Title Treasury Legislation Amendment (Repeal Day 2015) Bill 2015
Database Bills Digests
Date 03-02-2016
Source Bills Digest Service
Parl No. 44
Author SWOBODA, Kai
Citation Id 4337573
Key item Yes
Major subject Treasurer's portfolio
Employer contributions
Superannuation fund industry
Australian Taxation Office
Receivership
Tax penalties
Unclaimed money
Notification and reporting
Minor subject Bills
Legislative amendments
Repeal of legislation
Statistics
Pages 24p., bibl.
Volume no. 077 (2015-16)
System Id legislation/billsdgs/4337573


Treasury Legislation Amendment (Repeal Day 2015) Bill 2015

ISSN 1328-8091

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BILLS DIGEST NO. 77, 2015–16 3 FEBRUARY 2016

Treasury Legislation Amendment (Repeal Day 2015) Bill 2015 Kai Swoboda Economics Section

Contents

The Bills Digest at a glance ................................................... 3

Purpose and structure of the Bill .......................................... 4

Background ......................................................................... 4

Committee consideration .................................................... 5

Senate Selection of Bills Committee........................................ 5

Senate Standing Committee for the Scrutiny of Bills .............. 5

Policy position of non-government parties/independents ..... 5

Financial implications .......................................................... 5

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

Parliamentary Joint Committee on Human Rights .................. 6

Schedule 1—Superannuation guarantee charge changes ....... 6

Background .............................................................................. 6

Current arrangements ........................................................... 6

Changes to penalty arrangements ........................................ 7

Compliance superannuation guarantee arrangements ........ 7

Unpaid superannuation ......................................................... 8

Policy development ............................................................... 9

Australian National Audit Office ......................................... 9

Board of Taxation ................................................................ 9

Inspector-General of Taxation .......................................... 10

Consultation ...................................................................... 11

Position of major interest groups .......................................... 11

Key issues and provisions ...................................................... 11

Are changes to penalty arrangements required? ............... 11

Date introduced: 12 November 2015

House: House of Representatives

Portfolio: Treasury

Commencement: Schedule 1 and Parts 1 and 2 of Schedule 2 commence on 1 July 2016. Part 3 of Schedule 2 commences on a day fixed by proclamation but does not commence at all if no such proclamation is made within six months of Royal Assent. Schedules 3 and 4 commence the day after Royal Assent.

Links: The links to the Bill, its Explanatory Memorandum and second reading speech can be found on the Bill’s home page, or through the Australian Parliament website.

When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the ComLaw website.

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Lessening of penalties and simplifying the calculation of the superannuation guarantee charge—impact on employees and employers .................................................. 12

Using ordinary times earnings to work out superannuation guarantee shortfall ................................. 13

Changing the start point for calculating the nominal interest component........................................................... 13

Impact on employees and employers ............................... 13

Other penalties .................................................................... 14

Schedule 2—Lost members and unclaimed superannuation changes .................................................... 14

Background ............................................................................ 15

Terminal medical condition payment arrangements .......... 15

Lost member statements .................................................... 15

Policy development ............................................................. 16

Position of major interest groups .......................................... 16

Key issues and provisions ...................................................... 17

Withdrawals in relation to a terminal medical condition ... 17

Small Superannuation Accounts Act 1995 amendments ..................................................................... 17

Superannuation Guarantee (Administration) Act 1992 amendments ..................................................................... 17

Other amendments in Part 1 of Schedule 2 ...................... 17

Concluding comments ....................................................... 18

Lost members statements ................................................... 18

Schedule 3—Modify ‘in receivership’ rules ......................... 18

Background ............................................................................ 18

Responsible entities and registered schemes ..................... 18

Current situation ................................................................. 19

What problems are being addressed? ................................ 19

Policy development ............................................................. 20

Position of major interest groups .......................................... 21

Key issues and provisions ...................................................... 21

Notification Obligations ...................................................... 21

Definitions ........................................................................... 21

Reporting obligations .......................................................... 23

Concluding comments ........................................................... 24

Schedule 4—Repeal of inoperative acts and provisions of the taxation law ................................................................ 24

Position of major interest groups .......................................... 24

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The Bills Digest at a glance

Overview of the Bill

• The Treasury Legislation Amendment (Repeal Day 2015) Bill 2015 consists of four Schedules, each of which deals with separate matters.

• The main thrust of these changes is the Government’s broad strategy for a reduction in business regulation and the repeal of redundant legislation and regulations.

• The measures proposed by the Bill have a nil net financial impact.

Schedule 1—Changes to the calculation of the superannuation guarantee charge

• The superannuation guarantee charge is paid by employers who do not make the appropriate superannuation contribution on behalf of their employees by the required time.

• The changes proposed by the Bill change the way the charge is calculated, reduce the period over which a nominal interest charge is applied and remove an additional penalty (which is to be replaced by general tax penalty provisions).

Schedule 2—Payment of superannuation for those with a terminal medical condition and lost members reporting

• People with a diagnosed terminal medical condition are generally able to access their superannuation tax free. However, sometimes the payment of certain ATO administrated superannuation monies can be delayed by requiring these monies to be paid to the person indirectly through their superannuation fund. The changes proposed by the Bill will allow the Commissioner of Taxation to make these payments directly to the individual concerned.

• Superannuation funds are required to report biannually to the Commissioner about ‘lost’ superannuation members—generally those members of a super fund who are inactive or uncontactable—so that the Commissioner can maintain a register of such members. This requirement is proposed to be repealed although this information will still be available through other channels and such a register will continue to be maintained.

Schedule 3—Modifying the notification and reporting obligations for certain corporations that have property in receivership or property in respect of which a controller is acting

• Schedule 3 proposes to modify the notification and reporting obligations for those corporations that have property in receivership or a controller acting in respect of that property.

• Under the proposed amendments, corporations acting as responsible entities will only have to notify that a either a receiver or a controller has been appointed on the public documents and negotiable instruments of the registered scheme that is subject to these actions, rather than on every public document and negotiable instrument of the said corporation or other entities connected with that corporation.

• Further, where a controller has been appointed, the corporation only has to report to that controller on the affairs of the entity that is itself in receivership, and not the affairs of the entire corporation.

Schedule 4—Repeal of inoperative acts and provisions of the taxation law

• Schedule 4 repeals a number of inoperative or spent taxation provisions.

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Purpose and structure of the Bill The Treasury Legislation Amendment (Repeal Day 2015) Bill 2015 (the Bill) contains four separate Schedules. Each Schedule deals with separate material and amends various taxation, superannuation and other laws.

Schedule 1 of the Bill amends several Acts to change arrangements relating to the calculation and application of penalties on employers who make a late or insufficient compulsory superannuation payment on behalf of an employee:

• it amends the Superannuation Guarantee (Administration) Act 1992 and the Tax and Superannuation Laws Amendment (Norfolk Island Reforms) Act 2015 to align the earnings base for calculating the superannuation guarantee charge with the earnings base for calculating superannuation guarantee contributions

• it amends the Superannuation Guarantee (Administration) Act to provide that the nominal interest on unpaid or late superannuation guarantee charge contributions is only paid for the period in which they are actually outstanding and

• it amends the Crimes (Taxation Offences) Act 1980, the Superannuation Guarantee (Administration) Act and the Taxation Administration Act 1953 to align the penalties imposed under the superannuation guarantee charge regime with the administrative penalties imposed by the Taxation Administration Act.

Schedule 2 of the Bill amends the Income Tax Assessment Act 1997, Superannuation (Unclaimed Money and Lost Members) Act 1999, and other superannuation laws to enable the Commissioner of Taxation to pay certain superannuation amounts directly to individuals with a terminal medical condition and to remove the requirement for superannuation funds to lodge a biannual lost members statement with the Commissioner.

Schedule 3 of the Bill amends the Corporations Act 2001 to modify the notification and reporting obligations for certain corporations that have property in receivership or a controller acting in respect of that property.

Schedule 4 of the Bill repeals a number of inoperative or spent taxation Acts as well as amending various tax laws to remove a number of inoperative or spent provisions.

