Report
Background to the inquiry
1.1 The Superannuation Contributions and Termination Payments Taxes Legislation
Amendment Bill 1999 was introduced into the House of Representatives on
30 June 1999. The Bill was referred to this Committee following a report
by the Selection of Bills Committee on 11 August 1999 [1] for examination and report by 15 September 1999.
1.2 In its report the Selection of Bills Committee listed the following
reasons for referral and issues for consideration:
Consideration of Government amendments to the superannuation surcharge
tax;
Especially clarification of “surchargeable contributions”
for defined benefit funds on contributions holidays.
1.3 The committee secretariat contacted a number of interested parties
and posted details of the inquiry on the Senate's Internet sits. The Committee
received 17 submissions to the inquiry (Appendix 1 refers). A public hearing
on the Bill was conducted in Canberra on 30 August 1999. The report records
the names of witnesses who gave evidence at the hearing in Appendix 2,
and the full transcript of the hearing is available at the internet address
of .
Background to the Bill
1.4 The Second Reading speech and Explanatory Memorandum provides the
following outline and description of the regulatory objective of the Bills.
1.5 The main objective of the Bill is to enhance the overall operation
and efficiency of the superannuation surcharge measure by removing the
requirement for the Commissioner of Taxation to determine an advance instalment
when an assessment of surcharge is made.
1.6 The amendments to remove the requirement to determine an advance
instalment will benefit superannuation funds and the community and generally,
reduce the administrative burden on superannuation funds.
1.7 The Bill amends a number of related Acts. The Superannuation Contributions
Tax (Assessment and Collection) Act 1997 is amended to:
- remove the requirement for the Commissioner of Taxation to determine
an advance instalment of surcharge when an assessment of surcharge is
made after 23 March 1999;
- provide for a self-assessment regime for certain superannuation providers;
and
- clarify the definition of `surchargeable contributions” and how
they are to be calculated.
1.8 The Superannuation Contributions Tax (Assessment and Collection)
Act 1997 and the Superannuation Contributions Tax (Members of Constitutionally
Protected Superannuation Funds) Assessment and Collection Act 1997
are amended to settle a range of technical issues to clarify and simplify
aspects of the legislation.
1.9 Some of the amendments will apply retrospectively to ensure the surcharge
measure applies equitably to both defined benefit fund members and to
members of funds other than defined benefit funds.
1.10 The amendments are designed to clarify and simplify particular aspects
of the existing law (for example, there has been some uncertainty whether
superannuation funds on `contributions holidays' have to report surchargeable
contributions given that no contributions are actually paid into a fund
– the effect of the amendments is that some funds will be required
to resubmit reports to the Commissioner).
1.11 In addition, the amendments will allow members of constitutionally
protected funds who rollover a benefit to another superannuation fund
to direct the new fund to pay the amount in the surcharge debt account
from the benefits rolled over.
1.12 The Termination Payments Tax (Assessment and Collection) Act
1997 is also amended to maintain consistent application of assessment
provisions across the surcharge Acts.
1.13 Consequential amendments are made to the Income Tax Assessment
Act 1936, the Superannuation Industry (Supervision) Act 1993
and the Taxation Laws Amendment Act (No. 3) 1997. The amendments
to the Income Tax Assessment Act 1936 is to ensure that where a
member of a superannuation fund as an eligible termination payment for
income tax purposes. This means that members of superannuation funds are
treated in the same way as members in a constitutionally protected fund.
Date of effect
1.14 This Act commences on the day on which it receives Royal Assent.
Schedule 1 (other than items 43 to 45) is taken to have commenced on 5 June 1997.
Schedule 2 (other than items 26 to 28) is taken to have commenced on 7 December 1997.
Schedule 6 is taken to have commenced on 14 October 1997 immediately
after the commencement of Schedule 1 to the Taxation Laws Amendment Act
(No. 3) 1997.
