House of Representatives

Explanatory Memorandum

Circulated by the authority of the Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP

Chapter 4 - Other superannuation amendments

Outline of chapter

4.1 Schedule 4 to this Bill modifies the operation of the superannuation sections of the income tax law to:

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allow a deduction for eligible contributions to be claimed from successor superannuation funds after 1 July 2011;

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increase the time-limit for deductible employer contributions made for former employees;

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clarify the due date of the shortfall interest charge for the purposes of excess contributions tax;

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allow the Commissioner of Taxation (Commissioner) to exercise discretion for the purposes of excess contributions tax before an assessment is issued;

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provide a regulation-making power to specify additional circumstances when a benefit from a public sector superannuation scheme will have an untaxed element; and

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streamline references to the Immigration Secretary and Immigration Department.

Context of amendments

Background

Deduction notices for successor fund transfers

4.2 A person can generally claim a tax deduction for personal superannuation contributions if they are less than 75 years of age, earned less than 10 per cent of their total income as an employee during the financial year and notified their superannuation provider of their intention to claim a deduction.

4.3 Superannuation funds are permitted to transfer a member's benefit from the original fund to a successor fund where the successor fund confers equivalent rights to those that the member had under the original fund in respect of the benefits. Successor fund transfers commonly occur where funds are merged, for example, following a corporate restructure.

4.4 Trustees of superannuation funds are not obliged to advise their members that a successor fund transfer is about to occur. Members who are moved from one superannuation fund to another as a result of a successor fund transfer are not able to provide a successor superannuation fund with a valid notice of intent to deduct a contribution as they are no longer a member of the superannuation fund to which the contribution was made. Similarly, a member is not able to vary a notice of intention to claim a deduction.

4.5 Tax Laws Amendment (2009 Measures No. 6) Act 2010 permits a member in a fund to provide a deduction notice to a successor fund even though the contribution was made to the original fund. This applies in relation to transfer events that happen on or after 24 December 2008 and before 1 July 2011.

Deductibility of employer contributions for former employees

4.6 Employers are entitled to a deduction for certain superannuation contributions made on behalf of former employees. These include:

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contributions to satisfy superannuation guarantee (SG) obligations;

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one-off salary sacrifice contributions that relate to a period when the person was an employee; and

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contributions made in lieu of salary or wages that relate to a period of service during which they were an employee if made within two months of them ceasing employment.

4.7 The Superannuation Guarantee (Administration) Act 1992 requires that employers pay SG contributions within 28 days of the end of the quarter, and as such, employers may pay superannuation every four months. However, contributions made by an employer on behalf of a former employee are not deductible where the contribution is made more than two months after the person ceased employment.

Deductibility of employer contributions to defined benefit interests on behalf of former employees

4.8 As outlined above, there are restrictions on when an employer can claim a deduction for a superannuation contribution. Defined benefits funds may require additional funding from employer sponsors to fund the pensions of retired members several months, or years after the employee ceased employment in order to ensure the fund remains solvent. However, it is not clear that these contributions are deductible if they are made more than two months after the person ceased employment.

Clarify the due date for shortfall interest charge relating to excess contributions tax

4.9 The taxation laws currently do not provide a due date for the shortfall interest charge in relation to excess contributions tax.

Amend the timing of the Commissioner's discretion relating to excess contributions tax

4.10 Excess contributions tax applies to superannuation contributions that exceed the concessional or non-concessional contributions cap. The Commissioner can disregard or allocate to another financial year all or part of a person's contributions for the purposes of excess contributions tax. Such discretion can be exercised only where there are special circumstances and doing so is consistent with the purposes of the law in relation to excess contributions tax. However, the Commissioner cannot exercise this discretion without first issuing an excess contributions tax assessment.

Summary of new law

4.11 Schedule 4 to this Bill modifies the operation of the income tax law to:

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allow an individual to give a notice of intent to deduct a contribution (made to an original fund) to a successor superannuation fund;

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allow employers to claim a deduction for superannuation contributions made in respect of a former employee within four months of the employee ceasing employment and at any time after the employee ceases employment for defined benefit interests;

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clarify the due date of the shortfall interest charge for the purposes of excess contributions tax is 21 days after the Commissioner provides notice of the amount payable;

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allow the Commissioner to exercise discretion to disregard or allocate to another financial year all or part of a person's contributions for the purposes of excess contributions tax before an assessment is issued;

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provide a regulation-making power to specify additional circumstances when a benefit from a public sector superannuation scheme will have an untaxed element; and

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streamline references to the Immigration Secretary and Immigration Department in relation to disclosure of migration and citizenship information for the legislated purposes.

