House of Representatives

Explanatory Memorandum

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

Chapter 2 - Miscellaneous superannuation guarantee amendments

Outline of chapter

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

•

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

•

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

•

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

•

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

•

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

•

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

•

replace references to repealed paragraph 13(1)(ab);

•

remove incorrect and outdated references to the Insurance and Superannuation Commissioner; and

•

replace fixed dollar penalties with references to penalty units.

Context of amendments

Order of allocation of payments of the SGC

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

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

Depositing SG vouchers

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

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

Payments to individuals aged 65 years or over

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

Conversion notices

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

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

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

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

Requirement to report annual national payroll

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

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

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

Date of imposition of GIC

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

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

Minor technical amendments

References to paragraph 13(1)(ab)

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

Reference to Commissioner of Insurance and Superannuation

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

Monetary penalties

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

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

Summary of new law

Order of allocation of payments of the SGC

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

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

Depositing SG vouchers

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

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

Payments to individuals aged 65 years or over

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

Conversion notices

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

Requirement to report annual national payroll

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

Date of imposition of GIC

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

Minor technical amendments

References to paragraph 13(1)(ab)

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

Reference to Commissioner of Insurance and Superannuation

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

Monetary penalties

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

Detailed explanation of new law

Order of allocation of payments of the SGC

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

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

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

Example 2.1

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

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

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

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

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

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

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

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

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

Example 2.2

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

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

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

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

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

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

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

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

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

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

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

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

Depositing SG vouchers

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

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

Payments to individuals aged 65 years or over

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

•

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

•

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

•

pay it into a SHAR.

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

Conversion notices

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

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

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

Requirement to report annual national payroll

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

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

Date of imposition of GIC

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

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

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

Minor technical amendments

References to paragraph 13(1)(ab)

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

Reference to Commissioner of Insurance and Superannuation

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

Monetary penalties

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

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

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

Application and transitional provisions

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

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

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

Consequential amendments

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