Background One of the major themes of the Government’s legislative program is a reduction in business regulation and the repeal of redundant legislation and regulations.1 Four separate packages of Bills have been introduced in the Parliament to date as part of this program:

• 2015 Spring Repeal Day—Treasury Legislation Amendment (Repeal Day 2015) Bill 2015 (this Bill), Omnibus Repeal Day (Spring 2015) Bill 2015 and the Amending Acts 1990 to 1999 Repeal Bill 2015

• 2015 Autumn Repeal Day—Omnibus Repeal Day (Autumn 2015) Bill 2015, Amending Acts 1980 to 1989 Repeal Bill 2015 and the Competition and Consumer Amendment (Deregulatory and Other Measures) Bill 2015

• 2014 Spring Repeal Day—Bills that were part of this package included the Omnibus Repeal Day (Spring 2014) Bill 2014, Amending Acts 1970 to 1979 Repeal Bill 2014 and the Treasury Legislation Amendment (Repeal Day) Bill 2014

• 2014 Autumn Repeal Day—Bills that were part of this package included the Omnibus Repeal Day (Autumn 2014) Bill 2014, Amending Acts 1901 to 1969 Repeal Bill 2014, and the Statute Law Revision Bill (No 1) 2014.2

In general, the measures included in the first three repeal day packages have been non-controversial and have largely focussed on removing redundant legislation and provisions. That said, there have been elements of some of the repeal day Bills that have not received unanimous support, including:

• the 2014 Autumn Repeal Day package included the Australian Charities and Not–for–profit Commission (Repeal) (No. 1) Bill 2014. This Bill, which proposes to abolish the Australian Charities and Not–for–profit

1. Liberal Party of Australia, The Coalition's policy for small business, Coalition policy document, Election 2013; T Abbott, ‘Speech: Deregulation’, House of Representatives, Debates, 22 October 2014, p. 11590–1, both accessed 2 December 2015. 2. Department of Prime Minister and Cabinet (PM&C), ‘Repeal Day’, Cutting Red Tape website, accessed 2 December 2015.

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Commission, was opposed by the Australian Labor Party (ALP) and the Australian Greens.3 The Bill remains in the House of Representatives4

• the 2014 Spring Repeal Day package included the Treasury Legislation Amendment (Repeal Day) Bill 2014. The Bill proposed to repeal not yet implemented superannuation payslip reporting requirements.5 The part of the Bill that included this measure was opposed by the Australian Greens in the Senate.6 However, the Bill as originally introduced (that is, including the repeal of the payslip reporting requirements) was passed by the Senate on 10 February 2015.7

The Government claims that as a result of this repeal day program, as at 12 November 2015, it has repealed over 10,000 legislative instruments and introduced legislation to repeal around 3,600 Acts of Parliament.8

Committee consideration Senate Selection of Bills Committee On 26 November 2015, the Senate Selection of Bills Committee recommended that the Bill not be referred to a committee for inquiry.9

Senate Standing Committee for the Scrutiny of Bills The Senate Standing Committee for the Scrutiny of Bills had no comment on the Bill.10

Policy position of non-government parties/independents During debate on the Bill in the House of Representatives, the Shadow Minister for Financial Services and Superannuation indicated that the ALP would support Schedules 2, 3 and 4, noting that these ‘contain what we consider to be uncontroversial measures or measures that we support’.11 However, the ALP does not support Schedule 1 of the Bill, considering that these amendments ‘will do so much damage to the superannuation balances of Australian workers’.12

As at the date of writing, no other non-government parties or independents had taken a position on the Bill.

Financial implications The Explanatory Memorandum states that the proposed changes in the Bill have a nil net financial impact.13

Statement of Compatibility with Human Rights As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bill’s compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act. The Government considers that the Bill is compatible.14

3. M Thomas, Australian Charities and Not-for-profits Commission (Repeal) (No. 1) Bill 2014, Bills digest, 68, 2013–14, Parliamentary Library, Canberra, May 2014, pp. 4–5, accessed 18 January 2016. 4. Parliament of Australia, ‘Australian Charities and Not-for-profits Commission (Repeal) (No. 1) Bill 2014 homepage’, Australian Parliament website, accessed 18 January 2016. 5. K Swoboda, Treasury Legislation Amendment (Repeal Day) Bill 2014, Bills digest, 67, 2014–15, Parliamentary Library, Canberra, February 2015,

pp. 5–9, accessed 18 January 2016. 6. J Rice, ‘Second reading speech: Treasury Legislation Amendment (Repeal Day) Bill 2014’, Senate, Debates, 10 February 2015, p. 355, accessed 18 January 2016. 7. Parliament of Australia, ‘Treasury Legislation Amendment (Repeal Day) Bill 2014 homepage’, Australian Parliament website, accessed

18 January 2016. 8. PM&C, ‘Tracking our progress’, Cutting Red Tape website, accessed 2 December 2015. 9. Senate Selection of Bills Committee, Report, 15, 2015, The Senate, 26 November 2015, p. 3, accessed 10 December 2015. 10. Senate Standing Committee for the Scrutiny of Bills, Alert digest, 13, 2015, The Senate, 25 November 2015, p. 41, accessed

10 December 2015. 11. J Chalmers, ‘Second reading speech: Treasury Legislation Amendment (Repeal Day 2015) Bill 2015’, House of Representatives, Debates, 1 December 2015, p. 14273, accessed 3 December 2015. 12. Ibid.

13. Explanatory Memorandum, Treasury Legislation Amendment (Repeal Day) Bill 2015, pp. 3–4. 14. The Statement of Compatibility with Human Rights can be found at pages 17–18, 24, 36 and 41–42 of the Explanatory Memorandum to the Bill.

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Parliamentary Joint Committee on Human Rights The Parliamentary Joint Committee on Human Rights considers that the Bill does not raise human rights concerns.15

Schedule 1—Superannuation guarantee charge changes Schedule 1 makes three main changes to the superannuation guarantee charge (SGC) arrangements:

• it amends the Superannuation Guarantee (Administration) Act 1992 and the Tax and Superannuation Laws Amendment (Norfolk Island Reforms) Act 2015 to align the earnings base for calculating the SGC with the earnings base for calculating superannuation guarantee contributions.

• it amends the Superannuation Guarantee (Administration) Act to provide that the nominal interest on unpaid or late SGC contributions is only paid for the period in which they are actually outstanding, and

• it amends the Crimes (Taxation Offences) Act 1980, the Superannuation Guarantee (Administration) Act and Taxation Administration Act 1953 to align the penalties imposed under the SGC regime with the administrative penalties imposed by the Taxation Administration Act 1953.

Item 27 of Schedule 1 specifies that the amendments apply to a quarter beginning on or after 1 July 2016.

Background

Current arrangements Under the Superannuation Guarantee (Administration) Act 1992, employers are penalised if they do not pay a prescribed minimum level of superannuation contributions each quarter—subject to certain exemptions—set at a specific percentage of an employee’s ordinary time earnings (the legislated percentage).16 This percentage is currently 9.5 per cent and is legislated to rise to 12 per cent on 1 July 2025.17

To avoid penalties, employers must generally pay the required superannuation contribution for each employee within 28 days of the end of a quarter.18 The penalty arrangements for not making the appropriate level of contribution for each employee (defined as the ‘superannuation guarantee shortfall’) comprises of three separate components:

• the total of the amounts that employees have been underpaid based on the ‘total salary or wages paid by the employer to the employee for the quarter’, less any contributions made, multiplied by the legislated percentage

• a ‘nominal interest component’—which is broadly a substitute for fund earnings that would have accrued if the employer had provided the prescribed minimum superannuation contributions during the quarter— calculated by multiplying the total of the employer’s individual superannuation guarantee shortfalls for the quarter by the interest rate of 10 per cent per annum.19 The interest is imposed from the beginning of the quarter in question until the date on which superannuation guarantee charge in relation to the total would be payable and

• an ‘administration component’ of $20 per quarter per employee for whom there is a superannuation guarantee shortfall (this amount may be prescribed in regulations).20

If the appropriate amount of superannuation contribution is not paid for an employee for a given quarter, within 28 days after the end of the quarter, the employer is required to lodge a superannuation guarantee statement by the 28th day of the following month.21 For example, for the quarter 1 January to 30 March, superannuation contributions are required to be paid by 28 April and if they are not paid on time the superannuation guarantee statements are required to be lodged by 28 May.

15. Parliamentary Joint Committee on Human Rights, Thirty-first report of the 44th Parliament, The Senate, Canberra, 24 November 2015, p. 2, accessed 28 January 2016. 16. Superannuation Guarantee (Administration) Act 1992, sections 19, 27–29, accessed 20 January 2016. 17. Ibid., section 19. 18. Ibid., section 23. 19. Regulation 7A, Superannuation Guarantee (Administration) Regulations 1993, accessed 20 January 2016. 20. Superannuation Guarantee (Administration) Act 1992, op. cit., sections 17, 19, 22, 23, 31 and 32. 21. Ibid., section 33.

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Where an employer lodges a superannuation guarantee statement for a quarter, and no previous statement for the quarter has been lodged and no previous assessment raised, the Commissioner is taken to have made an assessment of the employer’s superannuation guarantee shortfall and of the superannuation guarantee charge payable on the shortfall as specified in the statement.22

If an employer fails to lodge a superannuation guarantee statement for a quarter and the Commissioner is of the opinion that the employer is liable to pay superannuation guarantee charge, the Commissioner may make a default assessment of the employer’s superannuation guarantee shortfall and of the superannuation guarantee charge payable.23

If an employer fails to provide a superannuation guarantee statement or information relevant to assessing their superannuation guarantee charge liability, the employer is liable for an additional superannuation guarantee charge penalty up to 200 per cent of the charge payable by the employer for the quarter.24

Changes to penalty arrangements Some elements of the penalty arrangements applying to employers who have not made the appropriate level of superannuation payments on behalf of an employee have undergone a number of changes since their inception from 1 July 1992 and some have remained largely unchanged:

• The assessment of whether superannuation had been underpaid changed from being calculated on a ‘notional earnings base’ in many cases to being standardised on an ‘ordinary time earnings’ basis from 1 July 2008.25 The superannuation guarantee charge however has continued to be imposed on salary or wages since the inception of the superannuation guarantee.

