Chapter 2
Key issues
2.1
This chapter describes the measures contained in the bill and considers
the evidence that the committee received on specific proposed amendments. The
first three sections of this chapter each examine one of the three schedules to
the bill. The committee's comments on a particular schedule can be found at the
end of the relevant section. The committee's overall conclusions and
recommendations are at the end of the chapter.
Schedule 1—Income tax relief for transfers to a MySuper product
2.2
The measures in schedule 1 to the bill relate to the government's Stronger
Super reform package that was developed in response to the 2010 report of
the Super System Review (also known as the Cooper Review).[1]
One of the main recommendations of the Super System Review was that a simple,
low cost superannuation product called 'MySuper' be introduced. MySuper would replace
existing default products.
2.3
From 1 July 2013, superannuation funds will be able to offer MySuper.
From 1 January 2014, employers must make superannuation guarantee contributions
for employees who have not made a choice of fund to a fund that offers a
MySuper product.[2]
Funds that do not intend to offer a MySuper product are required to transfer
the account balances of existing default members to a superannuation fund that
does offer a MySuper product by 1 July 2017.[3]
However, the transfer of default members' account balances may have adverse
financial consequences for those members due to:
- unused tax and capital losses, which have value as they
can ordinarily be used in later income years to reduce taxable income or to
offset against capital gains; however, as superannuation funds typically credit
the value of unutilised losses to the account balances of their members if the
losses cannot be transferred the affected members' balances would be reduced by
the value of the losses;[4]
and
- capital gains tax (CGT) consequences associated with the
transfer of assets from one entity to another.
2.4
As the explanatory memorandum notes, if a mandatory transfer resulting
from the MySuper legislation creates an income tax liability, or if relevant
losses remain within the transferring entity, this would have an adverse impact
on the affected members.[5]
To avoid any adverse impact on members whose balances will be mandatorily
transferred, schedule 1 to the bill proposes to amend the Income Tax
Assessment Act 1997 (ITAA 1997) to provide that where members' account
balances have been mandatorily transferred from a complying superannuation fund
(or a life insurance company or a pooled superannuation trust that the fund
invests in to support its default members)[6]
to a MySuper product in another superannuation fund, the transferring
superannuation fund may choose to undertake a 'loss transfer' or a 'CGT roll‑over':
- Under the loss transfer option, any realised capital and tax
losses that are reasonably attributable to the accrued default amount[7]
of the default members may be transferred to another entity. The explanatory
memorandum notes that this will allow the transferring entity to liquidate
assets that are supporting its default members and to then transfer cash and
realised losses to the receiving entity.[8]
- If an entity utilises the CGT roll‑over, any income
tax liability for assets transferred to the other superannuation fund that is reasonably
attributable to the accrued default amount of the default member may be
deferred.[9]
This would mean that the transferring entity would disregard any CGT
consequences and that the liability will not arise until the ultimate disposal
of the asset by the other entity.[10]
Special arrangements are proposed to account for depreciating assets.[11]
2.5
It is proposed that this relief would end on 30 June 2017, which is the
deadline for the transfer of default members' accrued default amounts to a
MySuper product.[12]
Tax deductions for personal
contributions
2.6
Individuals who make a personal contribution to a complying
superannuation fund can currently claim an income tax deduction if they give a
notice to their fund and certain conditions are satisfied. A consequential
amendment is contained in the bill that would ensure that members whose accrued
default amount has been mandatorily transferred to another fund under the
MySuper legislation can access this deduction. This will occur by enabling
individuals to give a notice to their new fund.[13]
Evidence received on schedule 1
2.7
The Australian Institute of Superannuation Trustees and the Industry
Super Network advised that they support the proposed amendments contained in
schedule 1:
This measure solves the problem whereby members may be
transferred en masse, but without the need to sell down investments in order to
provide an orderly transfer, a transfer of both members as well as assets.
Further, this measure ensures that unrealised capital losses, assets that are
of considerable potential value to super fund members, are able to also be
transferred, rather than ceasing to exist at the point of transfer, which may
be for little or no value.[14]
2.8
Other organisations, while supportive of the measures overall, raised
some technical issues regarding the bill. These are discussed in the following
paragraphs.
