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Superannuation Guarantee (Administration) Bill 1992



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House: House of Representatives Portfolio: Treasury

Purpose To provide for the administration of the superannuation guarantee levy (SGL) which will require a levy to be paid where employers fail to contribute a percentage of employee's earnings to a fully vesting superannuation fund.

Background The percentage of employees with superannuation coverage has increased dramatically in recent years and particularly between 1990 and 1991. The following table shows the growth of superannuation coverage from 1988 to 1991.

1988

1989

1990

1991 Full- time employees

49.4%

55.1%

59.5%

79.9% Part- time employees

9.6%

17.8%

24.9%

42.3% Total

42.4%

48.1%

52.9%

72.2% Source: ABS, Employee Benefits in Australia, No. 6334.0, July 1991

The same source shows that there is little difference in coverage between males and females for full- time employees, while for part- time employees females have significantly greater coverage than part- time male employees.

The growth of superannuation coverage has been a significant element of the governments retirement income policy, which seeks to make people more self- sufficient in retirement, largely due to the increased burden that would be placed on taxpayers in the future if the aged pension continued as the main form of retirement income. This would result from the changing age structure of society, which will mean fewer employed people per pension beneficiary. A major spur to the growth of superannuation coverage was the 1986 National Wage Case decision to include a superannuation component in Federal awards. The decision provided for 3% of salary to be paid as superannuation. However, it should be noted that the decision applied only to Federal awards, so that employees with no award coverage, or who are covered by State awards were not covered by the decision. As well, compliance has proved to be a problem, with some employers not contributing the required amount towards superannuation for their employees.

The decision to introduce a superannuation guarantee levy (SGL) was announced in the 1991- 92 Budget. The main reasons given for the introduction of the levy were to extend superannuation coverage, ensure compliance with award superannuation and to provide `an orderly mechanism by which the level of employer superannuation support can be increased over time, consistent with retirement incomes policy objectives and the economy's capacity to pay.' 1 Unlike award superannuation, where increases in employer contributions would be subject to determination by the Industrial Relations Commission, the SGL is planned to increase in accordance with the plan outlined in the Budget, which proposes an increase in superannuation from a minimum of 3% in 1992- 3 to 9% in 2000- 1. (This may be changed by future amendments to this Act.) The proposal also envisages other methods to increase the rate of contribution to 12% by 2000 and foreshadows consideration being given to this matter at a later date. More details of the SGL were released in an Information Paper released by the Treasurer in December 1991.

The SGL is not intended to replace award superannuation and the requirements will not be cumulative, with employers having to pay the higher of their award requirement, if any, and the SGL. It should be noted that the enforcement provisions of the SGL will only apply to the rate of contribution established by this Bill. The ACTU has foreshadowed that it will apply to the Industrial Relations Commission for increases in the award contribution to match increases in the SGL.

The reactions of the peak employee and employer bodies to the proposed SGL were predictable. The ACTU is in favour of the plan, seeing it as `an historic step towards ensuring that all workers are able to enjoy a full and rewarding retirement.' 2 The ACTU favoured a compulsory scheme rather than one that provided incentives for superannuation contributions, such as tax concessions, as incentives had been used in the past but had failed to encourage superannuation for lower paid workers. One matter of concern for the ACTU was the treatment of lower paid workers, where it was of the view that there should be a minimum, `dollar' contribution for each employee so that for low paid employees there would be a contribution that may exceed the percentage of wage that applied.

The Confederation of Australian Industry (CAI) is opposed to the levy. Its main arguments are based on the effects on investment and unemployment. The CAI argues that enterprises currently not providing superannuation will be required to meet the costs of contributions or the levy from their retained earnings. The reduction in retained earnings will reduce the amount available for enterprises, and particularly small and medium sized enterprises, to re- invest in the enterprise and this will result in lower investment.

The alternative will be for such firms to borrow the funds for investment, but the funds likely to be available for small/medium firms may not increase to offset the reduction in retained earnings. This is due to the practice of superannuation investments to be channelled into the larger, blue- chip firms which is likely to see the proportion of available capital invested in these bodies increase, meaning a reduction in the proportion available to small/medium firms. As well, the small/medium firm will face the increased cost associated with borrowing. However, these effects may be offset by the fact that not all retained profits are re- invested, so that funds need not be channelled from investment but may come from other uses of retained earnings, and that the additional cost of borrowing may not be sufficient to effect many rational investment decisions, which are based on many criteria.

