House of Representatives

Explanatory Memorandum

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

Chapter 3 Regulation impact statement

Policy objective

3.1 The Government co-contribution seeks to improve the standard of living in retirement of low income earners. Low income earners who make personal undeducted contributions to a superannuation fund or RSA will be eligible for a co-contribution paid by the Government.

3.2 From 1 July 2002, the existing low income superannuation contributions rebate (a maximum of $100) will be replaced with a $1,000 Government superannuation co-contribution for personal undeducted superannuation contributions by individuals on incomes up to $20,000, with a reduced co-contribution available for individuals with incomes up to $32,500.

3.3 In any one year of income, the Government co-contribution will be the lesser of:

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$1,000, reduced by 8 cents for each $1 of the taxpayer's assessable income and reportable fringe benefits over $20,000; and

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the total amount of personal undeducted contributions made by the member in the year of income.

3.4 Where this calculation results in a Government co-contribution amount less than $20, then a co-contribution of $20 will be paid, as long as the person's income is below $32,500 and the person has made personal undeducted superannuation contributions during the year.

3.5 This measure is expected to result in a budgetary cost of $115 million in 2003-2004, $125 million in 2004-2005 and $115 million in 2005-2006.

Implementation options

3.6 To determine eligibility for a Government co-contribution the ATO will need to be aware of a person's assessable income and reportable fringe benefits, and the amount of personal undeducted contributions made by a person. Two possible options were raised in industry consultation on how the Government co-contributions could be administered.

Option 1

3.7 Under option 1:

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a superannuation fund would report all personal undeducted contributions made in the previous financial year to the ATO by 31 October;

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the ATO would determine if a person is eligible for a Government co-contribution by matching this information with the person's income (which will be determined from their tax return);

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if the person is eligible for a Government co-contribution it will be paid directly to a superannuation fund nominated by the person, or if there is no nomination, to a fund determined by the Commissioner as belonging to the person. The Government co-contribution will be paid directly to a person who has retired or their estate if they have died; and

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once the payment has been made the person will be notified by the fund (except retirees and deceased who will be notified by the ATO) of the Government co-contribution. This will be done at the next normal reporting date between the funds and their members.

Option 2

3.8 Under option 2:

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the low income earner would apply for a Government co-contribution through the income tax return;

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the low income earner would need to supply the ATO with the account details of their superannuation fund and evidence that they have made personal undeducted contributions;

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superannuation funds would be required to provide this information to all members on or before 28 July each year to allow these people to finalise their tax return;

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the ATO would pay the Government co-contribution to the fund specified in the income tax return. The co-contribution would be paid directly to a person who has retired or their estate if they have died; and

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once the payment has been made the person would be notified by the fund (except retirees and deceased persons who will be notified by the ATO) of the Government co-contribution. This will be done at the next normal reporting date between the funds and their members.

Assessment of impacts

3.9 The potential compliance and administrative impacts of these options have been carefully considered in consultation with the superannuation industry. Option 1 places the costs of providing the required information onto the superannuation industry while option 2 places these requirements on both the industry and low income earners.

Impact group identification

3.10 Groups affected by this measure are:

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superannuation funds, RSA providers (approximately 254,000 will be affected);

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low income earners (the policy has been costed on approximately 350,000 people being eligible for a Government co-contribution);

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tax agents, who have clients who are on low incomes (if option 2 is adopted); and

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the ATO.

Analysis of costs / benefits

Option 1

Compliance costs

3.11 This option relies on superannuation funds reporting personal contributions to the ATO every year. The Superannuation Contributions Tax (Assessment and Collection) Act 1997 already requires superannuation funds to report all superannuation contributions to the ATO.

3.12 However, funds are not currently required to separately identify personal contributions. To satisfy this requirement, funds will need to change their systems to enable them to provide this data to the ATO. This system change will impose an initial cost on superannuation funds. Given that the reporting systems are already in place this is not expected to be a large cost. The ATO will release specifications to superannuation funds to assist them in reporting this information. This will reduce the overall costs to the funds in meeting their requirements. Once these system changes are in place the ongoing costs of reporting personal contributions to the ATO are not expected to be substantial.

3.13 Funds will also have to amend their member reporting systems to advise their eligible members that they have received a Government co-contribution. To ensure no additional mailing costs are imposed on funds, they will not have to provide the co-contribution information until the next time they report to their members.

3.14 To assist industry in making the necessary system changes, the new reporting arrangements will only apply after 1 July 2003.

3.15 Some funds may also need to amend their governing rules to accept the Government co-contribution. However it is expected that this will only affect a minority of defined benefit funds whose rules do not accept additional contributions. The industry has advised that the overwhelming majority of funds will already be able to accept the Government co-contribution. (The APRA has estimated that there are 722 defined benefit funds of which it is estimated less than 10% may be affected.)

