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Superannuation Contributions Tax (Members of Constitutionally Protected Superannuation Funds) Assessment and Collection Bill 1997



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Superannuation Contributions Tax (Members of Constitutionally Protected Superannuation Funds) Assessment and Collection Bill 1997

Bills Digest

No. 61 1997-98

ISSN 1328-8091

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I N F O R M A T I O N A N D R E S E A R C H S E R V I C E S

Bills Digest No. 61 1997-98

Superannuation Contributions Tax (Members of Constitutionally Protected Superannuation Funds) Assessment and Collection Bill 1997

John Harrison Economics, Commerce and Industrial Relations Group 24 October 1997

Contents

Purpose ...................................................................................................................................... 1

Background .............................................................................................................................. 1

Main Provisions ........................................................................................................................ 4

Warning:

This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments.

This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

Superannuation Contributions Tax (Members of Constitutionally Protected Superannuation Funds) Assessment and Collection Bill 1997

Date Introduced: 2 October 1997

House: House of Representatives

Portfolio: Treasury

Commencement: Royal Assent

Purpose

To provide for the assessment and collection of the superannuation surcharge from members of constitutionally protected superannuation funds.

Background

This Background is written for the following six Bills :

• Superannuation Contributions Tax (Members of Constitutionally Protected Superannuation Funds) Assessment and Collection Bill 1997;

• Superannuation Contributions Tax (Members of Constitutionally Protected Superannuation Funds) Imposition Bill 1997;

• Superannuation Contributions Tax Imposition Amendment Bill 1997;

• Termination Payments Tax Imposition Amendment Bill 1997;

• Superannuation Contributions and Termination Payments Taxes Legislation Amendment Bill 1997; and

• Superannuation Legislation Amendment (Superannuation Contributions Tax) Bill 1997

2 Superannuation Contributions Tax (Members of Constitutionally Protected Superannuation Funds) Assessment and Collection Bill 1997

Warning:

This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments.

This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

These six Bills complete a package of legislation designed to give a legislative framework to the introduction of a superannuation contributions surcharge for high income earners. For further background the reader is referred to Bills Digest Nos. 124-130 1996-97 which discusses the preliminary seven Bills introduced into Parliament in February 1997 dealing with the superannuation surcharge. Such legislation was introduced pursuant to a revenue measure announced in the 1996-97 Budget. Briefly, the Government sought to reduce the concessional treatment provided to superannuation for high income earners. A 'surcharge' was to apply to superannuation members whose taxable income and superannuation contributions (employer / self employed) exceeded $70,000. The surcharge would be imposed at the rate of 0.001% for each $1 of annual income in excess of $70,000 with a maximum of 15% achieved when taxable income and superannuation contributions reached $85,000.

The surcharge would apply to both accumulated benefit funds and defined benefit funds. Accumulated benefit funds (more common in the private sector) are those superannuation funds where the member's benefit depends on the performance of the funds and how their superannuation contributions and earnings have accumulated. Defined benefit funds (more common in the public sector) do not depend on the fund's performance. In defined benefit funds, the member's benefits are defined (often by a formula), and usually depend on the number of years of contributions of the member and their final salary.

It is estimated that the revenue impact of the surcharge will be $480 million in 1997-98, $470 million in 1998-99 and $530 million in 1999-2000.

While the policy to reduce superannuation concessions to high income earners was simple, the design of its administration to realise such policy was quite complex and faced considerable opposition from the superannuation industry and other key players. The following lists a chronology of various events in relation to the somewhat problematic path of the previous superannuation contributions surcharge legislation.

Date Event

August 1996

Budget

Superannuation Surcharge announced in Budget, applying to all funds. An Actuarial Advisory Committee was established to report on the application of the superannuation contributions surcharge to defined benefit funds and unfunded and constitutionally protected schemes.

September 1996

Salary sacrifice arrangements to be thwarted

At an address to the Association of Superannuation Funds of Australia (ASFA), the Taxation Commissioner, Mr Carmody advised that the Tax Office was aware of the possibility of salary packaging arrangements to defeat the proposed superannuation surcharge, and would take appropriate action if such planning practices emerged.

Superannuation Contributions Tax (Members of Constitutionally Protected Superannuation Funds) Assessment and Collection Bill 1997 3

Warning:

This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments.

This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

October 1996

Surcharge collection mechanisms to be reviewed

Assistant Treasurer, Senator Kemp, advised at an ASFA Conference in Brisbane that the Tax Office and the Insurance and Superannuation Commission were consulting extensively with industry to discuss the development of efficient and effective mechanisms related to the administration of the surcharge.