The CAI's other main point is that the SGL will impose an additional cost on employers and that, in the current recessed climate, this will force employers to reduce costs by shedding labour and will be sufficient to force some small/medium enterprises into liquidation. This will result in increased unemployment, and the CAI has estimated that the effect of the SGL will be to put at risk between 45 000 and 60 000 jobs. 3 It should be noted that superannuation contributions made by an employer are tax deductible, while the SGL will not be deductible.

Another criticism of the SGL, which also applied to the training guarantee levy, is that the SGL resembles a pay- roll tax in that it is imposed regardless of the profitability, or otherwise, of the enterprise. This can be contrasted with income tax which is payable only on the actual funds made by the person/enterprise.

The SGL has also been criticised on the grounds of its administration costs. The main administrative cost to employers will be complying with the record keeping involved to ensure the correct amount of contributions are made. This will become particularly burdensome in 1993- 4 and later years when the contribution period is reduced to a month, so that each employer will be required to calculate the amount payable each month in respect to each employee. In addition to the employers costs of arranging for superannuation contributions, there will also be the costs associated with directing any amount paid under the SGL to the individual employee concerned. Where an employer has a shortfall in their contributions, they will be subject to the levy to recover the shortfall, an interest component and an administrative charge. In the second reading speech for the Bill, the Minister states `The purpose of the administrative charge is to recover some of the costs incurred in administering the tax. the charge will initially consist of a flat amount of $50 plus an amount of $30 for each employee in respect of whom the employer has a superannuation shortfall.' 4 Another cost in the scheme will be that charged by the superannuation funds to administer the employees superannuation. In cases of low or minimal contribution, it is likely that such charges will be equal to, or exceed, the required contribution.

A further criticism that has been made in respect of the SGL is that there is no requirement for an employee contribution. It has been argued that this will reduce the employees perceived value of the contribution made by the employer while reducing the end benefit available and increasing employers costs compared to a situation where both the employer and employee are required to contribute to their superannuation. The situation where an employee is already entitled to their maximum superannuation benefit that is subject to concessional treatment (i.e. where they have reached their reasonable benefit limit) is not dealt with in the Bill.

In many aspects, the SGL is similar to the training guarantee levy and the Commonwealth will rely on the same power to support the levy, i.e. the taxation power contained in sub- section 51(ii) of the Constitution. The use of this power to impose the training guarantee levy is currently subject to a challenge in the High Court and if that challenge is successful the implication is that the taxation power cannot be used to support the SGL. However, if this is the case, the Commonwealth will be able to rely on other powers, such as the corporations and trade and commerce powers, to ensure a wide application of the levies. If these powers were relied on, the levies would not have the universal application they have relying on the taxation power. While on the matter of the training guarantee levy, that levy and the SGL have some different implications to employers paying the levies. The main difference is that employers should be able to see direct benefits from the training guarantee levy as the training standards and competence of its employees increases, which should see some productivity gains. However, with the SGL employers can not expect to see any direct return to the enterprise as benefits will only accrue to the employee and then only after retirement.

Main Provisions The Bill will commence on 1 July 1992 (clause 2).

The treatment of the Commonwealth and tax- exempt Commonwealth authorities is dealt with in clause 5. Such bodies will not be liable to pay the superannuation guarantee charge, but Part 8 of the Bill, which deals with the distribution of the charge, will be taken to apply as if the charge had been paid (this means that such shortfalls will be distributed and the cost met from Consolidated Revenue).

Part 2 (clauses 6 to 15) of the Bill contains a number of definitions, including those for: * annual national payroll: the sum of wages and salaries paid in Australia or outside Australia in connection with services rendered or performed in Australia.

* contribution period: the year ending 30 June 1993 and each month after this time.

* defined benefit superannuation scheme: where the benefit payable on retirement is defined by reference to the persons salary (whether for a period, at retirement or before retirement) and, for private schemes, some or all of the contributions are paid into an aggregate fund (i.e. the funds are not kept in the name of individuals).

* ordinary time earnings: earnings in respect of ordinary hours of work plus over award payments, shift loading or commission.

* part- time employee: someone employed for 30 hours a week or less.

* complying fund or scheme: a complying fund for the purposes of the Income Tax Assessment Act 1936 (i.e. one that satisfies the occupational superannuation standards).

