CHAPTER 2
THE SURCHARGE LEGISLATION
Introduction
2.1 The package of legislation introduced by the Government imposes a
surcharge of up to 15 per cent on all employer and deductible personal
superannuation contributions made by, or for, high income earners with
assessable incomes over $70 000. The legislation also imposes a similar
surcharge payment on "golden handshakes".
2.2 The thresholds at which liability for surcharge commences and reaches
its maximum will be indexed from 1997-98 to the increase in full-time
adult average weekly ordinary times earnings.
2.3 The surcharge is to have effect from budget night 1996 and applies
to contributions made after the budget announcement. Accordingly, the
surcharge does not affect any superannuation contributions or termination
payments made prior to that night, regardless of the income of the recipient.
2.4 About 355 000 taxpayers are expected to be affected by the surcharge.
[1]
2.5 An important feature of the legislation is that the superannuation
provider, not the employee, is liable to pay the surcharge.
How are surcharge payments calculated?
2.6 Liability for surcharge in respect of superannuation contributions
and termination payments commences at an "assessable income"
of $70 000. Effectively, it increases by 1 per cent for each additional
$1 000 of assessable income above the $70 000 threshold, reaching a maximum
of 15 per cent at $85 000. For example, a person with an assessable income
level of $75 500 will be liable for a surcharge of 5.5 percent on their
employer and/or deductible superannuation contributions.
2.7 "Assessable income" for the purposes of the surcharge is
defined in the legislation to mean taxable income plus all employer and
tax deductible personal superannuation contributions. The definition of
assessable income also includes termination payments, with some exceptions
as described later in the chapter.
2.8 Defined benefits schemes require a different approach to assessing
surcharge liabilities. If the contributions are held under a defined benefits
scheme, the surcharge is payable on an amount calculated by reference
to a notional surchargeable contributions factor determined for the member
and the member's annual salary for the purposes of the scheme. [2]
2.9 Unfunded defined benefits schemes, such as those that apply to parliamentarians,
the judiciary and many State and Commonwealth public sector employees,
are not funded until the benefit is paid. Accordingly, the surcharge cannot
be collected from these schemes each year.
2.10 To address this issue, the Government has decided that the surcharge
liability in respect of individuals in these schemes is to be accumulated
and will be payable by the superannuation provider at the time the affected
member's benefit commences to be paid. [3]
Interest will be payable on the accumulated debt, and will be charged
at the 10 year bond rate, currently 7.94 per cent. [4]
How will the surcharge be collected?
2.11 Each year, superannuation providers will be required to send to
the Australian Taxation Office (ATO) details of contributions received
in relation to each member. The reporting date will be 31 October each
year.
2.12 The legislation enables the providers to seek tax file numbers from
members for this purpose. While there is no obligation on members to provide
their TFNs, contributions made on their behalf and termination payments
will be surcharged at the full rate of 15 per cent if the TFN is not supplied
to the provider.
2.13 The legislation also contains a number of provisions to facilitate
the provision of TFNs. (See paras 2.37 - 2.41 below)
2.14 Having received the TFNs, the ATO will then cross match the information
supplied by superannuation providers with tax returns lodged by taxpayers.
When the ATO determines that a member's assessable income is over the
surcharge threshold and there is a surcharge liability, the ATO will assess
the amount of surcharge and will periodically send assessments to the
provider who holds the member's contributions.
2.15 The superannuation provider must then debit the member's superannuation
account with the surcharge liability and send the amount owing to the
ATO within one month of the assessment.
2.16 The legislation also provides for payment of an advance instalment
of surcharge liability from 1998, payable on 15 June of each year. The
advance instalment will be 50 per cent of the surcharge assessed in the
previous year.
2.17 In the second reading speech, Mr Miles advised the House that the
Government had considered several alternative measures of collecting the
surcharge that have been suggested. He said that the alternatives suggested
all involve an unacceptable increase in compliance costs for employers,
small business and all Australians. He explained the Government's position
in the following terms:
A number of these alternatives involve transferring the reporting obligation
from superannuation funds to the significantly larger number of employers.
The government believes this would represent a substantial increase
in the compliance burden of small business.
