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Economics Legislation Committee
12/06/2018

JEREMENKO, Mr Robert, Division Head, Retirement Income Policy Division, Treasury

O'HALLORAN, Mr James, Deputy Commissioner, Superannuation, Australian Taxation Office

PRESTON, Mr Robb John, Manager, Retirement Income Policy Division, Treasury

[14:01]

CHAIR: Good afternoon, gentlemen—long time no see. I remind officials that the Senate has resolved that an officer of a department of the Commonwealth or a state or territory shall not be asked to give opinions on matters of policy and shall be given reasonable opportunity to refer questions asked of the officer to superior officers or to a minister. This resolution prohibits only questions asking for opinions on matters of policy and does not preclude questions asking for explanations of policy or factual questions about when and how policies were adopted.

Thank you for appearing before the committee today. I invite you to make a brief opening statement should you wish to do.

Mr Jeremenko : There will be no opening statement from us.

Mr O'Halloran : There's no opening statement from me.

CHAIR: I might kick off the questions. Perhaps you could give us a broadbrush approach on how the amnesty measure in this bill complements the broader integrity measures introduced into parliament in March?

Mr Jeremenko : Certainly. I like to think of it as a bit of a yin and yang approach. The amnesty in the bill before the committee does complement very much the Treasury Laws Amendment (2018 Measures No. 4) Bill 2018 that was introduced earlier this year. That earlier bill contains a number of increased measures that will allow the tax office to better enforce the current law. Most of that will apply from 1 July 2018—the bringing of small business into Single Touch Payroll 1 July 2019—but it is very much a forward-looking package that aims to address the significant $2.85 billion in unpaid super guarantee. That is still a 95 per cent compliance rate that people are being paid their super but five per cent and that amount of money is still too large. That's the one arm of this package that will look to address that from, as I say, 1 July 2018.

The important part about the amnesty in the bill before the committee today is that it looks to bring forward more of the payment of the unpaid super guarantee but going backwards. As I said, the first arm looks forward to addressing the ongoing compliance. This will make sure that some $230 million is brought forward in terms of the payment of super that employees are owed, and it's only valid for a one-time-only 12-month period, as the minister made clear in her introduction of the bill. So the two packages working together, the government certainly believes, provides the right balance, and it will, at the end of the day, result in more superannuation entitlements, rightly, going to the workers that should have got them in the first place.

Senator KETTER: I have a follow-up question. On the figure of $230 million, that's not just your prediction as to how much the amnesty measure will deliver; it's all aspects?

Mr Jeremenko : That is the amnesty.

Senator KETTER: That's the amnesty?

Mr Preston : Yes.

Mr Jeremenko : That's right. So 50,000 employers and $230 million.

Mr Preston : 50,000 employees—

Mr Jeremenko : Sorry; employees.

Mr Preston : and 10,000 employers.

CHAIR: You stole my question, Senator Ketter. That was exactly what I was going to ask. I had been quoting that number earlier in the day and I wanted to make sure that it was in fact Treasury modelling. Can you confirm that under the terms of the amnesty employees must be paid every last dollar of the money that's owed to them, and how those payments might occur? It's only the government that misses out on potential revenue, isn't it? No employee will miss out under the amnesty?

Mr Jeremenko : That's right. Importantly with the amnesty, the penalties and fees that are waived are those charges, if you like, that otherwise would be going to the government. In terms of the actual amount—as in the interest owed on the superannuation that hadn't been paid as well as the superannuation itself—that all goes to the employee that missed out. There is no discounting of the amount that the employee would otherwise have received, which I think is an important point.

CHAIR: And it goes back the entire history of superannuation?

Mr Jeremenko : That's right.

CHAIR: So it could potentially be 25 years of unpaid superannuation plus 10 per cent per year interest; is that correct?

Mr Jeremenko : Is that the correct figure, Mr Preston?

Mr Preston : Yes.

Mr Jeremenko : That's right. And I think it speaks to the rarity of amnesties. As I said, the minister made it very clear this is a one-off. There has not been a super guarantee payment amnesty in that 25-year period, and it's something that is appropriate now given that the other mechanism I mentioned, which is before the parliament in the other piece of legislation, really does beef up the enforcement powers of the tax office.

CHAIR: On that issue of it being a one-off, one of the concerns that ISA had was that potentially unscrupulous employers might see this as an opportunity for further amnesties, or there might be multiple amnesties, so it might actually be a disincentive to participate immediately. They could kick the can down the road a little bit. Do Treasury or the ATO have any comments to make on that particular concern of ISA?

Mr Jeremenko : I might make an opening comment. I think Mr O'Halloran might like to talk to this. Certainly, as I just commented, in the space of super it's extremely rare. In the case of corporate tax, income tax, it's also rare. It goes to the point that, when these amnesties are given, the expected response rate is very much dependent on the fact that these are not regular occurrences. The government's well aware of that. The minister has described it as a one-off. In terms of a policy recommendation, certainly Treasury do not see this as something that we would recommend happen again any time soon—not because it is in any way not valid to do today but going to the point that there need to be exceptional circumstances that merit the offering of an amnesty. Certainly there is no risk that this will be ongoing or recurring, and that is not the message that I would expect businesses to take out of this such that they hold back for any longer than they should. It is: fess up now, and then the new powers are coming in from 1 July.