* employer and employee will have their general meaning, but `employees' will also cover members of executive bodies of companies; people engaged under contract where the contract is wholly or principally for the supply of labour; members of parliament; people engaged to perform entertainment, sport or presentations; and members of local government councils.

* notional earnings base: this term has two meanings. Basically, where the employer contributed to a superannuation fund in respect of an employee immediately before 11 August 1991, it will be the earnings on the later of the first day of a contribution period or the first day of employment. However, if the award, arrangement etc. that determines the contributions is changed on or after 21 August 1991 to reduce their notional earnings base, the alternative method described below will apply. In the alternative method, which also applies to situations where there was no superannuation contribution immediately prior to 21 August 1991, the notional earnings base is the employees earnings on the later of the first day of a contribution period, their first day of employment and the day on which an employer began to contribute to a fund.

* maximum contribution base: this will be $80 000 for 1992- 3 and this amount indexed and divided by 12 for later years. The division by 12 reflects the change to monthly contribution periods for 1993- 4 and later years.

Part 3 of the Bill (clauses 16 to 29) deals with the liability of employers other than the Commonwealth and tax- exempt Commonwealth Authorities. Clause 16 provides that the superannuation guarantee charge is payable by the employer (the charge will be imposed by the Superannuation Guarantee Charge Bill 1992).

The superannuation guarantee shortfall will comprise the sum of shortfalls (if any) in respect of each employee plus the nominal interest component and the administrative component (clause 17). The calculation of an individuals shortfall is dealt with in clauses 18 and 19. The two clauses are necessary as the shortfall will be calculated on an annual basis in 1992- 3 and on a monthly basis for later years. Clause 18 provides that for 1992- 3 the shortfall will be the total wages or salary paid to the employee in the year multiplied by the charge percentage over 100, while that for later years will be the wages or salary paid in a month multiplied by the charge percentage over 100. The charge percentages are contained in clause 20. There will be two charge rates, one for employers with a notional payroll for the base year (1991- 2) in excess of $500 000 (Table 1 below) and one for those with a notional payroll for the base year of $500 000 or less (Table 2 below). The percentages are:

Table 1 Table 2

YEAR

%

YEAR

%

1992- 3

5

1992- 3

3

1993- 4

5

1993- 4

3

1994- 5

6

1994- 5

4

1995- 6

6

1995- 6

5

1996- 7

7

1996- 7

6

1997- 8

7

1997- 8

7

1998- 9

8

1998- 9

8

1999- 2000

8

1999- 2000

8

2000+

9

2000+

9 Where a person commences to be an employer in 1992 or later years, the contribution percentage will be as outlined above, calculated on a monthly basis, and their base year will be the first whole year that they are an employer (clause 21).

Clauses 22 and 23 provide for reductions in the charge percentage where other superannuation contributions are made. Where the contributions are to a defined benefits scheme and a benefit certificate has been issued that specifies the contribution rate for a class of employees, the required contribution is reduced by the contribution rate multiplied by the percentage of time in a contribution period for which the contribution was made. Clause 23 deals with contributions made in other circumstances, including contributions made under awards. For contributions made in accordance with industrial awards, or under a superannuation agreement, which are based on the employees notional earnings base, the required contribution rate is to be reduced in the same manner as described above. Where the employees notional earnings base is not specified, the contribution rate is to be calculated as a percentage of the employees ordinary time earnings. Included in the calculations will be contributions made within 28 days of the end of a contribution period or for 1992- 3, contributions made up to 14 August 1993 (this will allow employers to make the contributions for a contribution period after the end of that period).

Clause 24 to 26 deal with salaries and wages that are to be excluded from calculations, and which effectively exempt certain employees from the SGL. The exclusions are wages and salaries paid to: * an employee over 65; * non- resident for work done outside Australia; * a resident for work done outside Australia; * an employee who receives less than $250 per month; * part- time employees under 18; and * members of the Reserve Forces.

Where an employer enters into an arrangement that, in the Commissioners opinion was made solely or principally to avoid payment of their superannuation obligation, the employer will be liable to pay the amount that they would have to pay except for the arrangement (clause 27). (a penalty charge will also be payable - see below.)

The `nominal interest rate component', which is imposed on shortfalls to take account of earnings that would have been made on funds had contributions been made on time, will be that specified in the relevant provision of the Taxation (Interest on Overpayments) Act 1983 (i.e currently 14.026% or the rate fixed by regulation) (clause 28).