Comparison of key features of new law and current law

Detailed explanation of new law

Deduction notices for successor funds

4.12 This amendment will allow members of the original superannuation fund to provide a deduction notice to the successor superannuation fund for contributions made to the original fund after 1 July 2011. [Schedule 4, Part 1, item 3, subsection 290-170(5) of the Income Tax Assessment Act 1997 (ITAA 1997)]

4.13 There are no other changes to the existing requirements to claim a deduction. That is, a person can generally claim a tax deduction for personal superannuation contributions if they are less than 75 years of age, earned less than 10 per cent of their total income as an employee during the financial year and notified their superannuation provider of their intention to claim a deduction.

4.14 The provision requires that after making the contribution, all of the member's superannuation interest in the original fund (to which the contribution was made for which the notice is given) must be transferred to the successor fund and the member must not have previously provided a valid notice to any superannuation provider in relation to the contribution. [Schedule 4, Part 1, item 3, paragraphs 290-170(5)(c) and (d) of the ITAA 1997]

4.15 The amendment will permit the member to vary a valid deduction notice, however a valid notice cannot be revoked or withdrawn. The variation can only reduce the contribution amount stated. [Schedule 4, Part 1, item 4, subsection 290-180(5) of the ITAA 1997] . This means that a member can vary a deduction notice in relation to a contribution made to the original fund by giving the variation notice to the successor fund. The other existing conditions for giving a variation notice remain unchanged. That is, the time limits for giving the variation apply, you must be a member of the successor fund, the successor fund must hold the contributions and an income stream must not have commenced to be paid.

Example 4.1: Variation of a deduction notice

Mary makes a contribution to Fund A. As she satisfies all the deduction requirements, she advises Fund A that she wishes to claim a deduction for the contribution. The trustee acknowledges receipt of the notice. At a later date, Mary is advised that her entire superannuation interest has been transferred to Fund B. Mary wishes to vary the original deduction notice which she gave to Fund A. She can do this by giving the variation notice to Fund B.

Contribution cap effects

4.16 This amendment clarifies that if the contribution is ultimately deductible it will be a concessional contribution. [Schedule 4, Part 1, item 5, paragraph 292-25(2)(b) of the ITAA 1997]

4.17 This amendment also clarifies that if the contribution is not ultimately deductible it will remain a non-concessional contribution. [Schedule 4, Part 1, item 6, paragraph 292-90(2)(b) of the ITAA 1997]

Fund income tax effects

4.18 A contribution transferred in a roll-over superannuation benefit to a successor fund must be included in the assessable income of the successor fund where:

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the contribution made to the original fund in the current or previous financial year was not covered by a valid and acknowledged notice given to any provider; and

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while the benefit, which includes the contribution made to the original fund, is held by the successor fund, the contribution becomes covered by a valid and acknowledged notice given to the superannuation provider of the successor fund.

[Schedule 4, Part 1, items 7 and 8, subsection 295-190(1) of the ITAA 1997]

4.19 In addition, the successor provider must include this contribution in the assessable income of the fund in the income year in which the transfer is received (provided that the notice is received by the time the trustee lodges its income tax return for that financial year). Otherwise, it is included in the income year in which the notice is received. [Schedule 4, Part 1, item 11, subsections 295-190(5) and (6) of the ITAA 1997]

Variation notice effects on the fund's income tax

4.20 Where the successor provider receives a variation notice before its income tax return is lodged in the year in which the benefit was transferred, the relevant contribution is not included in the assessable income to the extent that the relevant contribution has been reduced by the variation notice. [Schedule 4, Part 1, item 14, subsections 295-197(1) and (2) of the ITAA 1997]

4.21 Where the variation notice is received after the provider has lodged its income tax return, the successor provider has a choice as to how to treat the benefit amount (as reduced by the variation notice). The successor provider is entitled to a deduction in the income year in which it is notified. Alternatively, the successor provider has the option to amend its tax return for the income year in which the contribution was transferred, but only if that would result in a greater reduction in tax for that year than the reduction in tax that would occur for the income year in which the notice is received. [Schedule 4, Part 1, items 14 and 16, subsections 295-197(3) and (4) and subsection 295-490(1) of the ITAA 1997]

Deductibility of employer contributions for former employees, including to defined benefit interests.