CHAIR: So there must be some understanding in your modelling that non-compliant employers now are more likely to be compliant post-amnesty than they would be if the amnesty didn't exist or if there were other incentives to comply. Sorry; I didn't ask that question very well. Are you hoping that more employers will be compliant post-amnesty than they are now?

Mr Jeremenko : That's right.

CHAIR: And that they'll continue to be compliant, I suppose.

Mr Jeremenko : Exactly. We expect a doubling of the number of employers that effectively fess up to their unpaid super obligations.

CHAIR: It's not just fessing up, though. Once the amnesty's done and the superannuation is paid, they will be compliant on an ongoing basis—is that part of the modelling?

Mr Jeremenko : I might ask Mr Preston to talk in more detail to some of the modelling, but certainly—going back to the suite of legislation, with the Treasury Laws Amendment (2018 Measures No. 4) Bill 2018 and the increased powers coming in from 1 July—the tax office saying that they are going to start to use those and continue their enforcement activity now, even during the amnesty period, sends the right signal. Hopefully, there is some sort of longer term behavioural change from the amnesty itself, but I think that the bigger change will be as a result of the increased tax office powers that try to address that 2.85 underpayment.

CHAIR: Yes, as opposed to the—

Mr Jeremenko : Correct. Perhaps I can ask my colleagues if they want to add.

Mr Preston : I might have to take on notice your question going to: did we change the assumption of the self-correction going forward? For the purposes of what we're trying to do—well, it's not us; it's our Tax Analysis Division—they're trying to understand what the tax consequences of this measure might be. It's not clear to me that the change in future compliance behaviour would necessarily have a tax impact that they'd be interested in looking into, so I'm not sure whether that has been factored into the estimate or not.

One thing that has been factored in—and I think it goes to the points that Mr Jeremenko was making about future noncompliance—is that in the explanatory memorandum it's stated that, in general, a minimum 50 per cent penalty will be applied, and that has been reflected in the costing. I think it would be unusual, given the minister's public statements, for an employer to think that it would be worth not coming forward, given that there is going to be improved visibility from the other bill and higher penalties for people for historical noncompliance if people don't come forward.

CHAIR: I was just going to say that the ISA also suggested that the evidence was mixed as to the effectiveness of an amnesty and that potentially Treasury or the ATO were painting an overly rosy picture as to the effectiveness. Have you got any comments about that particular assessment?

Mr O'Halloran : I might just make a few comments on that. Certainly there are a number of studies that draw all sorts of comparative conclusions internationally about the effect of amnesties, but, if I may say so, the context is somewhat different—the timing and these things. But certainly I did hear the previous witnesses discuss that one element perhaps is that the super guarantee is an unusual beast. It is, in fact, somebody else's loss. That is one characteristic. But, if I may say so—subject, obviously, to the parliamentary process—what strikes me is an ability to change behaviour out of this. One can't guarantee these things. The issue is to have a range of strategies that are complementary.

I've heard some informal feedback, perhaps, that people think that, because an amnesty has been announced, subject to the passage of the law, we're stopping everything else. I think one of the unique and positive features of this is that it does create what I'd call a bit of natural tension. There is in fact an SG task force. There is in fact the quite step-change visibility of superannuation payments as a consequence of STP, which we've discussed in other fora. So I think we are in a unique place.

If I may just quickly touch back to the working group report and perhaps even evidence that the ATO gave at similar committees, the one thing that I think was universally agreed was that one of the issues out of the super guarantee system 15 or 18 months ago and perhaps systemically for longer was that it was really fragmented in that in one sense it was about the relationship between the employee, the employer and the super fund. From the ATO's point of view, clearly there was a particular obligation of which we had no visibility to be able to identify, let alone prevent—not totally; I don't want to say that there weren't improvements that could have been done.

So my sense is that, when one looks at what we will be able to do with confidence around the postamnesty environment, the visibility of SG payments and payday event liabilities and other things, I think the amnesty needs to be looked at as part of that sea change of the manner in which we'll see, much more readily, the decisions of people to comply or not. Also I think some of the characteristics of the amnesty certainly present a real challenge or opportunity for small businesses, perhaps, who for all sorts of reasons have not perhaps come forward. I think it does present a unique opportunity at the same time that the ATO is continuing to do its enforcement activity and therefore its penalties and the like off the back of new data.

CHAIR: Can I just take you back to the SG task force. How long has that been operational? That's a new thing?

Mr O'Halloran : It starts on 1 July, in terms of specifics. It's over a three-year period. It will do two things. One is that it will give us some additional audit teams, if you like. Secondly, it will allow us to invest in some data modelling and models, which I've touched on previously, improved already in the last seven months. Thirdly, it will give us a capacity in terms of debt collection, but particularly subject to the passage of bill No. 4. Obviously, how those directions and those things come out—those things all come together, I think, to paint a different ability to both see and deal with noncompliance in SG, again subject to the passage of the laws.

CHAIR: There was additional funding provided to the ATO for that?

Mr O'Halloran : Yes, there was.