The administrative component will be $50 plus $30 (or the amount prescribed) multiplied by the number of employees in respect of whom there is a contribution shortfall (clause 29).

Part 4 of the Bill (clauses 30 to 39) deals with statements and assessment. Employers with a superannuation guarantee shortfall will be required to lodge an annual statement with the Commissioner of Taxation by 14 August in the next year, or by a later date if so allowed by the Commissioner. The statement is to include details, in respect of each employee for whom there is a shortfall, of the employees name, postal address and tax file number (if known) (clause 30). Clause 54 (see below) deals with the penalty charge applicable if this is not done. Clause 31 will allow the Commissioner to request information from other employers. Where an employer fails to lodge a statement, and the Commissioner is of the opinion that there the employer has a shortfall, the Commissioner may assess the shortfall (clause 33). Assessment may generally be amended within four years, although the Commissioner may make an amendment at any time if of the opinion that there has been avoidance due to fraud or an evasion of the charge (clause 34). Where there is a refund payable to an employer due to an amended assessment, the refund is to be paid to the employer. However, no interest will be payable (clause 35).

Part 5 of the Bill (clauses 40 to 42) deals with the administration of the Bill, which will be in the hands of the Commissioner of Taxation (clause 40). Clause 41 will require an Annual Report to be lodged on the operation of the Bill, while clause 41 deals with secrecy. The secrecy provision will apply to the Commissioner, Second Commissioners, Deputy Commissioners, officers and employees of the Australian Public Service under the control of the Commissioner and people otherwise employed by the Commonwealth. It will be an offence for such a person to disclose or make a record of protected information (i.e. information concerning a person or information gained due to the operation of this Bill), other than for the purposes or administration of this Bill. Such people will not be required to disclose protected information to a court or to produce a protected document.

The collection and recovery of the charge is dealt with in Part 6 of the Bill (clauses 43 to 53). The charge will become payable on the day the statement is lodged (clause 43), although the Commissioner may grant an extension of time for payment (clause 45). If charge remains unpaid after the day it becomes payable, the employer will be liable for a penalty at the rate determined by reference to the relevant provision of the Taxation (Interest on Underpayments) Act 1983 (currently 14.026% or the rate fixed by regulation). The penalty will be payable from the date originally due if an extension of time to pay is granted under clause 45. Where the charge has not ben paid, it will become a debt due to the Commonwealth (clause 47), which may be recovered from a deceased employers estate (clauses 49 and 50) or from people who owes money to, holds funds on behalf of or have an authority to deal with the funds of, the employer (clause 51). It will be an offence for such people not to comply with a request for the funds.

The penalty charge is dealt with in Part 7 of the Bill (clauses 54 to 57). Clause 54 provides that the penalty charge will be payable where the employer fails to provide a statement or information relevant to determining if they have a shortfall, fails to keep records in relation to the charge or refuses to provide details of their calculation of liability when requested. The amount of penalty will be equal to twice the charge payable by the employer during the year. If no charge was payable, the penalty will be $20. A similar penalty will be payable where the employer makes a false or misleading statement or omits information that makes a statement false or misleading (clause 55). Where there has been an arrangement to avoid the charge and the employer has been assessed as liable to make a payment under clause 27, the rate of penalty will be two times the amount of charge payable less the amount payable if clause 27 had not applied (clause 56).

The distribution of the shortfall charge is dealt with in Part 8 of the Bill (clauses 58 to 65). The first step is to calculate the amount of shortfall paid in respect of each employee (clause 59), and this amount will then be payable to a complying fund nominated by the employee or paid into a fund for the benefit of the employee in accordance with the regulations (clause 60). Where the employee is under 55 but has retired due to illness, the shortfall will be payable to the employee (clause 61), and if the employee has died, it will be payable to their estate (clause 62). Amounts payable under the part will be paid from Consolidated Revenue and will be appropriated by clause 65. References 1. 1991- 92 Budget Paper No. 1, p. 4.6. 2. ACTU, Media Release, 2 April 1992. 3. The canberra Times, 14 February 1992. 4. House of Representatives, Hansard, 2 April 1992, p. 1766.

Bills Digest Service Parliamentary Research Service For further information, if required, contact the Economics and Commerce Group on 06 2772460.

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

Commonwealth of Australia 1992

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Published by the Department of the Parliamentary Library, 1992.