/100)
= $50 * 0.9 = $45
9.99 A shareholder or associate who received an amount treated as a dividend would need to be informed if his or her dividend were reduced in this way, so that the correct amount could be declared in an income tax return. Therefore, if this section reduces the amount taken to be a dividend paid by a private company, the company must inform the shareholder or associate in writing of the company's distributable surplus and the amount otherwise taken to be paid as dividends [new subsections 109Y(4) and (5)] . This will provide the fraction to be applied to amounts otherwise taken to be dividends received by the shareholder or associate from the company.
Characteristics of dividends taken to be paid under this Division
9.100 Paragraph 44(1)(a) includes in the assessable income of a shareholder in a company, 'dividends paid to him by the company out of profits derived by it from any source'. New section 109Z ensures that paragraph 44(1)(a) applies to amounts treated as dividends under new Division 7A , by taking the dividend to be paid to the shareholder or associate in the capacity of a shareholder, and out of the private company's profits.
No dividend taken to be paid for withholding tax purposes
9.101 Dividends received by non-resident individuals are normally subject to withholding tax under Division 11A of Part III, which is collected under Division 4 of Part VI. However amounts treated as dividends under section 108 are not subject to withholding tax. Likewise, amounts treated as dividends under new Division 7A are not subject to withholding tax. [New section 109ZA]
Amount treated as dividend is not a fringe benefit
9.102 Fringe benefits tax (FBT) can apply to 'loan benefits' and 'debt waiver' benefits provided to employees and their associates. In the case of a private company, it may be that an employee of the company or an associate of an employee is also a shareholder or associate of a shareholder of the company. Thus a private company might be subject to FBT on an amount which is also treated as a dividend under new section 109D or 109F .
9.103 New section 109ZB avoids doubt as to which law prevails by providing that new Division 7A applies to a loan even if the amount could be a fringe benefit [new subsection 109ZB(1)] . This also applies to a forgiven debt [new subsection 109ZB(2)] .
9.104 Double taxation is avoided by providing that amounts taken to be paid to a shareholder or associate as a dividend under new Division 7A are excluded from the definition of fringe benefit contained in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 [item 11] . Thus a private company will not be subject to FBT on an amount taxed to a shareholder or associate under new Division 7A . This exclusion from FBT applies for the FBT year in which 4 December 1997 occurs and later FBT years [item 12] .
9.105 New subsection 109ZB(3) ensures that new Division 7A will not apply if a payment is made to a shareholder or associate in their capacity as an employee or associate of an employee. Thedefinition of employee is that which applies for the purposes of the Fringe Benefits Tax Assessment Act 1986. This will mean that payments (including the transfer of property, such as mobile phones and laptop computers) to a shareholder (or associate) in their capacity as an employee or an associate of an employee will be subject to the provisions of the Fringe Benefits Tax Assessment Act 1986 and not Division 7A. It will also ensure that superannuation contributions made by a private company on behalf of a shareholder (or associate) who is an employee will not be subject to Division 7A.
Treatment of dividend used to offset an earlier dividend
9.106 As a general rule, if a dividend (referred to as the later dividend) is used to offset an amount that has already been subject to tax as a dividend under new Division 7A , that later dividend will not be taxed [newsection 109ZC] . If part of the later dividend is used to offset the earlier amount, the part which is offset will not be taxed.
9.107 The later dividend could be part of a general dividend paid by the private company. If this is the case, the dividend could be either fully or partly franked. Therefore, an exception to the general rule is provided, so that a later dividend would still be considered to be assessable income to the extent that it is franked. [New subsection 109ZC(2)]
9.108 This exception means that the franking credit attached to a later dividend is still available to shareholders, to be applied against income tax liabilities, where that franked dividend is used to offset an earlier amount treated as a dividend. [New subsection 109ZC(3)]
9.109 A number of terms are used throughout new Division 7A , which are defined in that Division or in other parts of the income tax law, under either the 1936 or 1997 Income Tax Assessment Act. New section 109ZD provides references to these definitions.
