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Treasury Laws Amendment (2018 Superannuation Measures No. 1) Bill 2018

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2016-2017-2018

 

THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA

 

 

 

HOUSE OF REPRESENTATIVES

 

 

 

Treasury Laws Amendment (2018 Superannuation MeaSures No. 1) Bill 2018

 

 

 

 

EXPLANATORY MEMORANDUM

 

 

 

(Circulated by authority of the

Minister for Revenue and Financial Services, Minister for Women and

Minister Assisting the Prime Minister for the Public Service,

the Hon Kelly O’Dwyer MP)

 

 



Table of contents

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

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

Chapter 1 ........... Superannuation guarantee amnesty.............................. 7

Chapter 2 ........... Superannuation - employees with multiple employers 21

Chapter 3 ........... Non-arm’s length income of superannuation entities 31

Chapter 4 ........... Limited recourse borrowing arrangements.................. 43

Chapter 5 ........... Statement of Compatibility with Human Rights.......... 51

 

 



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

Abbreviation

Definition

APRA

Australian Prudential Regulation Authority

ATO

Australian Taxation Office

Bill

Treasury Laws Amendment (2018 Superannuation Measures No. 1) Bill 2018

Commissioner

Commissioner of Taxation

ITAA 1936

Income Tax Assessment Act 1936

ITAA 1997

Income Tax Assessment Act 1997

SG

Superannuation guarantee

SGAA 1992

Superannuation Guarantee (Administration) Act 1992

SIS Act

Superannuation Industry (Supervision) Act 1993

SIS Regs

Superannuation Industry (Supervision) Regulations 1994

SMSF

Self-managed superannuation fund

TAA 1953

Taxation Administration Act 1953

 

 



Superannuation guarantee amnesty

Schedule 1 provides for a one-off 12-month amnesty to encourage employers to self-correct historical SG non-compliance.

This complements the Government’s package of reforms to improve future SG compliance, which were recently introduced as part of the Treasury Laws Amendment (2018 Measures No. 4) Bill 2018. The recent reforms will improve the visibility of SG payments to the ATO, introduce stronger penalties for non-compliance and ensure more reliable collection of liabilities for unpaid SG in the future.

Date of effect The amendments apply from the day the Bill is introduced into the House of Representatives.

Proposal announced The amendments have not been previously announced.   

Financial impact The measure is estimated to result in a gain to revenue of $101 million over the forward estimates period:

2017-18

2018-19

2019-20

2020-21

2021-22

-

$48m

$21m

$21m

$11m

- Nil

Human rights implications :  This Schedule does not raise any human rights issue. See Statement of Compatibility with Human Rights — Chapter 5, paragraphs 5.1 to 5.5.

Compliance cost impact Nil.

Superannuation - employees with multiple employers

Schedule 2 amends the SGAA 1992 to allow individuals to avoid unintentionally breaching their concessional contributions cap when they receive superannuation contributions from multiple employers. Instead of receiving contributions into superannuation, an employee may apply to the Commissioner to opt out of the superannuation guarantee regime in respect of an employer and negotiate with the employer to receive additional cash or non-cash remuneration.

The amendments achieve this outcome by allowing certain employees with multiple employers to apply to the Commissioner for an ‘employer shortfall exemption certificate’, which prevents their employer from having a superannuation guarantee shortfall if they do not make superannuation contributions for a period.

Date of effect 1 July 2018.

Proposal announced This Schedule implements the measure ‘Superannuation - preventing inadvertent concessional cap breaches by certain employees’ from the 2018-19 Budget.

Financial impact : The measure is estimated to result in a gain to revenue of $2 million over the forward estimates period:

2017-18

2018-19

2019-20

2020-21

2021-22

-

$1m

$1m

..

..

- nil

.. not zero but rounded to zero

Human rights implications :  This Schedule does not raise any human rights issue. See Statement of Compatibility with Human Rights — Chapter 5, paragraphs 5.6 to 5.10.

Compliance cost impact :  This Schedule has the following estimated compliance costs:

•        Total one-off implementation cost of $147,213 for individuals relating to learning and education about the changes;

•        Total ongoing total compliance costs following implementation of $5,981 for those individuals who choose to take up the exemption;

•        Total ongoing compliance costs following implementation for business of $121,404 in relation to record-keeping, systems and procedure for individuals who take up the superannuation guarantee exemption).

Non-arm’s length income of superannuation entities

Schedule 3 ensures that the non-arm’s length income rules for superannuation entities apply in situations where a superannuation entity incurs non arm’s length expenses in gaining or producing the income.

Date of effect: 1 July 2018.

Proposal announced: 2017-18 Budget.

Financial impact:   The measure is estimated to result in a gain to revenue of $30 million over the forward estimates period, reflecting the additional tax paid by non-arm’s length lenders on interest income earned on loans:

2017-18

2018-19

2019-20

2020-21

2021-22

-

$ 5 m

$ 5 m

$ 10 m

$ 10 m

- Nil

Human rights implications:   This Schedule does not raise any human rights issue. See Statement of Compatibility with Human Rights — Chapter 5, paragraphs 5.11 to 5.14.

Compliance cost impact:   Estimated one-off compliance cost of $2.8 million. No ongoing compliance cost impact following implementation.

Limited recourse borrowing arrangements

Schedule 4 amends the total superannuation balance rules to ensure that, in certain circumstances involving limited recourse borrowing arrangements, the total value of a superannuation fund’s assets is taken into account in working out individual members’ total superannuation balances.

Date of effect 1 July 2018.

Proposal announced :  This measure was originally announced in the 2017-18 Budget. Following consultation, the scope of the measure as announced was reduced.

Financial impact The measure is estimated to result in a gain to revenue of $1 million over the forward estimates period.

2017-18

2018-19

2019-20

2020-21

2021-22

-

..

..

..

$1m

- Nil

.. not zero but rounded to zero

Human rights implications :  This Schedule does not raise any human rights issue. See Statement of Compatibility with Human Rights — Chapter 5, paragraphs 5.15 to 5.18.

Compliance cost impact Estimated one-off compliance cost of $1million. No ongoing compliance cost impact following implementation.

 

 



Chapter 1          

Superannuation guarantee amnesty

Outline of chapter

1.1                   Schedule 1 provides for a one-off 12-month amnesty to encourage employers to self-correct historical SG non-compliance.

1.2                   This complements the Government’s package of reforms to improve future SG compliance, which were recently introduced as part of the Treasury Laws Amendment (2018 Measures No. 4) Bill 2018. The recent reforms will improve the visibility of SG payments to the ATO, introduce stronger penalties for non-compliance and ensure more reliable collection of liabilities for unpaid SG in the future.

1.3                   All legislative references in this chapter are to the SGAA 1992 unless otherwise stated.

Context of amendments

1.4                   The SG rules are set out in the SGAA 1992. These rules ensure that employees have a minimum level of superannuation contributions in respect of their employment. The rules achieve this by imposing a tax (the SG charge) on employers who fail to contribute a minimum percentage of their employees’ ordinary time earnings into superannuation. Avoiding a liability to this charge provides employers with an incentive to make contributions on behalf of their employees.

1.5                   Employers are liable to pay to the Commissioner an amount of SG charge equal to their ‘SG shortfall’ for a quarter, which is worked out by adding together the following amounts for the quarter:

•        the total of the employer’s individual SG shortfalls (which are amounts representing the amount by which an employer has fallen short of contributing the minimum percentage for a particular employee);

•        the employer’s nominal interest component, which is the amount of interest on the total of the employer’s individual SG shortfalls for the quarter calculated from the beginning of the relevant quarter until the date SG charge is payable; and

•        the employer’s administration component, which is $20 per employee in respect of whom the employer has an individual SG shortfall for the quarter.

1.6                   Generally, an employer can deduct from their assessable income contributions they make on behalf of their employees that reduce the employer’s SG shortfall. However, consistent with the treatment of other taxes, SG charge is not deductible. Late contributions that an employer has elected to offset against their SG charge liability are also not deductible.

1.7                   Failure to contribute a minimum percentage of their employee’s ordinary time earnings to a complying superannuation fund for the benefit of the employee by the required time under the SGAA 1992 can result in liability to pay the following amounts to the Commissioner:

•        SG charge (composed of the total of individual SG shortfalls, nominal interest, and the $20 per employee per quarter administration component - described above);

•        penalties (known as ‘Part 7 penalties’) for failing or refusing to provide a statement or information as required under the SGAA 1992, which can be up to 200 per cent of the amount of the underlying SG charge; and

•        general interest charge imposed where SG charge or Part 7 penalties are not paid by the due date.

1.8                   The SGAA 1992 includes rules to ensure that components of SG charge reflecting an individual employee’s SG entitlement collected from employers by the Commissioner and any related general interest charge on unpaid amounts of SG charge are applied for the employee’s benefit. For example, the Commissioner is generally required to pay to the relevant employee’s superannuation account the individual SG shortfall for the employee for the quarter, any nominal interest component for the quarter and any related general interest charge that has accrued at that time.

Summary of new law

1.9                   The amendments encourage employers to voluntarily disclose historical SG non-compliance and pay an employee’s full entitlement including the employee’s individual shortfall, nominal interest, and any related general interest charge on unpaid amounts of SG charge.

1.10                They achieve this outcome by providing a one-off 12-month amnesty to allow employers to claim tax deductions for payments of SG charge or contributions made during the amnesty period to offset SG charge, as well as have penalties and fees that may otherwise apply in relation to historical SG non-compliance reduced to nil.

1.11               In general terms, to qualify for the amnesty an employer must disclose to the Commissioner information related to an SG shortfall for a quarter that ends at least 28 days before the start of the 12-month amnesty period.

1.12               The Commissioner may notify an employer that they have ceased to qualify for the amnesty if the employer fails to pay, or enter into and comply with arrangements to pay, any SG charge imposed on the disclosed shortfall for the quarter. This means the employer will lose all benefits from the amnesty.

Comparison of key features of new law and current law

New law

Current law

Deductibility of payments of SG charge and contributions offset against SG charge

To the extent that SG charge is imposed in relation to SG shortfall qualifying for the beneficial treatment under the amnesty, payments in respect of that SG charge made during the amnesty period are deductible.

To the extent that contributions are offset against SG charge imposed in relation to SG shortfall qualifying for the beneficial treatment under the amnesty, contributions made during the amnesty period are deductible.

SG charge and contributions offset against SG charge are not deductible.

 

Administration component of SG charge

An employer is liable to pay SG charge equal to their SG shortfall.

However, where an employer qualifies for the amnesty, their SG shortfall for a quarter does not include an administrative component for employees in respect of whom the employer has an individual SG shortfall that was only identified because of a disclosure under the amnesty.

