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Superannuation Laws Amendment (2004 Measures No. 2) Bill 2004

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2002-2003-2004

 

THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA

 

 

 

HOUSE OF REPRESENTATIVES

 

 

 

superannuation laws amendment (2004 measures n o. 2) BILL 2004

 

 

 

EXPLANATORY MEMORANDUM

 

 

 

(Circulated by authority of the

Treasurer, the Hon Peter Costello, MP)



T able of contents

Glossary                                                                                                               1

General outline and financial impact............................................................ 3

Chapter 1            Actuary’s certificates for account based income

streams................................................................................... 9

Chapter 2            Under 18 superannuation contribution deduction

work test............................................................................... 13

Chapter 3            Retirement savings accounts portability time

frames.................................................................................. 19

Chapter 4            Simplification of superannuation guarantee

earnings bases................................................................... 21

Chapter 5            Cancelling registrable superannuation entity

licences................................................................................ 33

Index                                                                                                                  35



The following abbreviations and acronyms are used throughout this explanatory memorandum.

Abbreviation

Definition

APRA

Australian Prudential Regulation Authority

ATO

Australian Taxation Office

ITAA 1936

Income Tax Assessment Act 1936

ITAA 1997

Income Tax Assessment Act 1997

IT Regulations

Income Tax Regulations 1936

RSA

retirement savings account

RSA Act 1997

Retirement Savings Accounts Act 1997

SG

superannuation guarantee

SGAA 1992

Superannuation Guarantee (Administration) Act 1992

 



Actuary’s certificates for account based income streams

Schedule 1 to this bill will amend the Income Tax Assessment Act 1936 , removing the requirement for superannuation funds to obtain an actuary’s certificate in order to qualify for exemption from tax on income derived by assets supporting certain pension liabilities or an exemption of a proportion of income attributable to certain pension liabilities.

The amendments allow for the Income Tax Regulations 1936 to prescribe pensions for this purpose.

Date of effect :  The amendments will commence from Royal Assent but will have no application unless and until regulations are made for the purposes of the amendments.

Proposal announced :  This measure was announced in the Treasurer’s Press Release No. 011 of 25 February 2004 titled A more flexible and adaptable retirement income system .

Financial impact :  This measure is not expected to have a significant financial impact.

Compliance cost impact :  This measure will reduce compliance costs by removing the requirement for some superannuation funds to obtain an actuary’s certificate.

Under 18 superannuation contribution deduction work test

Schedule 1 to this bill will also amend the Income Tax Assessment Act 1997 to provide an additional condition that needs to be satisfied by taxpayers below the age of 18 in order to claim a taxation deduction for personal superannuation contributions.

Date of effect :  This measure applies in relation to taxation assessments for the 2004-2005 income year and for subsequent income years.

Proposal announced :  This measure was announced in the Treasurer’s Press Release No. 011 of 25 February 2004 titled A more flexible and adaptable retirement income system .

Financial impact :  This measure is expected to have a negligible budgetary impact. The impact was included in the estimate of the cost of removing the superannuation contribution work test for those people below age 65. The table below presents the expected financial impact of that measure.

Year

2004-2005

$ million

2005-2006

$ million

2006-2007

$ million

2007-2008

$ million

Revenue impact

+12.8

-34.5

-40.1

-45.9

Compliance cost impact :  Nil.

Summary of regulation impact statement

Regulation impact on business

Impact :  There will be no additional compliance costs placed on the superannuation industry.

Main points

·          Responsibility for monitoring the additional work test for people under the age of 18 claiming a taxation deduction will be with the Australian Taxation Office.

·          The removal of the superannuation contribution work test measure involves the removal of all costs associated with monitoring the existing work test. This is achieved by removing the need for the superannuation industry to monitor whether members have worked in the two years prior to making a contribution.

Retirement savings accounts portability time frames

Schedule 1 to this bill also amends the Retirement Savings Accounts Act 1997 to more closely align the portability regime for retirement savings account (RSA) providers with the regime that applies to other superannuation providers. Specifically, the period in which an RSA provider must action a portability request would be reduced from the current time frame of 12 months and aligned with the Superannuation Industry (Supervision) Regulations 1994 , which require action as soon as possible after the request and within 90 days.

Date of effect :  This measure applies from either 1 July 2004 or 28 days after Royal Assent, which ever is later.

Proposal announced :  This measure was announced in the Prime Minister’s Press Release of 5 November 2001 titled A Better Superannuation System .

Financial impact :  Nil.

Compliance cost impact :  Compliance costs for this measure are not expected to be significant as the law currently requires RSA providers to transfer account balances as soon as practicably possible after receiving a request from an account holder.