Need for regulations and further
guidance
2.9
Mercer and the Association of Superannuation Funds of Australia (ASFA)
both suggested that the Australian Taxation Office (ATO) will need to provide
further guidance on various matters and perhaps review a previous taxation
ruling. Regarding the rollover of tax losses, Mercer stated that where only a
part of a fund's membership is being transferred 'there is likely to be a range
of complexities and hence the potential for disputes with the ATO over the
methodology for determining the amounts which are 'reasonably attributable' to
the [accrued default amount] transfer. Mercer suggested this could be overcome
by the ATO providing 'sensible and practical guidance as well as adopting a
reasonable approach'.[15]
2.10
On tax deductions for personal contributions, Mercer advised that the
methodology outlined in the ATO's taxation ruling TR 2010/1 could result in the
process envisaged by the bill being unworkable as the receiving entity would be
unlikely to have the information necessary for determining whether the notice
is valid and would, therefore, be unable to proceed with the notice.[16]
2.11
ASFA also argued that consideration should be given to amending the Superannuation
Industry (Supervision) Regulations 1994 to provide that contributions splitting[17]
notices may be served on the receiving fund 'in a similar fashion to the manner
in which the bill enables claim for a deduction for a personal contribution to
be given to the successor fund'.[18]
Calls for ongoing tax relief and
relief for intra-fund transfers
2.12
ASFA argued that the CGT relief should be ongoing so that it applies to
all future superannuation fund mergers. ASFA suggested that, in these circumstances:
... the underlying beneficial interest in the assets
remains the same and only the legal ownership has been changed from one trustee
to another. In these circumstances any capital gain/loss is not as a result of
the final disposal of an asset to a third party but instead a CGT event is
triggered merely by the change in legal ownership from one trustee to another,
despite the underlying beneficial entitlements remaining the same.[19]
2.13
ASFA added that a member of the fund does 'not have any control over the
decision to merge funds or the consequential transfer of the legal ownership of
the assets', yet ultimately they bear the tax consequences of any CGT gains and
losses as opposed to the trustee as legal owner.[20]
2.14
The Financial Services Council (FSC) raised the issue of intra-fund
transfers. The FSC provided the following analysis:
A superannuation Trustee that holds [accrued default amounts]
on behalf of a member is required to transfer those amounts to a suitable
MySuper product. This is a mandatory transfer.
The MySuper regime does not, however mandate that the
member's [accrued default amount] must be transferred between funds, it clearly
recognises that the MySuper product may be the same product in which the
member's monies reside, a different product within the same fund, or a product
within a different fund. If the Trustee selects a suitable MySuper product
within the same fund as the appropriate MySuper product, the transfer to this
product is 'mandatory' in the same way as a transfer to a product in a
different fund would be, had that been the appropriate product selected by the
Trustee.[21]
2.15
The FSC argued that the loss transfer and CGT roll-over relief should
also be provided to support transfers between products within a single fund.[22]
ANZ, which also recommended that relief be provided for intra-fund transfers,
suggested that not doing so 'disadvantages funds that wish to move their
existing members into a MySuper offering within the same superannuation fund in
order to improve efficiency and reform outdated investment structures'.
However, if the relief was broadened to 'permit movement between two products
or structures within the same fund', ANZ considers that this would remove
potential detrimental impacts to members who hold their superannuation savings
through these structures'.[23]
2.16
The FSC also noted circumstances where a unit trust holds assets under
the complying superannuation class of a life insurance company. It argued that asset
transfers from unit trusts will be needed for mandatory MySuper transfers
within the same superannuation fund. The FSC suggested that, without relief:
the transfer of assets will crystallise tax on gains that
will unfairly deplete superannuant's [sic] balances, contrary to the policy
intent of MySuper. It will also deprive superannuant's [sic] of the value of
losses, either previously realised or crystallised on the transfer of assets...[24]
2.17
Treasury, however, provided the following advice to the committee:
Some stakeholders have sought to extend the scope of the
income tax relief to voluntary superannuation fund restructures in order to
achieve various objectives as part of implementing the MySuper reforms. These
voluntary restructures are undertaken for commercial reasons rather than being
required under the MySuper reforms. Extending the relief to cover such
restructures would involve an additional cost to revenue.[25]
Committee view on schedule 1
2.18
The committee is of the view that the matters stakeholders have raised
do not need to be addressed by this bill. The bill aims to ensure that the
introduction of MySuper does not have an adverse impact on the balances of
individuals whose accounts are mandatorily transferred to another entity as a
result of the MySuper reforms. On contributions splitting, for example, it is
apparent that this is an issue that could arise in other circumstances where member
benefits are transferred into a successor fund. If this issue warrants further
consideration, it should occur through a process where it can be
comprehensively considered. Suggestions for the tax relief to be made permanent
also appear to be beyond the scope of the bill, as the bill is clearly linked
to the 30 June 2017 deadline for the transfer of default members' accrued
default amount to a MySuper product. Finally, the committee has not been
convinced that the proposed amendments should accommodate restructures that are
convenient for an entity but which are not specifically required by the MySuper
legislation.
2.19
However, the committee is of the view that the ATO should review the
evidence received during this inquiry and consider whether its current taxation
rulings need to be adapted or if it needs to provide further information by
other means as a result of the amendments contained in this bill.