An employer is liable to pay SG charge equal to their SG shortfall.

An employer’s SG shortfall for a quarter includes an administration component of $20 per employee in respect of whom the employer has an individual SG shortfall for the quarter.



 

New law

Current law

Liability to pay penalties under Part 7

An employer’s liability to pay penalties calculated under Part 7 for a quarter is reduced by the extent to which the employer qualifies for the amnesty for the quarter.

 

An employer that fails or refuses to provide a statement or information as required under the SGAA 1992 may be liable for a penalty under Part 7. The maximum amount of penalty payable is equal to double the amount of SG charge payable by the employer for the relevant quarter.

Detailed explanation of new law

1.13               These amendments provide a one-off 12-month amnesty with reduced penalties and fees to encourage employers to disclose historical SG non-compliance and pay any SG charge imposed in relation to the disclosed SG shortfall. To further encourage payment of SG, the amnesty allows employers who qualify for the amnesty to claim tax deductions for payments of SG charge and contributions made to offset SG charge made during the amnesty period.

1.14               Specifically, an employer that qualifies for the amnesty in relation to their SG shortfall for a quarter:

•        has no administrative component in respect of employees in respect of whom the employer has an individual SG shortfall that was only identified because of a disclosure under the amnesty;

•        has no penalties under Part 7 in respect of amounts of SG shortfall that qualify for the amnesty; and

•        can deduct payments made in relation to SG charge imposed on the SG shortfall, or contributions that are offset against the SG charge, that are made during the amnesty period.

1.15               To further incentivise take-up, if the Commissioner identifies that an employer has an SG shortfall after the amnesty concludes, the Commissioner will take into account the employer’s ability to access the amnesty when determining any remission of the Part 7 penalty. The Commissioner must consider the particular circumstances of each case, however, in general a minimum penalty of 50 per cent would be applied to employers who could have come forward during the amnesty but did not do so. The Commissioner’s considerations for remission in cases following the amnesty will be outlined in ATO guidance materials.

Requirements for an employer to qualify for the amnesty in relation to historical amounts of SG shortfall

1.16               An employer qualifies for the beneficial treatment provided by the amnesty in relation to the employer’s SG shortfall for a quarter covered by the amnesty if:

•        during the amnesty period the employer discloses to the Commissioner, in the approved form, information that relates to the amount of SG shortfall for the first time; and

•        the Commissioner has not, at any time before the disclosure, informed the employer that the Commissioner is examining (or that the Commissioner intends to examine), the employer’s compliance with an obligation to pay SG charge for the quarter; and

•        the employer has not been disqualified from the beneficial treatment under the amnesty. [Schedule 1, item 13, subsections 74(1) and (4)]

1.17               However, if despite the disclosure, an employer would still have had an SG shortfall for the quarter, the employer’s SG shortfall is covered by the amnesty only to the extent that it resulted in the SG shortfall being increased. [Schedule 1, item 13, subsection 74(2)]

1.18               This reflects the fact that an employer has a single SG shortfall for a quarter. In some cases, an employer may have already been assessed as having an SG shortfall for a quarter prior to the amnesty. Where this occurs, it would be inappropriate for a disclosure that resulted in an employer having a greater amount of SG shortfall for the quarter obtaining the benefit of the amnesty in respect of the original amount of SG shortfall.

Disclosures must be made in the amnesty period

1.19               To qualify for the amnesty, a disclosure must be made during the amnesty period. [Schedule 1, item 13, paragraph 74(1)(a)]

1.20               The amnesty period is the period of 12 months that starts on the day that this Bill was introduced into the House of Representatives (being the time that the amnesty was first publically announced). [Schedule 1, item 13, subsection 74(3)]

Disclosure must relate to quarters covered by the amnesty

1.21               The beneficial treatment provided by the amnesty is available for a quarter that ends at least 28 days before the start of the amnesty period. [Schedule 1, item 13, paragraph 74(1)(b)]

1.22               This means that the beneficial treatment provided by the amnesty is available in relation to the quarter starting on 1 July 1992 (which is the day the Superannuation Guarantee Charge Act 1992 commenced) and all subsequent quarters until and including the quarter starting on 1 January 2018. An employer will not be able to benefit from the amnesty for SG shortfall relating to the quarter starting on 1 April 2018 or subsequent quarters.

1.23               This ensures that the amnesty addresses historical non-compliance and is not available for non-compliance that occurs after the amnesty is announced.

Examination of compliance with obligation to pay SG charge

1.24               For a disclosure in respect of a quarter to qualify for the amnesty, the Commissioner must not have, at any time before the disclosure, informed the employer that they are examining, or intend to examine, the employer’s compliance with their obligation to pay SG charge in relation to the quarter. [Schedule 1, item 13, paragraph 74(1)(c)]

1.25               This timing requirement reflects that the amnesty is only available to employers that come forward about their non-compliance and is not intended to provide protection for non-compliance identified through other ATO compliance activity.

1.26               For the purposes of these amendments, ‘examination' takes its ordinary meaning. The Australian Oxford Dictionary, 2004 Oxford University Press, Melbourne (the Australian Oxford Dictionary), defines 'examination' as meaning 'the act or an instance of examining'. 'Examine' is in turn defined in the Australian Oxford Dictionary as meaning to 'inquire into the nature or condition etc. of', 'look closely or analytically at'.

1.27               The Commissioner’s views on the meaning of ‘examination’ in the context of disclosures more generally is explained in the ATO’s ruling ‘MT 2012/3 Administrative penalties: voluntary disclosures’. That is, the term 'examination' is very broad and covers not only traditional audits the Commissioner undertakes to ascertain an entity's tax-related liability but any examination of an entity's affairs. A range of compliance activities undertaken by the Commissioner may involve an examination of an entity's affairs including reviews, audits, verification checks, record-keeping reviews/audits and other similar activities.

First time disclosure has occurred

1.28               To qualify for the amnesty, the disclosure must relate to an amount of SG shortfall that has not previously been disclosed to the Commissioner. [Schedule 1, item 13, subparagraph 74(1)(a)(ii)]

1.29               An employer that has come forward before the start of the amnesty period will not benefit from the amnesty by disclosing an amount of SG shortfall that has previously been disclosed to the Commissioner (that is, by disclosing an amount included in an existing SG charge assessment). These amendments are designed to provide employers with an incentive to come forward with information about historical underpayment of superannuation, rather than provide reduced penalties or charges for past disclosures made by an employer.

1.30               An employer may still qualify for beneficial treatment under the amnesty if the employer has previously made disclosures about their SG shortfall for a quarter but comes forward with information about additional amounts of SG shortfall for the quarter. This could be the case where an employer has previously lodged a SG statement for the quarter which understated the amount of SG shortfall. If the employer otherwise met the qualifying conditions of the amnesty, the employer could obtain beneficial treatment in relation to the additional matters disclosed under the amnesty.

Disclosure must be in the approved form

1.31               To qualify for the beneficial treatment under the amnesty, an employer must make the disclosure in the approved form. [Schedule 1, item 13, paragraph 74(1)(a)]

1.32               Requiring the disclosure to be in the approved form allows the Commissioner to specify the information and manner of providing the information that is necessary for the disclosure to be effective.

1.33               The approved form for the disclosure is expected to include a SG statement. Under the SGAA 1992, the first SG statement for a quarter has effect as an assessment of the employer’s SG shortfall for the relevant quarter and the SG charge payable on the shortfall.

Paying SG charge or making contributions to offset liability to SG charge

1.34               Generally, under the SGAA 1992, SG charge (imposed on SG shortfall disclosed under the amnesty) is due and payable on the day the SG statement is lodged. If an employer qualifies for the amnesty for a quarter, the SG charge for that quarter will comprise the total of individual shortfalls and the nominal interest.

1.35               Where an employer has the capacity to pay on the day they make the disclosure and does not have an existing SG charge assessment for the quarter, the employer may choose to make contributions (of the employee’s individual shortfall and nominal interest) directly into an employee’s superannuation account and elect to offset these amounts against their liability for SG charge in accordance with section 23A of the SGAA 1992.

1.36               Employers who have an existing SG charge assessment for the quarter, or are otherwise unable to contribute directly into their employee’s superannuation accounts, will need to pay the SG charge  (or amounts equal to the SG charge) to the Commissioner.

1.37               Employers must pay the components of the SG charge imposed on the disclosed amount that reflect their employees’ SG entitlements (individual SG shortfall for relevant employees and nominal interest), as well as any general interest charge imposed on overdue SG charge. This allows the Commissioner to deal with such amounts for the benefit of employees to ensure employees would still be paid their full SG entitlement.

1.38               Employers that have difficulty paying SG charge by the due date can negotiate with the Commissioner to pay the amount under a payment arrangement.

Disqualification for failing to pay SG charge or to enter into and comply with payment arrangement

1.39               The Commissioner may, by written notice, disqualify an employer from the beneficial treatment provided by the amnesty if the employer has failed to:

•        pay to the Commissioner amounts equivalent to any SG charge (imposed on the disclosed SG shortfall) on or before the day the SG charge becomes payable; or

•        enter into a payment arrangement in relation to that amount; or

•        comply with such a payment arrangement. [Schedule 1, item 13, subsection 74(5)]

1.40               The effect of such a notice is that the employer ceases to qualify, and is taken to have never qualified, for the amnesty in relation to the relevant amount of SG shortfall. [Schedule 1, item 13, subsection 74(4)]

1.41               In such cases, the Commissioner can unwind any benefits that have accrued to the employer under the amnesty by amending the assessments of the employer.

1.42               Requiring the Commissioner to issue a notice provides employers with certainty as to which quarters they cease to qualify for the amnesty.

1.43               For the purposes of working out whether the Commissioner may notify an employer that they have ceased to qualify for the amnesty, an employer is taken to have paid the SG charge that was disclosed under the amnesty if they have paid an amount equal to the amount of the SG charge that was disclosed. [Schedule 1, item 13, subsection 74(6)]

1.44               This ensures that employers that already had an outstanding SG charge debt prior to making a disclosure under the amnesty are not required to first clear that debt before having payments count for the purposes of the amnesty (which would otherwise be the case under the method for allocating payments under PSLA 2011/20 Payment and credit allocation). This approach ensures that employees who have been waiting longer for their unpaid superannuation will receive their unpaid superannuation first, but still provides an incentive for employers with an existing debt to come forward during the amnesty.

1.45               If an employer fully offsets their liability for SG charge by making contributions directly into an employee’s superannuation account (refer above), no SG charge will become payable. In this situation, the Commissioner will not have the ability to disqualify an employer from qualifying for the amnesty.