Financial impact
1.15 The Bill defers the payment of $120 million for the 2000-2001 financial
year and $10 million for later financial years by removing the requirement
to determine an advance instalment. There is little, if any, financial
impact from the other amendments.
Compliance cost impact
1.16 The Government contends that compliance costs associated with the
amendments are low. The Government is of the view that putting in place
a self assessment regime for specified funds and removing the perceived
complexity by clarifying and simplifying aspects of the legislation will
aid compliance and reduce costs for superannuation providers.
1.17 The Office of Regulation Review has advised that a regulation impact
statement is not required in relation to these measures.
Tabling date for report
1.18 The Committee draws to the attention of the Senate that as a result
of the Selection of Bills Committee Report, the tabling date for this
report was set as 15 September 1999, a non-sitting day. The Committee
points out that legislation inquiries and reports are generally conducted
and prepared under difficult time constraints. Frequently, it is necessary
for Committees to meet on several occasions to finalise reports. The Committees'
Secretariats also require sufficient time to prepare and print final versions
of the reports for tabling purposes.
1.19 The Committee considers that, as a general principle, Legislation
Committees should not be required to be present reports on legislation
out of session or on the first sitting day of a sitting period. If it
is considered necessary to depart from this practice in individual cases,
the Committee believes that it would be appropriate for the Selection
of Bills Committee to consult the Committee concerned prior to setting
the tabling date.
Comment on Evidence and Submissions prepared by the Assistant Treasurer
1.20 During the public hearing on the Bill held on Monday 30 August,
the Assistant Treasurer, Senator the Hon. Rod Kemp, undertook to provide
comments on issues raised in a number of submissions nominated by Committee
members, in particular the submissions made by William M. Mercer Ltd and
the Institute of Actuaries.
1.21 On 7 September, the Minister provided the Committee with the promised
information, together with comments on the majority of the submissions
made. The Committee found the Ministers' comprehensive comments to be
useful and wishes to thank him for the assistance provided in this regard.
The Minister's comments appear in Appendix 3 at the back of this report.
Issues raised in evidence
General issues relating to the parent legislation
1.22 Several submissions to the Committee and witnesses who gave oral
evidence took the opportunity to re-state their continued opposition to
the surcharge tax legislation. The former Select Committee on Superannuation
reported these dissenting views to the Senate on several occasions when
it tabled reports on the original legislation and on subsequent amending
legislation.
1.23 The Committee is of the view that these issues are largely outside
of the scope of the bill referred to it. However, for the information
of the Senate, the Committee records that the following key areas of dispute
about the surcharge appear to be unresolved:
- the efficiency and cost of the adopted collection method - Clayton
Utz for example claimed that the industry's reporting costs in the first
year of operation were $270m, to enable the Government to collect $340m
of revenue;
- the appropriateness of taxing superannuation contributions - the Association
of Superannuation Funds of Australia (ASFA) and others are of the view
that it is more appropriate and equitable to tax benefits. ASFA criticised
both the current Government's surcharge and the previous Labor Government's
contributions tax in this regard;
- alleged inequity of requiring all fund members, including those under
the surcharge threshold to nonetheless meet part of the fund's cost
of complying with the legislation's requirements; and
- rates of tax that may be payable on retrenchment payments.
1.24 The Committee acknowledges that many groups within the superannuation
industry disagree with the surcharge. However, the Committee does not
consider it appropriate to re-open this debate in the context of this
bill.
Support for the bill
1.25 It is clear from the evidence received that many within the superannuation
industry welcome this bill and do not wish to see it delayed.
