Appendix 3

Superannuation Contributions and Termination Payments Taxes Legislation Amendment Bill 1999
Table of Contents

Appendix 3

Senator Brian Gibson
Chairman
Senate Economics Legislation Committee
Parliament House
CANBERRA ACT 2600

Dear Senator Gibson

SUPERANNUATION CONTRIBUTIONS AND TERMINATION PAYMENTS TAXES LEGISLATION AMENDMENT BILL 1999

Thank you for providing me with the opportunity to provide comment on the various submissions put to the Committee. To assist the Committee in its deliberations, I have provided some general comment on the more common aspects raised in the submissions. In the attachment, I have commented on specific issues raised.

Court challenge

A number of the witnesses at the hearing referred to a legal challenge and suggested it was inappropriate for the Committee to be considering the proposed amendments before a Court had the opportunity to rule on the issues under challenge.

At the time of writing, neither the Australian Taxation Office (ATO) nor the Government is aware of any proceedings having been issued in any Court in relation to the surcharge measure.

The ATO had previously agreed to fund a test case in relation to the `contribution holiday' issue because conflicting legal advice has added confusion and uncertainty for trustees. The ATO decided not to continue with the test case because the provisions of the Bill remove the confusion and uncertainty.

I might add the ATO has been informed by the legal adviser to the group of funds considering a legal challenge that the provisions in the Bill address concerns that may have given rise to a court challenge. The ATO has also informed me that its legal advisers are satisfied the legislation and the proposed amendments are constitutional.

Provisions that are to apply from commencement of the original legislation

The Government has always been of the view the legislation applying to the surchargeable contributions of high income earners from 20 August 1996 is unambiguous and sets out what is required to be reported and what is surchargeable. This was more so after the Superannuation Contributions and Termination Payments Taxes Legislation Amendment Act 1997 received Royal Assent in December 1997. This Act amended aspects of the surcharge legislation to address a perception that the surcharge may not apply to defined benefit funds or to defined benefit funds on `contribution holidays'.

The decision of the Government to introduce a Bill which simplifies and clarifies aspects of the existing law was made to remove the uncertainty and confusion that had been created by conflicting legal views about the application of the law to defined benefit funds. I am enclosing for the benefit of the Committee the text of two letters written variously to a number of companies providing actuarial services, to some legal advisers to superannuation funds and to industry bodies, which sets out the views of the ATO on the application of the law.

As you can see, those letters were written to allay concerns arising from views that were in conflict with what the ATO understood the legislation required. Notwithstanding the advice contained in the letters, trustees were uncertain of their position and confused by the opposing views they continued to receive from their legal advisers. It is interesting to note that despite the time between the advice from the ATO and the introduction of this Bill, there has been no legal challenge mounted to test these opposing views in the Courts.

The majority of funds reported surchargeable contributions for the years ended 30 June 1997 and 1998 based on the requirements of the legislation, notwithstanding the fact that a number had received legal advice that there may be issues about the application of the legislation to those funds. Unfortunately, a small number of defined benefit funds reported nil surchargeable contributions for the 1997 and 1998 financial years (some 1 230 for 1997 and 740 for 1998). There are an unknown number of funds that reported reduced surchargeable contributions. Some of these funds have reported on the basis there were no actual contributions because the fund was on a contributions holiday.

Parts of the Government's package of amendments are specifically designed to remove any doubt about what superannuation contributions are subject to the surcharge, how those amounts are to be calculated and what guidelines actuaries are to use to calculate notional factors (which are complemented by provisions that clearly set out what is to be reported for surcharge purposes). It is appropriate these particular provisions should have effect from the commencement of the original legislation.

Superannuation Contributions Ruling SCR 97/1

When considering the surcharge measure, the Government established an Actuarial Advisory Committee, which consisted of two actuaries appointed by the Government and two nominated by the Institute of Actuaries of Australia. That expert Committee made a number of recommendations to Government in relation to the measure, including recommendations about the method for determining how surchargeable contributions was to be calculated for members of defined benefit funds.