1.46               Employers who enter into a payment arrangement with the Commissioner will not cease to qualify for the amnesty provided that they comply with the terms of the arrangement. [Schedule 1, item 13, subparagraph 74(5)(a)(ii) and paragraph 74(5)(b) ]

Beneficial treatment available under the amnesty

1.47               An employer who has an amount of SG shortfall for a quarter that qualifies for the amnesty:

•        can claim deductions in respect of payments made in relation to SG charge and contributions that offset the charge to the extent the charge relates to the SG shortfall; and

•        does not have any additional administrative components in respect of the SG shortfall; and

•        is not liable to any Part 7 penalties for a failure to lodge an SG statement in respect of the shortfall by the time that they were required to do so under the SGAA 1992.

Deductibility of payments of SG charge and offsetting contributions

1.48               The amendments allow payments made in relation to SG charge imposed on SG shortfall disclosed under the amnesty to be deducted from an employer’s assessable income in accordance with the general deductibility rules in the ITAA 1997. The payments must be made during the 12-month amnesty period. [Schedule 1, items 1 and 2, subsections 26-95(1) and (2) of ITAA 1997]

1.49               The payments may be deducted whether or not the Commissioner applies the payment to satisfy an employer’s liability to pay the charge imposed on the SG shortfall that qualifies for the amnesty. [Schedule 1, item 2, paragraph 26-95(2)(b) of the ITAA 1997]

1.50               This ensures that employers that already had an outstanding SG charge debt prior to making a disclosure under the amnesty are able to claim deductions for payments they make even though the Commissioner will first apply their payments to clear their existing debt.

1.51               An employer may deduct payments made in relation to SG charge imposed on SG shortfall disclosed under the amnesty up to the amount of the charge. [Schedule 1, item 2, subsection 26-95(2) of the ITAA 1997]

1.52               This ensures that an employer that has negotiated a payment arrangement with the Commissioner is able to claim deductions for part payments up to the value of the total SG charge imposed on the SG shortfall disclosed under the amnesty.

1.53               Allowing such payments to be deductible provides an incentive for employers to voluntarily disclose historical underpayment of superannuation under the amnesty and pay SG charge to the Commissioner during the 12-month amnesty period.

1.54               The amendments also allow contributions that an employer has elected to offset against SG charge imposed on the SG shortfall disclosed in accordance with the amnesty to be deducted from an employer’s assessable income in accordance with the general deductibility rules in the ITAA 1997. The contributions must also be made during the 12-month amnesty period. [Schedule 1, items 3 and 5, subsections 290-95(1) and (2) of ITAA 1997]

1.55               This ensures commensurate benefits are provided for employers who contribute directly to their employees’ funds when disclosing under the amnesty to the benefits for those who make payments in relation to SG charge and leave it to the Commissioner to distribute the amounts to the relevant funds.

Administration component

1.56               An employer does not have an administration component included in their SG shortfall in respect of an amount of SG shortfall to the extent that the amount qualifies under the amnesty. [Schedule 1, items 10 and 11, subsections 32(1), (2) and (3)]

1.57               As the administration component is charged on an employee by employee basis, this rule prevents an employer from having additional administration components added to their SG shortfall for a quarter as a result of the disclosure.

1.58               However, if an employer already had an administration component in respect of an employee because of a previous assessment (for example, one that occurred prior to the amnesty), the amnesty does not affect the previous administration component.

Example 1.1- previous administration components

An employer with 100 employees for a quarter covered by the amnesty previously had individual SG shortfalls identified in respect of 40 of those employees for the quarter.

Prior to the amnesty, the employer’s SG shortfall (calculated in respect of the 40 employees) included an administration component for each of those employees.

During the amnesty, the employer discloses that they recently became aware of a small individual SG shortfall in respect of all 100 of their employees. For the original 40 employees, this amount was in addition to the individual SG shortfalls originally identified.

As this disclosure occurred under the amnesty, the employer does not have an administration component included in their (increased) SG shortfall for the quarter. However, the employer still has an administration component in respect of the original 40 employees.

Part 7 penalties

1.59               An employer is not liable to Part 7 penalties for a failure to provide an SG statement by the time they were required to do so in respect of an amount of SG shortfall that is covered by the amnesty. [Schedule 1, item 12, section 60]

1.60               Although the Commissioner already has the power to remit penalties under Part 7, legislating the exemption from such penalties provides employers with greater certainty about the result of making a disclosure under the amnesty.

1.61               As with the approach in respect of an employer’s administration component, the exemption from Part 7 penalties does not reduce any historical penalties that were imposed in respect of a previously assessed amount of SG charge. Instead, the protection provided under the amnesty in respect of penalties only applies in respect of any further amounts of Part 7 penalties that an employer would be liable to as a result of making a disclosure under the amnesty.

Consequential amendments

1.62               Schedule 1 makes consequential amendments to include a definition of ‘superannuation guarantee shortfall’ in subsection 995-1(1) of the ITAA 1997 and update a note in the ITAA 1997 so that it accurately reflects the law relating to the deductibility of SG charge. [Schedule 1, items 4 and 8, subsection 995-1(1) and note to section 290-95 of the ITAA 1997]

1.63               The Schedule also includes amendments to ensure employees are not disadvantaged as a result of the amnesty.

Streamlining process to ensure employees will not be disadvantaged

1.64               The amnesty may result in employers paying to the Commissioner SG charge which represents late payments of SG covering a number of years. The Commissioner must pay these amounts to an employee’s superannuation account for the employee’s benefit in accordance with the SGAA 1992 (refer above). These contributions would be considered concessional contributions and may cause employees to exceed their annual concessional contributions cap.

1.65               Employees may be disadvantaged by this. Generally, individuals are not subject to tax on their concessional contributions. However, concessional contributions in excess of the cap (‘excess concessional contributions’) are included in the individual’s assessable income. Further, the employee would be liable to pay an ‘excess concessional contributions charge’.

1.66               However, the ITAA 1997 provides the Commissioner with the discretion to make a determination, for the purposes of working out an individual’s excess concessional contributions for a financial year, disregarding concessional contributions or allocating them to another financial year. The Commissioner may only make a determination if the individual makes an application and the Commissioner considers that there are special circumstances and that making the determination is consistent with the object of Division 291 of the ITAA 1997.

1.67               Issuing such a determination would allow the Commissioner to ensure employees are not disadvantaged by contributions representing late SG payments made on their behalf as a result of the amnesty.

1.68               These amendments provide an exception to the requirement for an individual to apply for the Commissioner to make a determination to disregard or reallocate a contribution. The exception applies where the Commissioner has made contributions on behalf of the individual and the contributions represent amounts recovered under the amnesty from the individual’s employer. [Schedule 1, item 6, subsection 291-465(2A)  of ITAA 1997]

1.69               The amendments streamline the exercise of the Commissioner’s discretion to make a determination by allowing the Commissioner to make such a determination on the Commissioner’s own initiative in conjunction with making the contribution on behalf of the employer.

1.70               The exception does not apply where the employer has made the contributions directly to an employee’s fund and has used those contributions to offset their SG charge liability.

1.71               This reflects that in such cases, the potential breach of an individual’s cap has been caused by the employer rather than the Commissioner, and the Commissioner’s visibility of the actual contributions is reliant upon third-party reporting by funds.

1.72               Such individuals can still request that the Commissioner exercise the discretion under the existing power.

Ensuring employees will not be liable for additional tax under Division 293

1.73                Generally, individuals are not subject to tax on their concessional contributions. However, if the sum of an individual’s income for surcharge purposes less reportable superannuation contributions (broadly their taxable income disregarding investment losses, plus any reportable fringe benefits) and their low tax contributions (broadly their concessional contributions) exceeds $250,000, the individual must pay tax at a rate of 15 per cent on the lesser of the amount by which that sum exceeds $250,000 or the individual’s low tax contributions under Division 293 of the ITAA 1997.

1.74               Currently, an employee’s ‘low tax contributed amounts’ would include any contributions made by the Commissioner for their benefit representing late SG payments as well as late SG contributions made by their employer to offset their liability to pay SG charge.

1.75               These amendments ensure that such contributions made as a result of the amnesty are excluded from the calculation of an employee’s ‘low tax contributed amounts’. [Schedule 1, item 7, paragraphs 29-30(4)(c) and (d) of ITAA 1997]

1.76               This will ensure that such contributions do not attract additional tax under Division 293 or cause other low tax contributed amounts to attract additional tax under Division 293.

Application and transitional provisions

1.77               Schedule 1 includes amendments to the SGAA 1992 relating to qualifying for the amnesty and providing that an employer’s administrative component of SG shortfall and penalties under Part 7 of that Act are reduced in respect of amounts qualifying for the amnesty. These amendments commence on the day that this Bill was introduced into the House of Representatives. [Subsection 2(1) (table item 2) of Treasury Laws Amendment (2018 Superannuation Measures No. 1) Act 2018]

1.78               An employer may only qualify for the amnesty in relation to disclosures that are made during the 12-month amnesty period and the disclosures must relate to certain historical quarters (refer above). [Schedule 1, item 13, paragraph 74(1)(b) and subsection 74(3)]

1.79               The amendments relating to the deductibility of payments of SG charge and offsetting contributions apply in relation to the 2017-18 income year and later income years. However, to be deducible the relevant payment or contribution must also be made during the 12-month amnesty period. [Schedule 1, items 2, 5 and 9, sections 26-95 and 290-95 of the ITAA 1997]

1.80               The consequential amendments to ensure employees are not disadvantaged as a result of the amnesty and to add a definition of superannuation guarantee shortfall in the ITAA 1997 (refer above) apply in relation to the 2017-18 income year and later income years. This ensures that:

•        the exercise of the Commissioner’s discretion to make a determination to disregard concessional contributions or allocate them to another financial year can be streamlined for contributions made by the Commissioner in the 2017-18 income year and later years; and

•        contributions made by the Commissioner and late contributions made by an employer to offset their liability to pay SG charge will not attract additional tax under Division 293 of the ITAA 1997 for the 2017-18 income year and later years. [Schedule 1, item 9]

1.81               Whilst the amendments apply to non-compliance of superannuation guarantee amounts in past years, the amendments are wholly beneficial for taxpayers. The amendments allow employers that qualify for the beneficial treatment provided by the amnesty to claim tax deductibility of their SG charge payments (and offsetting contributions) as well as have penalties and fees that may otherwise apply reduced. Under the amnesty, an employer must still pay to the Commissioner (or contribute to the employee’s superannuation account for the employee’s benefit) the employee’s SG entitlement in full. Therefore, the amendments will not affect the quantum of an employee’s entitlement to have unpaid SG amounts recovered by the Commissioner from a non-compliant employer applied for the employee’s benefit irrespective of whether or not the employer qualifies for the amnesty.