1.26 The Investment and Financial Services Association (IFSA), for example,
wrote to the Committee in these terms:
IFSA is therefore very supportive of the Government's decision to abolish
the advance instalment and supports the expeditious passage of this
bill. [2]
1.27 The Institute of Actuaries, while expressing reservations about
aspects of the bill, also expressed its general support for its passage
:
In general, we support these amendments. …While we have an issue
with the retrospectivity, we understand, and we think everybody else
understands, the government's intent. That is that they do not want
those funds which file nil returns to be able to be able to file nil
returns….we would not like the fact that we do not think much of
the retrospectivity idea to in any way detract from our view that there
are other amendments proposed here which will make the legislation more
workable and more certain. So therefore, we would not think that the
legislation should be knocked out just because we do not like the idea
of retrospectivity. We have been asking for certainty all along. [3]
1.28 A submission from William M. Mercer Pty Ltd (Mercer) also indicated
support for significant aspects of the bill. Mercer indicated that they
particularly agreed with:
- the removal of the advance surcharge;
- the removal of the requirement for superannuation funds to report
to all members on information supplied to the ATO.
1.29 Mercer also indicated qualified support for the aim of clarifying
the treatment of defined benefit funds. Mercer however also expressed
disagreement with some aspects of the bill, as discussed later in this
report.
1.30 ASFA also endorsed the Government's decision:
Senator Watson—But the question is—and I am just trying to
get this from you—that basically you endorse the government's chosen
method for rectifying a problem.
Dr Anderson—Yes. Certainty for trustees about what is being taxed
and how you tax it has been foremost in the association's mind in looking
at these amendments. [4]
1.31 The Committee acknowledges however that there are those who do not
share these views and who consider that the bill should be amended or
rejected.
Retrospectivity
1.32 Several witnesses and submissions criticised the retrospective provisions
within the bill. Without discounting the issues raised by witnesses and
submissions about other aspects of the bill, it was clear that this issue
is the major concern of many who gave evidence to the inquiry.
1.33 Concerns about retrospectivity focus on item 3 of schedule 1. This
amendment requires funds to calculate the notional surcharge contributions
factor for the years 1996/97 - 1998/99 according to the method set out
in Superannuation Contributions ruling 97/1 (SCR 97/1). Funds also have
the option of using a methodology approved in writing by the Australian
Taxation Office (ATO). This methodology replaces the previous method of
an actuary setting a calculation factor in accordance with Australian
actuarial practice.
1.34 Several of the submissions contended that the requirement to conform
to SCR 97/1 represents a significant departure from industry practice
established through a reasonable and advised interpretation of the legislation
and ATO rulings. They argued that the requirement to adopt a different
methodology in respect of financial years for which returns had already
been submitted amounts to the application of retrospective taxation.
1.35 The Law Council Superannuation Group (the Law Council) was also
among those critical of the use of retrospective provisions. The Council
took issue with the Government view that the intention of the legislation
had always been clear:
That unfortunately misses the point because the intention of Parliament
is what legislation expresses. If the legislation does not express that
intention or expresses some other intention, then the citizen is clearly
entitled to act upon a fair reading of the legislation. [5]
1.36 A potential consequence of application of these retrospective provisions
is the situation of funds where surchargeable members have left. A submission
from Mr Chris Beeny noted that the retrospective application of SCR 97/1
may result in revised surcharge assessments for members who have left
the fund, creating extra work for trustees and the ATO. [6]
1.37 Mercer also identified a potential issue for in respect of death
benefits already paid. Mercer stated that many beneficiaries have received
death benefits payments since August 1996 and have been correctly advised,
under the current legislation, that they will not be liable to pay the
surcharge. However, they contended that the amendments would require beneficiaries
who have already received a death benefit to pay a surcharge liability
where no liability currently exists. [7]
1.38 The Association of Superannuation Funds of Australia (ASFA) also
expressed misgivings about retrospective provisions. However, ASFA considered
that there was an inherent dilemma associated with the issue. The essential
nature of the dilemma relates to equity issues that arise as a result
of the interpretation of the original legislation by some funds that resulted
in them filing nil returns [8], while others accepted that they had a liability
to pay. Dr Michaela Anderson, Director, Policy and Research, explained
ASFA's dilemma:
We do not like retrospective legislation. On the other hand, we also
do not like perhaps some people being subject to the tax and others
not being subject to the tax. The fact is that we are in this dilemma
of: do you want retrospective tax for perhaps even equity reasons? [9]
Government response
1.39 The Minister, Senator the Hon. Rod Kemp, reiterated the Government's
position that the changes in the legislation are to add clarity sought
by the industry to what the Government nonetheless considers to sound
parent legislation:
It puts us in a bit of a dilemma if people want the legislation to
be clarified in their eyes. From our point of view, as I said, the legislation
was sound, but if we could accommodate their views that made sense.