Subsequently, the Commissioner of Taxation issued Superannuation Contributions Ruling SCR 97/1 in August 1997 to set a standard for actuaries to follow when providing certificates on notional factors for the purposes of the legislation. The method for calculating notional factors, which is in an attachment to the Ruling, was prepared by the Australian Government Actuary who received input from the Institute of Actuaries of Australia.

Subsequent to SCR97/1, some industry participants obtained legal advice that absence of the guidance note meant there was no `Australian actuarial practice' for calculating notional factors.

However, advice obtained by the ATO refutes this. It stated that the method set out in the Ruling was consistent with `Australian actuarial practice' and if an actuary used that method for calculating notional factors, then the calculation was in accordance with the requirements of the legislation. The Bill incorporates the method for calculating notional factors set out in the Ruling into the legislation. This should remove any concerns about the existence of `Australian actuarial practice' and give actuaries the certainty they are looking for when calculating notional factors for the purposes of the legislation.

Using the methods set out in the law may result in more than one answer

The claim that fund trustees would `shop around' to find an actuary to certify notional factors that give the best result is not an issue created by the provisions in the Bill. 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.

Alternative methods for calculating notional factors

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:-

Funds required to submit new reports

  1. 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.
  2. I might add here the decision to insert a provision to enable the making of Regulations with effect from the commencement of the original legislation was made because the ATO has been informed there is a likelihood there will be a need to be able to address particular issues with the minority of funds that will be required to submit new reports for the 1997 and 1998 financial years. However, it is generally expected that Regulations likely to result in a change to the method of calculating notional factors will have prospective application to full financial years.
  3. The funds that have reported surchargeable contributions calculated in line with the legislation, including in line with methods approved in writing by the Commissioner of Taxation or the Australian Government Actuary on behalf of the Commissioner, 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.

Costs

There are likely to be costs associated with introducing any new measure and any costs incurred in order to set up a fund to comply with surcharge requirements may better be regarded as start up costs and amortised over a period of years. The method of imposing and collecting the surcharge is the most effective and cost efficient when compared to the alternative method originally suggested by industry, which would have involved all employers, all funds and all taxpayers in the process.

The administrative requirements for the surcharge are essentially similar to the process that superannuation funds undertake as part of normal business operations (processing and remitting payments, crediting and debiting accounts and reporting to members and regulators). The design of the surcharge recognises these similarities and takes into account reductions in compliance costs that can be achieved by aligning surcharge requirements with normal operations of superannuation funds.

I understand that a review conducted by the Association of Superannuation Funds of Australia (ASFA) indicated that overall administrative costs within the industry are in the order of $4bn per annum (see November 1998 edition of Superfunds magazine at page 15). Any additional annual costs attributed to the surcharge are small when compared to these overall costs.

Furthermore, the Australian Prudential Regulation Authority (APRA) conducted a survey of superannuation funds and found that 'there does not appear to be a discernible impact on costs associated with the implementation of the superannuation surcharge. This suggests that any increased costs experienced by funds due to the surcharge may be matched by increased administrative efficiencies in other areas' (see June Quarter 1998 of the APRA Bulletin).

The provisions in the Bill that remove the requirement for the Commissioner to determine an advance instalment, provide alternative reporting requirements for funds and limit the time for objection will reduce costs for funds. I should also add that the ATO is continuing to provide more streamlined reporting arrangements to reduce costs for funds. A recent electronic commerce initiative with which the ATO has been involved (`EC-Net') has been estimated by industry to reduce administrative costs by $400m per annum.

Different treatment of amounts allocated from surplus for defined benefit and defined contribution funds

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. The different treatment only applies for the 1997 financial year. To amend 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.

I again thank the Committee for the opportunity of providing comment on the submissions received and trust the information I have provided assists the Committee in its deliberations.

Yours sincerely
Rod Kemp

 

24 February 1998

Our Reference:spr/pm/corr 95

Contact Officer: Paul Morrow Extn: 61961

Your Reference:

Dear

Recently, there has been discussion about aspects of the superannuation surcharge legislation which is impacting on reporting by defined benefit funds. The discussion has caused uncertainty for industry and more particularly, for trustees, who have been getting conflicting and perhaps, incomplete advice.