Outline of chapter

2.1                   Schedule 2 amends the SGAA 1992 to allow individuals to avoid unintentionally breaching their concessional contributions cap when they receive superannuation contributions from multiple employers. Instead of receiving contributions into superannuation, an employee may apply to the Commissioner to opt out of the SG regime in respect of an employer and negotiate with the employer to receive additional cash or non-cash remuneration.

2.2                   The amendments achieve this outcome by allowing certain employees with multiple employers to apply to the Commissioner for an ‘employer shortfall exemption certificate’, which prevents their employer from having a superannuation guarantee shortfall if they do not make superannuation contributions for a period.

2.3                   The amendments provide a framework for the issuing of a certificate, including the conditions which must be satisfied before the Commissioner may issue a certificate.

2.4                   All legislative references in this Chapter are to the SGAA 1992 unless otherwise stated.

Context of amendments

2.5                   In the 2018-19 Budget, the Government announced that from 1 July 2018, individuals with multiple employers would be able to nominate to opt out of the SG system in respect of their wages from certain employers. The opt-out means that eligible individuals can avoid inadvertently breaching their annual concessional contributions cap as a result of multiple employers making contributions into superannuation on their behalf. The amendments in this Schedule implement this measure by providing a framework for individuals to apply to the Commissioner for an employer shortfall exemption certificate, which prevents their employer from having a SG shortfall if they do not make superannuation contributions for a period.

2.6                   The SG rules ensure that employees have a minimum level of superannuation contributions in respect of their employment. The rules achieve this by imposing a tax (the SG charge) on employers who fail to contribute a minimum percentage of their employees’ ordinary time earnings into superannuation. Avoiding a liability to this charge provides employers with an incentive to make contributions on behalf of their employees.

2.7                   Employers are liable to pay to the Commissioner SG charge equal to their SG shortfall for a quarter. SG shortfall consists of the total of the employer’s individual SG shortfalls for each employee, nominal interest component and administration component for the quarter.

2.8                   An employer’s individual SG shortfall for an employee for a quarter is calculated by reference to a charge percentage and the total salary or wages paid by the employer to the employee for the quarter.

2.9                   Contributions that an employer makes in respect of their employees reduce the charge percentage for the employer. This reduces the employer’s SG shortfall for a quarter and corresponding liability for SG charge.

2.10               The SG rules include a ‘maximum contribution base’ beyond which an employer no longer needs to make superannuation contributions for an employee for a quarter to avoid liability for SG charge. This operates as a ceiling, limiting the amount of superannuation support that an employer is required to provide for an employee for a quarter. This is achieved by excluding amounts of salary or wages that exceed the maximum contribution base from the calculation of individual SG shortfall.

2.11               The rules for working out the maximum contribution base for a quarter depend upon the year in which the quarter falls. For a quarter in the 2001-02 financial year, or later years, the maximum contribution base is an amount indexed annually (starting from a base of $27,510 in 2001-02). For a quarter in the 2017-18 financial year or any later year, the maximum contribution base is instead worked out by reference to a charge percentage and the concessional contributions cap if that amount is less than the indexed amount for the quarter. This calculation broadly aims to prevent employer contributions from causing an employee to exceed their annual concessional contributions cap.

2.12               However, the maximum contribution base for an employee applies to each employer. If an employee has multiple employers, each employer must make superannuation contributions on the earnings they pay to the employee up to the maximum contribution base in order to avoid having an SG shortfall. This occurs even where the employee earns less than the maximum contribution base for each of their employers, but their income in total exceeds the maximum contribution base.

2.13               Individuals with multiple employers may inadvertently exceed their annual concessional contributions cap. Concessional contributions generally provide the most favourable superannuation treatment. When a concessional contribution is made by an employer, the employer can claim a deduction for making the contribution, and the contribution is taxed at the concessional rate of 15 per cent by the superannuation entity that receives it.

2.14               Where an individual’s contributions (including those made by their employer) exceed their annual concessional contributions cap, the excess is their ‘excess concessional contributions’ for the financial year. An individual’s excess concessional contributions are included in the individual’s assessable income for the year and taxed at marginal rates less a 15 per cent tax offset (representing the tax paid in the superannuation fund). They are also subject to a charge based on the shortfall interest charge to cover the resultant late payment of tax.

2.15               Individuals can choose to retain excess concessional contributions in superannuation as a non-concessional contribution or withdraw 85 per cent of the excess concessional contribution. 

Summary of new law

2.16               The amendments allow certain individuals with multiple employers to apply to the Commissioner for an employer shortfall exemption certificate. Such certificates prevent an employer from having an SG shortfall in relation to the employee for a quarter.

2.17               The amendments provide a framework for the issuing of a certificate, including the conditions which must be satisfied before the Commissioner may issue a certificate.

Comparison of key features of new law and current law

New law

Current law

From 1 July 2018, individuals with multiple employers can apply for the Commissioner to issue them with one or more employer shortfall exemption certificates.

An employer covered by an employer shortfall exemption certificate has a maximum contribution base of nil in relation to an employee for the quarter to which the certificate relates.

If an individual has multiple employers, each employer must make superannuation contributions on the earnings they pay to the employee up to the maximum contribution base in order to avoid having an SG shortfall.

 

Detailed explanation of new law

2.18               The Schedule amends the SGAA 1992 to ensure that an employer covered by an ‘employer shortfall exemption certificate’ issued by the Commissioner will not be liable for SG charge (or face other consequences under the SGAA 1992) if they do not make contributions on behalf of their employee for a quarter covered by a certificate.

2.19               The amendments insert new provisions in the SGAA 1992 which set out when an individual may apply for an employer shortfall exemption certificate, the conditions that must be satisfied before the Commissioner may issue an employer shortfall exemption certificate and the Commissioner’s obligations relating to making a decision to issue or refuse to issue a certificate.

Effect of employer shortfall exemption certificate

2.20               An employer’s maximum contribution base for an employee for a quarter is nil if the employer is covered by an employer shortfall exemption certificate issued by the Commissioner in relation to the employee for that quarter. [Schedule 2, item 2, section 19AA]

2.21               This means the total salary or wages paid by the employer to the employee for the quarter is taken to be nil when calculating the employer’s individual SG shortfall for the employee for the quarter. The effect of this is that the employer will not be liable for SG charge (or face other consequences under the SGAA 1992) if they do not make contributions on behalf of the employee for the quarter.

2.22               An employer shortfall exemption certificate does not prevent an employer from making contributions into superannuation on behalf of the employee. The effect of the certificate is only to remove the consequences of failing to make any contributions for the quarter covered by the certificate. This means an employer may choose to disregard a certificate and continue to make contributions. For example, this may be relevant where an employee and employer do not reach agreement on the terms of an alternative remuneration package for the relevant quarter, or if there has not been enough time for an employer to adjust payroll or other business software to discontinue contributions for the employee.

2.23               Once an employer shortfall exemption certificate has been issued, the Commissioner may not vary or revoke the certificate. [Schedule 2, item 2, subsection 19AB(8]

2.24               This provides certainty for employers that if a certificate has been issued for a quarter, the employer will not be liable for SG charge (or face other consequences under the SGAA 1992) if they do not make contributions on behalf of the employee for the quarter. This certainty minimises the administrative costs for employers associated with arranging their affairs in respect of the SG and allows the employer to agree to an alternative remuneration package with their employee on the basis of circumstances that cannot later be withdrawn unilaterally to the employer’s disadvantage. 

2.25               This does not preclude an employee and employer coming to an agreement to recommence superannuation contributions for the employee at any point during the quarter covered by an employer shortfall exemption certificate. For example, this may be relevant where an employee’s circumstances change and they no longer expect to exceed their concessional contributions cap.

2.26               However, as a certificate cannot be varied or revoked once issued, there is no legislative mechanism for an employer to be forced back into the SG framework in respect of the employee for the quarter covered by a certificate. This is appropriate as employees on higher incomes (such as those that are likely to breach their concessional contributions cap through employer contributions) are likely to be in a strong bargaining position with their employers, are able to safeguard their own interests and have voluntarily opted out of SG payments.

Conditions for issuing an employer shortfall exemption certificate

2.27               The Commissioner may issue an employer shortfall exemption certificate in relation to a person that has made an application to the Commissioner (in the approved form) and their employer for a quarter if all of the following conditions are satisfied:

•        the Commissioner considers that, disregarding the effect of issuing the certificate, the person is likely to exceed their concessional contributions cap for the financial year that includes the relevant quarter;

•        the Commissioner is satisfied after issuing the certificate, the employee will have at least one employer that would either have an individual SG shortfall in relation to the employee, or have such a shortfall if they did not make any contributions for the benefit of the employee;

•         the Commissioner considers that it is appropriate to issue the certificate in the circumstances.

[Schedule 2, item 2, section 19AB]

Application from employee

2.28               The Commissioner can only issue an employer shortfall exemption certificate at the request of the person who is the employee to be covered by the certificate. [Schedule 2, item 2, subsection 19AB(1)]

2.29               The Commissioner cannot issue an employer shortfall exemption certificate at the request of the individual’s employer or on the Commissioner’s own initiative.

2.30               The intent is to provide a mechanism for partially opting out of the SG system, initiated by employees with multiple employers who are likely to breach their annual concessional contributions cap. This allows those employees to instead choose to negotiate with their employer to receive additional cash or non-cash remuneration. There is no requirement to evidence that the foregone contributions have actually been substituted for higher wages. This is on the basis that employees with higher incomes (that is, those who are likely to breach their concessional contributions cap through employer contributions) are likely to be in a strong bargaining position with their employers and have voluntarily opted out of SG payments.

Employee must be likely to have excess concessional contributions

2.31               The Commissioner may only issue an employer shortfall exemption certificate if the Commissioner is satisfied that if the certificate is not issued the employee is likely to have excess concessional contributions for the financial year (whether or not issuing the certificate would prevent that result). [Schedule 2, item 2, paragraph 19AB(3)(a)]

2.32               This requirement ensures that employer shortfall exemption certificates target those employees who are likely to inadvertently breach their concessional contributions cap through employer contributions. In reaching a view on this issue, the Commissioner may rely on any information including past tax return data, single touch payroll reporting data and information provided in the employee’s application to make this assessment.

2.33               When considering this matter, the Commissioner must disregard the effect of the certificate under consideration, as the certificate will allow an employer to reduce the contributions they make in respect of the employee. It is not necessary for the Commissioner to be satisfied that issuing the particular certificate will prevent the employee having excess concessional contributions for the financial year.

