BILLS DIGEST NO. 29, 2019–20              12 September 2019

Treasury Laws Amendment (2018 Superannuation Measures No. 1) Bill 2019

Robert Anderson and Phillip Hawkins
Economic Policy Section 

Date introduced: 24 July 2019

House:  House of Representatives

Portfolio: Treasury

Commencement: Schedule 1 commences on the day after Royal Assent.

Schedules 2 and 3 commence on the first 1 January, 1 April, 1 July or 1 October following 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 Federal Register of Legislation website.

All hyperlinks in this Bills Digest are correct as at September 2019.

History of the Bill

The Treasury Laws Amendment (2018 Superannuation Measures No. 1) Bill 2018 (the 2018 Bill) was introduced into Parliament on 24 May 2018. It passed the House of Representatives and was introduced into the Senate, before lapsing at the dissolution of the 45th Parliament on 1 July 2019.

The Treasury Laws Amendment (2018 Superannuation Measures No. 1) Bill 2019 (the Bill) is substantively different to the 2018 Bill. The 2018 Bill contained an additional schedule (former Schedule 1) which proposed amendments to introduce an amnesty from certain penalties for employers who inform the Australian Taxation Office (ATO) that they had a historic Superannuation Guarantee (SG) shortfall. Former Schedule 1 was discussed significantly in the Senate Standing Committee on Economics inquiry into the 2018 Bill and there were differing views from submitters to the inquiry on the need for the proposed amnesty.[1]

The Australian Labor Party (ALP) and the Australian Greens did not support the proposed amnesty.[2] The ALP introduced amendments into the House of Representatives to remove Schedule 1 from the 2018 Bill.[3] The ALP senators on the Senate Standing Committee on Economics inquiry issued a dissenting report strongly disputing the need for the proposed amnesty and recommended that Schedule 1 be removed from the Bill.[4]

The remaining schedules in the Bill are the same as proposed in the 2018 Bill.

A Bills Digest was prepared for the 2018 Bill.[5] Much of the material in this Bills Digest has been sourced from that earlier one.

Purpose of the Bill

The Bill makes amendments to superannuation and related tax laws. The Bill complements measures contained in the Treasury Laws Amendment (2018 Measures No. 4) Act 2019, which strengthened the penalty regime for SG non-compliance.

Structure of the Bill

The Bill consists of three Schedules:

•       Schedule 1 proposes amendments to the Superannuation Guarantee (Administration) Act 1992 (SGAA) to allow employees who have multiple employers to opt out of receiving SG from an employer if that SG amount would push them above the concessional contributions cap

•       Schedule 2 proposes amendments to the Income Tax Assessment Act 1997 (ITAA97) to tighten the rules relating to non-arm’s length expenditure of superannuation funds and

•       Schedule 3 proposes amendments to the ITAA97, the Taxation Administration Act 1953 (Tax Administration Act) and the Income Tax (Transitional Provisions) Act 1997 to, in certain circumstances, take account of limited recourse borrowing arrangements in superannuation funds when calculating an individual’s total superannuation balance.

Committee consideration

Senate Selection of Bills Committee

The Senate Selection of Bills Committee recommended that the Bill not be referred to committee.

The 2018 Bill was considered by the Senate Economics Legislation Committee. Details of the inquiry are at the Committee home page. The Committee’s Final Report recommended passage of the Bill.[6] As discussed above, the ALP senators on the Committee objected to Schedule 1 of the 2018 Bill.[7] The provisions that were contained in Schedule 1 to the 2018 Bill do not appear in the current Bill.

Senate Standing Committee for the Scrutiny of Bills

The Senate Standing Committee for the Scrutiny of Bills (the Scrutiny Committee) considered the Bill in its Scrutiny Digest of 31 July 2019. The Scrutiny Committee reiterated the comments that it made on the 2018 Bill in its Scrutiny Digest of 20 June 2018.[8] These comments related to the proposed amnesty in Schedule 1 of the 2018 Bill, which has not been included in this Bill.

Policy position of non-government parties/independents

In comments on the 2018 Bill, ALP senators on the Senate Economics Legislation Committee supported the measures that are contained in Schedules 1 and 2 of the current Bill.[9] In relation to the measure proposed in Schedule 3 of the current Bill, the ALP Senators stated that they were not opposed to the measure, but that ‘a Shorten Labor Government will take the responsible decision and adopt the recommendation of the Financial System Inquiry to restore the prohibition on direct borrowing by superannuation funds on a prospective basis’.[10]

At the time of writing the position of other non-government parties and independents is not known.

