Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)Chapter 2 - Removal of deductions for contributions to non-complying superannuation funds
Outline of Chapter
2.1 The amendments made by items 1, 2 and 4 to 7 of Schedule 1 ensure that taxpayers cannot claim a deduction for a superannuation contribution knowingly made to a non-complying superannuation fund, including a non-resident superannuation fund.
Background to the legislation
2.2 Subdivision AA of Division 3, Part III of the Income Tax Assessment Act 1936 (ITAA 1936) provides a code for deductions for contributions to superannuation funds for the benefit of eligible employees. This is an exclusive code for deductions to be claimed for employer contributions to either complying superannuation funds under section 82AAC or non-complying superannuation funds under section 82AAE.
2.3 The concessions available for contributions to non-complying superannuation funds have been targeted by some tax planners who seek to gain much greater tax concessions than those that were intended to be available.
2.4 Under the current law, contributions to a non-complying superannuation fund are deductible to employers and subject to fringe benefits tax (FBT). Taxation planners, however, are using tax planning structures to maximise deductions while claiming that FBT does not apply, marketing the schemes as a complete tax wipe-out.
2.5 The application of FBT to contributions made to any non-complying fund, both resident and non-resident, was intended to ensure that these funds were not attractive in comparison to complying funds, the Government's preferred vehicle for retirement savings.
Summary of new law
2.6 The amended provisions ensure that no deduction is available for a contribution knowingly made to a non-complying superannuation fund in any circumstances, including a contribution made to a non-resident superannuation fund, through either the ITAA 1936 or the Income Tax Assessment Act 1997 (ITAA 1997).
| New law | Current law |
|---|---|
| No deduction available for contributions knowingly made to non-complying superannuation funds. | Deductible contributions can be made to non-complying superannuation funds. |
Detailed explanation of new law
2.7 Section 82AAE is repealed. This removes the major provision through which deductions have previously been available for a contribution to a non-complying superannuation fund (including a non-resident superannuation fund). [Schedule 1, item 4]
2.8 The insertion of subsection 26-75 in the ITAA 1997 ensures that no deduction is available under any other section of either Act for contributions made to a non-complying fund, with only one limited exception. [Schedule 1, item 6, section 26-75]
2.9 A definition of 'non-complying superannuation fund' is inserted into section 995-1 of the ITAA 1997. [Schedule 1, item 7]
2.10 In rare circumstances, a deduction may be available to an employer that makes a contribution to a non-complying superannuation fund that the employer reasonably believes to be a complying superannuation fund. Section 82AAD sets out the strict circumstances where this may apply.
2.11 The repeal of section 82AAE brings all taxpayers into line with visitors from overseas on short term visas (exempt visitors under section 517 of the ITAA 1936), since there was already no deduction available for these employees. However, contributions made to a non-resident superannuation fund for these exempt visitors remain excluded from the definition of fringe benefit.
2.12 Restricting the deduction for superannuation contributions to those contributions made to a complying superannuation fund ensures that the concession is better targeted to the provision of retirement income. Complying superannuation funds are the government's preferred vehicle for retirement savings.
2.13 Table 2.1 summarises the treatment of contributions made by an employer to a non-complying superannuation fund for the benefit of employees.
| For whose benefit is the contribution paid? | Is the contribution deductible to the employer? | Is the contribution subject to FBT? | Explanation |
|---|---|---|---|
| Individuals who are not residents of Australia and are employed overseas. | No | No | No FBT is payable on payments to employees where the source of their income is outside Australia. The proposals do not change the FBT treatment |
| Exempt visitors (i.e. temporary visa of 4 years or less). | No | No | The exemption from FBT is based on the assumption that these taxpayers intend to leave Australia and will not seek an Australian pension. The proposals do not change the FBT treatment |
| Resident employees who are not exempt visitors including Australian residents employed by an Australian company to work outside Australia. | No | Yes | These contributions are subject to FBT. This is an appropriate outcome since there is no reason for concessional taxation treatment for a resident contributing to a non-complying fund, and there is no reason why they cannot contribute to a complying fund.
The same treatment applies to individuals recruited to Australia for a period of more than 4 years. Contributions could be made to a complying fund to avoid this treatment. The Government's preferred approach in this instance is to endeavour to enter into bilateral negotiations with other countries to facilitate reciprocal agreements for the transfer of superannuation benefits by non-residents on permanent departure from Australia. Residents employed overseas (on a basis which allows them to maintain their residency status) receive concessional treatment for contributions only if they are made to a complying fund because they may intend to return to Australia. The proposals do not change the FBT treatment. |
Example 2.1
Harry employs Betty and Lara to manage his financial affairs. All are Australian residents. He makes contributions for Betty into a complying superannuation fund, which are deductible to the employer and not subject to FBT. He makes contributions for Lara into a non-complying superannuation fund. These contributions are not deductible and will be subject to FBT.
An exception to this is found in the case of contributions to a non-resident fund for individuals who are exempt visitors under section 517 of the ITAA 1936. If Lara were an exempt visitor the contributions would be excluded from FBT.
Example 2.2
Harry also employs Clive, a resident of Nepal, to manage his businesses in Nepal. A contribution made for Clive into Clive's local superannuation fund, a non-resident and non-complying superannuation fund for the purposes of Australian legislation, would not be deductible to Harry, nor would it attract a fringe benefits liability. This is consistent with the treatment of exempt visitors to Australia.
Example 2.3
Clive also has a business in Australia, where he employs Jane and Julia. A contribution made for Jane into a complying superannuation fund would be deductible to Clive. However, a contribution made for Julia to her Nepal based fund would not be deductible and would be subject to FBT (unless Julia is an exempt visitor).
2.14 It is an intended consequence of this amendment that superannuation benefits made to a non-complying superannuation fund will not be deductible but will be subject to FBT. Although unusual, this is designed to thwart tax planning arrangements that seek to gain greater tax concessions than those that were intended to be available.
Application and transitional provisions
2.15 This measure was announced in the Assistant Treasurer's Media Release No. 35 of 30 June 2000.
2.16 The amendments will apply to any superannuation contributions made after 4.00 pm, by legal time in the Australian Capital Territory, on 30 June 2000. [Schedule 1, subitem 11(1)]
Consequential amendments
2.17 Reference to section 82AAE will be removed from the following provisions because they will become redundant:
- •
- paragraph 67AAA(1)(b) [Schedule 1, item 1] ; and
- •
- subsection 73B(1) [Schedule 1, item 2] .
2.18 Reference to section 82AAE will be replaced by reference to section 26-75 of the ITAA 1997 in section 12-5 of the ITAA 1997. [Schedule 1, item 5]
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