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Tax Laws Amendment (2011 Measures No. 4) Bill 2011

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2010-2011

 

THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA

 

 

 

HOUSE OF REPRESENTATIVES

 

 

 

Tax Laws Amendment (2011 Measures N o . 4) Bill 2011

 

 

 

 

EXPLANATORY MEMORANDUM

 

 

 

 

(Circulated by the authority of the

Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP)

 



T able of contents

Glossary.............................................................................................................. 1

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

Chapter 1               Reduction in 2011-12 pay as you go instalments.......... 7

Chapter 2               Low-income taxpayer rebate............................................ 11

Chapter 3               Disability superannuation benefits................................. 15

Chapter 4               Amendments to reportable employer superannuation contributions definition  23

Index................................................................................................................. 31



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

Abbreviation

Definition

Commissioner

Commissioner of Taxation

GDP

gross domestic product

IT(TP) Act

Income Tax (Transitional Provisions) Act 1997

ITAA 1936

Income Tax Assessment Act 1936

ITAA 1997

Income Tax Assessment Act 1997

PAYG

pay as you go

RESC

reportable employer superannuation contributions

TAA 1953

Taxation Administration Act 1953

TPD

total and permanent disability



Reduction in 2011-12 pay as you go instalments

Schedule 1 to this Bill amends Schedule 1 to the Taxation Administration Act 1953 to set the gross domestic product (GDP) adjustment for pay as you go (PAYG) instalment taxpayers who use the GDP adjustment method at 4 per cent for the 2011-12 income year, instead of 8 per cent.

Date of effect This measure applies to PAYG instalment amounts for the 2011-12 income year that become due on or after the day after this Bill receives Royal Assent.  It does not apply where a taxpayer’s 2011-12 income year commenced before 1 April 2011.

Proposal announced This measure was announced in the 2011-12 Budget and in the Treasurer, the Assistant Treasurer and Minister for Financial Services and Superannuation and the Minister for Small Business’ joint Media Release No. 049 of 10 May 2011.

Financial impact This measure will have the following revenue implications:

2010-11

2011-12

2012-13

2013-14

2014-15

Nil

-$700m

$700m

Nil

Nil

Compliance cost impact :  Nil to Low. 

Low-income taxpayer rebate

Schedule 2 to this Bill amends the Income Tax Assessment Act 1936 to remove the ability of minors (children under 18 years of age) to use the low income tax offset to offset tax due on their unearned income, such as dividends, interest, rent, royalties and other income from property.  This will reduce the benefits of income splitting between adults and children and protect the integrity of the income tax system.

Date of effect This measure applies to assessments for the 2011-12 income year and later income years.

Proposal announced These amendments were announced in the Assistant Treasurer and Minister for Financial Services and Superannuation’s Media Release No. 072 of 10 May 2011.

Financial impact This measure has these revenue implications:

2011-12

2012-13

2013-14

2014-15

⊨

$240m

$250m

$250m

Compliance cost impact Low.  This measure removes the ability of a particular group of taxpayers to claim an offset on part of their income.

Disability superannuation benefits

Schedule 3 to this Bill allows the percentage of insurance costs for certain total and permanent disability (TPD) policies that can be claimed as deductions by superannuation funds to be specified in regulations.  These amendments will streamline the operation of the law for superannuation funds and insurance providers.

This Schedule and Clause 4 also extend the current transitional relief for the deductibility of TPD insurance premiums to funds that self insure their liability to provide disability benefits. 

Date of effect The changes allowing the deductible proportion of insurance costs for certain TPD policies to be specified in regulations will have effect from the 2011-12 income year.

The extension of transitional relief to self-insured funds will apply to the income years 2004-05 to 2010-11.  This extension will benefit these funds by providing them with greater scope to deduct the notional cost of insurance cover commonly regarded as TPD insurance for these income years. 

Proposal announced :  This measure has not been previously announced. 

Financial impact Nil.

Compliance cost impact Nil. 

Amendments to reportable employer superannuation contributions definition

Schedule 4 to this Bill amends the Taxation Administration Act 1953 to exclude from the ‘reportable employer superannuation contributions’ definition certain employer contributions to superannuation made pursuant to a requirement that employees cannot influence.

Date of effect This measure applies to the 2009-10 income year and later income years.  The retrospective application of these amendments has no adverse implications for taxpayers as the amendments exclude particular contributions that would otherwise have been caught by the reportable employer superannuation contributions definition and assessed as income for certain means-tested tax and transfer system programs. 

Proposal announced This measure was announced in the former Minister for Financial Services, Superannuation and Corporate Law’s Media Release No. 080 of 30 June 2010.

Financial impact Nil.

Compliance cost impact Low.



Outline of chapter

1.1                   Schedule 1 to this Bill amends Schedule 1 to the Taxation Administration Act 1953 (TAA 1953) to set the gross domestic product (GDP) adjustment for pay as you go (PAYG) instalment taxpayers who use the GDP adjustment method at 4 per cent for the 2011-12 income year, instead of 8 per cent.

Context of amendments

1.2                   Under the PAYG instalments system, taxpayers earning business or investment income pay instalments during the year towards their final tax liability for that income year.  Taxpayers may pay their PAYG instalments on the basis of GDP-adjusted notional tax (GDP adjustment method) or on the basis of instalment income.  Under either method taxpayers can choose to vary their instalment amounts to more accurately reflect their expected tax liability for the income year.

1.3                   The GDP adjustment method is available to individuals, multi-rate trustees and eligible small business entities.  The method is also available to self-assessment entities (primarily companies and certain superannuation funds) with $2 million or less of instalment income for the previous income year, or self-assessment entities with more than $2 million of instalment income for the previous income year who are eligible to pay an annual PAYG instalment but have chosen not to (section 45-130 of Schedule 1 to the TAA 1953).

1.4                   Taxpayers who pay PAYG instalments on the basis of the GDP adjustment method are generally quarterly payers who pay four instalments annually.  However, primary production businesses and special professionals are allowed to pay two instalments a year under the GDP adjustment method (section 45-134 of Schedule 1 to the TAA 1953).