Simplification of superannuation guarantee earnings bases

Schedule 1 to this bill will also amend the Superannuation Guarantee (Administration) Act 1992 to simplify the earnings base of an employee for superannuation guarantee (SG) purposes. Specifically, the amendments will:

·          remove provisions which currently allow earnings bases that existed prior to 21 August 1991 to be used to calculate an employer’s SG obligation in respect of an employee;

·          remove provisions which currently specify an earnings base for employers to calculate their SG obligation in relation to employee members of the Seafarers’ Retirement Fund;

·          remove provisions which currently specify an earnings base for employers to calculate their SG obligation in relation to employee members of the Aberfoyle Award Superannuation Fund;

·          remove provisions which allow earnings bases specified in industrial awards, superannuation schemes, occupational superannuation arrangements or a law of the Commonwealth, State or Territory to be used for SG purposes; and

·          require all employers to calculate their SG liability against an employee’s ordinary time earnings.

Date of effect :  These amendments apply from 1 July 2010.

Proposal announced :  This measure was announced in the Treasurer’s Press Release No. 011 of 25 February 2004 titled A more flexible and adaptable retirement income system .

Financial impact :  The table below presents the expected financial impact of this measure.

Year

2004-2005

$ million

2005-2006

$ million

2006-2007

$ million

2007-2008

$ million

Revenue

impact

-10

-15

-21

-24

Compliance cost impact :  These amendments are expected to simplify the SG earnings base provisions and, therefore have a positive impact on compliance costs.

Summary of regulation impact statement

Regulation impact on business

Impact :  This measure will impact on those employers who do not currently calculate SG obligations on the basis of ordinary time earnings. The measure will reduce the complexity experienced by employers in determining and calculating the relevant earnings base for an employee.

Employees are also expected to benefit from this measure as it will ensure that all employees receive superannuation contributions based on a minimum of ordinary time earnings.

Main points :

·          The complexity in determining the correct earnings base will be removed.

·          The inequality in the level of contributions between equivalent employees will be removed.

·          A lead in time of six years will allow the changes contained in this measure to be considered by employers and employees in the wage bargaining process.

Cancelling registrable superannuation entity licences

Schedule 1 to this bill also amends section 29G of the Superannuation Industry (Supervision) Act 1993 . The amendment addresses an incorrect cross-reference relating to the cancellation of registrable superannuation entity (RSE) licences. Section 29G is inserted into the Superannuation Industry (Supervision) Act 1993 by the Superannuation Safety Amendment Act 2004, and will apply from 1 July 2004.

The Superannuation Safety Amendment Act 2004 currently makes subsection 29G(1) subject to subsection 29G(2), rather than subsection 29G(3) as intended. The proposed amendment will clarify that the Australian Prudential Regulation Authority may not cancel an RSE licence without the Minister’s written consent.

Date of effect :  This amendment will apply immediately after the commencement of Schedule 1, Part 1 of the Superannuation Safety Amendment Act 2004 , on 1 July 2004.

Proposal Announcement :  This measure has not previously been announced.

Financial impact :  Nil.

Compliance cost impact :  Nil.

 

 



C hapter 1

Actuary’s certificates for account based income streams

Outline of chapter

1.1 Schedule 1 to this bill amends the Income Tax Assessment Act 1936 (ITAA 1936),removing the requirement for superannuation funds to obtain an actuary’s certificate in order to qualify for exemption from tax on income derived by assets supporting certain current pension liabilities or for an exemption of a proportion of income attributable to certain current pension liabilities.

1.2 The amendments allow for the Income Tax Regulations 1936 (IT Regulations) to prescribe pensions for this purpose.

Context of amendments

1.3         The requirement to obtain an actuary’s certificate first came into effect on 1 July 1990 and applied to pensions paid from defined benefit funds. The purpose of that measure was to ensure that superannuation funds were not avoiding tax by misstating the size of their pension liabilities or the value of assets required to support their pension liabilities.

1.4         Certain types of pensions have been introduced since then, that do not have a defined benefit. For example, an allocated pension is account based and does not have a guaranteed income stream. However, as the requirement to obtain an actuary’s certificate applies to pensions generally, the requirement encompasses these pensions.

Summary of new law

1.5         Section 282 of the ITAA 1936 provides that any amount of normal assessable income derived by a complying superannuation fund from assets that, when the income is derived, are segregated current pension assets, is exempt from tax.

1.6         This bill amends the definition of ‘segregated current pension assets’ in section 273A of the ITAA 1936 so that in circumstances in which the only type of pension that a fund is paying is a type that is prescribed in the IT Regulations, an actuary’s certificate is not required in order for assets to meet the definition of segregated current pension assets.

1.7         Section 283 of the ITAA 1936 provides an exemption of a proportion of income attributable to current pension liabilities.