The two areas causing most concern revolve around the calculation of a notional surchargeable contributions factor (NSCF). The first involves the issue of whether actuaries can calculate a NSCF for defined benefit funds in accordance with the Superannuation Contributions Tax (Assessment and Collection) Act 1997 (basically whether an actuary can calculate a NSCF in accordance with 'Australian actuarial practice'). The second issue is whether a NSCF can be calculated for defined benefit funds on contributions holidays.

It is the Commissioner's view actuaries can calculate a NSCF in accordance with the Act. The Commissioner has issued Superannuation Contributions Ruling SCR 97/1 which provides guidelines for actuaries to calculate the factor. The Ruling is consistent with Australian actuarial practice as required by the legislation and the method and assumptions set out in the Ruling were developed following consultation with the Institute of Actuaries of Australia. If an actuary uses the guidelines to calculate a NSCF, then it is the Commissioner's view, supported by the opinion of Chief General Counsel with the Australian Government Solicitor, that the calculation is in accordance with the Act.

It is also the Commissioner's view, again supported by the opinion of Chief General Counsel, that a NSCF can be calculated for defined benefit funds on contributions holidays. The amendment to the definition of 'notional surchargeable contribution factor', introduced in the Superannuation Contributions and Terminations Payments Taxes Legislation Amendment Act 1997, ensures that this is the case. The reason for the amendment is set out in the explanatory memorandum in the following words:-

"Subsection 8(3) determines the amount of surchargeable contributions for a member of a defined benefits fund based on a notional surchargeable contributions factor. The definition of 'notional surchargeable contributions factor' in section 43 of the Act is being amended to ensure that, if appropriate, a notional surchargeable contributions factor for a member for a particular year can be determined for an unfunded defined benefits scheme and for a funded defined benefits scheme that does not actually receive any contributions in that year because, for example, it is on a contributions holiday".

Parliament has given the Commissioner the general administration of the legislation and his interpretation of the law will prevail until such time as that interpretation is successfully challenged. Trustees need to be made aware of this and the fact the Commissioner will take steps to enforce his view.

I understand it has been suggested to some trustees that in light of the isolated views about the legislation, they might consider changing the information they have already reported to the Commissioner. When deciding what action they might take in response to the suggestion, trustees need to be aware the Commissioner will act on new information reported.

However, if he should decide at some later stage, perhaps after an audit, that the information upon which he acted did not reflect the true position, he would be obliged to issue an amended assessment. If that amendment results in an increase to the liability previously assessed, the legislation provides for an interest charge to be imposed. Trustees also need to be aware of the impact of the Taxation Administration Act, particularly when giving statements to the Commissioner.

In light of the views expressed above, the Commissioner is not prepared to further extend the time for fund trustees to report member information. Those trustees that have delayed reporting until these issues have been resolved should now take urgent steps to provide the requisite information to the Commissioner as soon as possible.

I would appreciate it if you could bring the contents of this letter to the attention of fund trustees and administrators. If you should wish to discuss the issue further, you should contact Paul Morrow on (02) 6216 1961.

Yours sincerely

Michael Monaghan
Deputy Commissioner
Superannuation

 

 

3 March 1998

Our Reference:spr/pm/corr 98

Contact Officer: Paul Morrow Extn: 61961

Your Reference:

Dear

You recently raised with me an issue that is causing some concern for actuaries. Apparently, some of them are of the view that their role in calculating a notional surchargeable contributions factor (NSCF) for members of defined benefit schemes constitutes an assessment of a liability for members of the schemes. The perception is that a third party is determining a tax liability based on a NSCF that is an imprecise and somewhat arbitrary figure when applied to individual members.

Questions as to the constitutionality of a particular provision are not matters for the ATO itself to address. However, I can provide some clarification around this issue and the first point I need to make is that actuaries do not assess a liability. They merely certify the NSCF applying to members of defined benefits schemes for trustees. The trustees use the NSCF so certified to calculate a member's surchargeable contributions, which are then reported to the Commissioner.