1.5                   A quarterly payer who pays instalments on the basis of the GDP adjustment method will pay the instalment amount determined and advised by the Commissioner of Taxation (Commissioner).  The Commissioner works out the amount of the instalments taxpayers pay in accordance with Subdivision 45-L of Schedule 1 to the TAA 1953.

1.6                   The amount of the instalments payable depends on the taxpayer’s GDP-adjusted notional tax which is worked out by the Commissioner (section 45-405 of Schedule 1 to the TAA 1953).  Broadly, the GDP-adjusted notional tax amount is worked out by increasing the taxpayer’s adjusted taxable income in the previous year by the GDP adjustment factor, which is generally a ratio representing the rate of nominal GDP growth between the previous two full calendar years.

1.7                   For the 2011-12 income year, the GDP adjustment factor calculated under the current law would be 8 per cent.  These amendments will set the GDP adjustment factor at 4 per cent for the 2011-12 income year.  This will provide eligible taxpayers (including eligible small businesses) with a smoother transition from the 2 per cent GDP adjustment factor that applied for the 2009-10 and 2010-11 income years as the economy recovered from the global financial crisis.

1.8                   Taxpayers whose 2011-12 income year commenced before 1 April 2011 are already paying PAYG instalments for the 2011-12 income year based on a 2 per cent GDP adjustment factor (calculated under the statutory ratio).  They will continue to do that for the rest of the 2011-12 income year.

1.9                   Taxpayers may themselves vary their instalment amounts calculated and notified by the Commissioner.

Summary of new law

1.10               The GDP adjustment factor to be used by the Commissioner to work out the GDP-adjusted notional tax amount will be set at 4 per cent for the 2011-12 income year.

Comparison of key features of new law and current law

New law

Current law

A GDP adjustment factor of 4 per cent will be used by the Commissioner for the 2011-12 income year to calculate GDP-adjusted notional tax under section 45-405 of Schedule 1 to the TAA 1953.

The GDP adjustment factor (which would otherwise be required to be used by the Commissioner to calculate GDP-adjusted notional tax for the 2011-12 income year under section 45-405 of Schedule 1 to the TAA 1953) would be 8 per cent.

Detailed explanation of new law

1.11               These amendments will set the GDP adjustment factor to be used by the Commissioner in calculating PAYG instalments for taxpayers who pay quarterly instalments on the basis of the GDP adjustment method at 4 per cent for the 2011-12 income year.  The GDP adjustment factor for income years after 2011-12 is to be based on the current methodology.  [Schedule 1, items 2 to 4, definition of ‘GDP adjustment’ in subsection 45-405(3) and subsection 45-402(1)]

Example 1.1

Aaron pays quarterly PAYG instalments on business and investment income he earns on the basis of the GDP adjustment method.

In the 2010-11 income year Aaron has business and investment adjusted taxable income of $50,000.  If the current GDP adjustment factor of 8 per cent were used, then Aaron’s PAYG instalments would be calculated using the adjusted taxable income of $54,000 for the 2011-12 income year.

However, applying the GDP adjustment factor of 4 per cent means that the adjusted taxable income for the 2011-12 income year will be only $52,000 and Aaron’s PAYG instalments will be calculated on this lower amount.

1.12               Taxpayers may still vary their quarterly instalments under section 45-112 of Schedule 1 to the TAA 1953 if they consider their income is expected to be lower or higher than the amount determined by the Commissioner using the 4 per cent GDP adjustment factor.

1.13               To avoid leaving inoperative provisions in the tax laws well after they cease to have effect, the provisions in the TAA 1953 that give effect to a 4 per cent GDP adjustment factor for the 2011-12 income year will be automatically repealed on 1 July 2016.  [Schedule 1, items 9 to 11]

Application and transitional provisions

1.14               These amendments apply for the purposes of working out the amount of an instalment that becomes due on or after the date of commencement, which is the day after the Bill receives Royal Assent.  [Schedule 1, item 12]

1.15               However, the amendments do not apply to a small group of taxpayers whose 2011-12 income year commenced before 1 April 2011.  These taxpayers will continue to pay PAYG instalments for the 2011-12 income year based on a 2 per cent GDP adjustment factor, which is worked out under the statutory formula in subsection 45-405(3) of Schedule 1 to the TAA 1953.  [Schedule 1, item 12]

Consequential amendments

1.16               Consequential amendments are made to the sunsetting provisions in Schedule 1 to the Tax Laws Amendment (2009 Measures No. 3) Act 2009 (2009-10 instalment reduction).  These amendments reflect the changes made by this Bill to the wording of the provisions to be automatically repealed on 1 July 2014 by Schedule 1 to the Tax Laws Amendment (2009 Measures No. 3) Act 2009 [Schedule 1, items 5 to 8]

1.17               A minor amendment is made to ensure consistency in describing the current year within the provisions for working out quarterly instalments on the basis of GDP-adjusted notional tax.  [Schedule 1, item 1, subsection 45-402(1)]



Chapter 2          

Low-income taxpayer rebate

Outline of chapter

2.1                   Schedule 2 to this Bill amends the Income Tax Assessment Act 1936 (ITAA 1936) to remove the ability of minors (children under 18 years of age) to use the low income tax offset to reduce tax due on income subject to Division 6AA of Part III of the ITAA 1936.

Context of amendments

2.2                   Special rules apply in calculating the tax payable on income of minors.  These rules have been in place since 1980 and are contained in Division 6AA of Part III of the ITAA 1936.  Under the rules, unearned income (income from property such as dividends, interest, rent and royalties) of minors over a certain level is taxed at the highest marginal rate of tax (45 per cent in 2010-11 and 2011-12).  Taxable income subject to the special tax rates is called ‘eligible taxable income’ in Division 6AA. 