Position of major interest groups

The Senate Standing Committee on Economics inquiry into the 2018 Bill received submissions from a number of stakeholders. The majority of these submissions pertained to the former Schedule 1 proposing the SG amnesty, which is not included in this Bill.

Financial implications

According to the Explanatory Memorandum to the Bill these measures are expected to increase revenue by $33 million over the 2018–19 Budget forward estimates period.[11]

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.[12]

Parliamentary Joint Committee on Human Rights

The Parliamentary Joint Committee on Human Rights considers that the Bill does not raise any human rights concerns.[13]

Schedule 1 – Superannuation: employees with multiple employers

Background

The effect of the amendments in Schedule 1 would be to allow an individual with multiple employers to apply to the ATO to have an employer’s legal requirement to pay the SG amount waived if payment of the SG amount would put the individual above their annual concessional contributions cap, so long as at least one of their employers is contributing an SG amount.

Concessional contributions cap

The concessional contribution cap limits the amount of pre-tax contributions that can be made into an individual’s superannuation account that are taxable at a concessional tax rate of 15 per cent (whether they are compulsory SG contributions or pre-tax voluntary contributions). Amounts above the cap are treated as assessable income of the individual and are taxed at the individual’s marginal tax rate. The concessional contribution cap for 2019–20 is $25,000 per annum.[14]

Maximum superannuation earnings base

A person’s employer is obliged to make SG contributions to their employee’s superannuation account equal to 9.5 per cent of ordinary time earnings (OTE).[15] However, the SG only obliges the employer to pay superannuation on income of up to $55,270 per quarter (roughly $221,080 per annum)[16] in 2019–20.[17] This is known as the ‘maximum superannuation contributions base’. This means that the amount of SG contributions an employer is obliged to make per quarter is capped at around $5,251 per quarter ($21,002 per annum). The maximum superannuation contributions base is indexed in line with Average Weekly Ordinary Time Earnings (AWOTE) each year.[18]

Key provisions

The purpose of the amendments in Schedule 1 is to allow a person to opt out of having a proportion of their income paid into their superannuation account for their second (or subsequent) employer if those contributions would put them over their concessional contributions cap for the financial year.

The proposed amendments would allow an individual to apply to the Commissioner for a shortfall exemption certificate in relation to a specified employer and for a specified quarter (proposed subsection 19AB(1) of the SGAA, at item 2 of Schedule 1).

An employer that has been issued with a shortfall exemption certificate has a maximum superannuation contribution base for that employee of zero. In other words, the employer is not required to make SG payments to that employee’s superannuation account and will not incur a SG shortfall (proposed section 19AA of the SGAA, at item 2 of Schedule 1).

The Commissioner may issue an employer shortfall exemption certificate if he or she is satisfied that:

•       if the certificate were not issued then the employee would be likely to exceed their concessional contributions cap for the financial year (proposed paragraph 19AB(3)(a) of the SGAA)

•       if the certificate is issued then the person has at least one other employer that would have a SG shortfall if they did not make superannuation contributions for the benefit of the employee (proposed paragraph 19AB(3)(b) of the SGAA) and

•       it is appropriate, in the circumstances, to issue the certificate (proposed paragraph 19AB(3)(c) of the SGAA). In considering whether it is appropriate, the Commissioner must have regard to the effect that issuing the certificate would have on the individual’s concessional contributions for the year and any other matter they deem relevant (proposed subsection 19AB(6) of the SGAA).

The Commissioner must notify the person and their employer in writing of their decision to issue an employer shortfall exemption certificate (proposed subsection 19AC(1) of the SGAA). If the Commissioner decides not to issue the certificate then they must notify the applicant in writing (proposed subsection 19AC(3) of the SGAA). If the Commissioner does not give notice of their decision within 60 days, the application is taken to have been denied (proposed subsection 19AC(4) of the SGAA).

Item 3 of Schedule 1 provides that the amendments in Schedule 1 only apply in relation to quarters on or after 1 July 2018.