CHAIR: How much additional funding?

Mr O'Halloran : I think it was in the order of $20 million.

CHAIR: Allowing the deductibility of payments made by employers under the amnesty was something that came up from previous witnesses as well. Is that a crucial part of ensuring success—to ensure that more employers take up the opportunity—or is it, as was implied by other witnesses, potentially rewarding employers that have failed to meet their SG obligations?

Mr O'Halloran : I think I'd have to pass to Treasury on that.

Mr Preston : When thinking about take-up rates—and this is based on my understanding of discussions between our Tax Analysis Division and the ATO—they looked at the holistic set of incentives that the amnesty provides, both before and after, and the view was that that was a key driver of future compliance. The way the deductibility or the lack of deductibility for late payment works is that, once someone becomes late, superannuation guarantee payments no longer are deductible. A simple way to think about that is an immediate 30 per cent penalty on the day that you become late, so it's a significant increase in the cost.

Now, it might not be the case that deductibility benefits everyone to that degree, because some businesses may be not-for-profits. Some may or may not be in a tax-paying position, so deductibility is not necessarily beneficial to all businesses, but it is nevertheless a significant factor.

CHAIR: Can I ask you to explain—again, this came up, but under different contexts from different witnesses—why the amnesty was introduced without any prior announcements.

Mr Jeremenko : The issue with flagging or foreshadowing an amnesty at some time in the future is the risk that employers that would be otherwise self-correcting stop doing it sooner than we would allow. So, effectively, if we had flagged back in March that a 12-month amnesty was coming and it was still introduced on 24 May, that gives that extra time, so it becomes a 15-month or 16-month amnesty. It's as simple as that. There are certain pieces of legislation and certain policy measures that are worked on across government, not just in the superannuation space, where the surprise factor, if you like, is important for compliance reasons, and that's the case with this one.

CHAIR: I suppose the reverse of that—and one of the questions that I know Senator Ketter has been asking today—is whether some of the participants or the witnesses that were here today had been consulted about this particular piece of legislation, or whether their constituents had asked for an amnesty. From Treasury's perspective, I suppose, and also from the ATO's perspective, had you seen a demand for an amnesty? Obviously, just because constituents haven't been asking for it doesn't necessarily mean it's not a good idea, but where did the idea come from if it wasn't from constituents?

Mr Jeremenko : It's certainly come up over the years. In terms of public reports by bodies, the Inspector-General of Taxation, back in 2016, noted particular aspects that are part of this amnesty now. That particular one was around the nondeductibility of the late payment. The inspector-general suggested that that is a huge disincentive. The Board of Taxation in 2014 recommended remission of penalties and deductibility of late payment in terms of going to two of the key aspects of what now makes up the amnesty. And as has already been said today, the Australian Chamber of Commerce and Industry has raised this in the past, back in 2015, and there have been other superannuation representative bodies that have raised it. There is one superannuation representative body in particular that has raised it with us in discussions over recent years.

CHAIR: Can I ask the ATO exactly what happens to an employer that has the opportunity to come forward during the amnesty but chooses not to or doesn't? What exactly are the penalties that will be applied to those employers?

Mr O'Halloran : After the amnesty?

CHAIR: Yes, after the amnesty.

Mr O'Halloran : Well, two things. Obviously we revert, if you like, to the current settings, which would be particularly around penalties—up to 200 per cent penalties. Also the deductibility obviously is no longer applicable. As important—and it might sound minor to some but it is certainly a very real consideration for long-term nonpayment—is the $20 administration fee that is applicable per employee per quarter. If one has a number of employees, that can be quite a large multiplier effect. So, those things would revert. In terms of the penalty itself, I've heard commentary today about the importance of the ATO communicating the amnesty once it's law, or if it's law—whatever the correct terminology is. And certainly that is important, because we would see that public awareness, and employer awareness in particular, is important. In the post-amnesty environment, clearly a consideration for us in terms of penalties would be: given that there has been a long-term amnesty program, why didn't somebody consciously come forward?—as an indication of their culpability. And therefore there would be a very firm penalty.

As I said, at the current settings it can be up to 200 per cent. I wouldn't suggest that in all instances, only where we had clear evidence that an employer was aware of the amnesty or it was more reasonable than not that they would have been. The second area would be things around their behaviour and the fact that they were aware at the time that they had underpaid. Those things would certainly be a strong determinant for a much clearer penalty position, or much stronger. Obviously we would see that—subject to where the law finishes, of course—as important messaging. Clearly that would need to be tempered to some degree with individual circumstances, but certainly one would think that if the effectiveness or the visibility of the amnesty is well known, as well as its pros and cons, then the community would expect us to put that into our deliberations when we're advising the community and our staff as to the correct application of very firm penalties. And I'm not commenting on bill No. 4 in terms of some of the other sanctions.

CHAIR: There was something in the ACTU's submission that suggested that employers could potentially destroy records of superannuation contributions from more than five years ago, which would entitle them to escape the liability for noncompliance from that time. What would happen to an employer that destroyed records of superannuation contributions to their employees?