Significantly, the administrative requirements on superannuation funds
under the government's approach are essentially similar to the processes
that superannuation funds already undertake as part of their normal
business operations. Against this background the government has decided
not to depart from the broad approach to collection of the surcharge
outlined on budget night. [5]
Other major features of this legislation
2.18 Other significant features of this legislation include:
- a provision that allows trustees to reduce member's benefits in order
to allow for payment of surcharge or advance payment. This provision
overrides any rules in trust instruments that may have otherwise prevented
trustees from reducing benefits;
- provisions that permit borrowings where surcharge assessments or instalment
payments cannot be readily met from fund assets;
- the SIS Act is amended to allow the quotation, provision and use of
TFNs. This amendment is intended to maximise the use of TFNs quoted
to trustees in order to minimise the number of surcharge assessments
raised purely due to the non-quotation of TFNs.
How does the surcharge alter the taxation of superannuation?
Combined effect of tax plus surcharge
2.19 Deductible contributions made by employers and self employed persons
to superannuation funds are currently taxed at a rate of 15 per cent.
This tax was introduced in May 1988. The surcharge will raise the effective
rate of taxation on contributions for persons with an assessable income
in excess of $70 000 to 30 per cent.
Taxation of Eligible Termination Payments (ETPs)
2.20 The taxation treatment of ETPs is highly complex and the following
is a brief summary of the current taxation regime.
2.21 ETPs include amounts payable on retirement, such as superannuation
payments, other than pensions or annuities, and also other amounts paid
to a person on ceasing employment, such as 'golden handshakes' and payment
for unused sick leave.
2.22 The taxation treatment of ETPs changed considerably in 1983. Prior
to that date, ETPs were generally taxed at the rate of 5 per cent. For
ETPs that relate to service after 1 July 1983, there are a number of components
of the payment which are taxed at different rates. Without addressing
each component, the effective result is that ETPs qualify for concessional
tax treatment and are taxed at between 20 per cent and 30 per cent depending
on the mix of components in the ETP.
2.23 There is further concessional tax treatment for those who receive
an ETP at age 55 or later. Such people will be taxed at either a zero
rate or 15 per cent, depending on the component of the ETP. This concession
only applies to a certain threshold, currently approximately $86 500.
The Bills
2.24 The surcharge legislation consists of the following Bills:
- Superannuation Contributions Surcharge (Assessment and Collection)
Bill 1997;
- Superannuation Contributions Surcharge (Consequential Amendments)
Bill 1997;
- Superannuation Contributions Surcharge Imposition Bill 1997;
- Termination Payments Surcharge (Assessment and Collection) Bill 1997;
- Termination Payments Surcharge Imposition Bill 1997;
- Superannuation Contributions Surcharge (Application to the Commonwealth)
Bill 1997; and
- Superannuation Contributions Surcharge (Application to the Commonwealth
_ Reduction of Benefits) Bill 1997
Superannuation Contributions Surcharge (Assessment and Collection) Bill
2.25 This Bill provides for the assessment and collection of the surcharge
on superannuation contributions paid to superannuation providers in respect
of "high income" individuals. The Bill has seven parts, the
features of which are described in the following paragraphs.
2.26 Part 1 of the Bill includes a simplified outline of the Bill.
2.27 Part 2 sets out the liability to surcharge and the advance payment
system. This section:
- sets 1 July 1996 as the date at which liability for the surcharge
commences;
- establishes $70 000, indexed to average weekly earnings, as the "adjusted
taxable income" level at which surcharge commences;
- defines who is liable to pay the surcharge;
- defines surchargeable contributions;
- establishes an advance instalment system for surcharge liability for
the following year; and
- establishes who is liable to pay the advance instalment.
2.28 Part 3 of the Bill:
- sets out the superannuation provider's obligations to provide statements
to the Commissioner for Taxation (who is to assess the level of surcharge),
other providers and members;
- establishes a provision for surcharge payable by members of defined
benefits funds to be deferred until benefits are paid. The amount owing
is to be indexed to the Treasury bond rate;
- sets out the ATO's powers to amend assessments, including the power
to require interest to be paid to the Commonwealth in the event that
insufficient surcharge is paid.