Part 2 of Schedule 1 amends the Administrative Decisions (Judicial Review) Act 1977 (ADJR Act) to provide that decisions by the Commissioner on applications for the grant of a shortfall exemption certificate are not reviewable under the ADJR Act. The Explanatory Memorandum to the Bill states:

This amendment would align the judicial review processes available for a decision to issue or refuse to issue an employer shortfall exemption certificate with those available for other taxation decisions by the Commissioner. Taxpayers are provided with full review rights under Part IVC of the TAA 1953 which is a well-established and comprehensive review scheme for taxation decisions. Part IVC of the TAA 1953 review is equally as accessible and effective as review under the Administrative Decisions (Judicial Review) Act 1977.[19]

Schedule 2 – Non-arm’s length income of complying superannuation entities

Background

Non-arm’s length income

The non-arm’s length income (NALI) provisions are an existing anti-avoidance measure that seeks to prevent superannuation funds from entering into schemes which utilise non-commercial transactions to inflate the earnings of a superannuation fund in order to:

•       obtain a concessional tax rate of 15 per cent on those earnings, rather than the individual’s marginal tax rate or

•       in effect, make contributions to a superannuation fund that do not count towards the individual’s concessional and non-concessional contributions caps.[20]

Non-arm’s length income is defined at section 295-550 of the ITAA97. It is essentially income that is more than would have been derived had a transaction been conducted at arm’s length. An example of non-arm’s length income could include an inflated dividend paid to the superannuation fund by a private company that the superannuation fund holds shares in.

Key provisions

Item 1 of Schedule 2 repeals and replaces the existing definition of NALI at subsection 295-550(1) of the ITAA97 to ensure that there is no ambiguity that expenditures incurred by superannuation funds can also be NALI. The definition of NALI is extended to schemes that are entered into that result in a loss, outgoing or expenditure (incurred in producing assessable income) that is lower than would have been expected had a transaction been conducted at an arm’s length basis (proposed paragraph 295-550(1)(b) of the ITAA97). It also includes transactions where no loss, outgoing or expenditure has been incurred at all but would be expected to have been incurred if the transaction were conducted on an arm’s length basis (proposed paragraph 295-550(1)(c) of the ITAA97).

Item 2 of Schedule 2 repeals and replaces subsection 295-550(5) of the ITAA97 which applies NALI provisions to income derived by a superannuation fund as a beneficiary of a trust to which it has a fixed entitlement. The changes include non-arm’s length losses, outgoings and expenditures incurred in producing assessable income as NALI.

Item 3 of Schedule 2 adds proposed subsection 296-550(7) to the ITAA97 to clarify that the new provisions apply to losses, outgoings and expenditures whether they are of a capital nature or not.

Item 4 of Schedule 2 provides that the proposed amendments made in Schedule 2 apply to the 2018–19 income year and later income years.

Schedule 3 – Limited recourse borrowing arrangements

Background

Limited recourse borrowing arrangements

Generally speaking, superannuation funds cannot borrow money to purchase investments.[21] However, regulated superannuation funds can borrow by entering into Limited Recourse Borrowing Arrangements (LRBA) with a third party.[22] LRBAs limit the lender’s rights to recover the funds under the LRBA to the assets purchased using those funds. The lender has no recourse to the other assets of the superannuation fund.[23]

Total superannuation balance

‘Total superannuation balance’ is defined in subsection 307-230(1) of the ITAA97 as, generally, the sum of:

•       the value of all superannuation benefits in the accumulation phase

•       the amount in the transfer balance account and

•       the amount of any ‘roll-over’ benefit which is not reflected in the person’s accumulation or transfer balance account.

A person’s total superannuation account balance is taken into account in determining, for example, the amount of an individual’s non-concessional contributions cap, the amount of unused concessional cap that individuals can carry-forward from prior financial years and in determining eligibility for the spouse tax offset.[24]

The proposed changes in Schedule 3 of the Bill change the definition of total superannuation balance so that in some circumstances LRBAs are taken into account when calculating the total superannuation balance for SMSFs. The measures are intended to ensure that LRBAs are not used to circumvent contributions caps.[25]

Key provisions

Item 1 of Schedule 3 amends the definition of total superannuation balance at section 307-230 of the ITAA97 to include an ‘LRBA amount’ in certain circumstances.

Item 2 adds proposed subsection 307-231 which details the LRBA arrangements that count towards an individual’s total superannuation amount. Proposed subsection 307-231(1) states that an individual has an ‘LRBA amount’ if:

•       the superannuation provider has entered into a limited recourse borrowing arrangement

•       the amount of the LRBA has not been repaid at the time of working out the individual’s total superannuation balance

•       the assets that secure the LRBA support a superannuation interest of the individual

•       the fund meets the criteria specified at proposed subsection 307-231(4), namely, it is a SMSF with less than five members and

•       either:

–      the person has satisfied a condition of release for their superannuation fund with a nil cashing restriction (either they have reached retirement or they are aged 65 or over) or

–      the lender under the LRBA is an associate of the superannuation provider.