Mr O'Halloran : Well, we've arguably got that situation now in terms of record keeping. We have an ability to raise default assessments on the best available information that we have, and we do that quite regularly. That phenomenon's not new, but it's not unusual. Obviously it varies as to whether it's intentional destruction of records or other things, but the commissioner has the ability to raise an assessment on the best available information if primary records, if you like, are—

CHAIR: So, the employers don't lose liability?

Mr O'Halloran : Certainly not. In fact, if there was more mischievous action involved there may be other sorts of sanctions or penalties or even charges that could be raised. There are some record-keeping limitations across most heads of revenue where, in the normal course of business, records are required to be kept only for certain periods of time.

CHAIR: So, the ACTU are mistaken with that claim. I also want to ask—and this question is again to Treasury, Mr Jeremenko—about schedule 2. Can you confirm that, under the superannuation guarantee opt-out measure in the bill, employees will have the same eventual outcome as under the current system? I'm assuming the plan is to have less administrative bother that goes with it.

Mr Jeremenko : That's correct. It's not in any way a reduction in the overall tax. There is a $2 million gain to the fiscal position of the government over the forward estimates. That's as a result of the timing effect of having the payment of income tax, if you like, over the payment of the excess contributions tax, which is collected a bit later. An individual who decides to give one of these exemption certificates to one of their employers would effectively be paying the same amount of tax but sooner. It is certainly the case, as you say, that it is removing a level of red tape that is involved currently in terms of that employee effectively withdrawing the amount of superannuation that exceeds the yearly caps that the law forced them to put in in the first place. That's why it's an anomalous position that we're fixing with this amendment in the schedule. The law forces employers to put in the 9½ per cent—potentially multiple times, in some people's cases—and, depending on that person's income overall, they are being forced to breach the $25,000 concessional cap. It's a silly position that this amendment will fix.

CHAIR: It's not a benefit to high-income earners other than the fact that it's an income smoothing and administrative reduction measure?

Mr Jeremenko : It's an administrative fix, but, importantly, the rationale for it is that often—it doesn't happen often, so I'll correct that—if we see a situation in any area of the law where someone is effectively being forced to breach another aspect of the law, that's something we need to fix. That's what this does.

Senator KETTER: You might have touched on this, Mr Jeremenko, but I think you said that it was ACCI who approached Treasury to advocate for this policy to government before the bill was released.

Mr Jeremenko : Correct.

Senator KETTER: What about COSBOA?

Mr Jeremenko : No, but I heard them this morning. They said that they have discussed it in the past with various people, but not me personally.

Senator KETTER: Apart from ACCI, are you aware of any other groups coming forward to advocate?

Mr Jeremenko : As I was saying earlier, large aspects of what is now the amnesty have been recommended by the Board of Taxation in the past and the Inspector-General of Taxation. ASFA has also raised it in the past. I did hear the evidence earlier today. I'm sure that it's just something that Mr Glen McCrea wasn't aware of, but, back in 2015, ASFA raised with Treasury the prospect of an amnesty that included exactly what we have in the amnesty before the committee. That includes the deductibility of the late SG and the remission of the penalties. As you know, ASFA is a body that represents the entire superannuation industry.

Senator KETTER: I accept what you've just put to me, but is there a possibility there might be more stakeholders that have come forward? Is a list of stakeholders something you could take on notice in regards to this policy?

Mr Jeremenko : I'm happy to take it on notice to do a thorough check, certainly.

Senator KETTER: Thank you.

Mr Preston : Was that in advance?

Senator KETTER: That is in advance of the bill, yes. When was the decision taken to adopt this policy of an amnesty?

Mr Jeremenko : I would have to take the exact timing on notice. It was certainly under advanced consideration, if you like, within government from the time that the measures No. 4 package—if I can call it that—was being looked at. From the second half of last year, we were looking at this as the two arms to the one package on unpaid SG.

Senator KETTER: Why wasn't it then included in the budget?

Mr Jeremenko : The policy decision to proceed is something that was only made recently.

Senator KETTER: That's the question I'm asking.

Mr Jeremenko : Sorry. I was talking about the thinking within government and Treasury, not necessarily that there was a decision to proceed. Again, I would have to take exactly when on notice.

Senator KETTER: So it was post the budget.

Mr Preston : No. It was pre-budget. It was a decision taken but not yet announced. The fiscal implications of the policy were reflected in the budget, but the measure wasn't announced through the budget for the reasons that we've explained previously.

Senator KETTER: Which stakeholders were then informed that the decision had been taken?

Mr Jeremenko : Is that on the amnesty?

Senator KETTER: Yes.

Mr Jeremenko : None would have been informed other than the tax office, which we obviously work closely with in producing our policies and costings, for the reasons that I said in terms of giving advance notice.

Senator KETTER: When did work first commence on drafting the bill?

Mr Jeremenko : I'd have to take that on notice.

Senator KETTER: Do you support the notion that superannuation is deferred wages?

Mr Jeremenko : I certainly think that, economically speaking, that is correct. If there wasn't a legal requirement to pay the super guarantee, you would expect that that would be reflected in wages. When the super guarantee is next legislated to increase to 10 per cent on 1 July 2021, that money has to come from somewhere. It is effectively a deferred form of that employee's wage.