9.110 New Division 7A provides definitions, for its purposes, for the terms:
- •
- amalgamated loan [new subsection 109E(3)] ;
- •
- benchmark interest rate for a year of income [new subsection 109N(2)] ;
- •
- distributable surplus [new subsection 109Y(2)] ;
- •
- forgive (a debt) [new subsections 109F(3) and (4)] ;
- •
- guarantee (used in new Subdivision E );
- •
- loan [new subsection 109D(4)] ; and
- •
- payment [new subsection 109C(3)] .
9.111 'Arrangement' and 'PAYE earnings' are given the meaning supplied by section 995-1 of the Income Tax Assessment Act 1997 (the 1997 Act). This subsection provides a reference list to the definitions contained in the 1997 Act. 'Entity' has the meaning given by section 960-100 of the 1997 Act. The interpretation rules applying to entities, which are contained in subsections 960-100(2), (3) and (4), also apply to new Division 7A [new section 109ZE] .
9.112 The term 'associate' is defined by section 318 of the Act. The reference to section 318 is also given in section 995-1 of the 1997 Act.
9.113 An amount treated as a dividend under new Division 7A cannot give rise to an imputation credit as it is not a frankable dividend [new paragraph (h) in the definition of "frankable dividend" in 160APA inserted by item 4] . Thus a shareholder or associate which receives an amount treated as a dividend under the Division is not entitled to a franking rebate to offset its income tax.
9.114 This could allow unfranked dividends to be streamed to particular shareholders or associates. Item 5 is intended to discourage this by inserting new section 160AQCNC which provides that a franking debit arises for a private company which is taken to have paid a dividend under the Division. The debit is calculated in the same way in which a franking debit is calculated in relation to a fully or partly franked dividend [new subsections 160AQCNC(2) and (4)] .
9.115 The creation of a franking debit and non-allowance of a corresponding credit will apply to amounts treated as dividends during the companys year of income in which 4 December 1997 occurs and later years of income. [Item 8]
9.116 Subsection 160AEA(1) defines 'passive income' for the purpose of Division 18 of Part III of the Act. Item 3 includes an amount taken to be a dividend in a year of income because of new Division 7A . The amendment applies for the year of income in which 4 December 1997 occurs and later years of income [item 8] .
9.117 Taxation Laws Amendment (Trust Losses and Other Deductions) Act 1998 inserted Schedule 2F into the Act to deal with the treatment of trust losses. Subsection 268-40(5) of the Schedule explains how to attribute assessable income between periods. Item 6 ensures that amounts treated as dividends under new Division 7A are attributed appropriately where dividends are taken to be paid on or after 4 December 1997 [item 9] .
9.118 Section 10-5 of the 1997 Act includes, in assessable income, amounts which are not ordinary income (through providing a list of such items which are specifically included). Item 13 includes amounts treated as dividends under new Division 7A of Part III by adding the Division to the list contained in section 10-5.
Regulation impact statement
Specification of policy objective
9.119 The purpose of this tax measure is to reduce the scope for tax avoidance by ensuring that tax is payable on distributions from private companies which take the form of loans which are not on commercial terms. Currently, private companies are, in certain circumstances, able to make distributions of realised or unrealised profits that are effectively tax free by structuring them as payments or loans to shareholders rather than as taxable distributions.
Identification of implementation options
9.120 Private company dividends disguised as loans are currently addressed by section 108 of the Income Tax Assessment Act 1936 (the Act). Section 108 operates by deeming an amount to be a dividend where a private company lends, advances, or credits the amount to or on behalf of a shareholder or an associate of the shareholder. However, the section only deems so much of the amount to be a deemed dividend as in the opinion of the Commissioner represents a distribution of profits. The section relies on field audits to identify cases. Such audits have shown that it is difficult to determine whether section 108 applies to particular transactions and that the section does not always apply where it was intended to.
9.121 The implementation of the Government's policy objective involves amending the tax law to strengthen section 108 of the Income tax Assessment Act 1936. As a result of the amendments the following will be treated as dividends:
- (a)
- all loans, advances, transfers of property, or the crediting of amounts by private companies to shareholders or their associates unless they come within a defined class of excluded loans;
- (b)
- all debts owed by shareholders or their associates to private companies that are forgiven, provided the loan itself has not been previously taxed under the provisions; and
- (c)
- all loans, advances, transfers of property, or credits made to unrelated third parties, where there is an agreement that the third party will advance, credit or loan a similar amount to a shareholder or associate of a shareholder of the original lender.