December 1996

ATO considers implementation issues

The Tax Office established an Implementation Advisory Group to oversee the process of implementing the superannuation surcharge measure with a view to developing optimal solutions to

implementation issues.

February 1997

Treasurer announces surcharge implementation details

Details of how the proposed superannuation contributions surcharge would apply to constitutionally protected schemes, defined benefit schemes, unfunded schemes and golden handshakes were outlined in the Treasurer's Press Release, 5 February 1997. The Treasurer observed there were constitutional issues associated with applying the proposed administrative and payment mechanisms to some schemes, in particular those run by the Commonwealth and State Governments. The Government would consult with the States and Territories to achieve a workable outcome for their schemes.

February 1997

Surcharge Bills introduced

A package of five superannuation-related Bills was introduced into Parliament to give legislative effect to the superannuation contributions surcharge and termination payments surcharge for higher income earners. These Bills dealt with the assessment and collection, imposition and consequential amendments to the surcharge.

March 1997

Further Surcharge Bills introduced

A further two Bills were introduced into Parliament. These Bills provided for the notional application of the superannuation contributions surcharge to members of non-contributory Commonwealth superannuation schemes (eg judges). These two Bills and the five surcharge Bills introduced in February were referred to the Senate Select Committee on Superannuation for report by March 1997.

March 1997

Constitutional validity questioned

Denis Rose QC provided preliminary advice on the constitutional validity of the proposed surcharge, which was submitted to the Senate Select Committee on Superannuation by the Business Council of Australia.

March 1997

Surcharge Bills

The superannuation contributions surcharge bills were passed by the House of Representatives with Government amendments, to be debated in the Senate in the Budget session of Parliament. Important

4 Superannuation Contributions Tax (Members of Constitutionally Protected Superannuation Funds) Assessment and Collection Bill 1997

Warning:

This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments.

This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

passed with amendments by House of Reresentatives

amendments included dealing with the Constitutional issues raised by Denis Rose QC to ensure the constitutional validity of the scheme, clarifying that the surcharge applied to exempt public sector superannuation schemes, changing the definition of 'holder' so that it covered unfunded defined benefits schemes and a provision for the calculation of the notional surchargeable contributions for members of defined benefit schemes.

March 1997

Senate Committee report on surcharge

The Senate Select Committee on Superannuation reported on the superannuation surcharge legislation. In the report, Government Senators recommended that the Senate pass the legislation, subject to certain technical amendments proposed by the Government which were subsequently passed by the House of Representatives (see above). The Labor and Democrat Senators, however, considered that it was inappropriate for the Government to require Parliament to pass legislation which could be constitutionally invalid. They also recommended an alternative collection mechanism.

May 1997

Surcharge Bills passed with amendments

The legislation was passed with further amendments aimed at ameliorating its effect on redundancy payouts and low income earners who failed to provide their tax file number (TFN). Also, the word 'surcharge' was changed to 'tax'.

June 1997

Surcharge Bills receive assent

The seven Bills dealing with the Superannuation Contributions Tax and the Termination Payments Tax received Royal Assent.

Accordingly, superannuation legislation is currently in place to deal with most private sector schemes which are accumulation funds.

The remaining six superannuation surcharge Bills complement the existing legislation. These Bills and their consequential amendments to various statutes will ensure that the superannuation contributions surcharge applies to all high income earners and includes Federal Parliamentarians, new federal Judges and certain tribunal members with the status of a judge, Commonwealth sector civilian employees, Defence Force Personnel and the Governor-General and certain State public servants.

Main Provisions

Superannuation Contributions Tax (Members of Constitutionally Protected Superannuation Funds) Assessment and Collection Bill 1997 5

Warning:

This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments.

This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

This Assessment and Collection Bill ensures that the superannuation contributions tax will apply to members of constitutionally protected superannuation funds and has effect from 20 August 1996.

The existing surcharge legislation applies a surcharge or tax on the superannuation providers. Certain State superannuation funds however, are protected constitutionally from revenue measures. This Bill overcomes constitutional problems posed in relation to members of State-run defined benefit funds by imposing the liability on the member rather than on the superannuation fund. The surcharge liability for a member for a year will be accumulated in a surcharge debt account (maintained by the Taxation Commissioner) for the member and will be payable by the member when the member's superannuation benefit becomes payable. The member will have the option of paying off the debt as it arises once an amount of surcharge has been assessed.