• the charge percentage remained at nine per cent between July 2002 and June 2012. It increased to 9.25 per cent on 1 July 2013 and then to 9.5 per cent from 1 July 2014. It will remain at 9.5 per cent until July 2021, when it rises by 0.5 percentage points each year until it reaches 12 per cent in July 2025.26

• the compliance arrangements were changed from an annual to quarterly approach from 1 July 200327

• the nominal interest component rate of 10 per cent has remained unchanged since 199628 and

• the $20 amount has remained unchanged since 1 July 2003, when it was reduced from $30 as part of the change from an annual compliance approach to a quarterly compliance approach.29

Compliance superannuation guarantee arrangements In 2014–15, approximately 880,000 employers may have been required to make superannuation guarantee contributions on behalf of their employees.30 The total value of compulsory superannuation contributions paid by employers under the superannuation guarantee to superannuation funds (excluding self managed superannuation funds) in 2014–15 was around $53 billion.31

Research suggests that overall employers generally do not have significant issues in complying with their superannuation obligations. A 2010 review commissioned by the ATO into employer attitudes on superannuation found that 74 per cent of employers considered it ‘easy’ to manage their superannuation obligations, with the smaller the business, the greater the proportion that considered it easy to manage their superannuation obligations.32 That said, the same research revealed that:

22. Ibid., section 35. 23. Ibid., section 36. 24. Ibid., section 59. 25. Superannuation Laws Amendment (2004 Measures No. 2) Act 2004, Schedule 1, accessed 10 December 2015. 26. Superannuation Guarantee (Administration) Act 1992 (as made), subsection 20(3); Minerals Resource Rent Tax Repeal and Other Measures

Act 2014, Schedule 6, both accessed 10 December 2015. 27. Taxation Laws Amendment (Superannuation) Act (No. 2) 2002, Schedule 1, accessed 20 January 2016. 28. Superannuation Guarantee (Administration) Regulations (Amendment), item 2, accessed 10 December 2015. 29. Taxation Laws Amendment (Superannuation) Act (No. 2) 2002, Schedule 1. 30. Australian Taxation Office, Annual report 2014–15, ATO, Canberra, 2015, p. 8, accessed 20 January 2016. 31. Australian Prudential Regulation Authority (APRA), Statistics: Quarterly Superannuation Performance, September 2015, APRA, Sydney,

19 November 2015, p. 10, accessed 11 December 2015. 32. Colmar Brunton, Investigating superannuation: quantitative investigation with employers final quantitative report, report prepared for the ATO, Colmar Brunton, Melbourne, 20 January 2010, p. 14, accessed 11 December 2015.

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• 34 per cent of businesses have at some point been late making SG payments including 20 per cent that had made late payments on multiple occasions

• the incidence of making late payments is more prevalent among businesses with fewer staff, with 39 per cent of micro businesses (up to five staff) having made a late payment in the past compared to 11 per cent of large businesses (100 or more staff). The most common reasons for being late with payments were oversight (32 per cent) and cash flow problems (26 per cent).33

A 2013 review of small and medium business owner attitudes to business tax affairs found that 98 per cent were ‘very confident or reasonably confident’ in managing their superannuation guarantee obligations.34 Of those businesses which employed contractors, four in five were confident in their understanding of superannuation obligations for contractors.35

Unpaid superannuation There are several sources of the estimated value of unpaid superannuation contributions. The first is based on compliance activity by the ATO to enforce the superannuation guarantee arrangements. This work, much of which is based on complaints received from employees, has identified almost $3.2 billion in unpaid superannuation contributions over the five years to 2014–15 (Table 1). Of this amount identified, around half is ultimately paid by employers and transferred into employees’ superannuation funds.

Table 1 Superannuation guarantee charge and penalties 2010–11 to 2014–15

2010–11 2011–12 2012–13 2013–14 2014–15

Superannuation guarantee charge raised ($m) 517 553 646 743 735

Raised from risk-based work ($m) na 157 207 237 156

Raised from employee complaints ($m) 329 306 331 417 474

Raised from voluntary lodgement ($m) na 90 108 88.5 105

Superannuation guarantee charge collections ($m) 269 323 337 395 379

Transferred to employee funds 258 295 312 388 372

Transferred as a share of raised (%) 50% 53% 48% 52% 51%

Source: Australian Taxation Office, Annual Report 2014–15, p. 56; Annual Report 2012–13, p. 55; Annual Report 2010–11, pp. 54 and 57, accessed 11 December 2015.

Another estimate of unpaid superannuation was commissioned by industry superannuation fund Cbus. This study, which covers activities outside of ATO superannuation guarantee compliance including the cash economy and ‘sham contracting’, estimated that non-compliance cost employees around $2.6 billion in 2013, with around 700,000 workers missing out on some or all of their superannuation contributions (Figure 1).36 The report noted that the most affected industry as construction, with property services, mining, hospitality and manufacturing industries also noted to have ‘elevated non-compliance’.37

33. Ibid., p. 9. 34. C Young, Small and medium enterprise perceptions survey (SMEPS) report, report prepared for the ATO, ORC International, Sydney, September 2013, p. 20, accessed 11 December 2015. 35. Ibid., p. 21. 36. Tria Investment Partners, Superannuation guarantee non-compliance, presentation slides prepared for Cbus Super, September 2015, p. 5,

accessed 11 December 2015. 37. Ibid.

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Figure 1 Estimated value of unpaid superannuation guarantee contributions, by source, 2010–2013 ($b)

Source: Tria Investment Partners, Superannuation guarantee non-compliance, presentation slides prepared for Cbus Super, September 2015, p. 6, accessed 11 December 2015.

Policy development There have been a number of recent reviews that have examined aspects of superannuation guarantee compliance arrangements. These have generally focused on different perspectives of compliance arrangements, such as compliance costs on employers or ATO compliance processes, rather than the system overall.

Australian National Audit Office A 2015 performance audit by the Australian National Audit Office (ANAO) focussed on how effectively the ATO performed its compliance activities in relation to the superannuation guarantee.38 The ANAO made four recommendations, which covered obtaining further information about non-compliance, increasing emphasis on the ATO’s role in enforcing compliance in its communication and marketing activities, an alignment with compliance activities in other business units and enabling a more reliable assessment of the effectiveness of compliance strategies.39

Prior to this, the ANAO had examined the ATO’s administration of the superannuation guarantee scheme in 1999.40

Board of Taxation A 2014 review by the Board of Taxation of tax impediments facing small business, which examined a range of superannuation guarantee compliance issues including changing the monthly threshold of $450 over which superannuation guarantee payments are required to be made to a quarterly threshold of $1,350.41 Of relevance to the proposals included in the Bill are the Board’s recommendations that:

• the superannuation guarantee charge be calculated on the basis of ordinary time earnings rather than salary and wages to align it with the way that superannuation contributions are calculated

• the calculation of the superannuation charge components be ‘redesigned by legislation’

• the superannuation guarantee charge and any employer contributions paid to a superannuation fund that are used to offset the charge payable should be deductible to the employer when the amounts are paid and

38. Australian National Audit Office (ANAO), Promoting compliance with superannuation guarantee obligations, ANAO report, 39, 2014–15, 3 June 2015, accessed 11 December 2015. 39. Ibid., pp. 29–30. 40. ANAO, Superannuation guarantee: Australian Taxation Office, Audit report, 16, 1999–2000, 15 November 1999, accessed 16 December 2015. 41. Board of Taxation, Review of tax impediments facing small business: A report to the Government, August 2014, p. 46, accessed 16 December

2015.

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• the automatic requirement on employers to lodge a superannuation guarantee charge statement (and the associated documentation) with the ATO when they become liable to the charge should be removed. The employer instead should be required to pay the late superannuation contribution and the associated interest directly to the superannuation fund.42

In relation to the superannuation charge components the Board noted that:

[T]he operation of the [superannuation guarantee] Charge regime is unnecessarily harsh, often with disproportionate outcomes, and very limited discretion by the Commissioner to take into account factors surrounding a late payment.

