House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Treasurer, the Hon John Dawkins, M.P.)

Chapter 4 Deductions for Contributions to Superannuation Funds

Clauses: 16, 17 and 65

Overview

Enable deductions for contributions to three superannuation funds to provide benefits for employees where one of those funds was established by a law of the Commonwealth, a State or Territory; and

Enable substantially self-employed people with minimal employer support to receive the same level tax deductions for personal superannuation contributions as self-employed people and employees without superannuation support.

Deductions for Contributions to Superannuation Funds

Deductions for Contributions to Superannuation Funds

Summary of the proposed amendments

4.1. The Bill will make two changes to the provisions which allow deductions for contributions to superannuation funds.

Contributions on behalf of employees to three eligible superannuation funds

4.2. This Bill will amend the income tax law with effect from 1 July 1990 to enable taxpayers to claim a deduction for contributions to three eligible superannuation funds for employees where one of those funds was established by a law of the Commonwealth, a State or Territory.

Contributions by substantially self-employed people

4.3. The Bill will also amend the income tax law to enable substantially self-employed people with minimal other (usually employer) superannuation support to receive the same level of tax deductions for personal superannuation contributions as self-employed people and employees without superannuation support. The proposed amendment applies to contributions made on or after 1 July 1991.

Part A: Contributions on Behalf of Employees to Three Eligible Superannuation Funds

Background to the legislation

4.4. Section 82AAC of the Income Tax Assessment Act 1936 allows a deduction for contributions to eligible superannuation funds (within the meaning of Part IX) to provide superannuation benefits for employees or their dependants.

4.5. Subsection 82AAC(2) of the Act imposes a two fund limit on claims for deduction under section 82AAC. The subsection was introduced with effect from 1 July 1990 to limit the scope for abuse under the new reasonable benefit limit arrangements. The limit of two funds was intended to accommodate arrangements where employers top up benefits through a second fund or provide benefits through both industry schemes and company schemes.

4.6. In some cases, employers may be required to contribute to a statutory fund in addition to the industry and company funds. Under the existing law, the employers can only claim a deduction for contributions to two of those funds.

Explanation of the proposed amendments

4.7. Section 82AAC will be amended to insert a further subsection so that subsection 82AAC(2) is taken never to have applied if the taxpayer claims deductions for contributions to three funds only and one of those funds was a fund which was in existence at 1 July 1990 and was established by a law of the Commonwealth, a State or Territory. In this regard, a statutory fund is not a fund to which contributions are made under a productivity award agreement.

4.8. This change will enable employers to claim a deduction for contributions to three funds where those conditions are met. If required, assessments can be amended to give effect to this change. [Clause 75]

Commencement date

4.9. The change proposed by this Bill to section 82AAC operates so that subsection 82AAC(2) is taken never to have applied where certain conditions are met. Subsection 82AAC(2) has been effective since 1 July 1990.

Clauses involved in the proposed amendment

Clause 16: inserts subsection 82AAC(2A) which provides for this change.

Part B: Contributions by substantially self-employed people

Background to the legislation

4.10. Income tax deductions are available under Subdivision AB of Division 3 of Part III of the Income Tax Assessment Act 1936 to eligible persons, as defined in subsection 82AAS(2), for their personal superannuation contributions to complying superannuation funds.

4.11. Prior to the 1990-91 financial year, the maximum annual deduction available was $3,000. From 1 July 1990, subsection 82AAT(2) provides for the deductibility of superannuation contributions as follows:

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Unsupported eligible persons (defined in subsection 82AAS(1) to mean, broadly speaking, self-employed people and employees without employer superannuation support) are entitled to a maximum deduction in the income year of the lesser of:

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3,000 plus 75% of contributions in excess of $3,000; and

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the amount of contribution necessary to fund the reasonable benefit limit for the individual concerned (i.e. the maximum deductible contributions specified in regulation 12A of the Income Tax Regulations).

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Eligible persons who are not "unsupported eligible persons" (broadly, employees whose only superannuation support is under an award based superannuation agreement) are entitled to a maximum deduction of $3,000.

4.12. Under the existing law, people who are substantially self-employed, but who undertake part-time employment through which they receive only superannuation support under an award based superannuation agreement, are not "unsupported eligible persons". Consequently they are restricted to a maximum deduction of $3,000 for their personal superannuation contributions, even though the amount of employer support received may be very small.

4.13. In such cases, the tax concessions forgone, because of the reduction in the maximum level of deductible contributions to $3,000, may exceed the benefit received from the employer superannuation support.

4.14. Examples of people who may fall into this situation are medical practitioners working in public hospitals, professionals working part-time as teachers at TAFE colleges or universities, and part-time statutory officers.

Explanation of the proposed amendments

4.15. The definition of "unsupported eligible person" in subsection 82AAS(1) will be extended to include a person who is substantially self-employed.

Who is a substantially self-employed person?

4.16. A substantially self-employed person is someone who derives less than 10% of their assessable income during the year from employment providing award based superannuation support (i.e. superannuation agreement contributions as defined in subsection 82AAS(1)). Also, if the person has no assessable income during the year from an employer who provides award based superannuation support, they will be a substantially self-employed person.

What are amounts derived from "that employment or those services"?

4.17. Amounts derived from "that employment or those services" (sub-subparagraph (b)(i)(A) and subparagraph (b)(ii) of the new definition of "unsupported eligible person") are salary and wages and any other payments, including eligible termination payments, paid by the employer providing the award based superannuation support. They do not include payments from other sources, such as eligible termination payments from superannuation funds (including the fund to which the employer makes award based superannuation contributions) or approved deposit funds.

Example 1

4.18. Consider a doctor who works one day a fortnight in a public hospital. Her income from that employment during the year is $10,000. The hospital contributes $300 to a superannuation scheme on behalf of the doctor in accordance with a productivity award agreement. The doctor's total assessable income is $120,000 - the balance being derived from her private practice. As the doctor derives less than 10% of her total assessable income from the hospital, she will qualify as a substantially self-employed person and will be able to claim a deduction for her own superannuation contributions in excess of $3,000. [Subject to the deduction limit under subsection 82AAT(2)].

Example 2

4.19. A person resigns from his job in June 1992 in order to start his own business. His former employer makes a contribution to a superannuation fund in accordance with a productivity award agreement but not until July. As the person derives no assessable income during the 1992-93 income year from an employer providing award based or other superannuation support, he will qualify as a substantially self-employed person and will be able to claim a deduction for his own superannuation contributions in excess of $3,000 in the 1992-93 year. [Subject to the deduction limit under subsection 82AAT(2)].

Example 3

4.20. An employee resigns from her job. She derived $5,000 assessable income from that employment during the year. Her employer contributed $150 to an award based superannuation fund. She immediately commenced employment with another employer who also made contributions to an award based superannuation fund during the year. Her total assessable income was $55,000. As she received award based superannuation support in relation to 100% of her employment income, she does not qualify as an "unsupported eligible person" and is therefore limited to a maximum deduction of $3,000 for her own superannuation contributions in the income year.

Commencement date

4.21. This amendment will apply to contributions made to superannuation funds on or after 1 July 1991.

Clauses involved in the proposed amendments

Clause 17: inserts a new definition of "unsupported eligible person" in subsection 82AAS(1) which provides for this change.

Clause 65(7): provides that the amendment will apply to contributions made on or after 1 July 1991.