9.122 A loan will be an excluded loan if the loan meets certain conditions. The conditions are that:
- •
- the loan agreement is in writing; and
- •
- interest is payable at a rate equal to or greater than the benchmark interest rate (same as for FBT purposes); and
- •
- the term of the loan is not greater than a specified maximum term for the loan; and
- •
- the amount payable in respect of the loan in a year of income is equal to or greater than either the specified minimum yearly repayment, or in the year of income in which the loan is discharged, the amount of the loan plus any outstanding interest payable in respect of the loan.
9.123 The new measures will be self-actuating and will have stricter application.
Assessment of impacts (costs and benefits)
9.124 The proposed measure will impact on new payments and loans made by private companies on or after the date of introduction of the legislation into the Parliament, and to any existing loans where the term of the loan is extended or the amount of the loan is increased. It will also apply to any loans forgiven after the date of introduction.
9.125 These amendments will affect shareholders and their associates who receive loans and payments from private companies. Where the loans and payments are either "excluded", (eg a loan made on commercial terms which complies with the new legislation), or they are fully repaid in the year that they were advanced or credited, the provisions will have no effect, and therefore, no costs.
9.126 The measures will impact on approximately 56,000 private companies and a number of their shareholders who will incur costs in restructuring their affairs in ensuring they comply with the new legislation requirements. It is estimated that approximately one quarter of small businesses that operate through private companies make loans and payments to their shareholders. The measures will apply equally to these shareholders as they would to larger private companies that make loans and payments to their shareholders.
9.127 The measure will also have an impact on the Australian Taxation Office (ATO). Because the measure is self actuating there will be less need for audit activity to identify cases where the provision should apply. There will also be several discretions in the legislation, the application of which will require ATO resources.
Analysis of the costs and benefits associated with the self actuating approach
9.128 The impact on compliance costs is not expected to be substantial, as most of the information or documentation required to comply with the proposed measures would already be kept in order to comply with existing company and taxation laws. Also, because loans that are considered to be commercial are excluded from the operation of the provisions, taxpayers can arrange their affairs accordingly. The initial costs associated with the operation of the new measures are also likely to be moderate, as the system will be relatively straightforward, both conceptually and legislatively.
9.129 It is expected that approximately one quarter of small businesses that are run through private companies would incur compliance costs associated with these measures. However, these taxpayers can reduce costs by ensuring that loans are either repaid before the end of the year in which they are made or that loans satisfy the criteria laid down in the legislation. Shareholders who do not currently repay loan accounts could incur costs in obtaining alternative finance. In those cases where the provisions do apply to deem loans to be dividends, there will be some minor costs associated with adjusting the company's franking account.
9.130 The total additional compliance costs relating to this proposal are expected to be approximately $3 million. These costs will be incurred as follows:
| 1996-1997 | $1 million |
| 1997-1998 | $2 million |
9.131 The compliance costs in 1996-97 relate to expenses that taxpayers would have incurred immediately following the Budget announcement.
9.132 The ongoing compliance cost is likely to be less than $1 million per year. These costs are in respect of expenses in obtaining tax advice on particular arrangements. This does not include the costs of some shareholders who rearrange their affairs to seek alternative sources of finance. There may also be some small costs in respect of taxpayers that have genuine loans, who may seek confirmation that their loans comply with the new legislation. It is reasonable to assume that genuine loans would be supported by a written loan agreement.
9.133 The self actuating scheme will reduce the need for the Commissioner to conduct audits and as such the administrative costs to the ATO may fall.
9.134 In subsequent years, the measures will affect shareholders taking out loans for the first time. However, there should be compliance cost savings as the new requirements will result in outcomes that are more certain. A taxpayer will know at the end of each year whether loans or payments will be treated as dividends rather than there being a possibility that the Commissioner will later deem the loans to be dividends.
9.135 The measures will affect shareholders taking out loans for the first time after the introduction of the provisions. This measure will prevent loss of revenue in future years.
9.136 Due to the sensitive nature of these proposals, external consultation was not undertaken prior to the announcement in the Federal Budget.