… Despite the intention of the regime, the Board is aware of a number of examples where the application of the law gives rise to disproportionate interest and administration elements. With no discretion by the Commissioner, factors surrounding a late payment cannot be considered. 43

On 20 January 2015, the then Minister for Small Business and then Assistant Treasurer released the Board’s report.44 As part of the announcement releasing the report, the Government announced changes to take effect from 1 July 2016 so that ‘penalties for employers who inadvertently pay their superannuation guarantee late or short pay their employees’ contributions by a small amount reflect the nature of the breach’.45

The Government’s broader response to the recommendations of the Board’s review did not support the recommendation allowing employers to assess superannuation obligations for employees against a quarterly threshold of $1,350, nor did it support the recommendation that the superannuation guarantee charge be deductible.46

Inspector-General of Taxation A 2014 review by the Inspector-General of Taxation (IGT) of the ATO’s administration of penalties examined how the ATO’s compliance activities, and the current legislative arrangements, impacted on businesses.47 The review included a summary of the penalties raised by the ATO in enforcing compliance with the superannuation guarantee. The review included a broad recommendation to government about improving the penalties regime to foster voluntary compliance as well as recommendations to the ATO about capability and practice in administering penalties.48

A 2010 review by the IGT of the ATO’s administration of the superannuation guarantee charge made recommendations to improve administration and compliance.49 Recommendations included the ATO obtaining better information about non-compliance risks and impacts, having employers provide information on payslips about the amount and date of payments and expanding its proactive audit work.50 The review noted that superannuation guarantee system ‘works well for the majority of Australians’ but that ‘the people most at risk with the current [superannuation guarantee] system are the employees who are the least empowered or incorrectly classified as ‘independent contractors’’.51 In relation to the penalty arrangements, the review noted that:

42. Ibid., pp. 47 and 50. 43. Ibid., p. 50. 44. B Billson (Minister for Small Business) and J Frydenberg (Assistant Treasurer), Board of Tax report on tax and small business, media release, 20 January 2015, accessed 16 December 2015.

45. Ibid.

46. Australian Government, Government response to the Board of Taxation’s review into tax impediments facing small business, 20 January 2015, accessed 16 December 2015. 47. Inspector-General of Taxation (IGT), Review into the Australian Taxation Office’s administration of penalties: A report to the Assistant Treasurer, IGT, Sydney, February 2014, accessed 11 December 2015. 48. Ibid., pp. vii to viii. 49. IGT, Review into the ATO’s administration of the Superannuation Guarantee Charge: A report to the Assistant Treasurer, IGT, Sydney, March

2010, accessed 16 December 2015. 50. Ibid., pp. 8–15. 51. Ibid., p. 3.

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The current penalty and prosecution regimes, and the ATO’s administration of these regimes, do not have either a sufficient deterrence or behavioural effect on those who do not lodge a [superannuation guarantee charge] Statement or on employers that do not make [superannuation guarantee] payments at all. 52

Consultation Draft legislation for the proposed measures was published by the Treasury on 21 August 2015.53 The Bill incorporates some additional elements relating to apportioning payments of shortfall amounts between employees but the key provisions remain unchanged from that exposure draft.

Position of major interest groups The Australian Chamber of Commerce and Industry (ACCI) is supportive of the proposed changes.54 In relation to the proposed change to align the earnings base for calculating the superannuation guarantee charge with the earnings base for calculating superannuation guarantee contributions, the ACCI notes that:

It is simply good law that a delayed payment of the same amount of contribution for two employees which is unpaid for the same amount of time should give rise to the same amount of shortfall. Law producing some other result is simply not good law. 55

The Association of Superannuation Funds of Australia (ASFA) considers that compliance with the superannuation guarantee by employers is a significant problem.56 AFSA noted that:

[T]he proposed changes contained in the Superannuation Guarantee Legislation Amendment (Simplification) Bill 2015 should only be made if additional resources are provided to the Australian Taxation Office to detect breaches of [superannuation guarantee] obligations and to pursue associated required payments by employers.

The passing of this legislation should not be a signal to employers that the obligation to make [superannuation guarantee] payments has in some way diminished.

In this context we consider that it is essential that dealing with [superannuation guarantee] non-compliance be more highly prioritised within the ATO and that the relevant areas within the ATO be more appropriately funded. 57

The Australian Institute of Superannuation Trustees (AIST) does not support the measures proposed by Schedule 1 of the Bill as it considers that they reduce disincentives to employers to pay superannuation on time.58 The AIST considers that the changes should be ‘abandoned’.59

Key issues and provisions

Are changes to penalty arrangements required? The purpose of penalties in the tax system is to ‘promote the smooth running of social and economic structures by shaping desired behaviours and punishing undesirable behaviours’.60 Underpinning the design of tax penalty arrangements under a self-assessment system are four general principles established in a 1989 United States tax policy paper for evaluating whether penalties encourage voluntary compliance—namely fairness,

52. Ibid., p.7. 53. Treasury, Superannuation Guarantee Legislation Amendment (Simplification) Bill 2015: Exposure Draft, Treasury website, [21 August 2015], accessed 16 December 2015. 54. Australian Chamber of Commerce and Industry, Submission to Treasury, Superannuation Guarantee Legislation Amendment (Simplification)

Bill 2015: Exposure Draft, 22 September 2015, p. 6, accessed 17 December 2015. 55. Ibid., p. 8. 56. Association of Superannuation Funds of Australia, Submission to Treasury, Superannuation Guarantee Legislation Amendment (Simplification)

Bill 2015: Exposure Draft, 18 September 2015, p. 2, accessed 17 December 2015. 57. Ibid.

58. Australian Institute of Superannuation Trustees, Submission to Treasury, Superannuation Guarantee Legislation Amendment (Simplification) Bill 2015: Exposure Draft, 15 September 2015, p. 1, accessed 17 December 2015. 59. Ibid.

60. Inspector-General of Taxation, Review into the Australian Taxation Office’s administration of penalties: A report to the Assistant Treasurer, op. cit., p. 2.

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comprehensibility, effectiveness and ease of administration.61 The paper also noted that individual penalties and the penalty regime as a whole must effectively balance these four principles.62

The Inspector-General of Taxation has summarised the two general models of taxpayer compliance—a deterrence model and a norms model—to understand what motivates taxpayers to comply with their tax obligations:

The deterrence model argues that taxpayers will comply with their obligations where the expected benefits of compliance outweigh the expected costs of non-compliance. As a result, this model implies that tax penalties should be high in order to increase the expected costs of non-compliance and thereby encourage taxpayer compliance.

… The norms model argues that a substantial number of taxpayers comply with their obligations through adherence to social or personal norms, such as reciprocal cooperation and trust. For example, a taxpayer who values integrity, honesty and the benefits of citizenship may feel guilt, shame or similar emotions if they do not meet their tax obligations.

63

As noted previously, there have been a number of recent reviews that have examined various aspects of employer compliance with the superannuation guarantee arrangements. These reviews have identified a number of policy issues including significant amounts of unpaid superannuation and high compliance costs for employers. They have also included options for significant policy change—including a recommendation by the Board of Taxation in 2014 that the calculation of the superannuation charge components be ‘redesigned by legislation’.64

While the formal tax penalty structure can influence compliance by employers with superannuation guarantee arrangements, it is important to note that much of the ATO’s identification of non-compliance relies on an employee notifying the ATO about possible non-payment or underpayment. For example, over the four years to 2014–15, almost 60 per cent of unpaid superannuation identified by the ATO was based on employee complaints to the ATO about unpaid superannuation.65

The ANAO noted that resourcing for the ATO’s superannuation business line as at July 2014 was a budget of $103.4 million, with 917 full-time-equivalent staff engaged in superannuation activities.66

Policy choices about the tax penalty regime arrangements for the superannuation guarantee scheme will necessarily need to incorporate a balance between creating incentives for employers to comply and the value of foregone superannuation payments to employees, the latter of which has a lasting impact on retirement incomes. However, also important are the administrative resources and effectiveness of the ATO’s reactive and proactive compliance activities.

Lessening of penalties and simplifying the calculation of the superannuation guarantee charge—impact on employees and employers Under existing arrangements, the superannuation guarantee charge includes a component that effectively compensates the employee for non-payment of the appropriate level of superannuation contributions, but it also includes a number of components that penalise an employer. From the employee’s perspective, the amount paid by the employer to the ATO that is then forwarded to the superannuation fund may be higher or lower than if the contribution had been paid on time, depending on the extent to which salary or wages is higher than ordinary time earnings and the investment returns made by the employee’s superannuation fund relative to the 10 per cent interest component.

From the employer’s perspective, the penalty aspects of the superannuation guarantee charge arrangements comprise:

61. Ibid., p. 3. 62. Ibid., p. 4. 63. Ibid., p. 5. 64. Board of Taxation, op. cit.; IGT, Review into the Australian Taxation Office’s administration of penalties: A report to the Assistant Treasurer,

op. cit.; ANAO, Promoting compliance with superannuation guarantee obligations, op. cit. 65. ATO, Annual report 2014–15, op. cit., p. 56. 66. ANAO, Promoting Compliance with Superannuation Guarantee Obligations, op. cit., p. 41.

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• the difference between using ‘salary and wages’ in the calculation of the individual guarantee shortfall rather than the generally lower ordinary times earnings67

• the administration fee of $20 per employee

• the 10 per cent interest component being calculated from the start of the relevant quarter rather than when the payment was due and

• the superannuation guarantee charge not being deductible.

In addition, the employer may also be liable to penalties for failure to keep records and to a 200 per cent penalty for the failure to provide a superannuation guarantee statement.