Senator KETTER: In fact, in the Treasury Laws Amendment (2018 Measures No. 4) Bill 2018 hearing, Mr Jeremenko, you made the comment:

The position that the government takes, and Treasury, is that any level of underpayment of SG is unacceptable.

Mr Jeremenko : Correct.

Senator KETTER: How is an SG amnesty consistent with that principle? Presumably we don't have amnesties for nonpayment of wages. Why is it different for superannuation?

Mr Jeremenko : As I was saying earlier, the super amnesty needs to be seen in the context of the bill No. 4 measures. It is not something that is a simple 'get out of jail free' card for employers; it is bringing forward payment of historical super underpayment that would not otherwise occur. As I said earlier, we're expecting double the number of employers to fess up as a result of this. That, combined with the powers starting from 1 July 2018—in some egregious cases, that is 12 months' jail for some employers—to address that unacceptably high $2.85 billion of unpaid SG, means that the amnesty is appropriate.

Senator KETTER: Have you advocated other amnesties to the government?

Mr Jeremenko : We're in the superannuation space for our sins, so this is the only amnesty!

Senator KETTER: Perhaps my question is more broadly to Treasury. Does Treasury advocate amnesties?

Mr Jeremenko : I would have to consult colleagues. As I believe I said at this committee's hearing on the No. 4 bill—and that Mr O'Halloran added to—given my background in income tax, I know that the tax office conducted Project DO IT a few years back. I understand that wasn't a legislative amnesty—rather, something the tax commissioner could do within his existing powers—but that's another one that I'm not sure whether or not Treasury had a role in formulating.

Senator KETTER: Could you take that on notice.

Mr Jeremenko : Certainly.

Senator KETTER: Sometimes people offer arguments that the SG compliance system is burdensome. There are events like natural disasters and people get sick and what have you. Are these valid arguments for SG noncompliance?

Mr Jeremenko : No. From a policy point of view, absolutely not. The government believes that, barring some changes we're making and have been making over the years—making it easier with Single Touch Payroll and technology more generally, not that that's an excuse—the current legal settings are very appropriate for employers paying the right amount of SG.

Senator KETTER: So what are the primary drivers of SG non-compliance?

Mr O'Halloran : Senator, just a couple of things, if I could. In terms of complexity or difficulty to comply, there are probably two things that are worth observing. One is that since the introduction of SuperStream there have been, through the use of technology, significant improvements at the employer end—in other words, the ability to have multiple payments disbursed through technology, as I think this committee is familiar with. The ATO free clearing house accommodates some 320,000 small businesses, from memory. So my point is not to labour those, other than to highlight that I think some of the residual difficulty has certainly improved significantly in terms of single point of payment and disbursement with the relationship between employer and distribution to an employee's fund.

We do see conflicting views, as you've alluded to. In one sense, it does make one wonder how you can't plan for quarterly events that happen every quarter—to be blunt. But also there are life events and instances that do occur. The current SG regime makes it very difficult for us to accommodate that in the sense of any late payments, et cetera, but certainly we do see some events whereby people perhaps are caught by awkward events. This is why the drive in the last few years has been to try and do two things. One is to obviously improve the visibility—as we've touched on before, and I don't mean to repeat myself—of when a payment is available. If I could give a quick statistic which is perhaps useful: even of the complaints that we get from employees, as we've said, there can be anything up to 20 per cent where in fact the SG has been paid. So the visibility from the employer and employee has certainly been a determinant or certainly one that adds to the view that it's complex and hard. Technology is the part answer. The other reason that's put forward—and I won't get into the details—is certainly cash flow. Obviously, there is a sense there that, depending on whether you're an employee or an employer, there are two views to that. One is that it should have been provisioned for, and the other one is that it does create difficulties for businesses to pay at a particular time.

So I think it does cover the full spectrum. I'm not trying to be evasive, but it does cover some visibility issues, through to some understanding and use of it as a cash cow, and the full spectrum. I think one of the reasons for perhaps advocating a range of tools similar to these packages—or perhaps even after the amnesty is that we can better identify some of the conscious decisions that have been made. I did hear the small business ombudsman talk about the fact that, for those that really want to comply, the availability of technology and software has to eventually be seen to be valuable, and we think that will go a long way. Again, drawing from some previous experience, we do see instances where people consciously choose not to pay, and they're the ones we certainly encourage and want to bring forward and appropriately sanction.

Senator KETTER: So if I can take from your answer—correct me if I am wrong, the major drivers are visibility, but I'm not sure if that is exactly a driver of—

Mr O'Halloran : Well, it probably makes it difficult to be aware of one's obligation or, conversely, make sure that employees can see when they have received their payment into their superannuation fund. So I think that adds to confidence that the system is working appropriately. As I said, that's why I linked it to the example of some of the complaints we get. Some of them are in fact non-complaints because they don't think they've been paid their SG—they're entitled to it, it but they haven't recognised it or seen it, particularly under the regime we are trying to move away from where that information is only available every 12 to 15 months.

Senator KETTER: So visibility, cash flow and the conscious decision not to pay, that's—

Mr O'Halloran : Yes, that covers the spectrum, I think.