9.137 However, since the Budget, some external consultation has been undertaken with a number of professional bodies. Submissions received during the consultation period were considered in the course of finalising the legislation. The Government has accepted several suggestions made in those submissions. For example:
- •
- The maximum term for a secured loan will be 25 years and the maximum term for an unsecured loan will be 7 years.
- •
- The benchmark interest rate may be applied to daily loan balances in order to work out how much of the repayment is applied to reduce the principal of the loan.
- •
- The real property against which a loan has been provided may be used as a security for other loans provided the loans do not exceed 90% of the total value of the security at any time.
9.138 Currently, section 108 of the Act is not as effective as it should be in preventing private companies from distributing profits in the form of loans. It relies on the identification by the ATO of such loans, which will occur only in individual cases where there has been an audit or where there has been a voluntary disclosure of information. There are often significant costs to taxpayers involved in ATO audits and examinations.
9.139 The amended provisions will apply automatically, and as such, will place an increased burden on taxpayers to ensure they have complied with the rules. However, the Government believes that these costs are more than offset by the prevention of further revenue leakage.
9.140 The Treasury and the ATO will monitor this taxation measure, as part of the whole taxation system, on an ongoing basis. In addition, the ATO has consultative arrangements in place to obtain feedback from professional and small business associations and through other taxpayer consultation forums.
Chapter 10 - Savings tax offset (Savings rebate)
Overview
10.1 The amendments contained in Schedule 10 provide for a new tax offset (commonly known as the savings rebate ) for resident individuals in respect of savings and investment income and undeducted superannuation contributions.
Summary of the amendments
10.2 The amendments insert new Subdivision 61-A into the Income Tax Assessment Act 1997 (ITAA97) to provide the savings tax offset. The offset will apply at a rate of 15% (7.5% in 1998-99 assessments) to undeducted superannuation contributions made by employees and the self-employed and net personal income from savings and investment (including net business income) up to an annual cap of $3,000. [Item 4]
10.3 The amendments will apply to superannuation contributions and savings and investment income from 1 July 1998, the offset first being claimed in 1998-99 assessments. [Item 14]
Background to the legislation
10.4 In the 1997 Budget, the Government announced a package of measures designed to encourage private saving and enhance Australia's retirement income system. Part of that package was the introduction of a broadly based savings offset through the tax system, designed to provide assistance for individual taxpayers who save or invest and encourage potential savers or investors.
Explanation of the amendments
The following explanation is structured as follows:
1. The savings tax offset
2. Savings and investment income
3. Deductions relating to savings and investment
4. Superannuation contributions
5. Netting of savings and investment income and superannuation contributions.
6. Trustees
7. Claiming the offset
8. Technical issues
9. Example of savings tax offset
10.5 An individual taxpayer who is a resident at any time during the year of income will be entitled to a tax offset of 15% of:
the sum of his or her
- •
- savings and investment income; and
- •
- personal contributions to a complying superannuation fund or RSA
less
- •
- their deductions which relate to savings and investment income; and
- •
- their deductions under section 82AAT of the Income Tax Assessment Act 1936 (ITAA36) for superannuation contributions.
The maximum tax offset for a year is $450. [Item 4, new section 61-55]
10.6 For the first income year the offset is available (1998-99 income year), the offset is calculated as 7.5% of the amount determined above, giving a maximum rebate in that year of $225. [Subitems 15(1) and (2)]
2. Savings and investment income
10.7 Savings and investment income is, broadly, all assessable income other than salary or wages as defined in subsection 221A(1) of the ITAA36.
10.8 There are two main exceptions.
10.9 Firstly, some amounts of salary or wages are counted for the purposes of the offset. These are:
- •
- certain amounts paid as superannuation pensions or annuities; and
- •
- eligible termination payments. [Item 4, new section 61-60]
10.10 In relation to pensions and annuities a distinction is drawn between those from Australian sources and foreign sources:
- •
- all Australian sourced pensions and annuities, other than social security pensions, are counted as savings and investment income. Social security pensions are principally those which may qualify the recipient for a pensioner or beneficiary rebate under section 160AAA of the ITAA36 [item 4, new subparagraph 61-60(1)(b)(i)] .