2.3                   The rules apply to income derived by the minor directly or through a trust.  Where the minor is an Australian resident the special rules do not apply if the eligible taxable income is $416 or less.  Eligible taxable income between $416 and $1,307 is taxed at 66 per cent on the part of the relevant taxable income exceeding $416, thereby phasing in the special tax rates.  Eligible taxable income of $1,308 and more is taxed at a flat 45 per cent.

2.4                   A foreign resident minor is taxed at 29 per cent on the first $416 of unearned income, at 66 per cent on eligible taxable income between $416 and $732 and at 45 per cent on relevant income of $733 and more.

2.5                   The aim of these rules is to discourage income splitting within families by directing income from adults to children to avoid higher marginal tax rates.

2.6                   In recent years the low income tax offset has increased significantly as a means of providing targeted tax relief to low-income earners.  The low income tax offset has been available to all taxpayers with incomes below its cut-out threshold, including minors.  An increasing amount of distributions from discretionary trusts have subsequently taken advantage of this concession to direct an increasing amount of income from adults to minors in order to minimise tax.  There is a significant spike in distributions from discretionary trusts at around the point where the effective tax-free threshold for minors has applied in each recent tax year, and that spike has moved broadly in accordance with increases to the effective tax-free threshold for minors.

2.7                   Removing the eligibility of minors to use the low income tax offset to reduce tax payable on their unearned income will discourage families from splitting income with their children — protecting the integrity and improving the fairness of the income tax system.

2.8                   Minors will still be able to use the low income tax offset to reduce tax payable on their work income.

Summary of new law

2.9                   This Schedule removes the ability of minors to use the low income tax offset to reduce tax due on income subject to Division 6AA of Part III of the ITAA 1936.

Comparison of key features of new law and current law

New law

Current law

The low income tax offset cannot be used to reduce tax on income of the taxpayer that is subject to Division 6AA of Part III of the ITAA 1936.

The low income tax offset is still available to reduce tax on other income of the taxpayer.

The low income tax offset can be used to reduce tax on any income of a taxpayer, including taxpayers whose income is subject to Division 6AA of Part III of the ITAA 1936.

Detailed explanation of new law

2.10               These amendments restrict the eligibility for the low income tax offset of taxpayers with income subject to Division 6AA of Part III of the ITAA 1936.

2.11               Item 1 of this Schedule includes a definition of ‘basic income tax liability’ in subsection 6(1) of the ITAA 1936.  ‘Basic income tax liability’ has the meaning given to that term by section 4-40 of the Income Tax Assessment Act 1997 (ITAA 1997).  Basic income tax liability is worked out using the income tax rate or rates applying to the taxpayer for the income year and any special provisions that apply to working out that liability.  [Schedule 2, item 1, subsection 6(1)]

2.12               Item 2 of this Schedule includes a definition of ‘eligible taxable income’ in subsection 6(1) of the ITAA 1936.  ‘Eligible taxable income’ has the meaning given by section 102AD of the ITAA 1936.  Section 102AD defines which income is subject to Division 6AA of Part III of the ITAA 1936 and is therefore taxed at the special rates of tax that are applicable where Division 6AA applies.  [Schedule 2, item 2, subsection 6(1)]

2.13               Item 3 of this Schedule adds three new subsections to section 159N of the ITAA 1936.  These subsections provide that a taxpayer who has income subject to Division 6AA of Part III of the ITAA 1936 has a limited eligibility for the low income tax offset. 

2.14               Where a taxpayer has income subject to Division 6AA of Part III of the ITAA 1936 the taxpayer is not entitled to the low income tax offset to the extent that the offset would be applied against the part of the taxpayer’s basic income tax liability that is attributable to the eligible taxable income of the taxpayer for that year of income.  (The eligible taxable income of the taxpayer is that income that is taxed as unearned income of the taxpayer.)  [Schedule 2, item 3, section 159N]

Example 2.1  

Fiona has income from part-time work of $10,000 and income subject to Division 6AA of Part III of the ITAA 1936 (unearned income) of $2,000.  Her $10,000 of work income is subject to the normal income tax rates and tax due on this income is $600.  Her $2,000 of unearned income is taxed at 45 per cent and tax due on this income is $900.  Fiona has a total gross tax liability of $1,500.  Under the old rules Fiona was able to use the low income tax offset to reduce tax on her total income to zero.  Under the new rules Fiona can still reduce tax on her work income to zero by using the low income tax offset but is not able to reduce tax on her unearned income.  Fiona now has a net total tax liability of $900.

2.15               In calculating tax on the taxpayer’s income the taxpayer may still apply the tax offset listed in item 15 in the table in subsection 63-10(1) of the ITAA 1997 against that part of the taxpayer’s basic income tax liability that is attributable to the taxpayer’s eligible taxable income.  This particular provision ensures that eligible taxpayers are still able to use the pensioner tax offset, where applicable, to reduce tax on their unearned income.  It is only the low income tax offset that can no longer be used to reduce tax on unearned income.

2.16               Items 4 and 5 of this Schedule amend section 63-10 of the ITAA 1997.  This section has priority rules for applying tax offsets against a taxpayer’s basic income tax liability.  Item 4 provides that the low income tax offset is the fourth offset in order of priority for applying tax offsets against a taxpayer’s basic income tax liability, after the senior Australians tax offset (applied both to individuals and to trustees) and the pensioner tax offset.  [Schedule 2, item 4, subsection 63-10(1)]

2.17               Currently the low income tax offset is covered by the category of any tax offset not covered by another item in the table in section 63-10.  The low income tax ofset now ranks ahead of all such offsets.

2.18               Item 5 adds a note to section 63-10 providing that rules about applying the low income tax offset are set out in new subsection 159N(4) of the ITAA 1936.  [Schedule 2, item 5, subsection 63-10(1)]

2.19               Item 6 refers to the application of this Schedule.  [Schedule 2, item 6]

Application and transitional provisions

2.20               These amendments commence on the day this Bill receives Royal Assent.

2.21               These amendments apply to income tax assessments for the 2011-12 and later income years.



Chapter 3          

Disability superannuation benefits

Outline of chapter

3.1                   Schedule 3 to this Bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to allow the percentage of insurance costs for certain total and permanent disability (TPD) policies that can be claimed as deductions to be specified in regulations.  These changes will apply from the 2011-12 income year. 

