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:-
- 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.
Funds required to submit new reports
- 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.
- 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.
- 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;
- a nil rate of surcharge will apply to accounts that existed for a
member before 7 May 1997 where surchargeable contributions
do not exceed the contributions threshold;
- 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:
- the ATO should be required to publish details of any approved alternative
methods for calculating notional factors; and
- the same rules for commutation should apply to those that take a lumps
sum;
- It also raises issues about:
- the Regulations; and
- the impact of surcharge when a member has died.
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
- 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.
- 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.
- The Bill enables Regulations to be made to:-
- 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);
- 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;
- insert, omit or alter a provision in Superannuation Contributions
Ruling SCR 97/1; and
- 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).
- 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.