4.22 This amendment will allow an employer to claim a deduction for a superannuation contribution made in respect of a former employee (or group of employees) where the contribution is made within four months of the employee's cessation of employment, providing the existing requirements are met. [Schedule 4, Part 2, item 21, subsection 290-85(1AA) of the ITAA 1997]

4.23 This amendment will allow an employer to claim a deduction for a superannuation contribution made in respect of a former employee to fund a defined benefit interest which accrued whilst the member was an employee regardless of when those contributions are made [Schedule 4, Part 2, item 21, subsection 290-85(1AB) of the ITAA 1997] . The existing deduction requirements must still be met and the definition of a defined benefit interest is outlined in section 292-175 of the ITAA 1997.

4.24 The contribution made by the employer must relate to a benefit which accrued while the member was an employee. [Schedule 4, Part 2, item 21, subsections 290-85(1AA) and (1AB) of the ITAA 1997]

4.25 The employer can claim a deduction if the contribution:

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would have been deductible if the employer had made it at a time when the other person was their employee; and

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would have been deductible if the current law had applied when the person was employed by the employer.

[Schedule 4, Part 2, item 21, subsections 290-85(1AA) and (1AB) of the ITAA 1997]

Example 4.2: Claiming a deduction under the current law

Nick finishes employment with his employer in 2002. Nick's employer makes a contribution to a defined benefit interest in 2012. The contribution made by Nick's employer relates to a benefit which accrued while Nick was an employee. Assuming the other laws that apply to deductibility in 2012 are also met, then the contribution is deductible. Therefore, Nick's employer is entitled to a deduction for the contribution.

4.26 The term contribution is not defined and as such, it may include superannuation guarantee contributions or a payment in lieu of salary or wages.

4.27 To ensure the integrity of this measure, a number of safeguards have been put in place, including:

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the employer must be at arm's length with the former employee in relation to the contribution; and

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actuarial verification is required to confirm that additional contributions are required

[Schedule 4, Part 2, item 21, subsection 290-85(1AB) of the ITAA 1997]

4.28 A deduction is also available for a contribution made where an employer makes a contribution for a person who is an employee of a company in which the employer has a controlling interest [Schedule 4, Part 2, item 23, subsections 290-85(1B) and (1C) of the ITAA 1997] . The current controlling interest deduction rules in section 290-90 of the ITAA 1997 continue to apply.

Clarify the due date for the shortfall interest charge relating to excess contributions tax

4.29 This amendment will clarify that any shortfall interest charge that a taxpayer is liable to pay, in relation to excess contributions tax, is due and payable 21 days after the day on which the Commissioner gives the taxpayer notice of the amount of the shortfall interest charge. [Schedule 4, Part 3, item 25, section 280-102A in Schedule 1 (note) of the Taxation Administration Act 1953]

Amend the Commissioner's discretion relating to excess contributions tax

4.30 This amendment will allow the Commissioner to make a determination to disregard (or reallocate) contributions for the purposes of excess contributions tax without first issuing an excess contributions tax assessment. This will thus facilitate administration of the timing of the use of the discretionary power. [Schedule 4, Part 4, item 27, paragraphs 292-465(2)(a) and (b) of the ITAA 1997]

4.31 The Commissioner can only make a determination after all of the contributions to be disregarded or reallocated have been made. If you receive an excess contributions tax assessment the existing application period of 60 days following the receipt of the assessment applies, or a longer period as determined by the Commissioner. [Schedule 4, Part 4, item 27, paragraphs 292-465(2)(a) and (b) of the ITAA 1997]

4.32 The Commissioner may include notice of a determination made in a notice of assessment. The amendments also clarify that a person may object to an excess contributions tax assessment on the grounds that they are dissatisfied with the Commissioner's determination or the Commissioner's decision not to make a determination. In addition, the making of a determination is a decision forming part of the process of making an assessment of tax for the purposes of the Administrative Decisions (Judicial Review) Act 1977 . [Schedule 4, Part 4, item 28, subsections 292-465(8) and (9) of the ITAA 1997]

4.33 There is no change to the criteria used to determine whether the determination should be made. Specifically, the current law outlines that the Commissioner may make the determination only if he or she considers that:

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there are special circumstances; and

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making the determination is consistent with the object of Division 292 of the ITAA 1997.