Proposed subsections 307-231(2) and (3) provide that the amount by which a personal total superannuation balance can be increased by a LRBA is limited to the individual’s share of the interest in the assets that secure the LRBA.[26]

Part 2 of Schedule 1 amends the Income Tax (Transitional Provisions) Act 1997 to provide that the amendments in Schedule 3 only apply to new borrowings entered into on or after 1 July 2018. The amendments also do not apply to an amount of an LRBA that is refinanced after 1 July 2018 if it is secured by the same assets as the old borrowing and is not greater than the balance of the old borrowing.

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[1].              Senate Economics Legislation Committee, Treasury Laws Amendment (2018 Superannuation Measures No. 1) Bill 2018 [Provisions], The Senate, Canberra, 18 June 2018, pp. 9–12; 17–23.

[2].              C Bowen (Shadow Treasurer), Liberal Party gives 26 year penalty holiday including ... tax deduction for superannuation theft!, media release, 29 May 2018; A Bandt, ‘Second reading speech: Treasury Laws Amendment (2018 Superannuation Measures No. 1) Bill 2018’, House of Representatives, Debates, 20 June 2018, p. 27.

[3].              C Bowen, Treasury Laws Amendment (2018 Superannuation Measures No. 1) Bill 2018 - amendments to be moved by the Opposition, House of Representatives, 20 June 2018.

[4].              Senate Economics Legislation Committee, Treasury Laws Amendment (2018 Superannuation Measures No. 1) Bill 2018 [Provisions], The Senate, Canberra, June 2018, pp. 17–24.

[5].              P Hawkins, Treasury Laws Amendment (2018 Superannuation Measures No. 1) Bill 2018, Bills Digest, 128, 2017–18, Parliamentary Library, Canberra, 21 June 2018.

[6].              Senate Economics Legislation Committee, Treasury Laws Amendment (2018 Superannuation Measures No. 1) Bill 2018 [Provisions], op. cit., p. 13.

[7].              Ibid., p. 24.

[8].              Senate Standing Committee for the Scrutiny of Bills, Scrutiny digest, 4, 2019, the Senate, 31 July 2019, p. 37.

[9].              Senate Economics Legislation Committee, Treasury Laws Amendment (2018 Superannuation Measures No. 1) Bill 2018 [Provisions], op. cit., p. 23.

[10].              Ibid., p. 24.

[11].              Explanatory Memorandum, Treasury Laws Amendment (2018 Superannuation Measures No. 1) Bill 2019, pp. 3–5.

[12].              The Statement of Compatibility with Human Rights can be found at page 37 of the Explanatory Memorandum to the Bill.

[13].              Parliamentary Joint Committee on Human Rights, Human rights scrutiny report, 3, 2019, 30 July 2019, p. 19.

[14].              ATO, ‘Concessional contributions cap’, ATO website, last modified 17 July 2019.

[15].              Section 19 of the Superannuation Guarantee (Administration) Act 1992 (SGAA).

[16].              Assuming a consistent spread of income throughout the year.

[17].              ATO, ‘Maximum super contribution base’, ATO website, last modified 17 July 2019.

[18].              Ibid.

[19].              Explanatory Memorandum, Treasury Laws Amendment (2018 Superannuation Measures No. 1) Bill 2019, p. 16.

[20].              Ibid., p. 17.

[21].              Superannuation Industry (Supervision) Act 1993, section 67.

[22].              Ibid., section 67A.

[23].              K Swoboda and L Nielson, Tax and Superannuation Laws Amendment (2015 Measures No. 2) Bill 2015, Bills Digest, 19, 2015–16, 7 September 2015, p. 8.

[24].              Explanatory Memorandum, Treasury Laws Amendment (2018 Superannuation Measures No. 1) Bill 2019, p. 32.

[25].              K O’Dwyer (Minister for Revenue and Financial Services), Consultation on superannuation taxation integrity measures, media release, 11 January 2018.

[26].              Explanatory Memorandum, Treasury Laws Amendment (2018 Superannuation Measures No. 1) Bill 2019, p. 33.