- •
- in the case of foreign pensions, only those for which the recipient is, or has been, entitled to a deduction for the undeducted purchase price of the pension are counted as savings and investment income [item 4, new subparagraph 61-60(1)(b)(ii)] . This is a relatively simple way of distinguishing between pensions which the recipient has at least partly funded, as opposed to solely government provided pensions.
10.11 All assessable amounts of eligible termination payments (ETPs) qualify as savings and investment income. This is because ETPs generally arise from the same kind of savings behaviour as give rise to pensions and annuities, which also count as savings and investment income. [Item 4, new paragraph 61-60(1)(c)]
10.12 The second main exception to the broad rule in paragraph 10.7 above, is that some amounts of non-salary or wage income are not counted for the purposes of the offset. These are:
- •
- remuneration and allowances paid to members of local governing bodies [item 4, new paragraph 61-60(2)(a)] ; and
- •
- assessable reimbursements of deductible amounts paid in respect of:
- -
- tax-related expenses; and
- -
- election expenses.
[Item 4, new paragraphs 61-60(2)(b) and (c)]
10.13 Payments to members of local governing bodies are in the nature of salary or wages, even though they are normally excluded from the definition of salary or wages. The assessable reimbursements referred to above do not relate to savings and investment.
3. Deductions relating to savings and investment income
10.14 Only deductions which relate to savings and investment income are deducted in determining the offset [item 4, new subsection 61-55(2) Step 3 in the Method statement] . Deductions that are not related to any particular amount of savings and investment income are not deducted [item 4, new subsection 61-55(4)] . This would mean, for example, that the following deductions would not be subtracted from savings and investment income:
- •
- gifts;
- •
- tax-related expenses;
- •
- carried forward losses;
- •
- superannuation contributions (but see paragraph 10.17 below).
4. Superannuation contributions
10.15 All personal contributions made by a taxpayer to a complying superannuation fund or a retirement savings account (RSA) are also taken into account in calculating the offset [item 4, new subsection 61-55(2) Step 2 in the Method statement] . The contributions will qualify notwithstanding that the taxpayer may also qualify for a rebate for the contributions under section 159SZ of the ITAA36. A taxpayer's entitlement to a rebate under section 159SZ is unaffected by their entitlement to the offset [item 4, new section 61-70] .
10.16 Contributions made on behalf of a spouse are not taken into account in calculating the offset, although these may qualify the taxpayer for a rebate under section 159T of the ITAA36.
10.17 The amount of personal contributions taken into account is reduced by the amount of the contributions that are deductible under section 82AAT of the ITAA36. [Item 4, new subsection 61-55(2) Step 4 in the Method statement]
5. Netting of savings and investment income and superannuation contributions
10.18 Net savings and investment income and undeducted superannuation contributions are effectively added together to determine the amount on which the offset is calculated. To obtain the offset the sum must be positive [Item 4, new subsection 61-55(2) Step 5 in the Method statement] .
| Hoa's taxable income is as follows: | |
| Rental income | $10,000 |
| Salary | $35,000 |
| less | |
| Rental deductions | $11,000 |
| Total income | $34,000 |
| In addition, Hoa makes personal superannuation contributions of $1,500. | |
| Hoa is entitled to an offset of 15% of $500 (ie. 10,000 + 1,500 - 11,000) | |
10.19 Certain trustees may also be entitled to the offset in their capacity as trustee. These are trustees who are liable to be assessed and pay tax on a share of the trust estate's net income under subsection98(1) of ITAA36 because the beneficiary presently entitled to that share is under a legal disability.
10.20 If the beneficiary is a resident individual, the trustee is entitled to an offset of 15% of the share (7.5% in 1998-99), up to a maximum of $450 ($225 in 1998-99). The trustee is so entitled in respect of each legally disabled beneficiary that is a resident individual. If a beneficiary is a beneficiary of more than one trust, where the trustee is assessed under subsection98(1), each trustee is entitled to the offset. [Item 4, new section 61-65]
10.21 The offset will be first available in assessments for the 1998-99 income year [item 14] . To obtain the benefit of the offset before assessment, provisional tax taxpayers may vary their provisional tax, and PAYE taxpayers may reduce the amount of tax instalments deducted from their salary and wages.