Senator KETTER: You've published in the explanatory memorandum what you expect to gain in terms of revenue from this measure. It's $101 million, I think, over the forward estimates. Can you please provide us with your estimate as to the amount of SG that will come forward?

Mr Jeremenko : So the SG that will come forward, I believe, is that $230 million figure I gave earlier. Yes, so the $230 million of unpaid SG.

Senator KETTER: And that will all be in the 2018-19 year?

Mr Jeremenko : There might be some timing difference, given that we started it in the 2017-18 financial year.

Mr Preston : We wouldn't expect it all to be, because some will be in this current financial year and some will be in the following financial year.

Mr Jeremenko : Yes, it will be split across financial years.

Senator KETTER: Can you tell us how you've modelled that $230 million?

Mr Jeremenko : Sure. We can drill into some of that for you. The number of employers who—if I can use the technical term—fess up on their SG every year is around 10,000. We're expecting a doubling of that, so an additional 10,000 employers. That extra 10,000 will result in 50,000 employees getting the $230 million that is unpaid. Given some rounding, that's $4,400 on average each.

Senator KETTER: Per employee?

Mr Jeremenko : Per employee; that's correct. For each of those 50,000.

Senator KETTER: And that's taken off your historical figures in terms of the amount of super that's recovered by 10,000 employers fessing up?

Mr Jeremenko : That's right, so that $230 million among 50,000 employees is additional as a result of the amnesty.

Senator KETTER: So 10,000 fess up in an ordinary year and you're saying that double that will fess up under these circumstances?

Mr Jeremenko : That's correct, so that's the estimate. In conjunction with the tax office we look to the experience that Project DO IT in the income tax space showed back then. Trying to predict human behaviour is a difficult thing. Mr Preston may want to add. We don't have a modeller in Treasury here at the table, so we're relaying information. But certainly that's our best estimate in terms of the uptick in fessing up.

Senator KETTER: There is a genuine consideration here of the benefit of this amnesty as opposed to the message it sends out. Whenever you have an amnesty on something—and I think the IMF have made comments about this—it can be counterproductive.

Mr Jeremenko : Sure.

Senator KETTER: If you keep having amnesties, they send a perverse message out there. I think your estimate was that the SG gap was something like $3 billion—

Mr O'Halloran : Yes, $2.8 billion.

Senator KETTER: and here we are recovering $230 million—a very small proportion of the overall gap—and yet there's this risk of sending the wrong message to employers on this very important issue.

Mr Jeremenko : Mr O'Halloran can jump in, but it goes to that first limb of the package in bill 4. Bill 4 and the extra powers and penalties—powers to the tax office and penalties to employers who are not paying SG—go to addressing that $2.85 billion. That will be over time. That won't be a 12-month fix, if you like, but this goes to at least bringing $230 million of the SG that historically hasn't been paid into the pockets of the employees.

Mr O'Halloran : I think I'm on point. Certainly the behaviour and the modelling, whether it's conservative or not, is probably tied up with how one views the overall package, but what I think shouldn't be lost is that I think from memory—and I'd have to check—we're sitting on about 3,000 cases at the moment, give or take, that by definition, subject to obviously the amnesty provisions, would not be eligible for the amnesty because we've already started serious work with them. I think the behavioural things will be interesting to watch. I just mention again that there's almost a natural tension there. Yes, it may be conservative in the sense of the number or it may be about the right number, but it doesn't feel unrealistic when one looks at the overall settings of the two or three bills plus the fact that we are continuing.

I think a point which came up in some other discussions was that, at the end of the day, after the amnesty we will continue to audit people, as we should. That is that firmer stick that you've touched on, Senator. Those people, of course, will be dealt with appropriately, regardless of the amnesty. So there is really no cover for those people who we identified in some of the modelling that I mentioned the other day as having a 93 per cent probability of noncompliance, which is quite high risk, and which we are moving to continue on. So we have a range of strategies that actually create the importance of SG. We will continue to pursue people who are slow or reactive or perhaps sitting on a choice in the current regime. Obviously others will make decisions in light of where the amnesty lands in that sense. So there is quite a good natural intention that each of these things will address different situations, but ultimately it is about getting real money into employees' superannuation accounts.

Something that may have been misunderstood previously is that, subject to the law and subject to us having the authority to do it, of course, we were encouraging people to pay directly to the fund, which is the total amount which immediately goes into the fund member's account. Obviously the other way, as the amnesty is currently framed, as I understand it, is that a payment is actually a key part of being eligible for the amnesty. It's not a promise to pay; it's actually entering into a payment arrangement and fulfilling those obligations. Again, that certainly gives material difference and support to an employee who has missed out over a period, for whatever reason. But I accept there are differing views on the context of the amnesty. I just wanted to paint the picture that they do complement each other, from our point of view at least, operationally.

Senator KETTER: Just coming back to the modelling for the amnesty, am I correct in assuming then that under the Project DO IT experience twice as many people fessed up in the amnesty period as did in a normal year?

Mr O'Halloran : I would have to take on notice the specific figures. That sounds right, but I just haven't got the figures for the repatriation under DO IT in front of me.