We thought this was the best way to move forward. I think it does provide
greater surety to people who had received legal advice that made them
uncertain about their responsibilities as trustees. Having made that
point, we still feel that the original bill was sound. These amendments,
made in response to submissions from industry, provide the clarity that
industry was seeking. We do not see them in that sense as being retrospective.
[10]
1.40 The Committee considers that in respect of the major issue about
the introduction of SCR 97/1 as a basis for calculating notional surchargeable
contributions factors (NCSFs), it is clear that trustees are not necessarily
forced to use SCR 97/1. As is stated in the bill, reiterated in evidence
by the Australian Taxation Office and in the Ministers written response
to the Committee, funds do retain the option of using well founded actuarial
practice as the basis for calculating NCSFs and using these in their returns,
subject to ATO approval of the methodology adopted. In his letter, the
Minister advised in the following terms:
The ATO can approve an alternative method for calculating notional
factors to cater for differing benefit designs/structures. However,
there is nothing in the Bill that requires or obliges a trustee to apply
to use an alternative method.
A trustee wishing to adopt an alternative methodology for calculating
notional factors will be required to:-
- put a request in writing explaining why the methodology in the Ruling
SCR 97/1 is not appropriate for the scheme; and
- put forward an alternative methodology; and
- explain why that methodology is more appropriate.
The ATO will seek actuarial advice when considering any such request.
For the 1997 and 1998 financial years, approval was given to a number
of fund trustees to use alternative methodologies for calculating notional
factors. [11]
1.41 The Committee also notes the evidence of the Institute of Actuaries
in this respect:
The vast majority of funds will have based the reported contributions
on methods and assumptions that are in accordance with SCR 97…
[12]
1.42 On the basis of this evidence, it appears that the only funds that
are likely to find themselves dealing with what might be described as
a retrospective impact are those who filed nil returns because they were
on "contributions holidays" or for other reasons.
1.43 The Committee notes advice from Mr Christopher Beeny that legal
challenge on the surcharge legislation is imminent. Mr Beeny advised that
this challenge concerns the basis on which several funds determined NSCEs.
He stated that he was of the view that changing the law retrospectively
denied funds their rights under the existing legislation.
1.44 The Committee has confirmed that the legal firm Arthur Robinson
and Hedderwicks, in conjunction with Clayton Utz and Mallesons Stephens
Jacques, is about to issue proceedings in the Federal Court.
1.45 While understanding that the Government considers that retrospective
provisions are required in this instance for equity reasons, the Committee
expresses its concern about the use of such provisions.
1.46 The Committee notes that in the case of this legislation, changes
are being made to clarify provisions that were identified as unclear some
time ago. As a general principle, the Committee considers that amendments
should be brought forward quickly to clarify situations where there is
doubt raised as to clarity and precision of meaning in legislation.
Re-reporting
1.47 Under the legislation, superannuation providers that have not provided
a return in accordance with SCR 97/1 or another method approved in writing
by the Commissioner must file a new return. These requirements were of
concern to a number of witnesses.