1.8         This bill amends the calculation of the value of a fund’s liabilities so that, in circumstances in which the only type of pension that a fund is paying is a type that is prescribed in the IT Regulations, an actuary’s certificate is not required to value a fund’s liabilities.

Comparison of key features of new law and current law

New law

Current law

When a fund is paying pensions of the type prescribed in the IT Regulations and no other type of pension, an actuary’s certificate is not required for assets supporting those pensions in order to meet the definition of segregated current pension assets.

An actuary’s certificate is required in order for assets to meet the definition of segregated current pension assets regardless of the type of pension the particular assets are supporting (section 273A of the ITAA 1936).

When a fund is paying pensions of the type prescribed in the IT Regulations and no other type of pension, an actuary’s certificate is not required in relation to the value of a fund’s liabilities in order to determine the proportion of normal assessable income that is exempt income.

If a fund has current pension liabilities, in respect of which it has not segregated assets it must obtain an actuary’s certificate in relation to the value of the fund’s liabilities in order to determine the proportion of normal assessable income that is exempt income (section 283 of the ITAA 1936).

Detailed explanation of new law

1.9         The amendments will insert subsections 273A(2) and (3), extending the definition of ‘segregated current pension assets’ in circumstances where a fund is paying pensions of the type prescribed in the IT Regulations and no other type of pension, to assets of the fund held in relation to pensions prescribed in the IT Regulations. [Schedule 1, item 1, subsections 273A(2) and (3)]

1.10       The amendments will insert subsection 283(2A) so that in circumstances where a fund is paying pensions of the type prescribed in the IT Regulations and no other type of pension, subsections 283(3) and (4) do not apply. [Schedule 1, item 2, subsection 283(2A)]

Application provisions

1.11       The amendments will commence from Royal Assent but will have no application unless and until regulations are made for the purposes of the amendments.



Outline of chapter

2.1         Schedule 1 to this bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to provide an additional condition that needs to be satisfied by taxpayers below the age of 18 in order to claim a taxation deduction for personal superannuation contributions.

Context of amendments

2.2         One of the measures contained in the Treasurer’s Press Release No. 011 of 25 February 2004, titled A more flexible and adaptable retirement income system , was the removal of the superannuation contribution work test for those people below age 65.

2.3         As a result of this removal some taxpayers who will now be able to make personal superannuation contributions will now also be able to claim a taxation deduction for these contributions.

2.4         Whilst the work test removal has the policy objective of improving equity of access to the superannuation system, for integrity reasons the Government also decided to implement an additional condition for claiming such taxation deductions by people below the age of 18.

Summary of new law

2.5         This bill amends the ITAA 1997 to provide an additional condition that needs to be satisfied by taxpayers below the age of 18 in order to claim a taxation deduction for personal superannuation contributions.

2.6         The additional condition will be that persons below the age of 18 will need to have derived eligible employment or business income in the income year in which the taxation deduction is being claimed.

Comparison of key features of new law and current law

New law

Current law

From 1 July 2004 persons under age 65 will not have to satisfy a work test in order to make personal superannuation contributions.

In addition to being an eligible person, in order to claim a tax deduction for these contributions, a person under 18 a years of age will now have to derive eligible employment or business income in the income year in which the taxation deduction is being claimed.

A work test is required before a person below the age of 18 can make personal superannuation contributions, the test being gainful employment of 10 hours in a week in the two years prior to making the contribution.

To claim a taxation deduction for that contribution the person must be an eligible person in the income year.

However, if a person below the age of 18 wants to claim a taxation deduction for such personal superannuation contributions, that person does not need to be employed in the income year in which the taxation deduction is claimed.

Detailed explanation of new law

2.7         The additional condition that needs to be satisfied by taxpayers below the age of 18 will be inserted after paragraph 26-80(3)(a) of the ITAA 1997 .

2.8         This condition will apply to persons who were under the age of 18 at the end of the income year in question. It will provide that they must have derived eligible employment or business income during the income year in question. The meanings of ‘eligible employment’ and ‘business’ are the same as those in subsections 82AAS(1) and 6(1) respectively of the Income Tax Assessment Act 1936 . [Schedule 1, item 3, paragraph 26-80(3)(aa)]

Application provisions

2.9         The amendments will apply to assessments for the 2004-2005 income year and subsequent income years. [Subclause 4(1)]

REGULATION IMPACT STATEMENT

Policy objective

2.10       The measures contained in the Treasurer’s Press Release No. 011 of 25 February 2004, titled A more flexible and adaptable retirement income system have the objective of simplifying the operation of the superannuation system and reducing compliance costs for superannuation providers associated with administering the current superannuation work tests.