Senator KETTER: They don't sound analogous to me—an employer paying superannuation as opposed to individual taxpayers paying income tax, which I presume was Project DO IT.

Mr Jeremenko : Correct, yes. Having money offshore—

Senator KETTER: They're different scenarios, so I'm wondering how relevant they are.

Mr Jeremenko : That's why I said it was 'informed by'. We'll get back to you on that. We didn't necessarily just roll over the behavioural effect of that amnesty to this one, because it is very different.

Senator KETTER: I take it, from the sound of it, that your modelling doesn't go to how many of the extra employers that fess up are in the categories of small business, medium business or large business?

Mr Jeremenko : I don't have that with me. I'm not sure it would, actually.

Mr Preston : We might have to take that on notice, but I'm not sure that—

Senator KETTER: It sounds like you're doing more of a top-down analysis rather than a bottom-up one.

Mr Jeremenko : I think that's fair to say.

Mr Preston : Treasury discussed it with ATO and looked at where past non-compliant behaviour has been observed and what can be gleaned from that. That's where things like that ratio of five employees to one employer came from and the relative orders of magnitude. But we'll have to take on notice exactly what they drilled into when it came to particular types of employers.

Mr O'Halloran : Whilst I can't comment on the modelling per se, on the incidence, as we've discussed before—and this is up until April this year—if you look at people who come forward who believe they've not been paid their super guarantee, it's certainly predominantly ex-employees. They continue to be predominantly from what you'd call small business, fewer than five employees, or maybe 10 in certain industries. Generally they tend to be service-type industries, but not exclusively. Perhaps something that is useful is that that's the sort of case numbers we've covered. But, certainly, we do find that, after we take action, we do in fact get SG collected in about 30 per cent of cases. But, in terms of the case numbers per year, whilst the employee notifications are not necessarily the only source, particularly from ATO initiated cases, we do see that the belief of nonpayment of SG is certainly predominantly from the small business. But, certainly since the focus on super guarantee in the last 15 to 18 months, I wouldn't want to discount that we do have some quite substantial businesses coming forward, in terms of realising that they've had systems issues that have had that multiplier effect, and making effectively voluntary disclosures. They're the two pockets, depending on whether you're referencing scale of business or perhaps the size and the impact on number of employees.

Senator KETTER: Given that we've got SGC essentially being tax deductible during the amnesty period, can you tell us: what's the projected loss of revenue as a result of that?

Mr Jeremenko : The $101 million gain to the budget over the forward estimates includes the cost to revenue of the deductibility, if you like. So it's a net number. Unless Mr Preston knows, I'll have to take on notice the breakdown of that.

Senator KETTER: Okay. Can you explain how, under the amnesty, missed earnings will be compensated?

Mr Preston : Missed earnings?

Mr Jeremenko : As in interest on the—

Senator KETTER: Yes, interest for the—

Mr Preston : Those provisions continue to apply, and they're unchanged. The same nominal interest arrangement, which is 10 percentage points from the start date of the quarter, not the day when the money was due, will continue to apply.

Senator KETTER: So the 10 per cent is compounded for the years of lost earnings. Is that right?

Mr Preston : No, it's a simple interest calculation, on my understanding. It doesn't compound, but it is a high interest rate, and, as I said, it starts applying from the start date of the quarter, not the actual date on which the payments are made, so, in many instances, it will be overcompensation for the lost earnings the person might have expected to have received in a super fund. I'm just remembering the PC benchmark report was around the seven per cent figure. There is a variety of numbers in that report, but six to seven per cent might not be unexpected.

Mr O'Halloran : And that's the current arrangement under the existing SGC environment.

Senator KETTER: Under the current arrangements, the commissioner does have a fair bit of discretion in terms of penalties. The SGC is a mandatory part of it, but there are options in regard to the penalties. You probably will want to take these questions on notice. Can you tell us the number of employers who lodged an SGC shortfall statement for each of the past five years for failing to pay the required SG amount on time?

Mr O'Halloran : Yes, I will take that on notice.

Senator KETTER: And, then, the number of employers where employee notifications were made for nonpayment or underpayment of SG.

Mr O'Halloran : Over the five years?

Senator KETTER: For each of the five years. The number of employers for whom other compliance activities of the ATO detected nonpayment or underpayment of SG.

Mr O'Halloran : Yes.

Senator KETTER: The number of employers for whom part 7 penalties applied, the number of employers for whom part 7 penalty remissions were granted, and the number of employers for whom the part 7 penalty was equal to 50 per cent or less of the SGC shortfall.

Mr O'Halloran : Yes.

Senator KETTER: And, then, I'm going to ask for some bands. The number of employers for whom part 7 penalties were, say, 50 to 100 per cent, 100 to 150 per cent, 150 to 199 per cent, and the maximum of 200 per cent in a separate category.

Mr O'Halloran : Yes, I'll take those on notice.

Senator KETTER: Back to you, Mr Jeremenko, can you tell me what proportion of employers who make use of the amnesty will have a company tax liability and are thus able to make use of the tax deduction provided by the amnesty?

Mr Jeremenko : I would have to take that on notice, Senator.

Senator KETTER: What is the aggregate dollar value of unpaid superannuation that is estimated to be paid under the amnesty which would not have been paid if the existing compliance regime continued?