1.48 The Institute of Actuaries submitted that re-reporting should be
kept to a minimum and confined to those who had filed nil returns:
The other aspect that we would like to make sure is addressed…is
on minimising the need for re-reporting or re-approval of any previous
approaches. The vast majority of funds will have based the reported
contributions on methods and assumptions that are in accordance with
SCR 97, or very similar to SCR 97/1, and we would like to see those
funds effectively not have to take any action after the amendments are
introduced. So it really should only be funds where the surplus issue
has been taken into account that should be required to re-report. [13]
1.49 The Law Council gave evidence on a similar theme and submitted that
a number of providers had sought and obtained actuarial advice as to the
correct basis for submitting returns. The Council made the point that
advice may or may not have been in accordance with SCR 97/1. The council
expressed concern that might now have to re-file returns when '…in
good faith and on the basis of appropriate advice, they filed statements
which satisfied the requirements of the Principal Act at the relevant
time.' [14]
1.50 The Council's view is that only those providers who had not lodged
returns in the spirit of the original legislation should have to lodge
further returns. The Council sought an amendment to the bill to provide
that the Commissioner must determine and notify a provider if the provider
is required to re-report information.
Government response
1.51 It is clear from the Ministers' response that the Government's focus
in this issue is on those funds that did not report surchargeable returns.
This is necessary to maintain equity with those that did report in accordance
with the legislation:
The provisions in the Bill require those funds that have not reported
surchargeable contributions for the 1997 and 1998 financial years calculated
in line with the requirements of the legislation to submit new reports
with surchargeable contributions calculated correctly. To require otherwise
would result in an inequitable result for the majority of funds that
reported correctly for both the 1997 and 1998 financial years. [15]
1.52 The Government has also stated that those funds that reported surchargeable
contributions calculated in line with the legislation will not have to
submit new reports. Similarly, there will be no need for adjustments to
be made to assessments that have been based on the correct surchargeable
contribution amounts.
1.53 The Committee notes the Ministers' response and observes that it
would be difficult to meet the demands for automatic acceptance of returns
without some form of quality control in the form of ATO scrutiny of methods
used to calculate NCSFs. While the majority of returns are likely to be
acceptable, this cannot be guaranteed. Equity demands a high degree of
conformity.
Variations in actuarial advice - more than one correct answer?
1.54 Under the proposed legislation, there are two allowable methods
of calculating the Notional Surcharge Contribution Factor (NSCF). These
are to use SCR97/1, or another method approved in writing by the Commissioner
for Taxation.
1.55 Several submissions argued that this placed trustees in the position
of having to decide whether they should shop around for actuarial advice
to identify the most favourable NSCF and lowest liability for members.
1.56 The Law Council was amongst those who criticised this aspect of
the legislation:
…this is most undesirable and puts the integrity and security
of the defined benefit superannuation system at risk. Furthermore, it
is not an appropriate basis for the determination of tax. [16]
Government response
1.57 The Assistant Treasurer, Senator the Hon. Rod Kemp, advised the
Committee that the claim that trustees would 'shop around' for the most
favourable result is not something caused by the bill. He said that they
were free to do so if they wished:
Trustees are certainly free to `shop around' if they choose, but I
would question the financial viability of adopting this approach, particularly
if the variation in notional factors is minimal. [17]
Different treatment of accumulation and defined benefit funds
1.58 Several submissions argued that as a result of the bill, members
of defined benefits schemes may be taxed more heavily than members of
accumulation schemes in like circumstances. This situation arises where
funds are paying benefits from surplus and are on "contributions
holidays".
1.59 The Law Council was among the several submissions that addressed
this issue. The Council submitted that Section 8(1) of the principal Act
required the calculation of surchargeable contributions in respect of
defined benefits funds on the basis of “equivalence” with accumulation
funds. The Council argued that the bill results in the taxation of defined
benefits funds on contributions holidays, whereas, in the 1996-97 income
year, there was no tax in respect of accumulation funds where the surplus
was allocated to members' accounts. [18] The
Council questioned the equity of this situation.
