SENATE

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Ralph Willis, MP)

Chapter 6 - Crediting of interest

Overview

6.1 This chapter sets out the definitions of certain interest amounts and the manner in which interest is to be calculated and credited to accounts in the Superannuation Holding Accounts Reserve. The chapter also sets out the mechanism for the recovery of interest from accounts that have been either refunded or accumulated.

Purpose of the provisions

6.2 The provisions contained in Part 6 of the Bill set out the mechanics of how interest is calculated and once calculated how that interest is credited to accounts in the Reserve.

Explanation of the provisions

Gross interest amount

6.3 The gross interest amount for a quarter is the sum of:

•

income which is derived by the Commonwealth during the quarter from the investment of money in the Reserve; plus

•

the amount (if any) determined by the Minister for Finance as notional interest earned on any amount of the Reserve that was not invested during the quarter. [Clause 38 of Part 6]

6.4 The money in the Reserve that is not required for the making of payments out of the Reserve may be invested in accordance with section 40 of the Financial Management and Accountability Act 1995 . Section 40 of that Act provides that those funds may be invested in the following areas:

•

securities of the Commonwealth or of a State or Territory;

•

securities guaranteed by the Commonwealth, a State or Territory;

•

a deposit with a bank, including a deposit evidenced by a certificate of deposit; and

•

any other form of investment prescribed by the regulations.

Thus the money in the Reserve is only capable of investment in relatively low risk areas.

6.5 Until the enactment of the Financial Management and Accountability Bill 1995 the investment of funds in the Reserve will be in accordance with section 62B of the Audit Act 1901 (refer to paragraph 2.7)

6.6 Where the money in the Reserve is not invested the gross interest amount shall be the amount (if any) that is determined by the Minister of Finance. In this case the Minister for Finance will deem an earning rate and the amount of interest in the Reserve. The earning rate may be based on Commonwealth securities such as 13 week Treasury Notes.

Net interest amount

6.7 The net interest amount for a quarter is the gross interest amount reduced by the costs incurred by the Commonwealth in connection with the administration of this Bill. The net interest amount, however, will not be reduced below zero. This is to ensure that account's within the Reserve are not eroded by administration fees of the Reserve. [Clause 39 of Part 6]

6.8 The basic policy behind the establishment of the Reserve is that account balances are protected from erosion by fees and charges. The administration costs of the Reserve are to be met soley out of interest derived by the Reserve. Any excess interest after reimbursing the Commonwealth for the cost of the administration of the Reserve may then be credited to accounts within the Reserve.

6.9 The costs of administering the Reserve for a quarter shall include amounts of carry forward excess costs, the amortisation of capital costs such as computer equipment and any investment costs incurred in connection with the investment of the money in the Reserve.

6.10 As soon as practical after the end of the quarter an amount equal to the net interest is to be transferred from the Consolidated Revenue Fund to the Unallocated Interest Pool of the Reserve for crediting to individual accounts.

Unallocated Interest Pool

6.11 The Unallocated Interest Pool is an accounting provision that forms part of the Reserve and is used as a holding facility for the net interest that is transferred to the Pool from the Consolidated Revenue Fund. The reason interest must first come from Consolidated Revenue Fund is discussed in paragraph 2.8. The Unallocated Interest Pool is credited when net interest is received from the Consolidated Revenue Fund and debited when allocated to individual accounts. The Unallocated Interest Pool is a convenient method of keeping track of the net interest received in the Reserve and the amount of interest credited to individual accounts and as such it performs a valuable accounting function. [Clauses 41 and 42 of Part 6]

6.12 Where the balance of the Unallocated Interest Pool is nil or insufficient to apply interest to individual accounts the Minister for Finance may decide to supplement the Unallocated Interest Pool from the Consolidated Revenue Fund. This circumstance may arise (for example) in the first quarter of the operation of the Reserve where a person withdraws their account balance before interest has been credited to the accounts. The person is entitled to interest on the money whilst it was in the Reserve but the Unallocated Interest Pool would not have been credited with interest from the Consolidated Revenue Fund. In this circumstance the Consolidated Revenue Fund is appropriated to enable interest to be credited to the individual's account. [Clause 43 of Part 6]

6.13 As interest is only paid on the first $1,200 of an account balance, it is possible for a surplus to build up in the Unallocated Interest Pool. If the Commissioner of Taxation is satisfied that there is a surplus in the Unallocated Interest Pool that surplus is to be transferred to the Consolidated Revenue Fund. This situation may arise where interest on accounts with balances in excess of $1,200 cannot be utilised because all other accounts have been credited with the capped maximum rate. In this circumstance the surplus is transferred to the Consolidated Revenue Fund. [Clause 44 of Part 6]

Gazettal of allocation day and allocation rate

6.14 As soon as practical after the net interest has been transferred from the Consolidated Revenue Fund to the Unallocated Interest Pool the Commissioner must Gazette that a specified day in the next quarter is the day on which interest is to be allocated to accounts in the Reserve (the allocation day) together with the rate of interest that is to be credited to accounts in the Reserve (the allocation rate). [Clause 46 of Part 6]

Calculation of the allocation rate

6.15 In order to work out the allocation rate it is necessary to follow the following steps:

Step 1 - adjusted total balances

(a)

for each day in the quarter work out the total balances of all accounts in the Reserve;

(b)

add up those totals; and

(c)

divide that total by the number of days in the quarter.