10.22 To limit the need for a provisional tax taxpayer to lodge a variation form in respect of his or her 1998-99 provisional tax, provisional tax for that year will be calculated as if the taxpayer was entitled to the offset in his or her 1997-98 assessment. However, the offset will be calculated only on net savings and investment income and at the 7.5% rate. [Item 16]
10.23 A transitional provision also ensures that 1999-2000 provisional tax is calculated on the basis of the offset being available at the 15% rate, rather than the 7.5% rate that will apply for 1998-99. [Subitem 15(3)]
10.24 The provisional tax provisions of the ITAA36 will also be amended to ensure the offset is taken into account in determining a taxpayer's liability to provisional tax. [Items 9 to 13]
10.25 The insertion of a new Subdivision into the ITAA97 necessitates updating the navigational aids for readers contained in that Act. Accordingly, the offset table in Division 13 is updated to reflect the new Subdivision [items 1 to 3] , and new definitions of 'RSA' and 'savings and investment income' are included in the Dictionary in section 995-1 of the ITAA 1997 [items 5 and 6] .
10.26 The Bill also inserts new provisions into the ITAA36 to allow for the proper interaction between the ITAA36 and the ITAA97 in respect of rebates, credits and tax offsets. [Items 7 and 8, new sections 160ADA and 160AHA]
10.27 The term 'tax offset' is used in the ITAA97 to describe things that may be either 'rebates' or 'credits' under the ITAA36. However, most of the 'rebates' and 'credits' in the ITAA36 have not yet been rewritten into the ITAA97.
10.28 Under the ITAA36 the amount of a rebate or credit to which a taxpayer is entitled is generally limited to the amount of tax (or Australian tax) payable by the taxpayer (sections 160AD and 160AO of ITAA36). To ensure that this rule similarly applies in respect of tax offsets available under the ITAA97, the Bill inserts two new provisions into the ITAA36. These treat tax offsets under the ITAA97 as rebates for the purposes of the ITAA36, unless the tax offset corresponds to a provision of the ITAA36 that provides for a credit, in which case the offset is treated as a credit for the purposes of the ITAA36.
9. Example of savings tax offset
Harry was employed as an architect until 31 December 1999. For the remainder of the year he runs his own business. Harry's taxable income is calculated as follows:
| $ | $ | |
|---|---|---|
| ASSESSABLE INCOME | ||
| Salary or wages | 20,000 | |
| Eligible termination payment (assume fully assessable) | 5,000 | |
| Business Income | 30,000 | 55,000 |
| Less ALLOWABLE DEDUCTIONS | ||
| Depreciation - computer (50% employment use and 50% use in business) | 500 | |
| Other business deductions | 8,000 | |
| Gifts | 100 | |
| Tax related expenses | 300 | 8,900 |
| TAXABLE INCOME | 46,100 |
Harry also made personal superannuation contributions to an employer sponsored superannuation scheme of $1,000. Harry's entitlement to the offset for the 1999-2000 income year would be calculated under the Method statement in new subsection 61-55(2) as follows:
| $ | $ | |
|---|---|---|
| STEP 1 | ||
| Savings and investment income [new section 61-60] | ||
| Business income | 30,000 | |
| Eligible termination payment | 5,000 | 35,000 |
| STEP 2 | ||
| Add Superannuation contributions | 1,000 | |
| 36,000 | ||
| STEP 3 | ||
| Less Savings and investment related deductions | ||
| Business deductions | 8,000 | |
| Depreciation-computer | 250 | 27,750 |
| (Note: Gifts and tax related expenses are not included as they do not relate to the derivation of business income or salary or wages income [new subsection 61-55(4)]). | ||
| STEP 4 | ||
| Less Superannuation contributions claimed as a deduction under section 82AAT of the ITAA36 | Nil | |
| STEP 5 | 27,750 | |
| The tax offset is 15% of $27,750, i.e $4162.50 [new subsection 61-55(2)] . However, Harry will receive a savings tax offset of $450 as the maximum amount a taxpayer can receive is limited to $450 [new subsection 61-55(3)]. | ||