As you are aware, a liability to surcharge will only arise if a member's adjusted taxable income (that is, taxable income plus surchargeable contributions) exceeds the surcharge threshold of $70,000 for the year ended 30 June 1997. The Commissioner is responsible for establishing whether adjusted taxable income exceeds the threshold and for assessing the holder of the contributions for a surcharge liability at the rate set out in the legislation.

I acknowledge that while the Commissioner has set down guidelines to assist actuaries to calculate a NSCF, it is open to them to use any method which is consistent with Australian actuarial practice to calculate the factor. This can mean differing results when calculating a NSCF, but this is to be expected when one relies on experts acting with integrity and exercising their skills in line with professional standards.

I might add here that this is not a precedent situation. There are many instances where the Commissioner may rely on the advice of experts to assist him to establish liabilities or to enable him to provide advice on how he will establish liabilities. The following lists but a few of the circumstances where the Commissioner would rely on external expert opinion:-

- when valuing capital items to establish capital gains tax liabilities;

- when determining the amount to be allowed as a deduction when gifts of property are made under the incentives for the arts schemes;

- when valuing trading stock;

- when valuing non cash business benefits or the consideration to be assessed in barter/countertrade transactions;

- for setting benchmark earning figures for specific industries;

- for establishing values for fringe benefit tax purposes;

- for estimating income for provisional tax variation purposes;

- when determining calculated liabilities of life companies;

- when calculating the current pension amount exempt from income tax for superannuation funds;

- when calculating the size of the deduction for death and disability premiums for funds that self insure;

- for determining the outstanding claims provision for a general insurer; and

- when determining the embedded value of a life company.

I can only repeat that in certifying a NSCF to apply to a member of a defined benefits fund, an actuary is only doing what a number of other experts do when asked to use their expertise to provide information for the Commissioner. The actuary's role under the surcharge legislation is to certify a NSCF as one of the first steps in getting information to the Commissioner.

Yours sincerely

Michael Monaghan
Deputy Commissioner
Superannuation

COMMENTS ON SUBMISSIONS TO THE SENATE ECONOMICS LEGISLATION COMMITTEE CONSIDERING THE SUPERANNUATION CONTRIBUTIONS AND TERMINATION PAYMENTS TAXES LEGISLATION AMENDMENT BILL 1999

Submission No. 1 – Clayton Utz

The submission suggests that many assessments are disputed because the members in relation to whose contributions the assessments have been raised are no longer members of the fund. It also suggests assessments are being raised inappropriately for members that do not quote their Tax File Number (TFN).

Comment

The legislation already provides that an assessment is taken not to have been made if a member leaves the fund before the fund receives a notice of assessment. All a fund trustee has to do if a member leaves before the assessment was received is to notify the ATO. There is no further liability on the fund to pay the amount assessed in respect of that member's contributions. The fund trustee would be required to pay an assessment if it was received before the member leaves the fund.

A member's TFN is required to enable the ATO to determine whether surcharge is payable and the rate at which it applies. Trustees are now required to request that a member quote their TFN on entry to the fund.

The fact a member does not quote a TFN to a provider does not necessarily mean that an assessment will be raised. The ATO is required to take steps to identify members for whom a provider does not hold a TFN.

If the Commissioner cannot identify a member,

- the full 15% surcharge rate will apply to accounts that existed before 7 May 1997 where the surchargeable contributions exceed the contributions threshold ($2 000 for 1996/1997, $2 092 for 1997/98 and $2 529 for 1998-99) - the assumption is that these members are high income earners;

- the full 15% surcharge rate will apply to new accounts opened on or after 7 May 1997 regardless of whether the surchargeable contributions exceed the contributions threshold;

The ATO has been able to obtain a high degree of TFN capture as a result of superannuation fund reporting, writing directly to members and internal matching of member details. Assessments to those members who could not be identified were issued in May 1999 and established liabilities of $44 million.