Administration costs

3.16 The ATO has estimated that costs in administering the Government co-contribution are:

Benefits

3.17 The main advantage of this system is that it does not impose additional costs or burdens on low income earners as it uses existing industry reporting systems to determine who is eligible for a Government co-contribution. Options which rely on the low income earner applying for the Government co-contribution would require the member to seek out the relevant information from their fund to accurately determine their entitlement.

3.18 This option will also identify all low income earners who are eligible for a Government co-contribution thus satisfying the policy intent of seeking to provide a higher standard of living in retirement for these members of the community. Where low income earners have to apply for the Government co-contribution there is the possibility that some people will not receive their entitlement because they fail to claim it.

Option 2

Compliance costs

3.19 A low income earner will need to claim their entitlement to a Government co-contribution by answering an additional question on the tax return. The tax return is already perceived by some sectors of the community as being large and complex and a question such as this may be lost in the quantum of information already being requested of taxpayers. This may lead to the low income earner bearing a cost of not applying for the Government co-contribution even though they are eligible to receive one, or additional tax agent fees incurred in complying with the new requirements.

3.20 To pay the Government co-contribution to the correct fund the taxpayer will need to provide the exact name of their fund (e.g. ABC Fund would not be sufficient if it runs multiple superannuation funds), the fund's identification number, their account details and the amount of personal undeducted contributions they have made in the year. If either the fund and/or account identification information is incorrect the ATO will not be able to pay the Government co-contribution to a fund. This would require intensive follow-up between the ATO and the member and/or tax agent. This will slow down lodgment and payment of tax refunds to individuals.

3.21 Members will not be readily aware of the required information. Therefore, this will have to be provided by their superannuation fund on or before 28 July to allow them to finalise their tax return. A similar requirement is placed on health insurance funds to allow taxpayers to complete the questions relating to the Medicare surcharge and the private health insurance rebate.

3.22 The APRA has estimated that there are approximately 25 million accounts of superannuation fund members and RSA account holders. Placing a requirement on funds to advise each of these members (through each of these accounts) of their personal undeducted contributions and identification details before 28 July each year would impose a significant ongoing cost on the superannuation industry.

3.23 Furthermore, the Government co-contribution (of up to $1,000) is more generous than the current 10% rebate (maximum $100) that currently applies to personal undeducted contributions made by low income earners. As such, the risk to revenue caused by false claims (intentional and unintentional) will greatly increase. To reduce this risk and to assist in compliance and audit activities, funds would be required to report these personal undeducted contributions to the ATO. This is consistent with the requirements placed on banks to report interest payments and companies to report dividends. Therefore, under this option funds would incur the same costs as under option 1.

3.24 As for option 1, funds will also have to amend their member reporting systems to advise eligible members that they have received a Government co-contribution. To ensure no additional mailing costs are imposed on funds, they would not have to provide the Government co-contribution information until the next time they report to their members.

3.25 As for option 1, some funds may also need to amend their governing rules to accept the Government co-contribution. However, it is expected that this will only affect a minority of defined benefit funds whose rules do not accept additional contributions. The industry has advised that the overwhelming majority of funds will already be able to accept the Government co-contribution. (The APRA has estimated that there are 722 defined benefit funds of which it is estimated less than 10% may be affected.)

Administration costs

3.26 The costs on the ATO are the same as in option 1.

Benefits

3.27 Low income earners may be more aware of the Government co-contribution and may be able to better identify the fund to which they wish the payment to be made.

Other issues - consultation

3.28 The Government has consulted with a wide range of superannuation funds, RSA providers, industry associations and fund administrators on the design of the administration system for the Government co-contribution.

3.29 It is expected that industry will be broadly supportive of the Government co-contribution administration arrangements. In particular, the 12 month transitional period will provide funds with a window to implement any necessary system changes. In discussions with industry there was also a recognition that option 1 would be a more automated and seamless way to administer the Government co-contribution.

Conclusion and recommended option

3.30 Option 1 is the most appropriate method to administer the Government co-contribution for low income earners.

3.31 Although option 1 does impose some initial cost on the industry, these costs are lower than the substantial ongoing costs which would be imposed on the industry under option 2. Option 1 also has the advantage over option 2 of providing funds with a 4-month timeframe to provide the information to the ATO as opposed to a one-month time frame for the statement to members.

3.32 It is preferable not to impose compliance costs on low income earners (such as option 2). Option 1 is the only method that meets this criteria.

3.33 Option 1 also best meets the policy objective of improving the standard of living in retirement of low income earners. Qualifying persons who have income of less than $32,500 and have made personal contributions will automatically receive a Government co-contribution thus increasing their potential retirement benefits.