3.2                   This Schedule and Clause 4 of this Bill also extend the current transitional relief for the deductibility of TPD insurance premiums to funds that self insure their liability to provide disability benefits.  This transitional relief will apply to the income years 2004-05 to 2010-11.

3.3                   These amendments will streamline the operation of the law for superannuation funds and insurance providers. 

3.4                   All legislative references in this chapter are to the ITAA 1997 unless otherwise stated.

Context of amendments

Background to the issue

3.5                   With the Better Super changes in 2007, the provisions allowing deductibility of TPD insurance costs incurred by superannuation funds were rewritten and transferred from the Income Tax Assessment Act 1936 (ITAA 1936) to the ITAA 1997, with effect for the 2007-08 and later income years. 

3.6                   The ITAA 1997 allows superannuation funds to deduct TPD insurance premiums to the extent the policies have a connection to a liability of the fund to provide disability superannuation benefits.  In broad terms, the definition of a ‘disability superannuation benefit’ requires medical certification that an individual is incapable of being gainfully employed in any occupation for which they are reasonably qualified by way of education, experience or training.  This definition can be contrasted with more generous forms of TPD insurance — for example, those which pay a benefit in the event an individual is unable to perform their own occupation, despite being capable of working in an alternative occupation. 

3.7                   However, the operation of the ITAA 1997 did not accord with industry practice under the ITAA 1936, which was to fully deduct the cost of all policies insuring against some form of permanent disability.  This practice continued after the Better Super rewrite.

The transitional relief

3.8                   Transitional provisions were enacted in 2010 with a view to allowing lead time for industry practice to be brought into alignment with the ITAA 1997.  Specifically, the Superannuation Legislation Amendment Act 2010 amended the tax law to provide transitional relief to complying superannuation funds for deductibility of premiums for TPD insurance policies for the income years 2004-05 to 2010-11. 

3.9                   Under this transitional relief, superannuation funds can claim tax deductions for a broader range of TPD insurance premiums than would otherwise be allowed for the relevant income years. 

3.10               Industry has raised concerns regarding its ability to comply with the relevant provisions of the ITAA 1997 when the transitional arrangements expire on 30 June 2011.  Industry’s concerns include that actuarial certification required to estimate the deductible portion of certain premiums and self-insurance arrangements may not be obtainable due to a lack of information.

Summary of new law

3.11               These amendments will allow the regulations to prescribe the percentage of premiums for certain TPD insurance policies that can be claimed as deductions.

3.12               Provisions are also enacted and inserted into the Income Tax (Transitional Provisions) Act 1997 (IT(TP) Act) to allow superannuation funds that self insure their liability to provide TPD benefits to their members to claim deductions in respect of a broader range of insurance policies for the income years 2004-05 to 2010-11.

Comparison of key features of new law and current law

New law

Current law

A superannuation fund may claim a deduction for the percentage of a premium for a TPD insurance policy specified in regulations.  If the fund claims a deduction in accordance with the specified percentage in the regulations it does not need to obtain an actuary’s certificate.

Self-insured funds can deduct the arm’s length cost of insurance to cover the liability to provide disability superannuation benefits based on percentages specified in the regulations.  The requirement to obtain an actuary’s certificate is not altered.

A superannuation fund can claim a deduction for so much of a TPD insurance premium as is attributable to a liability to provide disability superannuation benefits.  If this proportion is not specified in the insurance policy, the fund must obtain an actuary’s certificate in order to claim the deduction.

Self-insured funds can deduct the amount the fund could reasonably be expected to pay in an arm’s length transaction to obtain insurance to cover its liability to provide disability superannuation benefits In order to claim the deduction, the fund must obtain an actuary’s certificate. 

For the transitional period ( 2004-05 to 2010-11 ), self-insured funds may claim a deduction for TPD insurance costs based on the expanded meaning of the concept of permanent disability. 

Current transitional arrangements allow premium paying funds to claim deductions for TPD insurance costs based on an expanded meaning of the concept of permanent disability for the income years 2004-05 to 2010-11.  The transitional arrangements are not available to self-insured funds.

Detailed explanation of new law

Proportioning deductibility of insurance costs

3.13               This Schedule provides that the percentage of premiums and costs of certain TPD insurance policies that can be claimed as deductions may be specified in regulations.

3.14               Section 295-465 of the ITAA 1997 allows superannuation funds to deduct the cost of insurance (including self insurance) which is attributable to a liability of the fund to provide benefits referred to in section 295-460.  Section 295-460, inter alia , covers benefits which meet the definition of a ‘disability superannuation benefit’ in the ITAA 1997. 

3.15               Item 6 in the table in subsection 295-465(1) allows a fund to claim a deduction for so much of an insurance premium as is attributable to a liability to provide benefits referred to in section 295-460.  Partial deductibility can arise, for example, where the TPD definition contained in a particular policy is broader than the definition of ‘disability superannuation benefit’ in the ITAA 1997, or where it is the same but the insurance policy includes other (non-deductible) types of cover and the TPD component of the premium is not specified.  Subsection 295-465(3) requires the fund to obtain an actuary’s certificate in order to claim a deduction under item 6. 

3.16               For the purpose of deducting amounts under item 6 in the table in subsection 295-465(1), new subsection 295-465(1B) provides that the regulations may specify the proportion of a premium for a specified insurance policy that may be treated as being attributable to the liability to provide benefits referred to in section 295-460.  If an insurance policy held by a superannuation fund is of a type specified in the regulations, the fund may deduct the specified proportion of the premium.  Where the fund claims a deduction in accordance with the regulations, an actuary’s certificate will not be required.  [Schedule 3, items 1 and 2, subsection 295-465(1B) and item 3, subsection 295-465(3A)]

3.17               A superannuation fund will retain the ability to deduct an amount under item 6 in the table in subsection 295-465(1) without recourse to the regulations.  In that case, the requirement to obtain an actuary’s certificate will continue to apply. 