2.34               The Commissioner should still consider the effect of any other employer shortfall exemption certificates the Commissioner has issued or is proposing to issue in relation to the employee for the financial year. [Schedule 2, item 2, subsection 19AB(4)]

Employee must still be receiving contributions from another employer

2.35               The Commissioner must be satisfied that after issuing the employer shortfall exemption certificate, the employee will have at least one employer that would either have an individual SG shortfall in relation to the employee or have such a shortfall if they did not make any contributions for the benefit of the employee. [Schedule 2, item 2, paragraph 19AB(3)(b)]

2.36               The Commissioner may issue multiple certificates in relation to a single employee, each certificate covering a different employer. However, at least one employer must still be required to make contributions for the benefit of the employee in order to avoid liability for SG charge. This ensures that an employee will still receive a minimum level of contributions for the financial year.

2.37               When considering this matter, the Commissioner must have regard to the effect of any other employer shortfall exemption certificates the Commissioner has issued or is proposing to issue in relation to the employee for the financial year. [Schedule 2, item 2, subsection 19AB(5)]

2.38               This is because if a certificate has been issued in relation to another employer of the employee for the same quarter, that employer will not be required to make contributions for the benefit of the employee in order to avoid liability for SG charge. 

Appropriate to issue the employer shortfall exemption certificate

2.39               The Commissioner must consider that it is appropriate to issue the employer shortfall exemption certificate in the circumstances. [Schedule 2, item 2, paragraph 19AB(3)(c)]

2.40               In determining whether it is appropriate to issue an employer shortfall exemption certificate, the Commissioner may have regard to the effect that issuing a certificate is expected to have on an individual’s concessional contributions for a financial year, as well as any other matter that the Commissioner considers relevant. [Schedule 2, item 2, subsection 19AB(6)]

2.41               These requirements ensure that the Commissioner has specific regard to whether the combination of certificates the applicant has applied for is the most appropriate (having regard to the likely effect on their concessional contributions). It may be appropriate for the Commissioner to deny an application for an employer shortfall exemption certificate where a person has applied for a certificate that would reduce their contributions by a substantially larger amount than is necessary, relative to another possible certificate or where the Commissioner has already issued a certificate for another quarter in the same financial year. The Commissioner would also have regard to any circumstances in which an individual has engaged in behaviour that artificially enables them to apply for a certificate.

Applying for employer shortfall exemption certificates

2.42               A person may make an application to the Commissioner, requesting that the Commissioner issue an employer shortfall exemption certificate in respect of their employer for a quarter in a financial year.  An application may only be made in respect of an employer of the person at the time the application is made. That is, an application cannot be made in respect of a prospective employer.  [Schedule 2, item 2, paragraph 19AB(2)(b) and subsection 19AB(1)]

2.43               The application must be lodged with the Commissioner in the approved form. [Schedule 2, item 2, paragraph 19AB(2)(a)]

2.44               The Commissioner may rely on subsection 388-50(2) of Schedule 1 to the TAA 1953 to combine in the same approved form more than one application. This allows employees to request, through a single application, separate certificates for each employer and quarter that they are seeking a certificate in relation to. This minimises administrative costs associated with obtaining certificates.

2.45               Requiring the application to be lodged in the approved form allows the Commissioner to seek evidence of things that the Commissioner needs to be satisfied of, before issuing the certificate (refer above).

2.46               The due date for lodging an application is 60 days before the first day of the quarter to which the application relates. [Schedule 2, item 2, paragraph 19AB(2)(c)]

2.47               However, as the application must be lodged in the approved form, the Commissioner has the discretion to defer to due date for lodging the application under section 388-55 of Schedule 1 to the TAA 1953.

2.48               It is expected that for the first quarter of the 2018-19 financial year, the Commissioner will defer the due date for all applications to allow employees time to apply for an exemption following the commencement of these amendments.

Commissioner’s decision to issue or refuse to issue an employer shortfall exemption certificate

2.49               The Commissioner must provide written notice advising of a decision to issue an employer shortfall exemption certificate to:

•        the employee  that made the application; and

•        the employer that is covered by the certificate.

[Schedule 2, item 2, subsection 19AC(1)]

2.50               Requiring that the Commissioner notify an employer covered by the certificate (rather than leaving it to an employee) provides greater certainty for employers of the authenticity of the certificate.

2.51               If the Commissioner decides to issue an employer shortfall exemption certificate, the Commissioner must specify in the notice the following matters that are covered by the certificate:

•        the employer;

•        the employee; and

•        the quarter.

[Schedule 2, item 2, subsection 19AC(2)]

2.52               Issuing a certificate involves providing it to the employee. The Commissioner may combine one or more certificates covering the same employer and employee, such that a single certificate covers multiple quarters in a financial year (see section 990-5 of Schedule 1 to the TAA 1953) .

2.53               Where the Commissioner refuses to issue a certificate, the Commissioner must still notify the employee of the decision, but is not required to notify their employer. [Schedule 2, item 2, subsection 19AC(3)]

2.54               If the Commissioner fails to notify the employee of the Commissioner’s decision within 60 days of the lodgement of the application, the Commissioner will be taken to have refused the application. [Schedule 2, item 2, subsection 19AC(4)]

2.55               A person who is dissatisfied with the Commissioner’s decision to issue or refuse to issue an employer shortfall exemption certificate may object to the decision in the manner set out in Part IVC of the TAA 1953. This ensures that the standard objection processes that apply for tax administration matters apply to such decisions. [Schedule 2, item 2, subsection 19AB(7)]

2.56               The amendments also make it clear that an employer shortfall exemption certificate is not a legislative instrument. [Schedule 2, item 2, subsection 19AB(9)]

2.57               This provision is included to assist readers and does not change the general character of an employer shortfall exemption certificate (which is not a legislative instrument within the meaning of subsection 8(1) of the Legislation Act 2003).

2.58               Similarly, a notice that is provided by the Commissioner to issue or refuse to issue an employer shortfall exemption certificate is not a legislative instrument. No further clarification about this position is required as part of these amendments because this is already provided through the existing exemption in item 18 of the table in Subsection 6(1) of the Legislation (Exemption and other Matters) Regulation 2015 .

Consequential amendments

2.59               Schedule 2 inserts the definition of ‘employer shortfall exemption certificate’ into the list of defined terms in subsection 6(1) and inserts a note to assist readers of the legislation. [Schedule 2, items 1 and 2, subsection 6(1) and note to subsection 19AA(2)]

2.60               Schedule 2 also makes an amendment to ensure that the decisions of the Commissioner to issue or refuse to issue an employer shortfall exemption certificate are exempt from the operation of the Administrative Decisions (Judicial Review) Act 1977 . [Schedule 2, item 4, paragraph (gae) of Schedule 1 to the Administrative Decisions (Judicial Review) Act 1977]

2.61               This amendment would align the judicial review processes available for a decision to issue or refuse to issue an employer shortfall exemption certificate with those available for other taxation decisions by the Commissioner. Taxpayers are provided with full review rights under Part IVC of the TAA 1953 which is a well-established and comprehensive review scheme for taxation decisions. Part IVC of the TAA 1953 review is equally as accessible and effective as review under the Administrative Decisions (Judicial Review) Act 1977 .

Application provisions

2.62               The amendments apply in relation to quarters starting on or after 1 July 2018. That is, the amendments will allow the Commissioner to issue an employer shortfall exemption certificate covering a quarter starting on or after 1 July 2018 and will alter the maximum contribution base rules for such quarters. [Schedule 2, item 3]

2.63               If the Act commences after 1 July 2018, affected employers and employees will not be disadvantaged, as the measure is voluntary for both parties. An employee may choose to apply for a certificate in relation to their employer. An employer may choose to disregard a certificate and continue to make contributions for their employee (the only consequence of having a certificate is that the employer will not need to make such contributions to avoid liability for SG charge).



Outline of chapter

3.1                   The amendments in Schedule 3 ensure that the non-arm’s length income rules for superannuation entities apply in situations where a superannuation entity incurs non-arm’s length expenses in gaining or producing the income.

3.2                   All legislative references in this Chapter are to the ITAA 1997 unless otherwise stated.

Context of amendments

3.3                   The purpose of the non-arm’s length income provisions is to prevent the inflating of superannuation fund earnings through non-arm’s length dealings, for example, schemes involving non-commercial arrangements that stream income to the superannuation fund. The strategy is used by some individuals to increase superannuation savings in a way that is not caught by the concessional contributions cap and non-concessional contributions cap (contribution caps).

3.4                   The non-arm’s length income provisions contained in section 295-550 are essentially a re-write of the former provisions in section 273 of the ITAA 1936, the purpose of which was stated in the Explanatory Memorandum to the Superannuation Legislation Amendment Act (No.2) 1999

to prevent income from being unduly diverted into superannuation entities as a means of sheltering that income from the normal rates of tax applying to other entities, particularly the marginal rates applying to individual taxpayers.

3.5                   The changes introduced by the Treasury Laws Amendment (Fair and Sustainable Superannuation) Act 2016 lowered the annual contributions cap and threshold at which high income earners pay Division 293 tax on their concessionally taxed contributions. This increases the incentive to engage in arrangements that have the effect of circumventing these restrictions upon the transfer of wealth into superannuation.

Operation of existing law

Summary

3.6                   The purpose of the non-arm’s length income provisions is to prevent the inflating of superannuation fund earnings through non-arm’s length dealings.

3.7                   The concept of ‘non-arm’s length’ takes its ordinary meaning. In broad terms, the concept is interpreted as relating to transactions in which individuals or entities are not dealing with each other on a commercial, unrelated party basis. Parties do not have to be related to deal with each other on non-arm’s length terms. Benefits they or others receive due to the transaction are considered relevant in determining whether a transaction is on arm’s length, unrelated party terms.

3.8                   The taxable income of a superannuation entity is generally taxed at 15 per cent. However, the non-arm’s length component is taxed at the top marginal rate. This ensures that income derived from a transaction that is not on unrelated party, commercial terms does not receive concessional treatment in superannuation.

3.9                   There may be a technical deficiency in the non-arm’s length income provisions whereby non-arm’s length expenses (including where no expenses are charged) result in income not being treated as non-arm’s length income as intended. The amendments seek to remove any ambiguity in this respect and ensure that superannuation entities cannot circumvent the provisions by entering into schemes with non-arm’s length expenditure (including where they do not charge expenses). 

Detailed explanation

3.10               The taxable income of a complying superannuation fund, complying approved deposit fund or pooled superannuation trust (together, complying superannuation entities as defined in subsection 995-1(1)) is made up of two components — a low tax component which is taxed at 15 per cent and a non-arm’s length component which is taxed at the top marginal rate.

3.11               The non-arm’s length component for an income year is the amount of the fund’s non-arm’s length income less any deductions to the extent that they are attributable to that income (subsection 295-545(2)).