Untaxed elements in Public Sector Super Schemes

4.34 This amendment provides a regulation-making power to specify additional circumstances in which a benefit will consist of an untaxed element. [Schedule 4, Part 5, item 29, section 307-297 of the ITAA 1997]

Amendment in relation to the disclosure of migration and citizenship under the Superannuation (Unclaimed Money and Lost Members) Act 1999

4.35 Part 6 of Schedule 4 amends the administration provisions of Part 3A of the Superannuation (Unclaimed Money and Lost Members) Act 1999 (S(UMLM) Act).

4.36 Specifically, paragraphs 20N(2)(a) and (b) of the S(UMLM) Act are amended to incorporate references to the 'Immigration Secretary' and the 'Immigration Department' within the meaning of the Income Tax Assessment Act 1936 (ITAA 1936). While the references are replaced, there is no material change in the criteria used for disclosure of migrant and citizenship information.

4.37 This follows the approach taken in Tax Laws Amendment (2009 Measures No. 4) Act 2009 (Schedule 4, Part 1), which inserted streamlined references to Ministers, Departments and Secretaries. Item 38 of Schedule 4 to that amending Act inserted into the ITAA 1936 the definition of 'Immigration Department'; item 40 inserted the definition of 'Immigration Secretary'. [Schedule 4, Part 6, item 30, paragraphs 20N(2)(a) and (b)]

Application and transitional provisions

Application provisions

4.38 The amendments made by Part 1 of Schedule 4 apply to:

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deduction notices for personal contributions given on or after commencement of this item;

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notices of variation of deduction notices for personal contributions given on or after commencement of this item (whether the notices being varied were given before, on or after commencement of this item)

4.39 The amendments made by Part 2 of Schedule 4 apply to employer contributions made for former employees on or after commencement of this item.

4.40 The amendments made by Part 4 of Schedule 4 apply to applications made for the exercise of the Commissioner's discretion for the purposes of excess contributions tax on or after commencement of this item. [Schedule 4, Part 7, item 31]

Transitional provisions

4.41 If the Commissioner has granted a taxpayer an extension of time to apply for a determination for the exercise of the Commissioner's discretion before commencement of the amendments in Part 4 of Schedule 4, transitional provisions allow this extension of time to continue to apply after commencement of those amendments. [Schedule 4, Part 7, item 32]

Consequential amendments

4.42 A number of consequential amendments are made to adjust the wording to incorporate successor and original funds in the legislation, including the definition of a successor fund. [Schedule 4, Part 2, item 1, subparagraph 290-170(2)(d)(ii); item 2, subsection 290-170(4); item 9, subsection 295-190(1A); item 10 before subsection 295-190(2); item 12, section 295-195 (heading); item 13, subsections 295-195(1) and (2); item 15, subsection 295-490(1); cell at item 2 in the table, column headed 'can deduct' and item 17, subsection 995-1(1) of the ITAA 1997]

4.43 Two provisions from the Tax Laws Amendment (2009 Measures No. 6) Act 2010 are repealed as they are no longer required. [Schedule 4 Part 2, item 18]

4.44 A number of consequential amendments are made to adjust the wording to incorporate the additional deduction provisions for employer contributions in the legislation. [Schedule 4, Part 2, item 19 paragraph 290-85(1)(b); item 20, paragraph 290-85(1)(c); item 22, subparagraph 290-85(1A)(d)(iii); and item 24, paragraph 290-85(3)(a) of the ITAA 1997]

4.45 A wording change is required to incorporate the changes to the Commissioner's determination for excess contributions tax. [Schedule 4, Part 4, item 26, subsection 292-465(2) of the ITAA 1997]