Using ordinary times earnings to work out superannuation guarantee shortfall Item 4 of Schedule 1 amends the Superannuation Guarantee (Administration) Act 1992 by repealing the existing formula in subsection 19(1) which is used to calculate an employer’s ‘individual superannuation guarantee shortfall’ so that the charge amount is based on the employee’s ‘ordinary time earnings for the quarter’. Items 2 and 3 move the definition of ‘ordinary time earnings’ from subsection 6(1) to new section 11A. The proposed definition is restructured, but retains the exclusions in the current definition, including payments in lieu of sick leave and lump sums on termination of employment. As noted in the Explanatory Memorandum, ‘it is not intended that the calculation of ordinary time earnings be changed from the current definition’.68

As noted above, the use of ordinary time earnings to calculate the individual superannuation guarantee shortfall will be administratively simpler for employers but may result in a lower amount being calculated. This may therefore leave the employee ultimately receiving lower superannuation payments than otherwise and also reduce the level of penalty for employers.

Items 6 to 9 make consequential amendments to the Tax and Superannuation Laws Amendment (Norfolk Island Reforms) Act 2015—which was part of broader changes to extend many mainland social security, immigration, and health arrangements to Norfolk Island, as well as changes to the tax system—so as to similarly apply ordinary times earnings to work out superannuation guarantee shortfall for relevant employers on the island.69

Changing the start point for calculating the nominal interest component Item 11 repeals the existing definition of ‘nominal interest component’ in existing section 31 of the Superannuation Guarantee (Administration) Act, which is calculated from the beginning of the quarter to which it relates, and applies at the rate specified in regulations (currently 10 per cent per annum).70 This is replaced with a new definition which specifies that the ‘notional interest component’ is calculated at the rate specified in the regulations, but with interest accruing over the period starting on the 29th day after the end of the quarter (i.e. the day after which the superannuation contribution should have been paid) and generally ending the day before either the employer lodges the superannuation guarantee statement or the Commissioner makes a default assessment. New section 31 also provides that if a late payment had been made and the employer elects to offset the contribution against their individual superannuation guarantee shortfall for a quarter, then interest accrues up to the day after the employer makes the last late contribution payment.

Impact on employees and employers From the employee’s perspective, these two changes have the effect of lowering the amount that will be paid to the individual’s superannuation fund from the ATO. Using the worked examples under the proposed arrangements included in the Explanatory Memorandum and comparing these examples to existing arrangements, the employee ‘Mario’ would receive $29.30 less into his superannuation account when the

67. Ordinary times earnings can exclude a number of payments that will generally be part of salary and wages, such as overtime hours and bonuses in respect of overtime only (Australian Taxation Office (ATO), ‘Payments included in salary or wages and payments included in OTE’ ATO website, accessed 3 February 2016).

68. Explanatory Memorandum, op. cit., p. 11. 69. Under the Tax and Superannuation Laws Amendment (Norfolk Island Reforms) Act 2015, the superannuation guarantee system will apply on Norfolk Island for certain employees from 1 July 2016. For more information see B Pulle and K Swoboda, Tax and Superannuation Laws Amendment (Norfolk Island Reforms) Bill 2015 [and] A New Tax System (Medicare Levy Surcharge—Fringe Benefits) Amendment Bill 2015, Bills

digest, 99, 2014–15, Parliamentary Library, Canberra, 11 May 2015, accessed 29 January 2016. 70. The relevant regulations are the Superannuation Guarantee (Administration) Regulations 1993, Regulation 7A, accessed 15 December 2015.

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superannuation guarantee charge is paid to the ATO and then ultimately included in his superannuation fund (Table 2).

From the employer’s perspective, the proposed arrangements result in a further benefit because the reduction in penalty was not deductible, which at a 30 per cent corporate tax rate amounts to around a further $38.09 benefit ($309.36 plus 30 per cent) from the proposed arrangements—taking the total the employer’s penalty in paying superannuation contributions late in this example from $440.26 to $402.17—a reduction of nine per cent.

Table 2 Comparison of proposed and existing provisions on amounts paid by an employer based on examples 1.1 and 1.2 provided in the Explanatory Memorandum

Component Existing

arrangements Proposed arrangements Difference

(Proposed less existing)

Individual superannuation guarantee shortfall $304.00 $285.00 -$19.00

Nominal interest $14.66 $4.36 -$10.30

Administration $20.00 $20.00 $0.00

Total $338.66 $309.36 -$29.30

Employer payment plus non-deductibility of superannuation guarantee charge payments at 30% company tax rate

$440.26 $402.17 -$38.09

Total paid to employee’s superannuation fund (total less administration component) $318.66 $289.36 -$29.30

Source: Explanatory Memorandum, Treasury Legislation Amendment (Repeal Day 2015) Bill 2015, pp. 11–13; Parliamentary Library calculations using guidance material prepared by the Australian Taxation Office.

Other penalties Part 3 of Schedule 1 amends the Crimes (Taxation Offences) Act 1980, the Superannuation Guarantee (Administration) Act 1992 and the Taxation Administration Act 1953 to essentially remove the additional penalties that can be imposed by the Commission of Taxation under existing section 59 of Part 7 of the Superannuation Guarantee (Administration) Act and replaces them by providing that the employer is subject to an administrative penalty under the Taxation Administration Act.

The substantive amendment in Part 3 that achieves this is item 22, which repeals the existing Part 7 from the Superannuation Guarantee (Administration) Act. The remaining items in Parts 3 are largely consequential to the repeal of Part 7.

The imposition of administrative penalties by the Commissioner of Taxation is permitted under existing section 284–75 in Schedule 1 of the Taxation Administration Act, which provides for an administrative penalty in certain circumstances. These circumstances include making a statement that is false or misleading and failing to give the Commissioner a required document by the due date.71 The value of administrative penalties depends on the type of entity and nature of behaviour.72

Schedule 2—Lost members and unclaimed superannuation changes Schedule 2 amends the Income Tax Assessment Act 1997, Superannuation (Unclaimed Money and Lost Members) Act 1999, and other superannuation laws to enable the Commissioner of Taxation to pay certain superannuation amounts directly to individuals with a terminal medical condition and to remove the requirement for superannuation funds to lodge a biannual lost members statement with the Commissioner.

71. The charges and penalties regime is included in Part 4–25 of the Taxation Administration Act 1953, accessed 16 December 2015. 72. Ibid.

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Background

Terminal medical condition payment arrangements Under regulations made to the Superannuation Industry (Supervision) Act 1993, from 16 February 2008, a person has been able to access their superannuation balances if they meet the requirements of having a ‘terminal medical condition’.73 The criteria for such a condition existing are set out in the Superannuation Industry (Supervision) Regulations 2004 and require:

(a) two registered medical practitioners have certified, jointly or separately, that the person suffers from an illness, or has incurred an injury, that is likely to result in the death of the person within a period (the certification period) that ends not more than 24 months after the date of the certification;

(b) at least one of the registered medical practitioners is a specialist practicing in an area related to the illness or injury suffered by the person;

(c) for each of the certificates, the certification period has not ended. 74

One of these conditions was revised only recently and took effect from 1 July 2015. The change allowed members to access their superannuation if two medical practitioners have certified they have a terminal medical condition that is likely to result in their death within 24 months of certification. Previously the life expectancy period from date of certification was 12 months.75

Amounts released under these arrangements are generally tax free to the person with a terminal medical condition.76

Applications for early release of superannuation balances can be made by individuals directly to their superannuation fund(s). However, other superannuation amounts may be held by, or be payable to, the affected individual in the superannuation system through co-contributions, superannuation guarantee payments, or unclaimed superannuation amounts.77

As noted in the Explanatory Memorandum, it is these amounts held elsewhere in the superannuation system that can have payment arrangements that do not allow for the Commissioner of Taxation to make payments directly to the individual concerned, but require payments to be made first to the relevant superannuation fund(s).78

Schedule 2 of the Bill proposes to allow the Commissioner to make direct payments to affected individuals from these other areas of the superannuation system, rather than having them made indirectly through superannuation funds.

Lost member statements A lost member is a member of a super fund who is inactive, uncontactable, or transferred from another super provider as a lost member.79 A member is not a lost member if their address has been confirmed in the past two years, or they have indicated that they want to remain a member.80

As at 30 June 2015, there were almost 1.4 million lost accounts, with a combined total balance of $13.6 billion.81

73. Conditions of release are specified in Schedule 1 of the Superannuation Industry (Supervision) Regulations 1994, accessed 6 January 2016. 74. Superannuation Industry (Supervision) Regulations 1994, Regulation 6.01A, accessed 6 January 2016. 75. Tax and Superannuation Laws Amendment (Terminal Medical Conditions) Regulation 2015, accessed 6 January 2016. 76. Income Tax Assessment Act 1997, section 303–10, accessed 6 January 2016. Such payments are defined to be non-assessable non-exempt

income.

77. ATO, ‘Access to super for members with a terminal medical condition: Condition of release’, ATO website, accessed 6 January 2016. 78. Explanatory Memorandum, op. cit., pp. 20–21. 79. Section 22 of the Superannuation (Unclaimed Money and Lost Members) Act 1999 provides for the definition of a lost member to be specified in regulations. The definition is included in Regulation 1.03A of the Superannuation Industry (Supervision) Regulations 1994 and Regulation

1.06 of the Retirement Savings Accounts Regulations 1997 (accessed 18 January 2016). 80. Ibid.