3.12               The low tax component of the fund’s taxable income is the amount of the fund’s taxable income remaining after deducting the non-arm’s length component from its total taxable income (subsection 295-545(3)).

Non-arm’s length income of superannuation entities

3.13               There are several categories of non-arm’s length income, including:

•        ordinary or statutory income derived from a scheme where the parties are not dealing with each other at arm’s length and the amount of the income is greater than what it would have been had the parties been dealing at arm’s length in relation to the scheme (subsection 295-550(1)).

The other types of non-arm’s length income are:

•        private company dividends (including income attributable to such dividends) unless the amount is consistent with an arm’s length dealing (subsection 295-550(2)); and

•        trust distributions:

-       income derived as a beneficiary of a trust, other than because of holding a fixed entitlement (that is, discretionary trust distributions) (subsection 295-550(4)), and

-       income derived as a beneficiary of a trust through holding a fixed entitlement to the income of the trust where the fund acquired the entitlement under a scheme, or the income was derived under a scheme, the parties to which were not dealing with each other at arm’s length, and the amount of the income is more than what might have been expected to derive if those parties had been dealing with each other at arm’s length (subsection 295-550(5)).

Existence of a scheme, parties and dealings

3.14               In order for the non-arm’s length income provisions relating to ordinary and statutory income to apply, the non-arm’s length income must have been derived from a scheme, in relation to which the parties were not dealing with each other at arm’s length.

3.15               A ‘scheme’ is broadly defined in subsection 995-1(1) to cover a range of transactions and formal or informal arrangements. While a scheme can be undertaken by a single party, the non-arm’s length income rules require dealings between at least two parties, or a party acting in more than one capacity, because of the requirement that the parties to a scheme have not dealt with one another on an arm’s length basis.

Amount of income

3.16               The legislation requires the identification of a specific amount of ordinary or statutory income that is non-arm’s length income. This ensures that the consequences of an amount of income being non-arm’s length income are restricted to that amount of income and any related deductions.

3.17               As stated above, non-arm’s length income can be ordinary or statutory income. Statutory income includes amounts such as net capital gains or amounts obtained as a refund of franking credits by virtue of the application of the tax offset for imputation credits attaching to franked distributions.

3.18               There may be a technical deficiency in Subdivision 295-H, such that its operation in relation to non-arm’s length expenses is ambiguous. These amendments remove any such ambiguity.

3.19               For example, in cases where a superannuation entity acquires assets at less than market value (through a scheme entered into on non-arm’s length terms), it may not have been clear whether the ordinary and statutory income from these assets falls within the scope of the Subdivision in all cases.

3.20               Similarly, the application of paragraphs 295-550(1)(b) and 295-550(5)(b) may be ambiguous where expenses incurred by a superannuation entity in respect of an asset are not on arm’s length terms, but the amount of ordinary income or statutory income from the scheme is the same as might be expected had the dealing been at arm’s length. This may be the case, for example, where real property is acquired under a limited recourse borrowing arrangement and where the rent derived under the scheme is at market rates but the interest paid on the loan is not.

3.21               Finally, the current law may not apply to net capital gains in line with the policy intent of Subdivision 295-H. For example, a fund acquires an asset at less than its market value through non-arm’s length dealings and then disposes of the asset for market value consideration. The resulting net capital gain may arguably be the same as the gain that would have resulted had the parties been dealing with each other at arm’s length when the asset was acquired, due to the operation of the cost base market value substitution rules in section 112-20. This means that the current non-arm’s length income rules may have no effect, even though the transaction diverts more wealth into the concessionally taxed superannuation entity than would have been possible had the relevant dealings been at arm’s length. 

Summary of new law

3.22               This Bill clarifies the operation of Subdivision 295-H to ensure that complying superannuation entities cannot circumvent the non-arm’s length income rules by entering into schemes involving non-arm’s length expenditure (including where expenses are not incurred).

3.23               The framework for the new non-arm’s length income rules remains broadly the same:

•        there must be a scheme; and

•        the parties to the scheme must incur less (or nil) expenditure than would otherwise be expected if the parties were dealing with each other on an arm’s length basis  in relation to the scheme.

3.24               Expenses may be of a revenue or capital nature, in the same way that non-arm’s length income may be statutory or ordinary income.

Comparison of key features of new law and current law

New law

Current law

Non-arm’s length expenses (whether revenue or capital in nature) incurred by a superannuation entity in gaining or producing assessable income result in such income being included in the entity’s non-arm’s length component (non-arm’s length component). This means the income will be taxed at the top marginal rate.

It is not clear whether non-arm’s length expenses (whether revenue or capital in nature) incurred by a superannuation entity in gaining or producing assessable income result in such income being included in the entity’s non-arm’s length component. Accordingly, such income may be taxed at the concessional rate for superannuation entities.

Where the right to income from a trust through a fixed entitlement was acquired on a non-arm’s length basis, the income is included in a superannuation entity’s non-arm’s length component and taxed at the top marginal rate.

Where the right to income from a trust through a fixed entitlement was acquired on a non-arm’s length basis, it is not clear whether that income is included in a superannuation entity’s non-arm’s length component. Accordingly, such income may be taxed at the concessional rate for superannuation entities.

Detailed explanation of new law

Non-arm’s length expenses of superannuation entities

3.25               The amendments remove any ambiguity about how Subdivision 295-H applies to income derived from schemes where the superannuation entity has incurred non-arm’s length expenditure.

3.26               A new provision is added to ensure that a superannuation entity’s non-arm’s length income includes income where expenditure incurred in gaining or producing it was not an arm’s length expense. This includes where no expense was incurred (but might be expected to have been incurred if the transaction were on arm’s length terms). [Schedule 3, item 1, paragraphs 295-550(1)(b) and (c)]

3.27               While subsection 295-550(1) has been restructured as part of the amendments, the restructure does not affect the application of the provision to income that would have been captured as non-arm’s length income prior to the amendments.

3.28               Specifically, the scheme requirement formerly located in paragraph 295-550(1)(a) is now included in the chapeau to the subsection, and the former requirement that an amount is non-arm’s length income if it is more than the amount the entity might have derived on an arm’s length basis in paragraph 295-550(1)(b) is now contained in paragraph 295-550(1)(a). [Schedule 3, item 1, paragraph 295-550(1)(a)]

Example 3.1 - non-arm’s length expenses of a superannuation entity

An SMSF acquired a commercial property from a third party at its market value of $1,000,000 on 1 July 2015.

The SMSF derives rental income of $1,500 per week from the property ($78,000 per annum).

The SMSF financed the purchase of the property under limited recourse borrowing arrangements from a related party on terms consistent with section 67A of the SIS Act.

The limited recourse borrowing arrangements were entered into on terms that include no interest, no repayments until the end of the 25 year term and borrowing of the full purchase price of the commercial real property (i.e. 100 per cent gearing).

The SMSF was in a financial position to enter into limited recourse borrowing arrangements on commercial terms with an interest rate of approximately 5.8 per cent.

The SMSF has not incurred expenses that it might have been expected to incur in an arm’s length dealing in deriving the rental income. As such, the income that it derived from the non-arm’s length scheme is non-arm’s length income. The rental income of $78,000 (less deductions attributable to the income) therefore forms part of the SMSF’s non-arm’s length component and is taxed at the highest marginal rate. However, there will be no deduction for interest, which under the scheme was nil.

Non-arm’s length interest on borrowings to acquire an asset will result in any eventual capital gain on disposal of the rental property being treated as non-arm’s length income.

Expenses relating to a superannuation entity as beneficiary of a trust

3.29               When a superannuation entity holds a fixed entitlement to the income of a trust and derives income as a beneficiary of that trust, non-arm’s length expenses incurred in acquiring the entitlement or in gaining or producing the income result in the income forming part of the superannuation entity’s non-arm’s length component. [Schedule 3, item 2, paragraphs 295-550(5)(b) and (c)]

3.30               These changes ensure that the amendments apply consistently between the general non-arm’s length income rules for the income directly derived by a superannuation entity and where the superannuation entity derives income through its fixed entitlement to the income of a trust.

Example 3.2 - unit trust

A retail superannuation fund trustee acquires units in a unit trust as a beneficiary with a fixed entitlement, but pays a substantially lower amount for the units than stated in the promotional material for the unit trust due to a scheme the fund has entered into with the broker.

In acquiring the entitlement to a share of the unit trust’s earnings, the retail superannuation fund trustee did not incur expenditure it might have been expected to incur if dealing at arm’s length with the broker in purchasing the units.

The income derived from the units would have been the same whether or not they were acquired under an arm’s length transaction.

The amount earned is non-arm’s length income of the retail superannuation fund.

Any net capital gain made on disposal of the units may also be non-arm’s length income due to the amendments to subsection 295-550(1).

Non-arm’s length schemes and internal arrangements

3.31               For the non-arm’s length income rules to apply to a scheme, it is necessary that the parties to the scheme were not dealing with each other at arm’s length. [Schedule 3, items 1 and 2, subsections 295-550(1) and (5)]

3.32               As noted above, the term ‘scheme’ is defined by subsection 995-1(1) and the concept of ‘non-arm’s length’ takes its ordinary meaning.

3.33               The requirement that parties not be dealing with each other at arm’s length means that the non-arm’s length income rules do not apply in respect of a superannuation entity’s arrangements that are purely internal. This is because an entity’s internal functions are not undertaken with another party on any terms, non-arm’s length or otherwise.

3.34               For example, an SMSF trustee may undertake book keeping activities for no charge in performing their trustee duties. Such internal arrangements are outside of the scope of the non-arm’s length income rules as they do not constitute a scheme between parties dealing with one another on a non-arm’s length basis.

3.35               In certain cases, the trustee of a fund may undertake particular activities in performing its duties or choose to outsource those functions to third parties (for example, if the fund had a real estate portfolio, the trustee may be able to manage the properties or contract the services of a real estate agent). The question of whether the non-arm’s length income rules apply in respect of services or functions that are undertaken by the trustee depends on the capacity in which the trustee undertakes those activities.

3.36               As a general rule, the trustee of an SMSF is prevented from charging for the services or functions that it undertakes in its capacity as trustee by paragraph 17A(1)(f) of the SIS Act. Services of this kind do not involve a scheme between parties as they fundamentally relate to the trustee’s obligations in respect of the fund.

3.37               If the trustee is not acting as a trustee but is instead providing services that are procured as a third-party, the non-arm’s length income rules are intended to apply. Provided that the amount charged for any such services is not less than that which would be expected to be charged between parties dealing at arm’s length, the dealings will not be subject to the non-arm’s length income rules. In such cases, the trustee of an SMSF may also be prevented from charging any more than the arm’s length price because of the regulatory requirements in the SIS Act (see section 17B of the SIS Act, which permits a trustee to charge up to an arm’s length amount for duties or services performed other than in the capacity as trustee).