2.11       The measures also have other policy objectives, including improving equity of access to the superannuation system . One part of the superannuation system that is to be simplified is the work test relating to contributions made by persons under the age of 65.

2.12       This is intended to improve equity of access to the superannuation system by allowing all Australians under this age to save for their retirement in a prudentially regulated, concessionally taxed and preserved environment.

Background

2.13       The existing work test for contributing to superannuation which applies to members under the age of 65 means that to be eligible to contribute to superannuation or to have voluntary employer contributions made on their behalf, a member under the age of 65 generally must have worked for 10 hours in any week in the last two years.

2.14       No work test applies in respect of mandated employer contributions (typically SG contributions) on behalf of a member regardless of their age.

2.15       In recent years, a number of Australian Government initiatives have created exceptions to the work tests, allowing access to the superannuation system by groups other than the gainfully employed.

2.16       Issues relating to the work test for contributing to superannuation for those under the age of 65 years were canvassed in the Senate Select Committee on Superannuation’s 2002 report Superannuation and standards of living in retirement .

2.17       A number of submissions to the inquiry called for a widening of access to superannuation, including through changes to the work test. In particular, the Investment and Financial Services Association proposed that the removal of the work nexus for personal contributions be explored.

Implementation options

2.18       The Government’s option to remove the superannuation contribution work test for those people under the age of 65 will be achieved primarily by amendments to the relevant contribution acceptance regulations.

2.19       As a result of this work test removal some of the persons who can now personally contribute into superannuation without regard to a work test will be eligible to also claim a taxation deduction for these personal superannuation contributions.

2.20       For integrity reasons the Government also decided to impose an additional condition for claiming such taxation deductions by people less than 18 years of age, namely that these persons have worked at least 10 hours in the income year in which the deduction is being claimed.

Assessment of impacts

Impact group identification

2.21       Changes to the work test for those under 65 mainly affects self-employed persons and persons contributing to superannuation while currently out of the workforce. A removal of the work test will also impact on superannuation fund administrators.

Analysis of costs / benefits

2.22       The removal of the contribution work test for those under the age of 65 will reduce compliance costs for superannuation providers by removing the need for monitoring of whether members have worked in the past two years.

2.23       As a result, self-employed persons and persons currently out of the workforce will be able to make or receive superannuation contributions without restriction, and without a need to comply with any work test evidentiary requirements from providers.

2.24       Currently, superannuation providers are required to monitor, at the time of accepting a personal contribution from an individual, whether the person has been gainfully employed for at least 10 hours at sometime in the past two years. The method is left open to providers to decide.

2.25       This measure involves the complete removal of this requirement on superannuation providers and members and therefore all compliance costs associated with monitoring the existing work test.

2.26       The Government does not have information available on the current costs and therefore cannot estimate the benefit of the reduced compliance costs. As such, it is very difficult to estimate the probable savings for the superannuation industry of removing the work test for people under age 65.

2.27       The Productivity Commission Review of the Superannuation Industry (Supervision) Act 1993 and certain other Superannuation Acts found that there is only very limited quantitative information available on the magnitude of compliance costs that are imposed by the Superannuation Industry (Supervision) Act 1993 .

2.28       The responsibility for monitoring the additional work test for people under the age of 18 claiming a taxation deduction will be with the Australian Taxation Office (ATO). Whilst this measure may increase administration costs for the ATO it will not impose any burden on the superannuation providers or the taxpayers. There will be no additional compliance costs placed on the superannuation industry as a result.

2.29       The under 18 work test is intended to ensure that the opportunity of making personal contributions without a work test for all those under the age of 65 is not abused by those under the age of 18 and thereby reduces any potential risk to the revenue from such abuse.

Consultation

2.30       Consultation prior to the decision making stage in relation to this measure was not regarded as necessary, as it is an integrity measure.

2.31       Targeted confidential consultation with the superannuation industry on implementation issues associated with this measure has taken place following their announcement. As a result of these consultations some minor changes were made to the type of work test that will be administered by the ATO.

Conclusion and recommended option

2.32       This measure is aimed at addressing specific deficiencies in the access to the superannuation system and reducing sources of compliance costs in the superannuation regulatory arrangements, whilst protecting the integrity of the system for contributions made by persons under the age of 18 years.

2.33       As this option meets the policy objectives of this measure, the approach in this bill is recommended.



Outline of chapter

3.1         Schedule 1 to this bill amends the Retirement Savings Accounts Act 1997 (RSA Act 1997) to more closely align the portability regime for retirement savings account (RSA) providers with the regime that applies to other superannuation providers. Specifically, the period in which an RSA provider must action a portability request would be reduced from the current time frame of 12 months and aligned with the Superannuation Industry (Supervision) Regulations 1994 requirement of actioning the request as soon as possible and within 90 days.