Example 3.1  

Pandora Super Fund pays premiums to an insurance company for TPD insurance cover for its members.  The definition of permanent disability contained in the insurance policy covers members for the inability to perform their own occupation .  The own occupation definition of TPD specified in the policy is broader than the definition of ‘disability superannuation benefit’ in the ITAA 1997 — that is, it allows for a payout to be made in a broader range of circumstances.  Pandora can only deduct the part of the insurance policy premium that relates to the liability to provide disability superannuation benefits. 

For the purposes of this example, assume that own occupation TPD insurance is a type of policy specified in the regulations.  Under these amendments Pandora can deduct the percentage of the premium it pays for own occupation insurance that is specified in the regulations.  If Pandora claims a deduction in accordance with the regulations, there is no requirement for it to obtain an actuary’s certificate.

3.18               New subsection 295-465(1A) clarifies the link between items 5 and 6 in the table in subsection 295-465(1).  Specifically, it clarifies that a deduction can be claimed under item 6 for the remaining part of an insurance premium for which a partial deduction has been claimed under item 5 (because part of the premium is specified in the policy as being wholly for the liability to provide benefits referred to in section 295-460).  For example, if part of an insurance premium is specified in the policy as being wholly for the liability to provide superannuation death benefits (which are referred to in section 295-460), and the rest of the premium does not wholly relate to section 295-460 benefits, the rest of the premium falls under item 6 in the table.  In such circumstances, if some of the remaining part of the premium is attributable to the liability to provide benefits referred to in section 295-460, the fund can claim a deduction under item 6 in the table.  The fund can determine the amount of the deduction with reference to the regulations or by obtaining an actuary’s certificate.  [Schedule 3, item 2, subsection 295-465(1A)]

3.19               Subsection 295-465(2) allows superannuation funds that self insure their liability to provide disability benefits to deduct the amount the fund could reasonably expect to pay in an arm’s length transaction to obtain insurance to cover the liability to provide benefits referred to in section 295-460.  An actuary’s certificate must be obtained in order to claim a deduction under subsection 295-465(2). 

3.20               These amendments allow self-insuring funds to determine the amount they can deduct under subsection 295-465(2) by using percentages specified in the regulations.  For example, where an actuary has calculated the arm’s length cost of an insurance policy which covers a broader class of benefits than is referred to in section 295-460, and the insurance policy is of a kind specified in the regulations, the fund can apply the percentage specified in the regulations in respect of the policy to calculate the amount it can deduct under subsection 295-465(2).  This will avoid the need for the fund to obtain further actuarial certification.  However, the amendments do not entirely remove the need for self-insuring funds to obtain an actuary’s certificate under subsection 295-465(3) in order to claim a deduction.  [Schedule 3, items 5 and 6, subsections 295-465(2A) and (2B)]

Example 3.2  

Medusa Super Fund self insures its liability to provide TPD benefits to members in accordance with its trust deed.  Medusa’s trust deed uses the own occupation definition of permanent disability.  This definition is broader than the meaning of ‘disability superannuation benefit’ contained in the ITAA 1997.

Medusa has engaged an actuary to determine the amount it could reasonably expect to pay in an arm’s length transaction to obtain insurance to cover its liability to provide own occupation TPD benefits under its trust deed.   However, Medusa cannot claim a deduction for this amount, as subsection 295-465(2) of the ITAA 1997 requires that the amount must relate to the fund’s liability to provide disability superannuation benefits.

For the purposes of this example, assume that own occupation TPD insurance is a type of policy specified in the regulations.  Under these amendments, Medusa can deduct a percentage of the amount the actuary has determined it could expect to pay in an arm’s length transaction for own occupation insurance.  The percentage is specified in the regulations.

Transitional relief for self-insuring funds

3.21               This Schedule and Clause 4 of this Bill provide transitional relief for deductibility of notional TPD insurance costs incurred by superannuation funds that self insure their liability to provide disability benefits.  The transitional relief will provide these superannuation funds with greater scope to deduct the notional cost of insurance cover commonly regarded as TPD insurance for the income years 2004-05 to 2010-11.

3.22               Under section 295-466 of the IT(TP) Act the terms ‘disability superannuation benefit’ in the ITAA 1997, and ‘death or disability benefits’ in the ITAA 1936 have an expanded meaning for the period 2004-05 to 2010-11.  Specifically, the meaning of these terms is broadened to cover a benefit that is conditional on the disability of the member, and the disability to which it relates is described as a permanent disability in regulations made for the purpose of section 295-466. 

3.23               New section 295-467 is inserted into the IT(TP) Act to allow self-insuring funds to use the expanded meaning of the term ‘disability superannuation benefit’ in section 295-466 of the IT(TP) Act for the income years 2007-08 to 2010-11.  [Schedule 3, item 11, section 295-467 of the IT(TP) Act]

3.24               Similarly, the stand alone provisions in this Schedule allow self-insuring funds to use the expanded meaning of the term ‘death or disability benefits’ for the income years 2004-05 to 2006-07.  [Schedule 3, item 8]

3.25               The expanded meanings of ‘disability superannuation benefit’ and ‘death or disability benefits’ apply for the purposes of subsection 295-465(2) of the ITAA 1997 and subsection 279(2) of the ITAA 1936 which allow self-insuring superannuation funds to deduct the notional cost of TPD insurance.  [Schedule 3, item 11, subsection 295-467(3) of the IT(TP) Act and subitem 8(3)]

Example 3.3  

Zeus Super Fund self insures its liability to provide TPD benefits to members in accordance with its trust deed.  Zeus’s trust deed uses the own occupation definition of permanent disability.  This definition is broader than the meaning of ‘disability superannuation benefit’ in the ITAA 1997.