Part 1 deals with preliminary matters to the Bill. Clause 7 provides that the Act does not apply to members (of a constitutionally protected superannuation fund) who are State judges at the commencement of the Act.

Part 2 deals with the liability for the surcharge. The superannuation contributions surcharge is payable by the member (Clause 11). This surcharge applies to financial years commencing 1 July 1996, and will be payable if the member's adjusted taxable income is greater than the surcharge threshold for the financial year (Clause 8). The surchargeable contributions for accumulated benefits schemes are based on amounts actually paid to the superannuation providers, but in defined benefits schemes are based on their respective annual salaries multiplied by a notional factor (determined by reference to equivalent accumulated benefits schemes) (Clause 9). The surcharge threshold is $70,000 for the 1996-97 financial year and will be indexed in subsequent years. The new thresholds will be published by the Taxation Commissioner . (Clause 10).

Part 3 refers to the assessment and collection of the superannuation surcharge. Clause 12 requires that a superannuation provider give statements to the Taxation Commissioner at the end of the year setting out particulars including the name and tax file number of the member and the total contributions for the year. In addition, the superannuation Provider must give a statement to the Taxation Commissioner when the benefit a becomes payable to a member. Clause 14 provides that the Taxation Commissioner must assess a member's surcharge for a financial year based on their adjusted taxable income, and provide a copy of assessment with particulars to the member. Clause 15 provides for the deferment of the liability of a member to pay the surcharge, and for interest to accrue on the deferred amount. The Taxation Commissioner is to keep a surcharge debt account for each member, debiting the account with the surcharge and interest (based on the treasury bond rate). The debt becomes payable when the member receives their benefit (lump sum or pension) and must be paid within three months from the date that the Taxation Commissioner gives the member a notice stating their surcharge debt account liability. A member may voluntarily reduce their surcharge debt account, and the Taxation

6 Superannuation Contributions Tax (Members of Constitutionally Protected Superannuation Funds) Assessment and Collection Bill 1997

Warning:

This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments.

This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

Commissioner is required to acknowledge receipt, credit the payment and notify the member. Clauses 16 and 17 set out circumstances in which assessments may be amended. Where an assessment has been increased, the member must pay interest to the Commonwealth (Clause 18). The Taxation Commissioner may use TFNs for the purpose of this Bill (Clause 19), and a member has rights to object against an assessment where the member is dissatisfied with the Taxation Commissioner's calculation of the adjusted taxable income (Clause 20).

Part 4 refers to the recovery of unpaid surcharge, interest or late payment penalty. Clause 21 provides that the Taxation Commissioner may impose a penalty where a member has failed to make payment of their surcharge liability on the date that it is due and payable and Clause 22 provides that debts of surcharge, interest and late payment penalty may be recovered. Where the Taxation Commissioner decides not to remit the whole or part of any interest or late payment penalty, such a decision is subject to review prescribed by the administrative review procedures set out in Clause 25.

Part 5 deals with various administration provisions. The Taxation Commissioner has the general administration of the legislation (Clause 26) and must provide an annual report to the Treasurer (Clause 27). Certain information acquired under the Act is protected and officers administering it are subject to secrecy provisions laid out in Clause 28. Persons who divulge protected information face imprisonment for two years unless the disclosure is appropriate under certain circumstances set out in this clause, eg a person may divulge information to a court only for the purposes of the Act.

Part 6 deals with various miscellaneous provisions. Clause 30 provides that assessment is conclusive evidence of the correctness of calculations, and includes copies and certificates signed by the Taxation Commissioner, Deputy Commissioner or a Second Commissioner. Clause 31 provides the power to authorise access to premises, providing the officers carry authorised proof of identity. An occupier of such premises is required to provide all reasonable facilities and assistance to the authorised officer. Clause 32 gives the power to the Taxation Commissioner (by written notice) to request verbal or written information or documents from a person. The Taxation Commissioner has the power to require such information on oath or affirmation. Clause 33 provides that a superannuation provider must keep records in English (or readily accessible and convertible) which explain all transactions and other acts required by the provider under the Act, so that any liability under the Act can be be readily worked out. Clause 34 gives the Taxation Commissioner the power to collect money from persons who owe money to a member, and such persons must comply with the Taxation Commissioner's direction. Clause 35 states that the Criminal Code applies to all offences under the Act. Clause 36 provides that the Governor-General may make regulations prescribing matters necessary or convenient for the working of the Act.

Part 7 deals with interpretation. Clause 37 contains all the definitions used in the Act.