Schedule 2—Consequential measures related to the government's 'Sustaining
the superannuation contribution concession' policy
2.20
The proposed amendments contained in schedule 2 to the bill are
consequential to measures contained in other bills that, at the time of
writing, are currently before the Senate.[26]
If passed, those measures would reduce the tax concession that individuals with
an income above $300,000 receive on their concessional superannuation
contributions by imposing tax under the ITAA 1997. The size of the concession
would be reduced from 30 per cent to 15 per cent. The relevant explanatory
memorandum provides the following justification for those measures:
High income earners receive a significantly larger tax
concession on superannuation contributions than average income earners.
Concessional contributions that are included in the assessable income of
superannuation funds are subject to a flat rate of tax of 15 per cent
regardless of the income of the individual members of the fund. If the
superannuation contributions made for the individual had instead been included
in their salary and wages or business income, the high income earning
individual would have been taxed on this income at a marginal income tax rate
of 45 per cent (excluding the Medicare levy). As a result, currently these
individuals effectively receive a 30 per cent tax concession (excluding the
Medicare levy) on their superannuation contributions. In contrast, average
income earners are subject to a marginal tax rate of 32.5 per cent (excluding
the Medicare levy) and effectively receive a 17.5 per cent tax concession
(excluding the Medicare levy) on their superannuation contributions.[27]
2.21
Schedule 2 to this bill proposes consequential amendments that
specifically relate to the Defence Force Retirement and Death Benefits (DFRDB)
scheme. The amendments to the Defence Force Retirement and Death Benefits
Act 1973 that the bill proposes would enable the Commonwealth
Superannuation Corporation to pay a lump sum from a superannuation interest in
the DFRDB scheme to meet a debt account discharge liability (a debt under the
ITAA 1997) for Australian Defence Force (ADF) members that earn above $300,000.
2.22
In his second reading speech on the bill, the Minister noted that these
changes are intended to ensure that:
... beneficiaries of this scheme are not disadvantaged in
comparison to members of other Commonwealth defined benefit schemes and can
have their benefits adjusted to meet their liability under the sustaining the
superannuation contribution concession measure.[28]
Committee view on schedule 2
2.23
These measures are consequential to, and contingent on, broader changes
contained in other legislation currently before the Parliament. Accordingly,
and with the absence of any submissions commenting on schedule 2, the committee
considers these measures should proceed.
Schedule 3—MySuper and employees under a modern award
2.24
Schedule 3 was inserted into the bill by the House of Representatives on
20 June 2013. The schedule contains proposed amendments to the Fair
Work Amendment Act 2012 (FW Amendment Act)[29]
that are intended 'to allow contributions for default fund employees to whom a modern
award applies to be directed to an employer MySuper product, subject to the
product being approved by the [Fair Work Commission (FWC)] and specified on the
Schedule of Approved Employer MySuper Products'.[30]
The supplementary explanatory memorandum notes that the approval process by the
FWC will involve:
- an expert panel of the FWC[31]
assessing the corporate or tailored MySuper product against legislated criteria
relating to the performance of the product; and
- the expert panel assessing whether including the product on the
Schedule of Approved Employer MySuper Products would be in the best interests
of relevant default fund employees.[32]
2.25
The Department of Education, Employment and Workplace Relations (DEEWR)
advised that the proposed amendments have been developed in response to
concerns raised by large employers with corporate superannuation arrangements
during the Senate Education, Employment and Workplace Relations Legislation
Committee's inquiry into the FW Amendment Bill. The concerns of these
large employers:
related to employers not being able to make contributions for
modern award reliant employees to funds offering high performing employer
MySuper products, and potential disruption that changes to employee
superannuation arrangements may cause for employers and employees.[33]
2.26
Schedule 3 also proposes to amend the FW Amendment Act to increase the
maximum number of funds that, in relation to MySuper products, the FWC can
specify in a modern award. The number of funds will be increased from 10 to 15.
DEEWR advised that this is in response to concern that:
the existing limit of 10 funds may see some high performing
funds not being included in particular modern awards where there are more than
ten funds which meet the legislated criteria of being in the best interests of
employee members covered by the award. The proposed amendments ensure that high
performing funds have reasonable prospects of being specified in modern awards.[34]
2.27
Another proposed amendment in schedule 3 will provide that the new
requirements included in the FW Amendment Act do not apply before 1 January
2015. DEEWR advised that this would give the 'certainty sought by stakeholders
on how long existing arrangements will be able to continue'.[35]
Committee view on schedule 3
2.28
The committee considers that the proposed amendments contained in
schedule 3 should proceed.
Concluding comments
2.29
The committee is of the view that this bill should be passed. In
particular, the measures that relate to MySuper are important as they will
ensure that there will be neutral tax consequences in circumstances where a
fund that does not offer a MySuper product needs to transfer members to another
fund that does. On the remaining schedules to the bill, the committee has not
received any evidence that suggests that they should not proceed.
Recommendation 1
2.30
The committee recommends that the Senate pass the bill.
Senator Mark Bishop
Chair
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