The legislation provides for the amendment of an assessment, if appropriate, when a member subsequently quotes a TFN. Interest is also payable by the ATO on any surcharge amount overpaid.

Submission No. 2 – William M Mercer

The submission suggests:

In previous discussions with the author of the submission, it was also suggested that the words `worked out by an eligible actuary using the formula' at line 14 of page 6 of the Bill should be altered to remove the words `by an eligible actuary' as an actuary is only required to calculate notional factors, not the surchargeable contributions.

Comment

  1. The Australian Government Actuary has advised the ATO that in many cases, actuaries would be in a position to identify a particular fund if details of approved alternative methodologies and the circumstances in which those methodologies have been applied are published. The potential that this information, if published, could lead to the disclosure of the name of the relevant fund would be a breach of the secrecy provisions of the legislation.
  2. An amount commuted by a member of a constitutionally protected fund solely to pay a surcharge liability is not an eligible termination payment. The provisions in the Bill do no more than apply the same rule to an amount commuted by a member of any fund to pay a surcharge liability. The reason for this is that a person in receipt of a pension may not have funds available to pay a surcharge liability received after a pension commenced to be paid; a person in receipt of a lump sum would have funds available to pay a surcharge liability.
  3. The Bill enables Regulations to be made to:-
  4. set out reasonable interest amounts when calculating the surchargeable part of an amount allocated from surplus (if there are no Regulations in place, the allocated surplus amount is a `contributed amount' – note Superannuation Contributions Ruling SCR 99/1 provides guidelines for actuaries when calculating allocated surplus amounts);
  5. set out the methodology for calculating the actuarial value of the benefits that accrued to, and the value of administration expenses and risk benefits provided, in respect of a member for the 2000 financial year and later financial years;
  6. insert, omit or alter a provision in Superannuation Contributions Ruling SCR 97/1; and
  7. declare schemes that are unfunded defined benefit schemes.

    The ATO will seek actuarial advice in the course of preparing drafting instructions for Regulations.

    Any regulations setting out methodology calculating the actuarial value of the benefits that accrued to, and the value of administration expenses and risk benefits provided, in respect of a member for the 2000 financial year and later financial years will relate to full financial years (that is, the methodology set out in Ruling SCR 97/1 will apply for the 2000 financial year).

    1. The impact of the surcharge when a member has died.

    A surcharge liability for a deceased member of a constitutionally protected fund would be paid by the trustee or beneficiary of the deceased member's estate irrespective of whether a lump sum, or a pension or annuity, has been paid by the fund. If a member of any other fund dies and the fund pays a lump sum, or a pension or annuity, to a person other than the member before an assessment of surcharge is given to the fund, then no liability arises.

    However, surcharge continues to be payable by a fund if an assessment is given to the fund before the fund pays a lump sum, or a pension or annuity, even if the member has died. If the fund has paid a lump sum, or a pension or annuity, to the member and the member subsequently dies after the assessment has been received, the trustee or beneficiary of the member's estate is liable to pay any unpaid surcharge liability assessed.

    The provisions in the Bill ensure surcharge liabilities in relation to the contributions of deceased members of funds are treated consistently. The provisions also remove any liability to surcharge in relation to the contributions for the financial year in which a member dies, or later financial years. There is no intention that the Commissioner revisit any decisions already made in respect of the surcharge liabilities in relation to the contributions of deceased members.

    I am prepared to discuss removal of the words `by an eligible actuary' at line 14 of page 6 of the Bill if the Committee is of the view this is appropriate.

    Submission No. 3 – Law Council of Australia

    The submission suggests there is no mechanism in the legislation that enables a fund to recover the cost of the surcharge. It also suggests that restrictions on the ability to amend the governing rules of funds means the cost of the surcharge is borne by the employer sponsor.

    Comment

    An amendment to the Superannuation Industry (Supervision) Regulations in August 1997 ensures a trustee can be reimbursed for an amount paid as surcharge in respect of a member's contributions. Trustees could have amended the governing rules of their funds to operate prospectively to address concerns about the ability to pass on the surcharge liability to high income earning members.