Zeus has engaged an actuary to determine the amount it could reasonably expect to pay in an arm’s length transaction to obtain insurance to cover its liability to provide own occupation TPD benefits under its trust deed.   Zeus can claim a deduction for this entire amount for the income years 2004-05 to 2010-11.  This is because the inability of a member to perform their own occupation is described as a ‘permanent disability’ under the regulations made for the purpose of section 295-466 of the IT(TP) Act. 

Amendment of assessments

3.26               Section 170 of the ITAA 1936 limits the time period within which the Commissioner of Taxation can amend tax assessments to four years.  By the time this extension of the transitional arrangements receives Royal Assent, the four-year time limit on amending assessments will have expired for certain years to which the amendments apply.  Section 170 would therefore operate to prevent self-insuring superannuation funds, which have claimed a deduction for past years in accordance with the current law, from accessing the broader deduction allowed under the transitional provisions.

3.27               The effect of the amendments in this Schedule is that section 170 does not prevent the amendment of a tax assessment in a previous year, where the purpose of the amendment is to allow funds to take advantage of the extended transitional relief provided in this Bill and the amendment is made within two years of this Bill receiving Royal Assent.  [Clause 4, Schedule 3, item 11, subsection 295-467(4) of the IT(TP) Act]

Minor amendments

3.28               The note in paragraph 295-460(b) of the ITAA 1997, alerting the reader to transitional provisions in the IT(TP) Act, is amended to reflect the extension of these provisions to self-insured funds.  [Schedule 3, item 9, paragraph 295-460(b)]  

3.29               A note is inserted at the end of section 295-466 of the IT(TP) Act alerting the reader to the fact that this provision will be repealed on 1 January 2017.  [Schedule 3, item 10, section 295-466 of the IT(TP) Act]

Application

3.30               The extension of the transitional relief applies to a superannuation fund that is subject to current or contingent liabilities to provide disability benefits to its members in any of the income years 2004-05 to 2010-11.  [Schedule 3, subitem 8(1), item 11, subsection 295-467(1)]

3.31               The transitional relief will benefit self-insured funds by providing them with greater scope to deduct the notional cost of insurance cover commonly regarded as TPD insurance for the relevant income years. 

3.32               The amendments allowing superannuation funds to deduct the cost of specified insurance policies in accordance with the regulations apply to insurance policy premiums, or current or contingent liabilities, in respect of the 2011-12 and later income years.  [Schedule 3, items 4 and 7]

Commencement

3.33               These amendments commence on Royal Assent.  [Clause 2, items 1 to 3 in the table]

Repealing provision

3.34               The amendments to the IT(TP) Act will be repealed on 1 January 2017.  [Clause 2, item 4 in the table, Schedule 3, item 12]



Outline of chapter

4.1                   Schedule 4 to this Bill amends the definition of ‘reportable employer superannuation contributions’ in the Taxation Administration Act 1953 (TAA 1953) to exclude certain employer contributions to superannuation made for the benefit of an employee where the amount of additional contribution must be made pursuant to some requirement that the employee cannot influence. 

Context of amendments

4.2                   The ‘reportable employer superannuation contributions’ definition was inserted into Schedule 1 to the TAA 1953 by the Tax Laws Amendment (2009 Measures No. 1) Act 2009

4.3                   Reportable employer superannuation contributions are employer contributions to superannuation in addition to the superannuation guarantee charge of 9 per cent made for an individual’s benefit where the individual has or had some capacity, or might reasonably be expected to have or have had some capacity to influence the size of the contribution or the way in which the contribution was made so that assessable income was reduced. 

4.4                   The contributions will typically be those made under effective ‘salary sacrifice’ arrangements.  However, the definition also includes other contributions made for an individual’s benefit that the individual has capacity to influence.  

4.5                   Reportable employer superannuation contributions have been assessed as income in determining eligibility for a range of means-tested government assistance programs in the tax and transfer system, since 1 July 2009.

Summary of new law

4.6                   Schedule 4 amends the ‘reportable employer superannuation contributions’ definition to clarify that it does not include any contributions to superannuation that are made for an employee’s benefit pursuant to an ‘industrial instrument’ as defined in section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) or the rules of a superannuation fund.

4.7                   The former Minister for Financial Services, Superannuation and Corporate Law announced in Media Release No. 080 of 30 June 2010 that the Government would amend the reportable employer superannuation contributions definition to exclude additional employer contributions that are prescribed in legislation or other requirement that neither the employee nor their employer can directly control.

4.8                   These amendments have effect from 1 July 2009, which is when the definition was first enacted.

Comparison of key features of new law and current law

New law

Current law

Contributions to superannuation that are required by an ‘industrial instrument’ or rules of a superannuation fund are expressly excluded from the reportable employer superannuation contributions definition to the extent that there is no capacity to influence the content of the requirement to make the contribution or its size. 

Additional employer contributions to superannuation that are required by an ‘industrial instrument’ or the rules of a superannuation fund, the amount of which can be influenced due to an action or inaction taken by the employee, are included in the reportable employer superannuation contributions definition .

Detailed explanation of new law

4.9                   These amendments clarify that the reportable employer superannuation contributions definition extends to all applicable contributions made for an individual’s benefit in respect of an income year irrespective of when they are made.  This follows some uncertainty at the scope of the phrase ‘amount contributed’ in the initial wording of subsection 16-182(1) of the TAA 1953. 

4.10               The amendments mean that additional contributions made for a person’s benefit either before or after the end of an income year that are in respect of the income year are reportable employer superannuation contributions, as well as amounts contributed for the individual’s benefit during the year that are in respect of the year.  [Schedule 4, items 1 and 2, subsection 16-182(1)]

4.11               These amendments also confirm that an amount contributed before or after the end of an income year that is in respect of the income year and that the individual has or has had, or might reasonably be expected to have or have had, capacity to influence to be made in such a way that assessable income is reduced are reportable employer superannuation contributions.  [Schedule 4, item 3, paragraph 16-182(1)(d)]

Example 4.1  

Michael is an employee of JYU Pty Ltd (JYU).  Michael has entered an effective salary sacrifice agreement with JYU that means 2 per cent of his fortnightly pay is contributed to Michael’s superannuation fund in addition to the compulsory 9 per cent superannuation guarantee contribution.  JYU typically makes contributions to Michael’s superannuation fund on the 25 th day of the month after the month in which Michael’s salary is paid.  On this occasion, the 11 per cent contribution made on Michael’s behalf, including the 2 per cent ‘salary sacrificed’ contribution, is made on 25 July following the relevant income year.