2.29 Part 3 also gives the Commissioner for Taxation power to use tax
file numbers for the purposes of the legislation and describes how objections
against assessments are to be resolved.
2.30 Part 4 of the Bill deals with the recovery of unpaid surcharge,
advance instalments, interest or late payment penalties.
2.31 Part 5 of the Bill deals with administration including secrecy provisions
and the divulgence of information.
2.32 Part 6 of the Bill contains miscellaneous provisions. Key provisions
include:
- details of information a superannuation provider must provide to the
Commissioner of Taxation;
- a provision that allows superannuation providers to reduce members'
benefits on account of payment of surcharge or advance payment, overriding
any provisions in trust instruments that may have prevented any such
reduction of benefits;
- establishment of standards of evidence, rights of access to premises
and the powers of the Commissioner to obtain information and documents;
- standards of records to be kept and retained by the superannuation
provider.
2.33 Part 7 of the Bill contains the definitions used for the purposes
of the Act.
Superannuation Contributions Surcharge (Consequential Amendments) Bill
2.34 This Bill makes consequential amendments to five Acts as a result
of the decision to introduce the surcharge. It consists of five schedules,
each dealing with amendments to a particular Act. The Acts amended are
as follows:
- Income Tax Assessment Act 1936
- Retirement Savings Accounts Act 1997
- Superannuation Industry (Supervision) Act 1993
- Superannuation (Resolution of Complaints) Act 1993
- Taxation (Interest on Overpayments and Early Payments) Act 1993
2.35 Key features of this Bill are as follows:
Schedule 1 - amendments to the Income Tax Assessment Act
2.36 Amendments in Schedule 1 extend the use of the Tax File Number (TFN)
system to allow TFNs quoted for superannuation or taxation purposes to
be used for surcharge purposes. Where a TFN is quoted to a superannuation
fund for the purpose of calculating tax to be deducted from an early termination
payment (ETP), that quotation will be taken as having been quoted for
the purposes of the surcharge legislation.
Schedule 2 - amendments to the Retirement Savings Accounts Act
2.37 Schedule 2 amends Part 11 of the RSA Act to provide for the quotation,
provision and use of the TFNs of RSA holders and applicants for the purposes
of the legislation. These amendments are designed to avoid individuals
being subject to the surcharge simply because they have not provided their
TFN to the RSA provider.
Schedule 3 - amendments to the Superannuation Industry (Supervision)
Act
2.38 Schedule 3 deals with the use of TFNs for surcharge purposes. It
permits super fund members to quote TFNs directly to the fund or scheme
trustees for the purposes of the surcharge. Trustees are enabled to request
members' TFNs.
2.39 The schedule includes provisions that permit borrowings where surcharge
assessments or instalment payments cannot be readily met from fund assets.
2.40 Part 25A of the SIS Act is amended to allow the quotation, provision
and use of TFNs to maximise the use of TFNs quoted to trustees in order
to minimise the number of surcharge assessments raised purely due to the
non-quotation of TFNs.
2.41 Effectively, this means that where an employee has already quoted
a TFN to an employer fund for the purposes of the SIS legislation, the
employer may pass the TFN on to the trustee, provided the employee has
the option of objecting. The employer must give the employee 30 days notice
of intention to pass on the TFN and if the employee does not respond,
consent will be taken as having been granted. Similarly, the trustee is
permitted to pass the TFN on to another trustee, RSA provider or the ATO,
subject to the permission of the beneficiary.
Schedule 4 - amendments to the Superannuation (Resolution of Complaints)
Act
2.42 Amendments in this schedule enable the Superannuation Complaints
Tribunal to deal with complaints about the calculation of superannuation
contributions subject to the surcharge.
Schedule 5 - Amendments to the Taxation (Interest on Overpayments and
Early Payments) Act
2.43 Amendments in this schedule provide that where a person has paid
the assessed amount of surcharge and as a result of an amendment, the
surcharge liability is reduced, then the Commissioner for Taxation pays
interest on the amount of the reduction.
2.44 The rate of interest payable is 4 per cent less than would have
been payable than the rate of interest provided for in Section 214 of
the Income Tax Assessment Act.