81. Australian Taxation Office, Annual report 2014–15, op. cit., pp. 53–54.

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Superannuation funds have several reporting requirements in relation to lost members under the Superannuation (Unclaimed Money and Lost Members) Act 1999 but also under the Taxation Administration Act 1953.

Part 4 of the Superannuation (Unclaimed Money and Lost Members) Act 1999 requires (in association with the Superannuation (Unclaimed Money and Lost Members) Regulations 1999) the Commissioner of Taxation to keep a register of lost members containing information for the purpose of reuniting individuals with their lost superannuation money.82 This information is to be provided by superannuation funds on a biannual basis. This statement is referred to as a ‘lost members statement’.83 The relevant reporting dates are specified as 31 October for the period 1 January to 30 June of the same year and 30 April for the period 1 July to 31 December of the previous year.84

There is also a requirement to prepare an annual ‘member contributions statement’ under Division 390 of the Taxation Administration Act 1953 for all members of the fund.85 Information required in the statement includes contributions and account balances, but also information about the status of an account. The member contribution statement is required to be lodged with the ATO on or before 31 October following the end of the relevant financial year.86

The Bill proposes to repeal the existing provisions of Part 4 of the Superannuation (Unclaimed Money and Lost Members) Act, but there will continue to be a requirement for the Commissioner of Taxation to keep a register of lost members. The information for the register will be collected using the Commissioner’s existing administrative powers under the Taxation Administration Act 1953.87

Policy development The 2015–16 Budget included an announcement of unspecified measures ‘that will reduce red tape for superannuation funds and individuals by removing redundant reporting obligations and by streamlining lost and unclaimed superannuation administrative arrangements’.88 These measures were to come into effect from 1 July 2016.

On 28 August 2015, the Treasury released draft legislation that included ‘lost and unclaimed superannuation reforms’.89 These proposed changes are largely identical to those included in Schedule 2 of the Bill and make reference to the 2015–16 Budget announcement.90

Position of major interest groups The Australian Institute of Superannuation Trustees (AIST) supports the proposed changes that allow the Commissioner to directly pay persons with a terminal medical condition, and the eventual removal of the lost member statement.91 However, the AIST proposes that the lost member statement removal should be delayed by one year ‘in order to avoid a gap in lost member reporting and improve the quality of reporting’.92

82. Superannuation (Unclaimed Money and Lost Members) Act 1999; Superannuation (Unclaimed Money and Lost Members) Regulations 1999, Part 4, both accessed 18 January 2016. 83. Australian Taxation Office (ATO), ‘Lost members’, ATO website, accessed 18 January 2016. 84. Regulation 6 of the Superannuation (Unclaimed Money and Lost Members) Regulations 1999; (ATO, ‘Lost members: When to lodge, records

to keep’, ATO website, accessed 18 January 2016). 85. Taxation Administration Act 1953, Division 390, accessed 18 January 2016. 86. Australian Taxation Office (ATO), ‘Member contributions’, ATO website, accessed 20 January 2016. 87. Explanatory Memorandum, op. cit., p. 22. 88. Australian Government, Budget measures: budget paper no. 2, 2015–16, p. 173, accessed 6 January 2016. 89. Treasury, Treasury Legislation Amendment (Spring Repeal Day 2015) Bill 2015: Exposure Draft, [28 August 2015], accessed 6 January 2016. 90. Treasury, Treasury Legislation Amendment (Spring Repeal Day 2015) Bill 2015: Exposure Draft: explanatory material, [28 August 2015], p. 17,

accessed 6 January 2016. 91. Australian Institute of Superannuation Trustees (AIST), Submission to Treasury, Treasury Legislation Amendment (Spring Repeal Day 2015) Bill 2015: Exposure Draft, 28 September 2015, p. 1, accessed 6 January 2016. 92. Ibid.

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Key issues and provisions

Withdrawals in relation to a terminal medical condition

Small Superannuation Accounts Act 1995 amendments The Small Superannuation Accounts Act 1995 provided a mechanism for employers to make deposits to a collection mechanism to meet their superannuation guarantee obligations from 1 July 1995 to 30 June 2006 with payments received into the Superannuation Holding Accounts Special Account (SHASA), which is administered by the ATO.93 Since 1 July 2006, the SHASA has acted as a facility to accept payments of superannuation guarantee charge amounts, government co-contributions or the low income superannuation contributions.94

The Small Superannuation Accounts Act provides a number of circumstances in which direct withdrawals by individuals are permitted, including if the balance is less than $200 and the individual has ceased to be employed by all depositors; the individual is in receipt of Commonwealth income support payments for a sufficient period; or the individual has retired because of permanent disability.95 Alternatively, individuals can make a request to the Commissioner of Taxation to transfer moneys from the SHASA to a superannuation account.96

Item 8 of Schedule 2 is the substantive amendment to the Small Superannuation Accounts Act and inserts new section 65A to require requested amounts be paid directly to people and for their SHASA account to be debited by the amount of the payment, where those people satisfy the terminal medical condition criteria and after they have made a written withdrawal request to the Commissioner of Taxation. These arrangements broadly replicate the provisions applying to withdrawals relating to other circumstances.

Superannuation Guarantee (Administration) Act 1992 amendments Section 65 of the Superannuation Guarantee (Administration) Act 1992 provides for the Commissioner of Taxation to make payments of the superannuation guarantee charge shortfall component to the SHASA if the employee has not nominated an appropriate account.97

Item 10 amends the Superannuation Guarantee (Administration) Act to insert new section 66A to provide for the payment of shortfall amounts, after a request has been made by an individual who satisfies the terminal medical condition requirements, directly to the individual. This broadly replicates the existing arrangements that apply to payments to employees who retire due to permanent incapacity or invalidity.

Other amendments in Part 1 of Schedule 2 Items 1 to 3, which amend section 307–5 of the Income Tax Assessment Act 1997 are consequential to the amendments to the Small Superannuation Accounts Act and the Superannuation Guarantee (Administration) Act and provide for the payments made by the Commissioner of Taxation after application by an individual who satisfies the terminal medical condition requirements to be classified as a ‘superannuation benefit’—thereby allowing them to be tax free.

Section 24G of the Superannuation (Unclaimed Money and Lost Members) Act 1999 provides that the Commissioner of Taxation must pay amounts of ‘lost’ member superannuation balances transferred to the Commissioner from a superannuation fund directly to a person in certain circumstances.98 The circumstances are: the person has not directed the Commissioner to pay the amount to a nominated complying superannuation plan; the person has reached the eligibility age or the amount is less than $200; and the person

93. L Nielsen, Superannuation Legislation Amendment (Choice of Superannuation Funds) Bill 2005, Bills digest, 171, 2004–05, Parliamentary Library, Canberra, May 2005, p. 4, accessed 3 February 2016. 94. Small Superannuation Accounts Act 1995, section 3, accessed 6 January 2016. 95. Ibid., section 62. Sections 63 to 67A provide the specific requirements of each circumstance. 96. Ibid, sections 61 and 61A. 97. Superannuation Guarantee (Administration) Act 1992, paragraph 65(1)(c) and subsection 65(5), accessed 6 January 2016. 98. Superannuation (Unclaimed Money and Lost Members) Act 1999, paragraph 24G(2)(d), accessed 6 January 2016.

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has not died.99 The Commissioner is able to make such a payment on application or on his or her own initiative.100

Items 11 and 12 amend the Superannuation (Unclaimed Money and Lost Members) Act by repealing the existing paragraph 24G(2)(d), substituting a new paragraph 24G(2)(d) and inserting a new subsection 24G(2A). Together these new provisions allow money to be paid directly to a person if: the person is alive; the person has not directed the Commissioner to pay the amount to a nominated complying superannuation plan; and the person has reached the eligibility age, the amount is less than $200 or the person satisfies the terminal medical condition requirements.

Concluding comments Providing terminally ill persons with earlier access to their superannuation benefits is a significant practical change. However, further complementary legislative change may be required for terminally ill persons to properly realise the benefits of their superannuation scheme. The change made to the regulations in 2015 and this amendment apply to superannuation only. Associated changes have not been made to life insurance policies included with most superannuation fund memberships. Most policies allow a prepayment of insurance if someone has a life expectancy of less than one year. The new law does not change this timeframe, creating a gap year when insurance cover can lapse and is not available for withdrawal once the superannuation is withdrawn and the account is closed. While insurance funds may change their prepayment conditions, it may be useful to have certainty and consistency through legislative change. Simply providing notice on the websites of some superannuation funds about the year gap and the need to retain money in the fund may not be sufficient. This voluntary solution by industry does not deal with the issue of need for access to those monies, especially where the person’s superannuation entitlement may be insufficient relative to the economic demands they face, or where circumstances do not favour their actually having an opportunity to read that notice on some of the superannuation funds’ websites.