Michael has capacity to influence the making of this additional 2 per cent contribution in a way that his assessable income is reduced so that it is a reportable employer superannuation contribution.  Because the additional contribution made on 25 July is made in respect of the preceding income year, it will be considered a reportable employer superannuation contribution and included in income when determining Michael’s eligibility for relevant means-tested government assistance payments for the previous income year.

4.12               These amendments also revise the reportable employer superannuation contributions definition to ensure that it does not include additional contributions to superannuation made on behalf of an employee as a result of some action or inaction by the employee if the contributions are required by an ‘industrial instrument’ or rules of a superannuation fund and the employee had or has no capacity to influence, and cannot reasonably be expected to have or have had, capacity to influence, the content of that requirement.  [Schedule 4, item 4, subsection 16-182(5)]

4.13               Industrial instrument is defined in section 995-1 of the ITAA 1997 as an ‘Australian law or an award, order, determination or industrial agreement in force under an Australian law’. 

4.14               Australian law is defined in section 995-1 of the ITAA 1997 and means a law of the Commonwealth Parliament or a state or territory parliament.  It includes primary legislation and subordinate legislation, being laws made by the executive arm of government with authorisation of Parliament such as regulations, rules, by-laws, proclamations, deeds and notices.

Example 4.2  

Rodger’s employer is required to make an employer contribution for Rodger’s benefit under the deed of the superannuation fund into which Rodger’s employer contributes.  This deed is subordinate legislation under a provision of state legislation.  The amount of the contribution is prescribed in the deed and is based on the amount of personal superannuation contribution made by Rodger.  For example, Rodger can elect to contribute 0 per cent, 5 per cent or 8 per cent of his salary as a personal after-tax contribution.  The deed requires that if Rodger elects to contribute 0 per cent, 5 per cent or 8 per cent, his employer must contribute 9 per cent, 11.5 per cent or 13 per cent respectively.  Rodger elects to contribute 8 per cent of his salary as a personal after-tax contribution.  His employer contributes 13 per cent to Rodger’s superannuation as required. 

None of the amount the employer contributes is a reportable employer superannuation contribution as the additional employer contributions are required by an Australian law.  Neither Rodger nor his employer has capacity to influence the requirement for the additional contribution to be made or its size as the contribution and its amount are determined by the deed.  None of Rodger’s personal after-tax superannuation contributions are reportable employer superannuation contributions as they are made from his assessable income. 

4.15               ‘Australian law’ also includes any international instrument that has the force of law in Australia.  Examples include international conventions, model laws, international agreements or international rules that are legislated as having the force of law by an Australian Parliament. Additional contributions that must be made for an individual’s benefit under an international instrument as a result of some action or inaction of the individual are not reportable employer superannuation contributions to the extent the requirement for the contributions and their size are prescribed in the instrument.  

Example 4.3  

Rani’s employer is required to make a 6 per cent contribution for Rani’s benefit in accordance with an international agreement that has the force of law in Australia where Rani makes a 7 per cent or greater personal after-tax contribution.  Rani has no capacity to influence, and could not reasonably be expected to have capacity to influence, the content of the requirement for this contribution to be made or its size as the requirement is contained in an international agreement.  The international agreement was negotiated between Australia and other foreign nations.  None of the 6 per cent contribution made by Rani’s employer is a reportable employer superannuation contribution and none of the 7 per cent personal after-tax contribution made by Rani is a reportable employer superannuation contribution as the amounts are included in Rani’s assessable income.

4.16               The definition of ‘industrial instrument’ includes ‘an award, order, determination or industrial agreement in force under an Australian law’, which includes a modern award or enterprise agreement as defined in the Fair Work Act 2009 .

4.17               These amendments mean that the reportable employer superannuation contributions definition does not include contributions that are required by a modern award or enterprise agreement to the extent that the individual has no capacity to influence the content of the modern award or enterprise agreement as they relate to the requirement for the contribution to be made or the size of the contribution.  So long as the employee has no capacity to influence the content of the requirement for the additional contribution to be made or the size of the contribution, then there will be no reportable employer superannuation contribution. 

Example 4.4  

Thomas is an employee of MHT Pty Ltd (MHT).  Thomas’ employment conditions are governed by an enterprise agreement that was negotiated between MHT and workplace and union representatives.  Thomas was not involved in the negotiations and had no involvement in the preparation of the enterprise agreement, aside from voting on it.  The terms of the enterprise agreement provide that MHT will make an additional 0.75 per cent, 1.75 per cent or 2.75 per cent employer contribution if Thomas elects to contribute 3 per cent, 4 per cent or 5 per cent of his salary as a personal after-tax contribution.  Thomas elects to contribute a 5 per cent personal after-tax contribution.  MHT makes an additional 2.75 per cent contribution as required.

None of the amount MHT contributes is considered a reportable employer superannuation contribution as the additional 2.75 per cent contribution is required to be made under an Australian law, being the enterprise agreement entered between MHT and its employees.  None of Thomas’ personal after-tax superannuation contributions are reportable employer superannuation contributions as they are made from his assessable income.

4.18               These amendments also mean the definition of reportable employer superannuation contributions excludes additional contributions that are required to be made for an individual’s benefit by the rules of a ‘superannuation fund’ (as defined in section 995-1 of the ITAA 1997). 