Context of amendments

3.2         Currently an RSA provider commits an offence if they fail to action a valid request from an RSA holder and transfer the balance of the holder’s account within the time frame specified in subsection 50(2) of the RSA Act 1997. The provision requires the transfer to be made within the time frame specified in the RSA contract; as soon as practicably possible and, in any case, within a maximum period of 12 months. The portability regime contained in the Superannuation Industry (Supervision) Regulations 1994 commences on 1 July 2004 and will apply to superannuation funds. This measure will ensure that RSA holders are entitled to the same responsiveness from their account providers as superannuation fund account holders can expect from superannuation fund trustees.

Summary of new law

3.3         The amendments will ensure that superannuation fund members and RSA account holders have access to similar portability arranagements. The amendments will allow RSA providers a maximum period of 90 days to give effect to a portability request. The Superannuation Industry (Supervision) Regulations 1994 will require superannuation fund trustees to action requests to have fund balances transferred in the same maximum time frame of 90 days.

Comparison of key features of new law and current law

New law

Current law

An RSA provider has an obligation to give effect to an RSA account holder’s request to transfer the balance of that account within the time frame specified in the RSA account contract, or as soon as practicably possible. In any case the transfer must be completed within 90 days of the request being made.

An RSA provider has an obligation to give effect to an RSA account holder’s request to transfer the balance of that account within the time frame specified in the RSA account contract, or as soon as practicably possible. In any case the transfer must be completed within 12 months of the request being made.

Detailed explanation of new law

3.4         The amendments will remove the reference to the maximum period of ‘12 months’ in subsection 50(2) and replace it with a reference to ‘90 days’. The effect of the change is that RSA providers will be subject to the same requirements as superannuation fund trustees; to complete transfers within 90 days of the request being made. [Schedule 1, item 4, subsection 50(2)]

Application provisions

3.5         The amendments will apply from 1 July 2004 or 28 days after Royal Assent, whichever is later. [Subclause 4(2)]

 



Outline of chapter

4.1         Schedule 1 to this bill amends the Superannuation Guarantee (Administration) Act 1992 (SGAA 1992) to simplify the earnings base of an employee for superannuation guarantee (SG) purposes. Specifically, the amendments will:

·          remove provisions which currently allow earnings bases that existed prior to 21 August 1991 to be used to calculate an employer’s contribution made in respect of an employee;

·          remove provisions which currently specify an earnings base for employers to calculate their contributions in relation to employee members of the Seafarers’ Retirement Fund;

·          remove provisions which currently specify an earnings base for employers to calculate their contributions in relation to employee members of the Aberfoyle Award Superannuation Fund;

·          remove provisions which allow earnings bases specified in industrial awards, superannuation schemes, occupational superannuation arrangements or a law of the Commonwealth, State or Territory to be used for SG purposes; and

·          require all employers to calculate their SG liability against an employee’s ordinary time earnings.

Context of amendments

4.2         The Treasurer announced in Press Release No. 011 of 25 February 2004 changes to provide a more flexible and adaptable retirement income system. The announcement included the Government’s decision to simplify the earnings base provisions of the SGAA 1992 by removing earnings bases that existed before 21 August 1991.

4.3         The SG arrangements currently require employers to provide a prescribed minimum level of superannuation contributions for their eligible employees. The required minimum rate of superannuation contributions is 9% of an employee’s notional earnings base.

4.4         The SGAA 1992 was developed in the context of the occupational superannuation arrangements that existed in the early 1990s. To minimise the impact on business at that time, the SGAA 1992 recognised earnings base provisions that existed prior to 21 August 1991 and allowed these to be used as the basis for determining an employer’s SG obligation.

4.5         Employers who contribute for the benefit of employees without a pre-21 August 1991 earnings base are subject to different rules. Employees without a pre-21 August 1991 earnings base will generally have an minimum earnings base equal to their ordinary time earnings.

4.6         As pre-21 August 1991 earnings bases are generally less than ordinary time earnings, some employers are currently able to pay lower superannuation contributions for their employees than other employers in the same industry.

Summary of new law

4.7         The amendments will remove the current earnings base provisions from the SGAA 1992. The effect of these changes is that the amount against which an employer calculates the contribution necessary to meet their SG obligations in respect of an employee is standardised to ordinary time earnings for all employees. Employers could continue to use notional earnings bases specified in legislation or industrial agreements where these are above an employee’s ordinary time earnings; however, any liability to pay the SG charge would only be assessed against ordinary time earnings.

4.8         Standardising the earnings base used to determine SG obligations to ordinary time earnings extends to the removal of references to industrial agreements, laws of the Commonwealth, State or Territory, an applicable superannuation scheme or retirement savings account from the provisions relating to earnings bases. These instruments currently prescribe notional earnings bases for SG purposes.