If the balance of any account exceeds $1,200 then the balance is taken to be $1,200.

Step 2 - provisional rate for the quarter

The provisonal rate for the quarter is calculated (to 4 decimal places) using the following formula:

(Net interest amount/Adjusted total balances) * 100


Example - Provisional rate

Assume net interest amount is $77 then using the formula:

(77/5060) * 100 = 1.521%


Provisional rate =1.5217%

Step 3 - total balances

(a)

for each day in the quarter work out the total balances of all accounts in the Reserve;

(b)

add up those totals; and

(c)

divide that total by the number of days in the quarter.

Step 4 - capped rate for the quarter

The capped rate for the quarter is calculated (to 4 decimal places) using the following formula:

(Gross interest amount/ Total balances) * 100


Example - capped rate

Assume the gross interest amount is $107.20 (see example after paragraph 6.9 above) then using the formula:

(107.20/5360) * 100 = 2%


Capped rate =2%

The allocation rate

6.16 The actual allocation rate is determined by comparing the provisional rate with the capped rate. Where the provisional rate is less than or equal to the capped rate, the allocation rate equals the provisional rate. Where the provisional rate exceeds the capped rate, the allocation rate is the capped rate. In the above example the provisional rate of 1.5217% is less than the capped rate of 2% therefore the allocation rate is 1.5217%. [Clause 47 of Part 6]

6.17 It should be noted that depending on the rate of return on the monies in the Reserve and the amount of administrative costs, the rate of interest to be applied to accounts could be 0%. However, the account balances will be protected from erosion as the administration fees cannot reduce the capital of the Reserve.

Crediting of interest

6.18 Interest accrues to an account each day based on the balance of the account at the end of that day. Interest does not accrue on accounts that exceed $1,200. If an account balance exceeds $1,200 the balance is taken to be $1,200. [Clause 49 of Part 6]

6.19 The rate and time of allocation of interest to an account depends on which of the following particular events occurs:

•

the allocation day event;

•

the withdrawal event;

•

the inactive account transfer event; or

•

the transitional - withdrawal event before first allocation day. [Clause 50 of Part 6]

Allocation day event

6.20 The allocation day event is where the account is still in the Reserve as at the day in which the interest is to be credited to the accounts in the Reserve. The allocation day event is the day which the Commisioner Gazettes as the allocation day (refer to paragraph 6.14 above).

6.21 Where the account is still in the Reserve as at the allocation day the rate of accrual to the account balance is worked out using the following formula:

(Allocation rate/Total number of days in the quarter)


6.22 Using the previous examples the allocation rate was 1.5217% and the number of days in the quarter was 91. In this circumstance the rate of accrual would be 0.016722%. Therefore an individual would have interest credited to their account at the rate of 0.016722% per day based on the balance of their account at the end of each day.

6.23 It is important to note that interest is not compounding and the rate of accrual is simply applied to the balance of the account at the end of each day to derive interest and that interest is then added up to determine the total interest earned during the quarter which is then credited to the account.

Withdrawal event

6.24 The withdrawal event is where the account is withdrawn from the Reserve before the allocation day. The allocation day is the day which the Commissioner Gazettes as the allocation day (refer to paragraph 6.14 above). In this circumstance the adjusted allocation rate is the rate that was last published in the Gazette. The rate of accrual is calculated using the following formula:

Adjusted allocation rate/Total number of days in the quarter


6.25 If we assume that the previous allocation rate was 1.4518% and that the employee withdrew the amount after 15 days into the new quarter then the allocation rate would be:

1.4518/15 = 0.096787%


Therefore interest would be calculated at 0.096786% per day for each of those 15 days based on the closing balance of the account for each day.

Inactive account transfer event

6.26 The inactive account transfer event is where the account is transferred from the Reserve due to the account being inactive before the allocation day. The allocation day is the day which the Commisioner Gazettes as the allocation day (refer to paragraph 6.14 above). Inactive accounts are discussed in chapter 9. In this circumstance the adjusted allocation rate is the rate that was last published in the Gazette. The rate of accrual is calculated using the same formula as for the withdrawal event discussed in paragraphs 6.24 and 6.25 above.

Transitional - withdrawal event before the first allocation day

6.27 If an employee withdraws their account balance before the allocation day for the quarter beginning on 1 July 1995 then the adjusted allocation rate will be 0.4% per quarter or a higher rate if the Minister for Finance determines. [Subclause 50(6) of Part 6]

Rounding up

6.28 Where an amount that is to be credited to an account on a particular day is not a number of whole cents, that total amount must be rounded up to the nearest cent. This will overcome the situation of amounts being calculated to six decimal points not being expressed as whole cents. [Clause 51 of Part 6]

Interest does not accrue on amounts refunded

6.29 Interest does not accrue, and is taken never to have accrued on amounts that are subsequently refunded. This also applies to SGC amounts that were incorrectly credited and have subsequently been debited.

6.30 Interest will also be adjusted where accounts have been amalgamated into one account and the amalgamated account excceds $1,200. For example where the Commissioner discovers that an individual has three accounts each with a balance of $1,000 which have been earning interest the Commissioner shall adjust the interest credited to ensure that no interest is credited on the amounts that exceed $1,200.

6.31 Any excess interest amounts that had previously been credited to such an account shall be reversed. The individual's account shall be debited and the Unallocated Interest Pool shall be credited with that amount. [Clauses 53 to 55 of Part 6]