    Submission No. 4 – Private submission from a Partner of Mallesons Stephen Jaques

    The submission raises a concern that members of funds who leave before their benefits vest are liable to pay a surcharge liability on amounts they do not ultimately receive.

    Comment

    The surcharge legislation does not prescribe the manner in which trustees may fund the surcharge liability assessed, so they are free to determine the manner of funding the liability. Where a member receives a benefit that is significantly less than that assumed in determining surchargeable contributions, trustees can choose to exercise their discretion to adjust any amount they may decide to deduct from a member's benefit to meet the liability.

    Submission No. 5 – Lend Lease

    The submission expresses concern that the legislation is silent on how trustees are to recoup the surcharge from members. It suggests trustees may be in breach of their fiduciary obligations to act in the best interests of members `if they seek to extract a tax from a member's benefits in circumstances where the legal position to do so is unclear or uncertain'.

    Comment

    The Government received advice when it was drafting the original legislation that a provision allowing trustees to reduce a member's benefits by the amount of surcharge paid in respect of the member's surchargeable contributions would be unconstitutional. As a result, the surcharge legislation does not prescribe the manner in which trustees may fund the surcharge liability assessed, so they are free to determine the manner of funding the liability. The Superannuation Industry (Supervision) Regulations ensure a trustee can be reimbursed for an amount paid as surcharge in respect of a member's contributions.

    The provisions in the Bill provide the clarity the trustees of the Lend Lease Fund are seeking. If the trustees have reported contributions calculated in line with the requirements of the legislation, there will be no need for them to submit new reports. If they are required to submit new reports in relation to members that have left their fund, amended assessments will either issue to the new fund of the member or to the member personally.

    Submission No. 9 – Mr Neil Wilson

    Mr Wilson's submission raised an issue about the interaction of the surcharge and reasonable benefit limits.

    Comment

    The reasonable benefits system is designed to limit the total amount of concessionally taxed superannuation and termination payments received by an individual. The termination payments surcharge applies if the recipient's adjusted taxable income exceeds the surcharge threshold.

    The termination payments surcharge does not apply to bona fide redundancies and approved early retirement scheme payments that are within the limits ($4 854 plus $2 427 for each full year of service).

    Submission No. 10 – Institute of Actuaries of Australia

    The submission raises an issue about the wording in clause 3 of Schedule 1 of the Bill that inserts paragraphs 8(5)(a) and (b) into the legislation (lines 9 and 15 at page 7). The Institute is concerned the words may not be sufficiently clear and could leave the paragraph open to broader interpretation.

    Comment

    I do not necessarily agree there is a problem with the wording. It is a rule of interpretation that a section, subsection or paragraph must be read in the context of the whole of the legislation. When this is done, the concerns of the Institute can be shown to be unwarranted.

    However, if the Committee is of the view a change to the words is appropriate, I would be prepared to discuss the form those words should take. I would also point out that similar words that have caused concern to the Institute appear at line 31 of page 6 of the Bill (paragraph (b) under the definition of `notional surchargeable contributions factor').

    Submission No. 12 – The Australian Workers Union

    The submission raises concerns that the proposals in the Bill do `not correct the fundamental flaw of the differing bases for calculation of the SG and the superannuation tax or the permitted lower base rate for the calculation of the SG'.

    Comment

    The proposals in the Bill were never intended to address this issue. Superannuation Guarantee legislation requires employers to make compulsory contributions to a superannuation fund for their eligible employees at a certain level, calculated on the employees earnings base. The contributions are generally based on the award earnings base for award employees.

    The earnings base for employees not covered under award arrangements would be the Superannuation Guarantee default earnings base. This is the ordinary time earnings as defined under the Superannuation Guarantee legislation.

    Surcharge applies if a person's adjusted taxable income exceeds $78 208 (for the 1999/2000 financial year). Employees whose adjusted taxable income exceeds $78 208 because of a variety of allowances may be subject to the superannuation surcharge even though the superannuation contributions attributed to them are relatively low.