Mr Jeremenko : During the amnesty period? $230 million—if that was the question?

Senator KETTER: Yes, I think that answers that question. I want to go back to the issue of missed earnings under this arrangement, and I think you've said that this is no different to what the current circumstance is.

Mr Jeremenko : Correct.

Senator KETTER: Let's say we have an employer who hasn't been paying the correct level of superannuation for, say, 10 years—I'm not sure if shortfall is the correct terminology in that circumstance—and you identify that there is an underpayment. Under normal circumstances, without an amnesty, would that interest rate, that 10 per cent, be applied on a compounding basis or would it just be a global figure?

Mr O'Halloran : I agree with Mr Preston—I'm happy to double-check, but it's a flat rate; it's not compounded. However, I will need to have it confirmed; I just haven't got it in front of me.

Senator KETTER: That becomes a significant issue, if we're talking about 26 years, for example, which is when the system commenced. It might be larger—10 per cent might compare favourably in one year to the six per cent annual, but if we're talking about compounding that's a fairly large difference.

Mr Jeremenko : Yes. What I would reiterate is that that isn't changing under this provision. However, I would hazard a guess that the unpaid superannuation would be worth a lot more to that employee that would be getting it now back under the amnesty, if, in your example, that person came forward during this amnesty period. I take your point about the way the interest is calculated, but that will potentially be a small number, depending on the figures, compared to the actual super that they will be getting with the flat 10 per cent.

Senator KETTER: Given the evidence of Ms Carnell—and I accept what she says: a lot of small business people are focused 100 per cent on their business—how confident can you be that you're going to give them some visibility of this and overcome perhaps some of the reluctance that they might have about embracing the ATO and fessing up? We know 10,000 do it a year but, in the overall scheme of things, that's a fairly small number.

Mr O'Halloran : I have some observations. One is: it will be important, and sometimes we will be doing it directly, once we can confirm the settings. Obviously, we would be, as is our normal course, going to anything from chambers of commerce to local councils, as many avenues as we can, to pass information, whether it be our information or wide-labelled. Some of the indicative feedback already is that people are waiting for official confirmation, because it feels very official. Therefore, in some instances, it could be that some people will want to see a lot of information that is badged from the ATO more than they would normally want to get a notice of assessment from us. However, my core answer is: we will be doing all we possibly can to communicate the outcome from the amnesty, the importance of it, the time lines and the benefits but also highlighting that we will be doing other activities in the meantime of which people will have to make a judgement on risk and reward. So we will be doing all we can, and I think we have a pretty good history of getting the messaging out through social media, through to other aspects. We do appreciate that it's in all of our interests, should the policy setting or the legislative process land, that people understand the amnesty, the context, the availability of it and how to consider it, particularly working through advisers, tax agents, BAS agents et cetera, as a real bottom-line differential. We will also be continuing to do enforcement action during this period.

CHAIR: I have a couple of follow-up questions. Mr O'Halloran, I think you made it quite clear that throughout the amnesty period the ATO will still be enforcing SG noncompliance and cracking down on employers that fail to pay their staff superannuation, but what happens if someone is caught during that period from your crackdown and then requests the amnesty?

Mr O'Halloran : Under the current legislation, if we've commenced effectively an audit or review or reached out to them, they wouldn't be eligible.

CHAIR: So the only people who are eligible for the amnesty are those that come forth voluntarily—

Mr O'Halloran : That's correct.

CHAIR: and fess up—I think that is the technical term that you use, Mr Jeremenko!

Mr O'Halloran : I'll leave that to Mr Jeremenko.

Mr Jeremenko : Plain speaking!

Mr O'Halloran : Yes. 'Come forward' is what I would say.

CHAIR: 'Come forward'—all right. That's what we'll use from now on.

Mr O'Halloran : I'm not an ogre!

CHAIR: A couple of witnesses suggested that the communication of the amnesty is going to be particularly important. Do you have any plans for that communication?

Mr O'Halloran : I can't do anything until I've got laws on it.

CHAIR: Okay, that's my next question. One of the things that you said, Mr Jeremenko, is that the reason why the amnesty wasn't canvassed as a potential policy prior to its announcement was that it potentially could affect the behaviour of employers. Is the flipside to that a suggestion that, because it has now been announced, there is a level of urgency to passing that legislation?

Mr Jeremenko : Certainly, regardless, the government would see it as an urgent bill, and I think that reflects the legislative status it's been given as a T-category bill to be passed this session, by the end of June. But that's right. Any lingering uncertainty around the legislation means that, as Mr O'Halloran said, until it is actually law, the tax office can't do certain things like start the promotion of it. So the sooner it is passed into law the better, in terms of giving it the full effect that the government hopes for.

CHAIR: Thank you, Mr Preston, Mr Jeremenko and Mr O'Halloran, for appearing before the committee today. That concludes today's hearing. I remind witnesses that answers to questions on notice are due this week on Thursday, 14 June, and the report is due to be tabled on Monday. On behalf of the committee, I'd like to thank those who have made submissions and sent their representatives here today for their cooperation in this inquiry.

Committee adjourned at 15:02