4.9         These amendments will apply from 1 July 2010. This will allow employers and employees time to adjust to the new employment arrangements and build, if necessary, the increased superannuation contributions into their wage bargaining processes.

Comparison of key features of new law and current law

New law

Current law

All employers will determine their SG obligation by applying the SG charge percentage (9%) to the relevant employee’s ordinary time earnings.

Employers currently determine their SG obligation by applying the SG charge percentage (9%) to the relevant employee’s notional earnings base.

·          If the relevant employee has a pre-21 August 1991 earnings base, then there is currently no default minimum earnings base.

·          If the relevant employee does not have a pre-21 August 1991 earnings base, then there is generally a default minimum earnings base equal to the employee’s ordinary time earnings.

·          If the relevant employee is a member of the Seafarers’ Retirement Fund or the Aberfoyle Award Superannuation Fund then there is currently no default minimum earnings base.

All references to ‘industrial awards, occupational superannuation arrangements, an applicable superannuation scheme or a law of the Commonwealth, State or Territory’ will be removed from the SGAA 1992 in so far as they relate to specifying notional earnings bases.

Currently an employee’s notional earnings base can be specified in an industrial award, an occupational superannuation arrangement, an applicable superannuation scheme or a law of the Commonwealth, State or Territory.

The SG charge percentage will be reduced by each percentage point that represents contributions as a proportion of ordinary time earnings.

The SG charge percentage is reduced by each percentage point that represents contributions as a proportion of the relevant notional earnings base.

Detailed explanation of new law

4.10       The amendments remove the mechanism for determining the notional earnings base of an employee by repealing sections 13, 13A, 13B and 14 of the SGAA 1992. Standardising the amount against which SG liability should be assessed to ordinary time earnings reduces complexity for employers, ensuring that employers only need consider ordinary time earnings as opposed to potentially multiple earnings bases for a variety of employees. Standardising earnings bases to ordinary time earnings means that where employees perform the same work under the same remuneration arrangements they can expect to receive SG contributions calculated against the same amount. [Schedule 1, item 5]

4.11       To ensure that employers still have a mechanism for reducing their charge percentage, section 23 of the SGAA 1992 will be amended. The amendments will remove subsections 23(2) to (5) and (9). The amendments will insert new subsection 23(2). This new subsection will provide a rule to reduce the charge percentage by a number calculated as:

[Schedule 1, item 6, subsection 23(2)]

Example 4.1

Jessica’s ordinary time earnings for a quarter is $4,000. Jessica’s employer, Clancy, contributes $360 to an approved superannuation fund for the benefit of Jessica on the last day of the quarter. Applying the formula in subsection 23(2) Clancy can reduce his charge percentage by 9 percentage points.

360/4,000  ×  100  =  9

4.12       Subsection 23(3) ensures that the charge rate is also reduced by any reduction allowed under section 22, which sets out the reduction mechanism where contributions are made to a defined benefit fund. [Schedule 1, item 6, subsection 23(3)]

4.13       Existing subsections 23(2) to (5) and subsection 23(9) will be redundant as they provide a reduction mechanism depending on the instrument in which a notional earnings base is specified. [Schedule 1, items 6 and 7]

Application provisions

4.14       The amendments will apply from 1 July 2010. [Subclause 4(3)]

REGULATION IMPACT STATEMENT

Issue / Background

4.15       The Superannuation Guarantee (Administration) Act 1992 (SGAA 1992) permits the use of reduced notional earnings bases as set out in an industrial award or statute that applied before 21 August 1991. This creates complexities and inequities within the SG system.

4.16       When calculating an employers SG liability, complexities arise for both employers and the Australian Taxation Office (ATO) in determining whether employers are entitled to use a reduced notional earnings base for their employees.

4.17       For example, the ATO will need to determine the appropriate notional earnings base for calculating an employer’s liability to the SG charge when auditing compliance with the SG arrangements. This can require determining whether the employer is entitled to use a pre-1991 earnings base and, if so, the nature of that earnings base. Complexities for employers can also arise when businesses change ownership - in particular, the new owners will need to determine the appropriate earnings base to use in calculating the minimum superannuation contributions needed to avoid the SG charge.

4.18       Inequities arise when employees who earn equivalent amounts are entitled to differing levels of compulsory contributions based on their occupation, the composition/structure of their earnings, and/or the operation of an arrangement that commenced prior to them commencing work.

4.19       The interaction of the SGAA 1992 and award and statute provisions more generally also creates complexities around the relevant level of superannuation contributions payable under this Act to reduce or remove an employer’s SG liability.

4.20       As the current arrangements are bound in legislation, addressing the anomalies present in the notional earnings base provisions of the SGAA 1992 requires direct Government intervention.