Lost members statements Item 15 of Part 2 of Schedule 2 repeals the existing Part 4 of the Superannuation (Unclaimed Money and Lost Members) Act 1999 which requires funds to submit biannual lost member statements to the Commissioner of Taxation. This is to be replaced by a new Part 4 which will require the Commissioner to keep a register of lost members and provide (as is currently the case) that the Commission may give information contained in the register to a state or territory authority subject to certain conditions.101

Schedule 3—Modify ‘in receivership’ rules This Schedule amends sections 428 and 429 of the Corporations Act to modify the notification and reporting obligations for certain types of corporations that have property in receivership or a controller acting in respect of that property.

Should these amendments pass through Parliament, corporations acting as responsible entities will only have to notify that a receiver or a controller has been appointed on the public documents and negotiable instruments of the registered scheme that is subject to these actions, instead on every public document and negotiable instrument of the said corporation or other entities connected with that corporation.

Further, where a controller has been appointed, the corporation only has to report to that controller on the affairs of the entity that is itself in receivership, and not the affairs of the entire corporation.

Background

Responsible entities and registered schemes The amendments in this Schedule are mainly concerned with ‘responsible entities’ of ‘registered schemes’.

99. Ibid. The term ‘eligibility age’ is defined in section 10 of the Act to be 65 years for a man and 60 years for a woman unless another age is prescribed by regulation. The relevant regulations, the Superannuation (Unclaimed Money and Lost Members) Regulations 1999, prescribe a uniform eligibility age for men and women be the greater of 65 years or if the governing rules of the fund specify that a benefit is payable to a member only at a specified age that is greater than 65 years—that age (Regulation 4A, accessed 6 January 2016).

100. Ibid., paragraph 24G(1)(b). 101. These conditions broadly relate to a State or Territory Authority that may be a trustee of a superannuation scheme (section 18, Superannuation (Unclaimed Money and Lost Members) Act 1999, accessed 18 January 2016.

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In section 9 of the Corporations Act a ‘registered scheme’ means a managed investment scheme that is registered under section 601EB. In turn, a ‘managed investment scheme’ means a scheme that has the following features:

• people contribute money or money’s worth as consideration to acquire rights (interests) to benefits produced by the scheme (whether the rights are actual, prospective or contingent and whether they are enforceable or not)

• any of the contributions are to be pooled, or used in a common enterprise, to produce financial benefits, or benefits consisting of rights or interests in property, for the people (the members) who hold interests in the scheme (whether as contributors to the scheme or as people who have acquired interests from holders)

• the members do not have day‑to‑day control over the operation of the scheme (whether or not they have the right to be consulted or to give directions) or

• a time-sharing scheme. 102

Managed investment schemes may invest in a wide variety of assets including shares, property, fixed interest or relatively unconventional assets such as rural land and enterprises.103

In section 9 of the Corporations Act a ‘responsible entity’ of a registered scheme means the company named in the Australian Securities and Investments Commission’s (ASIC) record of the scheme’s registration as the responsible entity or temporary responsible entity of the scheme.

A responsible entity has the dual role of trustee and manager of an investment scheme, and must be appointed if an investment scheme needs to be registered.104The responsible entity must be an Australian public company, with certain levels of net tangible assets, depending on the value of the scheme’s assets.105 The responsible entity must hold an Australian Financial Services Licence.106 When acting on behalf of an investment scheme, the responsible entity must, amongst other things, hold the scheme property.107 They may appoint a custodian to hold this property on their behalf. A corporation may be a responsible entity for a number of registered schemes.

Current situation Under existing law, where a receiver has been appointed to any property controlled by a corporation acting as a responsible entity, that corporation must state in every public document and in every negotiable instrument that a receiver, a receiver/manager or a controller (other than a receiver), as the case may be, has been appointed.108 This is called the notification obligation.109

Further, where a controller etc. has been appointed to the property of a corporation, including the property controlled by the corporation (such as the property of a registered scheme), that latter entity must give to the controller/receiver a report on all of its affairs within 14 days of receiving a notice to do so.110 This is the reporting obligation.111

What problems are being addressed? The notification obligation applies even where the corporation’s affairs are on a sound financial footing, but the affairs of a registered scheme, for which it is responsible (but for whom it does not bear any financial liability)

102. Corporations Act 2001 (Cth), section 9, accessed 20 January 2016. 103. There are a number of schemes that are excluded from the definition of a managed investment scheme in section 9 of the Corporations Act. For example, a partnership that has more than 20 members but does not need to be incorporated, a body corporate (except a time sharing scheme), a franchise, a statutory fund maintained under the Life Insurance Act 1995, a barter scheme or a retirement village scheme are not

managed investments for the purposes of the Corporations Act. 104. Corporations Act 2001 (Cth), section 601EA. 105. Australian Securities and Investments Commission, Financial requirements for responsible entities and operators of investor directed portfolio

services, Class Order 13/760, 28 August 2014, accessed 23 November 2015. 106. Corporations Act 2001(Cth), section 601FA. 107. Ibid., section 601FC. 108. Corporations Act 2001 (Cth), section 428, accessed 23 November 2015. 109. Explanatory Memorandum, op. cit., p. 25. 110. Corporations Act 2001 (Cth), section 429. 111. Explanatory Memorandum, op. cit., p. 26 and following.

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are unsound. The receiver, receiver/manager or controller (as the case may be) has been appointed in respect of this other entity, not in respect of the corporation itself.

The notification obligation may inappropriately give the impression that the corporation, acting as a scheme’s responsible entity, is financially unsound and has a receiver etc. appointed to it. Such an impression can significantly affect a corporation’s business and create problems for which no basis exists. An example of such problems may be that a supplier may refuse to provide goods or services to a corporation that it believes is in receivership, through fear of not getting paid.

Amendments in this Schedule seek to avoid such problems by only requiring the public documents and the negotiable instruments of the actual entity to which a receiver etc. has been appointed to meet the notification obligation.

The reporting obligation has two problems:

• under this requirement a controller receives a report that contains information on all of the affairs of the corporation and related entities. Most of this information is irreverent to the affairs of the entity in respect of which they have been appointed and

• the corporation is required to provide a costly comprehensive report to the controller, most of which is completely unnecessary and unusable by the controller.

The proposed amendments deal with these problems by requiring the corporation providing the report to only provide information relevant to the entity to which a controller has been appointed.

The reporting obligation has an additional difficulty where a custodian, rather than a responsible entity, holds the property. In these circumstances, under the current provisions, a controller/receiver has to obtain a report from the custodian; but the responsible entity is the most appropriate sources of this report as they usually have the necessary information.112

The proposed amendments empower the controller/receiver to serve a reporting obligation notice directly on the corporation which acts as the registered scheme’s responsible entity where a custodian holds the property. The custodian does not have to provide such reports.

Policy development Problems with the notification obligation were raised and discussed by the Corporations and Markets Advisory Committee in its March 2014 discussion paper entitled ‘The establishment and operation of managed investment schemes’. It noted:

the notification requirements do not provide any means for indicating:

• how much of the property of the company is affected by the appointment of a receiver (the partial appointment issue), or

• the capacity in which the company holds the property to which a receiver has been appointed (the capacity issue). 113

This report further observed that the notification requirements do not enable a distinction to be drawn between:

• an appointment [of a receiver/controller] to scheme property of a scheme that the [responsible entity] RE operates, and

• an appointment to the RE’s personal assets due to financial difficulties that the RE is experiencing in relation to its own affairs. 114

The paper further observed that this lack of detail in the notification requirement mainly affected REs that exercise that function in respect to several registered schemes.115

112. Ibid., p. 27. 113. Australian Government, Corporations and Markets Advisory Committee, The establishment and operation of managed investment schemes, discussion paper, March 2014, p. 196, accessed 23 November 2015. 114. Ibid., p. 197. 115. Ibid., p. 197. This paper called such REs ‘multi-function REs.’

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Possible reforms in this area were also mentioned in ASIC’s ‘Deregulatory Initiatives Report’ of May 2014, where it suggested that the government:

Modify the s428 and 429 [Corporations Act] requirements for responsible entities or custodial or depository service providers to use ‘in receivership’ in public documents and for officers to report when only the assets of a particular scheme or client are affected.

In the case of reporting to the controller, the affairs that are the subject of the reporting obligation should be affairs that relate to the relevant scheme or assets held in providing a custodial or depository service. 116

The Financial Services Council agreed with the first of the above proposals and did not comment on the second.117

On 28 August 2015 Treasury released an exposure draft of this Bill entitled ‘Treasury Legislation Amendment (Spring Repeal Day) Bill 2015’.118 The relevant provisions of this exposure draft are exactly the same as the provisions of Schedule 3 of this Bill. Submissions on this exposure draft closed on 28 September 2015.

Position of major interest groups As at the time of writing there has been little comment on the provisions of this particular Schedule. Not all the submissions on the exposure draft have been made public. As noted above, the Financial Services Council was generally supportive of a similar proposal to modify the notification obligation.119

Key issues and provisions

Notification Obligations As already discussed, under subsections 428(1) and (2) of the Corporations Act where a receiver or controller is appointed in respect of the property of a corporation, that latter entity must set out in every public document and in every negotiable instrument of that corporation a statement that these actions have been taken. This requirement applies to situations where a receiver/controller is appointed to the property of a scheme for which a corporation is a responsible entity.