4.19               However, a contribution remains a reportable employer superannuation contribution to the extent that an individual has or has had capacity to influence the content of the requirement for the contribution to be made.  Examples include additional employer contributions made under a common law employment contract whose terms and conditions the employee has influenced or additional employer contributions made on behalf of an employee as part of some negotiated remuneration package. 

Example 4.5  

Charlotte has a common law employment contract with her employer, KPT Pty Ltd (KPT).  The contract governs the terms and conditions of Charlotte’s employment and was settled following negotiations between Charlotte and KPT.  KPT made it clear to Charlotte during negotiations that she could influence the contents of the contract.  Under the contract, if Charlotte elects to make a 5 per cent personal superannuation contribution from her assessable income, this will be matched by a 2 per cent employer contribution from KPT (in addition to the compulsory 9 per cent superannuation guarantee contribution).  Charlotte’s 5 per cent contribution from assessable income is not a reportable employer superannuation contribution.  Because Charlotte had capacity to influence the terms of the contract and the making of the additional employer contribution, the additional 2 per cent employer superannuation contribution is a reportable employer superannuation contribution.  

Example 4.6  

Tina is one of two trustees of the Michaels Family self managed superannuation fund.  The other trustee is her husband, Peter.  Tina is also an employee of KJY Pty Ltd (KJY).  Under the Michaels Family self managed superannuation fund deed (deed), KJY is required to contribute 15 per cent of Tina’s fortnightly pay to the fund.  The contents of the deed were negotiated between Tina and Peter with the assistance of their tax agent.  Tina had full capacity to influence the content of the deed as it relates to the requirement for the amount of contribution exceeding the compulsory 9 per cent superannuation guarantee contribution to be made (being 6 per cent). 

Because Tina had capacity to influence the requirement in the deed for this additional 6 per cent contribution to be made, the fact it is required pursuant to the rules of a superannuation fund does not exclude it from the reportable employer superannuation contributions definition.  The 6 per cent contribution is a reportable employer superannuation contribution.

4.20               These amendments also do not alter the application of paragraph 16-182(1)(d) of the TAA 1953 of the reportable employer superannuation contributions definition.  That is, any contributions to superannuation made on behalf of an employee that the employee has influenced to be made in such a way that assessable income is reduced are reportable employer superannuation contributions even if the requirement for making of the contribution or their size are prescribed by or under an ‘industrial instrument’  or rules of a superannuation fund   

Example 4.7  

Kurt is required to make a prescribed personal superannuation contribution to his superannuation fund by a legislative instrument.  This instrument allows Kurt to elect to have the amount of the contribution paid from post-tax salary or he can choose to enter into an arrangement to ‘salary sacrifice’ the prescribed personal superannuation contribution and have his employer contribute the amount from his pre-tax salary.  Kurt has exercised the option to ‘salary sacrifice’ his required contribution and has it paid from his pre-tax income.  Because Kurt has influenced the way his superannuation contribution is made so that it reduces his assessable income, the amount of the contribution is a reportable employer superannuation contribution.  This is the case notwithstanding that the amount of the contribution is required by a legislative instrument.

Example 4.8  

Lana is an employee of ZXO Pty Ltd (ZXO).  Lana’s employment conditions are governed by an enterprise agreement that was negotiated between ZXO and its employees.  Lana had no capacity to influence the terms of this agreement.  In particular, Lana had no capacity to influence a clause of the agreement that requires 3 per cent of all employees’ fortnightly salaries to be contributed to the employer’s default superannuation fund.  This contribution is in addition to the compulsory 9 per cent superannuation guarantee contribution.

Under the terms of the enterprise agreement, employees may elect to have the 3 per cent contribution paid to them as assessable income.  Because Lana has capacity to influence the way the 3 per cent contribution is made so that assessable income is reduced by electing to have the contribution made to superannuation rather than receive assessable income, the amount of the 3 per cent contribution is a reportable employer superannuation contribution. 

Application and transitional provisions

4.21               These amendments commence retrospectively from 1 July 2009, which is the date the reportable employer superannuation contributions definition commenced, so that the relevant contributions will never have fallen within the definition.  [Schedule 4, item 5]

4.22               The retrospective application of these amendments has no adverse implications for taxpayers as these amendments exclude particular contribution amounts that would otherwise have been caught by the reportable employer superannuation contributions definition and assessed as income for certain means-tested tax and transfer system programs. 



Schedule 1:  Reduction in 2011-12 PAYG instalments

Bill reference

Paragraph number

Item 1, subsection 45-402(1)

1.17

Items 2 to 4, definition of ‘GDP adjustment’ in subsection 45-405(3) and subsection 45-402(1)

1.11

Items 5 to 8

1.16

Items 9 to 11

1.13

Item 12

1.14, 1.15

Schedule 2:  Low-income taxpayer rebate

Bill reference

Paragraph number

Item 1, subsection 6(1)

2.11

Item 2, subsection 6(1)

2.12

Item 3, section 159N

2.14

Item 4, subsection 63-10(1)

2.16

Item 5, subsection 63-10(1)

2.18

Item 6

2.19

Schedule 3:  Disability superannuation benefits

Bill reference

Paragraph number

Clause 2

3.33

Clause 4

3.27

Items 1 and 2, subsection 295-465(1B) and item 3, subsection 295-465(3A)

3.16

Item 2, subsection 295-465(1A)

3.18

Items 4 and 7

3.32

Items 5 and 6, subsections 295-465(2A) and (2B)

3.20

Item 8

3.24

Item 9, paragraph 295-460(b)

3.28

Item 10, section 295-466 of the IT(TP) Act

3.29

Item 11, section 295-467 of the IT(TP) Act

3.23

Item 11, subsection 295-467(3) of the IT(TP) Act and subitem 8(3)

3.25

Subitem 8(1), item 11, subsection 295-467(1)

3.30

Schedule 4:  Reportable employer superannuation contributions

Bill reference

Paragraph number

Items 1 and 2, subsection 16-182(1)

4.10

Item 3, paragraph 16-182(1)(d)

4.11

Item 4, subsection 16-182(5)

4.12

Item 5

4.21