Policy objective

4.21       The policy objective is to remove the complexity and inequity present in the current SG notional earnings base arrangements under the SGAA 1992. The basic principle underpinning this objective is that persons on similar overall levels of remuneration should receive similar levels of compulsory employer superannuation contributions.

Implementation options

Retain the current arrangements

4.22       There would be no change to the existing arrangements. That is, some employers could continue to use pre-21 August 1991 earnings bases in respect of their employees. Under the current provisions of the SGAA 1992, employers could potentially reduce their compulsory superannuation contributions through the use of workplace agreements.

Adopting ordinary time earnings as a standardised earnings base

4.23       Remove all references to industrial awards and statutes from the SGAA 1992 and adopt ordinary time earnings as the standard notional earnings base. This option proposes that the minimum notional earnings base of an employee be their ordinary time earnings.

Adopting salary and wages as a standardised earnings base

4.24       Remove all references to industrial awards and statutes from the SGAA 1992 and adopt salary or wages as the standard notional earnings base. This option proposes that the minimum notional earnings base of an employee be the total of their salary and/or wages.

Assessment of impacts

Impact group identification

4.25       There will be three main impact groups affected: employers who have SG obligations (this will be the vast majority of employers), employees who are entitled to superannuation contributions under the SG arrangements and the Australian Government.

Option 1 - Retain the current arrangements

Employers

4.26       Some employers will have an SG liability below that of others in equivalent circumstances. Determining the correct earnings base will remain complex.

Employees

4.27       The inequality in the level of contributions between equivalent employees will not be reduced. Salary and wage growth may compensate, to some degree for forgone contributions.

Government

4.28       Maintaining the current arrangements may lead to greater reliance on the age pension by affected employees. Government revenue will not be affected in the short term.

Option 2 - Adopting ordinary time earnings as a standardised earnings base

Employers

Benefits

4.29       Employers will experience reduced complexity in determining the correct earnings base. This will be because all employees will have an earnings base of ordinary time earnings under this option rather than each employee having potentially different earnings bases depending on their industrial award, superannuation fund trust deed or law which may currently prescribe earnings bases.

Cost

4.30       However, some employers will be required to make increased contributions if they are currently using an earnings base less than ordinary time earnings. These employers will also experience some initial administrative costs associated with system adjustments to determine the ordinary time earnings of each employee. The adjustment will only affect employers who need to capture different amounts. For instance an employer who currently does not capture a payment in calculating superannuation contributions that form part of an employee’s ordinary time earnings will have to adjust their systems to capture that payment.

Employees

Benefit

4.31       The inequality in the level of contributions between equivalent employees will be removed, resulting in higher retirement savings for affected employees. Employees who currently have their superannuation calculated on an earnings base less than ordinary time earnings may receive higher contributions.

Cost

4.32       The additional increase in superannuation contributions may displace salary and wage increases.

Government

4.33       The increase in contributions will help reduce reliance on the aged pension. The increase in concessionally taxed contributions will reduce aggregate taxable income and lead to lower tax revenue.

Table 4.1: Estimated cash revenue impact of the ordinary time earnings base option

Budget

year

2004-2005

$ million

2005-2006

$ million

2006-2007

$ million

2007-2008

$ million

Revenue impact

-10

-15

-21

-24

Option 3 - Adopting salary and wages as a standardised earnings base

Employers

Benefit

4.34       Employers will experience reduced complexity in determining the correct earnings base. This will be because all employees will have an earnings base of ordinary time earnings under this option rather than each employee having potentially different earnings bases depending on their industrial award, superannuation fund trust deed or law which may currently prescribe earnings bases.

Cost

4.35        Some employers will be required to make increased contributions if they are currently using an earnings base less than salary and wages, although these may partially be absorbed through lower pay outcomes. These employers will also experience some initial administrative costs associated with system adjustments to determine superannuation contributions based on the salary and wages of each employee. The adjustment will only affect employers who need to capture different amounts. For instance an employer who currently does not capture a payment in calculating superannuation contributions, that form part of an employee’s salary and wages, will have to adjust their systems to capture that payment.

Employees

4.36       The inequality in the level of contributions between equivalent employees will be removed. Employees who currently have their superannuation calculated on an earnings base less than salary and wages may receive higher contributions, resulting in higher retirement savings.

4.37       The additional increase in superannuation contributions may displace salary and wage increases.

Government

4.38       The increase in contributions will help reduce reliance on the aged pension.

4.39       The increase in concessionally taxed contributions will reduce aggregate taxable income and lead to lower tax revenue. This transfer will be greater with an earnings base of salary and wages than it would be if an earnings base of ordinary time earnings is adopted.