Item 6 of Schedule 3 inserts proposed subsections 428(2A), (2B) and (2C) into the Corporations Act, which modify the above requirement. Proposed subsection 428(2A) provides that subsections 428(1) and (2) apply only to documents or instruments that relate to relevant registered schemes and trusts where the only property of the corporation to which a receiver or ‘controller’ has been appointed is:

• ‘scheme property’ of any registered scheme of which the corporation is a responsible entity or

• property the corporation holds in trust if it is a ‘licensed trustee company’ or holds an ‘Australian financial services licence’ that covers the provision of ‘custodial or depository services’.

Definitions A number of terms used in both the existing section 428 and proposed amendments are defined in other areas of the Corporations Act. In section 9 a ‘controller’, in relation to property of a corporation, means:

• a receiver, or receiver and manager of that property; or

• anyone else who (whether or not as agent for the corporation) is in possession, or has control, of that property for the purpose of enforcing a security interest.

Section 9 of the same Act states that a receiver and manager has a meaning affected by section 90, which in turn specifies that ‘a receiver of property of a body corporate is also a manager if the receiver manages, or has under the terms of the receiver's appointment power to manage, affairs of the body.’120

Also in section 9 of the Corporations Act ‘scheme property’ of a registered scheme means:

116. ASIC, ASIC’s deregulatory initiatives, report, 391, ASIC, May 2014, p. 22, accessed 23 November 2015. 117. Financial Services Council, Submission to ASIC, ASIC’s deregulatory initiatives, 23 June 2014, p. 23, accessed 23 November 2015. 118. Treasury, Treasury Legislation Amendment (Spring Repeal Day) Bill 2015: Exposure Draft, [28 August 2015], accessed 23 November 2015. 119. Financial Services Council, op. cit., p.23. 120. Corporations Act 2001 (Cth), section 90.

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(a) contributions of money or money’s worth to the scheme

(b) money that forms part of the scheme property under provisions of this Act or the Australian Securities and Investments Commission Act 2001 (including regulations made under that Act)

(c) money borrowed or raised by the responsible entity for the purposes of the scheme

(d) property acquired, directly or indirectly, with, or with the proceeds of, contributions or money referred to in paragraph (a), (b) or (c) above and

(e) income and property derived, directly or indirectly, from contributions, money or property referred to in paragraph (a), (b), (c) or (d) above. 121

This definition covers both contributions of money and money’s worth, referring to in-specie contributions (contributions in kind as well as in cash).

In section 601RAA of the Corporations Act a ‘licensed trustee company’ means a trustee company that holds an Australian financial services licence (see below) covering the provision of one or more traditional trustee company services. Traditional trustee company services has the meaning given by subsection 601RAC(1), which includes performing estate management functions; preparing a will, a trust instrument, a power of attorney or an agency arrangement; applying for probate of a will, applying for grant of letters of administration, or electing to administer a deceased estate; or establishing and operating common funds.

Section 766E of the Corporations Act explains that a person (the provider) provides a ‘custodial or depository service’:

if under an arrangement between the provider and the client, or between the provider and another person with whom the client has an arrangement, (whether or not there are also other parties to any such arrangement), a financial product, or a beneficial interest in a financial product, is held by the provider in trust for, or on behalf of, the client or another person nominated by the client.

122

Finally, in section 9 an ‘Australian financial services licence’, when used in a provision outside Chapter 7 (as it is with the proposed amendments in this Schedule), has the same meaning as it has in Chapter 7 of the Corporations Act. In section 761A (in Chapter 7) an Australian financial services licence means:

a licence under section 913B that authorises a person who carries on a financial services business to provide financial services.

‘Financial services’ includes the provision of financial product advice, dealing in a financial product, making a market for a financial product, operating a registered scheme or providing a custodial or depository service.123

Many of these definitions are also important for understanding the operation of other amendments in this Schedule.

Proposed subsections 428(2B) and (2C) impose a positive duty on a corporation to set out in every public document and negotiable instrument of a registered scheme that a receiver, receiver and manager or controller (as the case may be) has been appointed if:

• the corporation is the responsible entity of a registered scheme

• a receiver, receiver and manager or controller has been appointed (as appropriate) and

• the scheme property is not the property of the corporation.

There is no requirement for the corporation to provide this information on its own statements or instruments in these circumstances.

121. Ibid., section 9. 122. Ibid., subsection 766E(1). 123. Ibid., section 766A.

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Reporting obligations Subsection 429(2) of the Corporations Act requires that when a person becomes a controller of the property of a corporation, amongst other things:

• that person must serve on the corporation as soon as practicable a notice that they are the controller of the property of the corporation (paragraph 429(2)(a)) and

• within 14 days of receiving that notice the reporting officers of that corporation (defined in subsection 429(1)) must report to the controller about the affairs of that corporation.

Item 8 inserts proposed subsection 429(2A) into the Corporations Act to allow the corporation to provide the controller with a report only on the affairs of the relevant registered scheme(s) or trust(s) where:

• the corporation is a licensed trustee company or

• the corporation holds an Australian Financial Services Licence that covers the provision of custodial or depository services and

• the only property of the corporation to which a controller has been appointed is held on trust.

In these circumstances a notice served by the controller under paragraph 429(2)(a) only has to refer to the relevant registered scheme(s) or trust(s); that is the schemes or trusts whose property is under the controller’s authority. As a result, the corporation only needs to report on those schemes or trusts

The Explanatory Memorandum notes that where the custodian is unlicensed, they have to report to the controller on all of their affairs, not just the affairs of the controlled property.124 This may be useful for continued supervision of an unlicensed custodian (see Concluding Comments for further discussion).

The amendments in item 8 do not cover the reporting obligation in relation to scheme property, only property held on trust by the corporation. Item 13 inserts proposed section 429A into the Corporations Act covering these situations. This proposed section specifies when the standard reporting obligation in subsection 429(2) applies. Where it does not apply the proposed section sets out an alternative reporting obligation, as follows:

• where a controller is appointed and the only property of the corporation controlled is scheme property of a registered scheme, in relation to which the corporation is the responsible entity, then the reporting obligations in subsection 429(2) apply, but only in respect of the relevant registered schemes and trusts and not the whole affairs of the corporation in question (proposed subsection 429A(1)) but

• where all of the above conditions apply, save where the corporation in question is not the responsible entity of the registered scheme but holds an Australian Financial Services License that covers the provision of custodial or depository services then the reporting obligations of subsection 429(2) do not apply (proposed subsection 429A(2)).

Instead, in these circumstances the controller must serve the notice seeking information on the responsible entity of the scheme, rather than the licensed custodian (proposed paragraphs 429A(3)(a) to (e)) and alternative reporting obligations to those in subsection 429(2) apply. The major differences between the reporting obligations are:

• subparagraphs 429(2)(c)(i) and (ii) require the controller to lodge with ASIC a copy of a report from the reporting officers of the relevant corporation and notice setting out any comments the controller sees fit to make, and to send the corporation a copy of that notice. Proposed subparagraph 429A(3)(g)(i) does not require the corporation in question to be sent a copy of any such notice sent to ASIC if the only property of the corporation that is controlled is scheme property of a registered scheme and

• the reports received by the controller have to be compiled by the corporation’s responsible officers, which in subsection 429(1) are a director or secretary of a company or an Australian registrable body or in the case of a foreign company, a local agent of the same. In proposed subparagraph 429A(3)(g)(ii) such responsible offices are restricted to those mentioned in proposed paragraph 429A(3)(f) – directors or the secretary of the responsible entity in question.

124. Explanatory Memorandum, op. cit., p. 33.

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The first dot point above does reduce (however slightly) the administrative action that a controller has to take in some circumstances. The Explanatory Memorandum states that all the amendments in Schedule 3 apply from the day after Royal Assent.125

Concluding comments Clearly, the proposed amendments in Schedule 3 do reduce the administrative requirements applying to a receiver, a receiver and manager or a controller appointed to the property of certain corporations. Further they also deal with the notification obligation problem of unduly giving the impression that all the affairs of a corporation are subject to the receivership provision of the Corporations Act, when in fact it may only be the affairs of a registered scheme or trust for which the corporation is a responsible entity.

However, it may also be argued that the appointment of receiver or controller to the property of a particular registered scheme for which the corporation is a responsible entity may indicate that wider problems exist. So the above amendments may also be seen as reducing investor protection and removing a potential red flag for those entering into commercial arrangements with the corporation in question.

Schedule 4—Repeal of inoperative acts and provisions of the taxation law This Schedule repeals a number of inoperative or spent taxation provisions, for which no good reason exists for their continued presence on the statute books. The Explanatory Memorandum contains an adequate commentary on the proposed amendments and repeals.126

Position of major interest groups As at the date of writing interest groups have not expressed an opinion on the provisions of Schedule 4.

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125. Ibid., p. 36. 126. Explanatory Memorandum, op. cit., p. 37.