1.60 Other submissions also questioned the relative treatment of defined
benefits and accumulation funds. Mercer, for example, argued that 'SCR
97/1 results in a far harsher tax treatment than applies to accumulation
funds in many circumstances'. [19] The details
of how Mercer consider the treatment of the two fund types differ may
be found in their submission.
1.61 The Lend Lease Superannuation Fund and others also expressed concern
about an alleged 'lack of symmetry' [20] between accumulation and defined benefit funds
for the 1996/97 financial year.
Government response
1.62 The Minister advised the Committee that the Parliament was aware
of the different treatment afforded amounts allocated from surplus when
it passed the Superannuation Contributions and Termination Payment
Taxes Legislation Amendment Act 1997. He stated that the different
treatment only applies for the 1997 financial year. The Minister's view
is that amending the law to address concerns about the differing treatment
would result in significant costs for those defined benefit funds that
had a surplus in that year. [21]
Other issues
1.63 The urgency of this legislation has required the Committee to conduct
its deliberations on this bill within a relatively compressed timeframe.
The Committee has therefore confined this report to what it considers
to be the most significant issues that were raised.
1.64 Material also continued to be received late in the report preparation
process and it has not been possible to exhaustively analyse and comment
on all material sent by contributors. In order to ensure that the Senate
will be adequately informed when it debates this bill, the Committee has
incorporated all additional material received in appendixes at the back
of this report. Submissions and Hansard are published separately.
Conclusions
1.65 It is the Committee's view that a great deal of the angst about
this bill may be attributed to continued underlying policy disagreements
between sections of the superannuation industry and the Government over
the surcharge concept and methodology and over the fundamental argument
about the appropriate taxing methodology for retirement savings. It is
not the intention of this Committee to enter into this debate, as the
Government's policy is clear and has been agreed by the Parliament with
the passage of the parent legislation. Further, the terms of reference
were confined to the provisions of this bill.
1.66 The Committee considers that this bill, if passed, will improve
the surcharge legislation by adding clarity and certainty sought by the
industry.
1.67 The bill removes a number of provisions that the industry found
onerous, such as the advance instalment provisions, and there is considerable
support for these changes. The changes will also decrease compliance costs.
1.68 However, the Committee expresses its concern about the application
of retrospective provisions in order to achieve equity outcomes.
1.69 The Committee notes that the Minister has indicated a willingness
to discuss amendments to aspects of the bill. These undertakings appear
in the correspondence sent to the Chairman of the Committee (reprinted
at Appendix 3).
1.70 Time constraints on the Committee's deliberations have prevented
the Committee from discussing these matters with the Minister prior to
tabling of this report.
Recommendation
1.71 The Committee recommends that the Bills be passed, subject to any
amendments agreed to following the foreshadowed discussions.
Senator the Hon. Brian Gibson
Chairman
Footnotes
[1] Selection of Bills Committee Report No.
12 of 1999, dated 11 August 1999.
[2] Submission No.14, p. 1.
[3] Evidence, p. E5.
[4] Evidence, p. E3.
[5] Submission No.3, p. 1.
[6] Submission No.4, p. 1.
[7] Submission No.2, p. 9.
[8] For example, elements of the industry argued
that there was no such thing as "established actuarial practice"
and therefore no liability.
[9] Evidence, p. E 1.
[10] Evidence, p. E25.
[11] Correspondence from Assistant Treasurer,
7 September 1999, p. 3.
[12] Evidence, p. E5.
[13] Evidence, p. E 5.
[14] Submission No.3, p. 4.
[15] Correspondence from Assistant Treasurer,
p. 3
[16] Submission No.3, p.5
[17] Correspondence from Assistant Treasurer,
p.3
[18] Submission No.3 p. 4
[19] Submission No.2, p. 10
[20] Lend Lease submission, p. 2.
[21] Correspondence from Assistant Treasurer,
7 September 1999, p. 4