Table 4.2: Cash revenue impact of salary and wages earnings base option

Budget

year

2004-2005

$ million

2005-2006

$ million

2006-2007

$ million

2007-2008

$ million

Revenue impact

-10

-15

-21

-85

Limitations of the impact analysis

4.40       Very limited actual data was available on the extent of use of pre-1991 award provisions and thus the revenue estimates should be regarded as indicative only. The limited data available to assess the increase in contributions does not suggest how the contributions are distributed among affected employers.

4.41       The estimation of the average marginal tax rate of those affected assumes no difference in average marginal tax rate by industry.

4.42       Calculating the number of potential losers under such a policy is difficult, as some employers may pay the additional cost of superannuation themselves, while others may take the additional cost from an employee’s cash pay.

4.43       The estimates of the revenue impact of option 3 reflect an assumption that no employers currently paying SG under an ordinary time earnings earnings base would move to a salary and wages earnings base in the first three years of the policy. The relatively small adjustment to SG contributions required in moving from an ordinary time earnings to a salary and wages base means that the change could be accommodated in a single enterprise agreement. In comparison, the larger increase in contributions required in moving from a grandfathered earnings base to either ordinary time earnings or salary and wages means that the change would likely occur over two enterprise agreements.

4.44       The degree of the impacts of the respective measures effecting the reliance on the age pension is unquantifiable. While increased contributions will lead to higher retirement savings, without knowledge of the other private savings of individuals affected by this change it cannot be ascertained how pressure on the age pension will change other than that it must result in some degree of alleviation.

Consultation

4.45       In July 2003, officers from the Department of the Treasury and the Department of Employment and Workplace Relations undertook consultations with industry groups that could be affected by the removal of the reduced notional earnings base provisions.

4.46       It was found that usage of the lower earnings bases varies considerably between and within industries. Overall, it was estimated that around 5% of businesses would use pre-1991 earnings bases. Usage has declined substantially since the SG legislation was introduced, particularly as companies have moved to enterprise agreements. However, in some instances employers consider the lower SG earnings bases a useful bargaining tool, with the incentive of higher superannuation used to encourage employees to move onto agreements.

4.47       Specific industry associations were generally more comfortable with a move to a simplified earnings base, particularly if sufficient lead-time was provided. However, a minority were outwardly opposed to the change as additional contributions would be necessary in their circumstances. In arriving at the recommendation below it was considered that equality for employees was of paramount importance.

Conclusion and recommended option

4.48       The preferred option is option 2, which removes all references to industrial awards and statutes from the SGAA 1992 and adopts ordinary time earnings as the standard notional earnings base.

4.49       This option would remove the complexity and inequity present in the current arrangements without imposing the same level of cost on employers and Government as an earnings base, based on total salary and wages’ would.

 



Outline of chapter

5.1         Schedule 1 to this bill makes a technical amendment to section 29G of the Superannuation Industry (Supervision) Act 1993 concerning cancelling registrable superannuation entity (RSE) licences.

Context of amendments

5.2         Provisions concerning the licensing of trustees and groups of individual trustees, including section 29G, were inserted into the Superannuation Industry (Supervision) Act 1993 by the Superannuation Safety Amendment Act 2004 .

Detailed explanation of new law

5.3         Item 60 makes a technical amendment to subsection 29G(1) of the Superannuation Industry (Supervision) Act 1993 to clarify that the Australian Prudential Regulation Authority’s (APRA’s) power to cancel in writing an RSE licence is subject to subsection 29G(3) of that Act. That is, APRA may not cancel an RSE licence without the Minister’s written consent unless:

·          the RSE licensee has requested that their licence be cancelled (see paragraph 29G(2)(a)); or

·          the RSE licensee is a body corporate that has been disqualified under Part 15 of the Superannuation Industry (Supervision) Act 1993 (see paragraph 29G(2)(b)).

5.4         Provisions concerning the licensing of trustees and groups of individual trustees, including section 29G, were inserted into the Superannuation Industry (Supervision) Act 1993 by the Superannuation Safety Amendment Act 2004 .The explanatory memorandum to the Superannuation Safety Amendment Act 2004 contains additional information on these provisions.

Application provisions

5.5         This amendment applies immediately after the commencement of Schedule 1, Part 1 of the Superannuation Safety Amendment Act 2004 .

 



I ndex         

Schedule 1: Amendments

Bill reference

Paragraph number

Item 1, subsections 273A(2) and (3)

1.9

Item 2, subsection 283(2A)

1.10

Item 3, paragraph 26-80(3)(aa)

2.8

Item 4, subsection 50(2)

3.4

Item 5

4.10

Item 6, subsection 23(3)

4.12

Items 6 and 7

4.13

Items 35 and 37, subsection 23(2)

4.11