    Submission No. 13 – Community and Public Sector Union (CPSU)

    The Union has raised concerns that members may receive an assessment for more than they have paid. It also expresses concern that there is no consistent mechanism for the reduction of benefits in funded defined benefit schemes and raises the issue of interest required to be imposed by unfunded defined benefit fund trustees on amounts in members' debt accounts.

    Comment

    Assessments issue to the trustee of a fund and are based on a member's surchargeable contributions (which would not usually be member contributions in the public sector) which is calculated using notional factors calculated by a fund's actuary. Generally in public sector schemes, members are required to contribute 5% of salary. The employer's contribution, the surchargeable contributions for a member, generally exceeds the amount a member is required to contribute.

    The surcharge legislation does not prescribe the manner in which trustees of funded defined benefit funds may fund the surcharge liability assessed, so they are free to determine the manner of funding the liability. I understand the trustees of a number of funded defined benefit schemes have put in place arrangements where members' benefits are not adjusted on an annual basis to reflect the liability assessed to the fund in respect of a member's contributions.

    These funds establish what is called an `offset debt account' for members whose contributions are assessed and debit that account for the amount paid. Interest is generally charged to the member's offset debt account at the fund earning rate. Members are given the opportunity of paying the amount in the offset debt account to the trustee to avoid the imposition of any interest charge (or to pay an amount to an offset credit account that attracts interest at the same rate).

    Regulation 5.02 of the Superannuation Industry (Supervision) Regulations allows trustees of any fund to charge costs (including taxation) against a member's benefit in a fund. In particular, sub Regulation 5.02(3) requires trustees of any fund to distribute those costs in a fair and reasonable manner.

    Regulation 13.16 of the Superannuation Industry (Supervision) Regulations affects the benefits of members whose notional contributions have been subject to surcharge and allows the minimum benefit payable to a member to be reduced by the amount that is necessary to reimburse the trustee for an amount of surcharge. Regulation 13.16 also allows the trustee to charge interest on an amount paid as surcharge before that amount is reimbursed to the trustee.

    The surcharge legislation specifically requires trustees of unfunded defined benefit funds to establish a debt account for members whose contributions have been subject to surcharge and to debit the accounts with the surcharge amount assessed. Members can pay the assessed liability each year, or can allow it to accrue and be paid by the trustee out of the member's benefits when they become funded.

    To ensure members of unfunded schemes do not get an advantage over members of funded schemes (whose trustees are required to pay the assessed surcharge liability on an annual basis), the legislation imposes an obligation on unfunded scheme trustees to calculate and impose an interest charge on the amount in the debt account at 30 June in any year. Interest is calculated at the 10 year Treasury bond rate.

    Submission No. 15 – Australian Institute of Superannuation Trustees

    The submission suggests the ATO should set a timeframe for repaying advance instalments and also should accept objections as being lodged on time for one year after the amendments take effect.

    Comment

    The Commissioner of Taxation has informed me that he has taken every step to ensure advance instalments are credited/refunded as soon as possible. The majority of the advance amounts were credited/refunded with the assessments that issued in May 1999.

    Transitional provisions in the Bill allow members and providers more time in which to object to assessments issued before the date of Royal Assent. The Commissioner of Taxation also has the power to accept objections as being lodged on time. It is his advice to me that he has ensured no member or provider has been disadvantaged by any refusal on his part to date to accept an objection as having been lodged on time.

    Submission No. 16 – Mr Ian Woods

    Mr Woods' submission suggests the Parliament should legislate against the use of surcharge offset debt accounts by trustees or legislate a rate of interest corporate trustees must use if they set up surcharge offset debt accounts.

    Comment

    The surcharge legislation does not prescribe the manner in which trustees of funded defined benefit funds may fund the surcharge liability assessed, so they are free to determine the manner of funding the liability. The Government is not convinced it would be appropriate to legislate in the manner suggested by Mr Woods.

    The question of charging interest and the rate at which that interest is charged is a matter for trustees who must act in the best interest of all members.