Attributing non-arm’s length expenses to particular amounts of income

3.38               Where there is a scheme that produced non-arm’s length income by applying non-arm’s length expenses, there must also be a sufficient nexus between the expense/s and the income, that is, the expenditure must have been incurred ‘in’ gaining or producing the relevant income. This reflects the analysis that must be undertaken in determining whether an expense is deductible under section 8-1, or can be included in the entity’s cost base for the transaction if the expense is of a capital nature (see below).

3.39               For example, where the non-arm’s length expense is an interest payment, identifying the relevant amount of income should be relatively straightforward. That is because a superannuation entity can only borrow under limited recourse borrowing arrangements, which means that the borrowed funds must be used to acquire a single, separately identifiable asset (subsection 67A(1) of the SIS Act). Where such an asset is used in deriving assessable income (including any capital gain on disposal), the income so derived will be non-arm’s length income (see the rental income in Example 1.1 above). However, income derived from other assets that the superannuation entity holds - for example, dividend income from publicly listed shares - would not be non-arm’s length income merely because the superannuation entity incurred a non-arm’s length interest expense under the limited recourse borrowing arrangements.

3.40               To calculate a superannuation entity’s non-arm’s length component (that is, the amount of taxable income that is taxed at the highest marginal rate), it is also necessary to identify any other deductions that are attributable to non-arm’s length income. Those deductions may include the non-arm’s length expense that caused an amount of an income to be non-arm’s length income (in the foregoing example, interest expenses).

Non-arm’s length capital expenditure that results in non-arm’s length income

3.41               In some circumstances, non-arm’s length capital expenditure can result in a superannuation entity earning non-arm’s length income. Where a fund acquires an asset for less than market value through non-arm’s length dealings, the revenue generated by that asset may be non-arm’s length income, as well as any statutory income (that is, net capital gains) resulting from the disposal of that asset. [Schedule 3, item 1, paragraph 295-550(1)(b); item 3, subsection 295-550(7)]

3.42               This ensures that trustees of funds do not have an incentive to acquire assets at less than market value for the purpose of generating potentially significant ongoing amounts of income which would be sheltered from marginal rates of tax. It further ensures that such income cannot escape taxation entirely where the assets are held in the retirement phase (that is, the income would no longer be treated as exempt current pension income).

3.43               Section 66 of the SIS Act specifically prohibits the acquisition of assets by the trustee of a fund from related parties. However, there is no prohibition against a trustee of a fund acquiring business real property and listed securities from related parties at market value.

3.44               As such, if the trustee of a fund were to acquire an asset from a related party on non-arm’s length terms (even when in contravention of section 66 of the SIS Act), any income that is generated from the asset would also be non-arm’s length income.

3.45               A superannuation fund may acquire an asset by purchasing an asset or by way of an in-specie contribution. Where a superannuation fund purchases an asset at less than market value or reports the in-specie contribution at less than market value, then the acquisition may form part of a non-arm’s length scheme such that any ordinary or statutory income derived from the asset and the disposal of the asset will be treated as non-arm’s length income.

3.46               The market value substitution rules in section 112-20 may apply in respect of an asset that is acquired by a superannuation fund under a scheme that is subject to the non-arm’s length income rules. The market value substitution rules adjust the first element of the cost base and reduced cost base of a CGT asset that is acquired by an entity to the market value of the asset.

3.47               The non-arm’s length income rules continue to apply to an asset that has its cost base increased by the market substitution rule. This approach reflects that both sets of rules may apply as a consequence of an asset being acquired at a non-arm’s length price.

3.48               For example, where real property is acquired (not as a contribution) by the fund for less than market value as part of a scheme where the parties were not dealing at arm’s length, any income generated from that asset (for example, rental income) will be non-arm’s length income. When the property is ultimately disposed of, the resulting capital gain will also be non-arm’s length income. However, in calculating the resulting capital gain, the market value substitution rule may apply such that any capital gain on the disposal of the asset is reduced as a result of the asset’s increased cost base to the market value at the time of acquisition.

Range of transactions may be on arm’s length terms

3.49               It can be difficult to determine an exact price that is ‘non-arm’s length’. An ‘arm’s length’ price may be accepted to fall within a range of commercial prices. For example, loans may be available at different interest rates based on a range of factors. Accordingly, an SMSF may be able to apply an acceptable commercial rate of interest to a loan within a band of rates available to it on an arm’s length basis.

3.50               In other circumstances, parties may enter into arrangements that result in discounted prices or favourable terms. This could occur where a party operates on simple cost-recovery basis for particular services but is able to justify doing so in commercial terms because of the economies of scale it achieves within its business by providing other services. For example, where services are provided to a large APRA fund either by the trustee acting in a separate capacity or by a related third party.

3.51               Transactions that are on arm’s length terms, for example, borrowing arrangements financed by Authorised Deposit-taking Institutions and other commercial lenders or that meet the safe harbour terms in ATO Practical Compliance Guideline PCG 2016/5 are not impacted by these amendments.

Application and transitional provisions

3.52               The amendments made by this Schedule apply in relation to income derived in the 2018-19 income year and later income years, regardless of whether the scheme was entered into before 1 July 2018. [Schedule 3, item 4]



Chapter 4          

Limited recourse borrowing arrangements

Outline of chapter

4.1                   The amendments in Schedule 4 amend the total superannuation balance rules that were enacted through the Treasury Laws Amendment (Fair and Sustainable Superannuation) Act 2016 .

4.2                   The changes support the operation and integrity of the total superannuation balance rules to ensure that, in certain circumstances involving limited recourse borrowing arrangements, the total value of a superannuation fund’s assets is taken into account in working out individual members’ total superannuation balances.

4.3                   All legislative references in this Chapter are to the ITAA 1997 unless otherwise stated.

Context of amendments

4.4                   The Treasury Laws Amendment (Fair and Sustainable Superannuation) Act 2016 (the Amending Act) enacted the Government’s superannuation reform package that was announced in the 2016-17 Budget.

4.5                   The amendments contained in Schedule 4 relate to the definition of total superannuation balance that was included in that package.

Total superannuation balance

4.6                   The concept of ‘total superannuation balance’ was introduced by the Amending Act. The term is defined by section 307-230 and, with some modifications, is designed to reflect the total value of all interests that an individual has in the superannuation system.

4.7                   To determine an individual’s total superannuation balance, the following amounts are added together:

•        the accumulation phase value of all superannuation interests that are not in the retirement phase;

•        the transfer balance in their transfer balance account, subject to certain modifications (but not where the balance is less than nil);

•        the amount of each roll-over superannuation benefit that is not reflected in the individual’s accumulation phase or transfer balance.

4.8                   The total superannuation balance is used by the non-concessional contribution cap rules, the unused concessional cap carry forward rules, the definition of disregarded small fund asset rules (which is relevant for determining whether a fund can use the segregated method in calculating its exempt current pension income), and in the spouse tax offset.

Limited recourse borrowing arrangements

4.9                   ‘Limited recourse borrowing arrangements’ (limited recourse borrowing arrangements) are an exception to the general prohibition on borrowing that applies to the trustees of regulated superannuation funds contained in subsection 67(1) of the SIS Act.

4.10               The exceptions for limited recourse borrowing arrangements are provided by sections 67A and 67B of the SIS Act. Section 67A relates to borrowing arrangements that the trustee of a registered superannuation fund uses to acquire an ‘acquirable asset’ and section 67B extends the exception to replacement assets.

4.11               The term, ‘acquirable asset’ is defined by subsection 67A(2) as a single asset that is not money and that is not prohibited from being acquired under any Act. Subsection 67A(3) also extends sections 67A and 67B so that they apply to a collection of identical assets in the same way as they apply to a single asset (for example, a collection of shares of the same class in a single company).

4.12               In addition to the requirement about the rights and interest that a trustee has in an acquirable asset, subsection 67A(1) contains conditions about limiting any rights against the trustee for a default on the arrangement to rights in respect of the acquirable asset.

Summary of new law

4.13               Schedule 4 amends the total superannuation balance test so that, in certain circumstances, it takes into account the outstanding balance of a limited recourse borrowing arrangements that is entered into by the trustee of a regulated superannuation fund that is an SMSF or that has less than

5 members.

4.14               As a result of these changes, an individual member’s total superannuation balance may be increased by the share of the outstanding balance of a limited recourse borrowing arrangement, commenced after

1 July 2018, related to the assets that support their superannuation interests. However, the increase only applies to members who have satisfied a condition of release with a nil cashing restriction, or those whose interests are supported by assets that are subject to a limited recourse borrowing arrangement between the superannuation fund and its associate.

Detailed explanation of new law

4.15               An individual’s total superannuation balance may be increased by an amount if an asset that supports one or more of their superannuation interests are subject to limited recourse borrowing arrangements. [Schedule 4, items 1 and 2, paragraph 307-230(1)(d) and subsection 307-231(1)]

4.16               The amount by which an individual’s total superannuation balance is increased is equal to a proportion of the outstanding balance of the limited recourse borrowing arrangements. This proportion is based on the individual’s share of the total superannuation interests that are supported by the asset that is subject to limited recourse borrowing arrangements. [Schedule 4, item 2, subsections 307-231(2) and (3)]

4.17               This increase to an individual member’s total superannuation balance ensures that it more accurately reflects the overall values of the assets in a superannuation fund that support the individual’s superannuation interests.

4.18               The addition to the total superannuation balance identifies a limited recourse borrowing arrangement that a fund has by reference to a borrowing under an arrangement that is entered into by a regulated superannuation fund and which is covered by the exception in subsection 67A(1) of the SIS Act. [Schedule 4, item 2, paragraph 307-231(1)(a)]

4.19               These increases only apply in respect of limited recourse borrowing arrangements commenced after 1 July 2018 where:

•        a member whose superannuation interests are supported by assets to which the limited recourse borrowing arrangements relate has satisfied a condition of release specified in paragraph 307-80(2)(c) (that is, a condition of release with a nil cashing restriction); or

•        the limited recourse borrowing arrangements are between the fund and one of its associates.

[Schedule 4, item 2, paragraph 307-231(1)(e)]

4.20               Further, the increase to an individual’s total superannuation balance can only occur where the limited recourse borrowing arrangements were entered into by a superannuation provider of a regulated fund that is an SMSF or that has less than 5 members. [Schedule 4, item 2, paragraph 307-231(1)(d) and subsection 307-231(4)]

4.21               For the increase to apply to an individual’s total superannuation balance, a regulated superannuation fund must have used the borrowing to acquire one or more assets, and any such assets must support the superannuation interests of an individual at the time at which the total superannuation balance is determined.

