House of Representatives

Explanatory Memorandum

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

Chapter 4 - Deductions for contributions to complying superannuation funds or RSAs

Outline of chapter

4.1 Schedule 3 to this bill will amend the ITAA 1936 and the ITAA 1997. The amendments will limit when a contribution to a complying superannuation fund or RSA will be an allowable tax deduction.

Context of amendments

4.2 This measure was foreshadowed in the Governments election policy statement A Better Superannuation System released on 5 November 2001. It recognises that some people choose to work past the age of 70 and still wish to save for their retirement. The Government announced the implementation of this commitment in the 2002-2003 Federal Budget.

Summary of new law

4.3 The ITAA 1997 will be amended so that a tax deduction will not generally be available where the contribution is in respect of a person aged 70 years or more, except where the contribution is required under an industrial award or to meet an SG obligation.

4.4 A contribution to a complying superannuation fund or RSA will continue to be an allowable tax deduction if it has been made in accordance with section 82AAC or section 82AAT of the ITAA 1936 for people aged less than 70 years.

Detailed explanation of new law

4.5 The Government foreshadowed in its election policy statement A Better Superannuation System its intention to increase from 70 years to 75 years the age up to which working members of superannuation funds could make personal superannuation contributions. Changes to the Superannuation Industry (Supervision) Regulations 1994 will be made to implement this policy.

4.6 While such contributions will be allowed it is generally not intended that these contributions be deductible to the taxpayer. This is because a member having turned 70 years has already satisfied all the relevant conditions of release and can have their superannuation benefits paid from the superannuation fund. To allow a tax deduction for a person over 70 years would open the opportunity for individuals to exploit the concessionality of the superannuation system by churning their contributions. That is, a member could make a contribution, have the benefits immediately paid from the superannuation fund, and then re-contribute the same amount. This could be done a number of times with the view to maximise the tax deduction. Such behaviour is not consistent with the purpose of the Governments retirement income policy.

4.7 In essence, the amendments to the ITAA 1997 prescribe that a tax deduction for a contribution to a complying superannuation fund or RSA will only be available where it is made in accordance with section 82AAC or section 82AAT of the ITAA 1936, and the working member of the fund is less than 70 years of age. An explanation of these provisions and the exceptions to the general rule are set out in paragraph 4.10 to 4.17.

4.8 Section 82AAC of the ITAA 1936 details the circumstance in which a taxpayer may claim a tax deduction (and the amount of the tax deduction) in relation to another person. Simply, a taxpayer (usually an employer) may claim a tax deduction for a superannuation contribution paid in respect of an eligible employee in the year of income the contribution is made. The amount of the deduction is also determined by reference to the particular employees age in that year of income.

4.9 Similarly, section 82AAT of the ITAA 1936 prescribes the circumstance in which a taxpayer may claim a tax deduction (and the amount of the deduction) for a personal contribution to a complying superannuation fund or RSA. The maximum amount of the tax deduction is also determined by reference to the persons age in the year of income the contribution is made.

4.10 The amendments to the ITAA 1997 will now mean that a taxpayer wishing to claim a tax deduction for a personal superannuation contribution must continue to meet the rules outlined under section 82AAT of the ITAA 1936, and the contribution must have been made within 28 days of the end of the month in which the taxpayer turned 70 years old. [Schedule 3, item 3, subsection 26-80(3)]

4.11 In relation to an employer claiming a tax deduction for superannuation contributions made in respect of employees, the taxpayer must continue to be entitled to a tax deduction under section 82AAC of the ITAA 1936 and the contribution must have been made within 28 days of the end of the month in which the employee turned 70 years old. [Schedule 3, item 3, subsection 26-80(2)]

4.12 For example, if an employee turned 70 years old on 31 December, and all other conditions were satisfied, an employer would be eligible to claim a deduction for any superannuation contributions made in respect of that employee between 1 July and 28 January. Subject to the exceptions outlined below, the employer would not be able to claim a tax deduction for any superannuation contributions made after 28 January in respect of that particular employee.

4.13 There are 2 exceptions to this rule. The first relates to contributions required to meet an SG obligation; the second relates to contributions made under an industrial award.

4.14 A tax deduction will still be allowed if the contribution is made as a consequence of an SG obligation. The amount of the tax deduction available is limited to 9% (from 1 July 2002) of the employees SG earnings base. [Schedule 3, item 3, subsection 26-80(5)]

4.15 Superannuation contributions required by an industrial award or determination in force under an Australian law will also continue to be an allowable tax deduction. To deny a tax deduction for a contribution required under a legal obligation would result in an unfair burden on employers. The tax deduction is limited, however, to the amount that must be paid as a superannuation contribution under that industrial award or determination. [Schedule 3, item 3, subsection 26-80(4)]

4.16 It should be noted that this amendment clearly specifies that only industrial awards or determinations which are in force under an Australian law will be eligible for a tax deduction. An industrial agreement, such as an Australian Workplace Agreement or a Certified Agreement, is not considered to be an award or determination for the purposes of this amendment. This is because a person could enter into an agreement for a salary sacrifice arrangement that could be an allowable deduction to the employer. This could provide scope to avoid the limitations on deductibility imposed by the amendments. [Schedule 3, item 3, paragraph 26-80(4)(c)]

4.17 For the sake of clarity, where a tax deduction is available because an employee is eligible for a superannuation contribution as a result of a SG entitlement and an industrial award, the taxpayer may choose the most appropriate provision under which to claim the tax deduction. [Schedule 3, item 3, subsection 26-80(6)]

4.18 It should be noted that in some circumstances, section 82AAD of the ITAA 1936 deems certain amounts paid to a non-complying superannuation fund to be paid to a complying superannuation fund for the purposes of section 82AAC. In addition, section 82AADA also deems an amount paid as a contribution to an RSA to be paid to a complying superannuation fund for the purposes of section 82AAC. These sections are unchanged.

4.19 Section 82AAF of the ITAA 1936 allows a deduction up to $1,200 for a deposit made for an eligible employee under the Small Superannuation Accounts Act 1995. This Act established the SHAR to provide a place for employers to deposit small amounts where they could not find a superannuation fund or RSA willing to accept the contribution (generally because the amount was seen to be too small). Before using SHAR, an employer must attempt to find a superannuation fund or RSA.

4.20 Section 28 of the Small Superannuation Accounts Act 1995 ensures that a deposit can only be made instead of a superannuation contribution and the deposit must be equal to the contribution. As a result of section 30, SHAR may only accept deposits in respect of a person less than 70 years, during the period of employment to which the deposit relates.

4.21 Finally, the amendments do not extend the application of SG arrangements for employees. SG continues to only be payable in respect of employees until they turn 70 years of age .

Application and transitional provisions

4.22 The measure will apply to assessments made on or after 1 July 2002.

Consequential amendments

4.23 There are no consequential amendments for this measure.