4.22               The connection between an asset of a fund and an individual member’s superannuation interests relates to the way in which the fund has allocated its assets to meet its current and future liabilities in relation to the member’s interests. The test requires a fund to determine which of its limited recourse borrowing arrangements assets support which members’ interests, as well as the extent to which those interests are supported. This  assessment builds on the framework that already exists for funds in tracking the way in which income from its assets is allocated between the interests of its members.

4.23               Although an individual’s total superannuation balance can generally be measured ‘at a time’, it is only relevant at the end of a particular income year. This is because the non-concessional contribution cap rules, the unused concessional cap carry forward rules, the disregarded small fund asset rule and the spouse tax offset rule test an individual’s total superannuation balance either ‘just before’ or ‘immediately before’ the start of the income year (see paragraphs 290-230(4A)(b), 291-20(3)(b), 292-85(2)(b) and 295-387(2)(c)). This means that the outstanding balance of a limited recourse borrowing arrangement only needs to be identified at the end of an income year for the purposes of adding a share of that outstanding balance to an individual’s total superannuation balance.

4.24               It should also be noted that artificially manipulating the allocation of assets that are subject to limited recourse borrowing arrangements against particular superannuation interests at a particular time may be subject to the general anti-avoidance rules in Part IVA of the ITAA 1936 where such allocations formed part of a scheme that had the dominant purpose of obtaining a tax benefit.

4.25               The outstanding balance of the limited recourse borrowing arrangements is the amount still owing under the limited recourse borrowing arrangements. Where an individual has a superannuation interest that is supported by an asset that is subject to limited recourse borrowing arrangements, the increase to their total superannuation balance is based on their share of this outstanding balance.

4.26               Including this proportion of the outstanding balance in a member’s total superannuation balance prevents double counting of the outstanding balance from occurring where more than one member has an interest supported by an asset that was acquired through limited recourse borrowing arrangements.

4.27               Where only one member’s interests are supported by an asset, the proportion will be equal to 1, meaning that an amount equal to the outstanding balance is added to the member’s total superannuation balance.

Members with a nil condition of release

4.28               Applying the amendment in the case of limited recourse borrowing arrangements that involves a member that has satisfied a nil condition of release addresses the risk of using limited recourse borrowing arrangements to facilitate a re-contribution strategy. In this context, a member who does not wish to exceed one of the total superannuation balance tests could withdraw an amount of their interests from superannuation and then, in their capacity as trustee, arrange for the fund to borrow an equivalent amount under limited recourse borrowing arrangements.

4.29               The SIS Act and SIS Regs contain the rules that determine when an individual can voluntarily withdraw amounts from superannuation. Specifically, regulations 6.18, 6.19 and 6.20 of the SIS Regs provides that a member’s benefits in a superannuation fund may be cashed on or after the member satisfies a condition of release, subject to any cashing restriction as to the amount or form of the payment (in this context, a ‘nil’ cashing restriction means there are no restrictions on the amount that can be released to a member).  The conditions of release and their related cashing restrictions are contained in the table in Schedule 1 to the SIS Regs.

4.30               The conditions with nil cashing restrictions that are covered by these amendments through the reference to paragraph 307-80(2)(c) are those referred to in items 101 (retirement), 102A (terminal medical condition), 103 (permanent incapacity), and 106 (attaining age 65)

4.31               Where the increase applies solely because one or more members have satisfied a nil condition of release, the increase is only applied in respect of those members. This means that the increase does not apply to other members who have not satisfied such a condition, despite the fact that their interests may be supported by the same assets to which the limited recourse borrowing arrangements relates.

4.32               However, if a member has satisfied a condition of release with a nil cashing restriction, they are required to take into account each limited recourse borrowing arrangement that their superannuation fund has in respect of assets that support their superannuation interests. [Schedule 4, item 2, paragraph 307-231(2)(a)]

Limited recourse borrowing arrangements with associates

4.33               Applying the amendments in the case of limited recourse borrowing arrangements that is with an associate of the superannuation fund ensures that the additional amount is included in a member’s total superannuation balance where there is an increased risk that the terms of the limited recourse borrowing arrangements are inconsistent with those that would have been entered into between independent parties. This approach supplements the broader changes to the non-arm’s length income rules discussed in the previous chapter.

4.34               In working out whether the limited recourse borrowing arrangements are with an associate of the superannuation fund, the definition of associate as it relates to a trustee in subsection 318(3) of the ITAA 1936 applies. This definition covers any entity that benefits under a trust (for example, the members of a superannuation fund), as well as the associates of those entities.

4.35               Where the adjustment applies because the limited recourse borrowing arrangements are with an associate, all members whose interests are supported by the assets to which the limited recourse borrowing arrangements relate will have their total superannuation balance adjusted.

4.36               In contrast, a member who has not satisfied a condition of release only needs to count the outstanding balance of limited recourse borrowing arrangements that are entered into between their fund and its associates. [Schedule 4, item 2, paragraph 307-231(2)(b)]

Example 4.1 - total superannuation balance where there is more than one member

Sue and Peter are the only members of their SMSF. The value of Peter’s superannuation interests in the fund is $1.2 million. The value of Sue’s superannuation interests is $1.8 million. All of the assets of the fund that support their interests are cash.

Sue and Peter have both retired and therefore satisfy a condition of a release with a nil cashing restriction.

The SMSF acquires a $3.5 million property. The SMSF purchases the property using $1.5 million of its own cash and borrows an additional $2 million using limited recourse borrowing arrangements.

The SMSF now holds assets worth $5 million (being the sum of the $1.5 million in cash and the $3.5 million property). The fund also has a liability of $2 million under the limited recourse borrowing arrangements.

Of its own cash that it used, 40 per cent ($600,000) was supporting Peter’s superannuation interests and the other 60 per cent ($900,000) was supporting Sue’s interests. These percentages also reflect the extent to which the asset supports Peter and Sue’s superannuation interests.

Peter’s total superannuation balance is $2 million. This is comprised of the $600,000 of cash that still supports his superannuation interest, the 40 per cent share of the net value of the property (being $600,000), and the 40 per cent share of the outstanding balance of the limited recourse borrowing arrangements (being $800,000).

Sue’s total superannuation balance is $3 million. This is comprised of the $900,000 of cash that still supports her superannuation interest, the 60 per cent share of the net value of the property (being $900,000), and the 60 per cent share of the outstanding balance of the limited recourse borrowing arrangements (being $1.2 million).

Reporting the outstanding balance of limited recourse borrowing arrangements

4.37                The amendments also extend the matters that may be included in information that is reported by the trustee of a superannuation fund to the Commissioner to include limited recourse borrowing arrangements amount that relates to an individual’s total superannuation balance. [Schedule 4, item 3, paragraph 390-5(9)(e)  in Schedule 1 to the TAA]

4.38               Although the matters covered by subsection 390-5(9) in Schedule 1 to the TAA do not limit the information that the Commissioner of Taxation can request, this amendment makes it clear that this will be information that a fund will be required to report.

4.39               Because the information relates to the liabilities that a fund has in respect of its assets, the outstanding balance of the limited recourse borrowing arrangements is information that will be already known by the trustee of a regulated superannuation fund. However, although this information will now need to be identified on a member basis, trustees will only have to do so in respect of the end of a particular income year.

Application and transitional provisions

4.40               The changes to the total superannuation balance test apply to borrowings arising under contracts entered into on or after 1 July 2018. They do not apply to the refinancing of the outstanding balance of borrowings arising under contracts entered into prior to 1 July 2018, or to borrowings arising under a contract that was entered into prior to 1 July 2018. [Schedule 4, item 4]

4.41               The changes in respect of matters that may be included in information that is reported by the trustee of a superannuation fund do not have a specific application provision and therefore apply from commencement. However, as the information that must be reported is the amount of a member’s ‘limited recourse borrowing arrangements amount’, there will be nothing for a fund to report until members begin to have limited recourse borrowing arrangements amounts (that is, in respect of periods that commence on or after 1 July 2018).



Chapter 5          

Statement of Compatibility with Human Rights

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Schedule 1 - Superannuation guarantee

5.1                   This Schedule is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 .

Overview

5.2                   This Schedule provides for a one-off 12-month amnesty to encourage employers to self-correct historical SG non-compliance.

5.3                   This complements the Government’s package of reforms to improve future SG compliance, which were recently introduced as part of the Treasury Laws Amendment (2018 Measures No. 4) Bill 2018. The recent reforms will improve the visibility of SG payments to the ATO, introduce stronger penalties for non-compliance and ensure more reliable collection of liabilities for unpaid SG in the future.

Human rights implications

5.4                   This Schedule does not engage any of the applicable rights or freedoms.

Conclusion

5.5                   This Schedule is compatible with human rights as it does not raise any human rights issues.

Schedule 2 - Superannuation - employees with multiple employers

5.6                   This Schedule is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 .

Overview

5.7                   Schedule 2 amends the Superannuation Guarantee (Administration) Act 1992 to allow individuals to avoid unintentionally breaching their concessional contributions cap when they receive superannuation contributions from multiple employers. Instead of receiving contributions into superannuation, an employee may apply to the Commissioner to opt out of the superannuation guarantee regime in respect of an employer and negotiate with the employer to receive additional cash or non-cash remuneration.

5.8                   The amendments achieve this outcome by allowing certain employees with multiple employers to apply to the Commissioner for an ‘employer shortfall exemption certificate’, which prevents their employer from having a superannuation guarantee shortfall if they do not make superannuation contributions for a period.

Human rights implications

5.9                   This Schedule does not engage any of the applicable rights or freedoms.

Conclusion

5.10               This Schedule is compatible with human rights as it does not raise any human rights issues.

Schedule 3 - Non-arm’s length income of superannuation entities

5.11               Schedule 3 is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 .

Overview

5.12               This Schedule ensures that the non-arm’s length income rules for superannuation entities apply in situations where a superannuation entity incurs non-arm’s length expenses in gaining or producing the income.

Human rights implications

5.13               This Schedule does not engage any of the applicable rights or freedoms.

Conclusion

5.14               Schedule 3 is compatible with human rights as it does not raise any human rights issues.

Schedule 4 - Limited recourse borrowing arrangements

5.15               Schedule 4 is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 .

Overview

5.16               This Schedule amends the total superannuation balance rules to ensure that, in certain circumstances involving limited recourse borrowing arrangements, the total value of a superannuation fund’s assets is taken into account in working out individual members’ total superannuation balances.

Human rights implications

5.17               This Schedule does not engage any of the applicable rights or freedoms.

Conclusion

5.18               Schedule 4 is compatible with human rights as it does not raise any human rights issues.