2.45 It is important to note that no interest is payable in respect of
amendments made as a result of the late provision of TFNs. For example,
if an individual does not supply a TFN and consequently is required to
pay the surcharge, no interest is payable on any amendment made if and
when the TFN is eventually provided. In such a situation, the Commissioner
will simply refund the surcharge payment.
Superannuation Contributions Surcharge Imposition Bill
2.46 This Bill imposes the surcharge and declares the rate at which it
is to be collected.
2.47 Under the provisions of this Bill, liability for surcharge commences
when a member's adjusted taxable income exceeds $70 000. The rate at which
the surcharge is imposed rises by 1 percentage point per $1 000. For example,
an individual with an adjusted taxable income of $82 500 is liable for
a surcharge of 12.5 percent.
2.48 If the members' adjusted taxable income is $85 000 or more, the
rate of surcharge is 15 per cent of his or her surchargeable contributions.
This amount is indexed by movements in average weekly earnings.
2.49 Section 5(3) provides that if a member has not provided a TFN and
the Commissioner for Taxation has not found it out by other means (for
example, through the provisions described in paragraphs 2.37 to 2.41 above),
the rate of surcharge is set at the maximum of 15 per cent, regardless
of income level.
Termination Payments Surcharge (Assessment and Collection) Bill
2.50 This Bill provides for the assessment and collection of surcharge
on 'golden handshakes'. These are described as
...termination payments that are funded by an employer rather than
through the superannuation system. [6]
2.51 The Bill includes provisions that are intended to avoid any retrospective
application of the surcharge to golden handshakes. A transitional measure
will apply to golden handshakes received within five years of the 1996-97
budget announcement. The surchargeable portion is only that part of the
golden handshake which relates to the employee's post 20 August 1996 service
with the particular employer. [7]
2.52 The Bill is divided into six parts:
- Part 1 - Preliminary details;
- Part 2 - Liability to surcharge;
- Part 3 - Assessment and collection of surcharge;
- Part 4 - Recovery of unpaid surcharge and advance instalments;
- Part 5 - Administration; and
- Part 6 - Miscellaneous.
Part 1 - Preliminary details
2.53 This part that provides an outline of the objects and purpose of
the Bill.
Part 2 - Liability to surcharge
2.54 This part has the following functions:
- identifies the amounts that will be subject to surcharge;
- explains when surcharge is payable;
- identifies who will be liable to pay the surcharge; and
- outlines transitional arrangements that affect the amount subject
to the surcharge.
2.55 Key features include:
- the Bill relies on S27A(1) of the Income Tax Assessment Act for the
definition of eligible termination payments (ETPs) subject to surcharge;
- the tax free amount of bona fide redundancy payments and approved
early retirement scheme payments are not considered to be ETPs and are
not surchargeable;
- Adjusted taxable income is defined as the sum of:
- - the taxable income for that financial year and
- - surchargeable contributions, unless already included in taxable
income because they have been paid out as an ETP;
- Accordingly, receipt of an ETP can place a taxpayer in the surchargeable
adjusted taxable income bracket;
- Surcharge on termination payments is only payable for that portion
of employment after budget night 1996. However, this provision only
applies to payments up to 20 August 2001. Payments after that date will
be fully surchargeable unless the taxpayer had entered into a written
agreement before 7.30pm, 20 August 1996, specifically recognising the
employee's entitlement to be paid an ETP on termination of employment.
Part 3 - Assessment and collection of surcharge
2.56 The provisions of this section:
- establish how and when assessments of the surcharge are to be made
by the Commissioner for Taxation;
- outline the conditions under which amended assessments of the surcharge
may be made and when interest will be payable;
- allow for objections against assessments of surcharge; and
- provide for TFNs to facilitate the effective administration of the
Act. [8]
Part 4 - Recovery of unpaid surcharge and advance instalments
2.57 The purpose of the provisions of this part of the Bill is to provide
for;
- late payment penalties;
- recovery of unpaid amounts of surcharge, interest and late payment
penalties;
- application of payment to debts; and
- review of decisions not to remit late payment penalties and interest.
Part 5 - Administration
2.58 This part of the Bill provides for:
- the general administration of the Act;
- an annual report to be given to Parliament on the operation of the
Act; and
- the protection of information obtained under the Act.
Part 6 - Miscellaneous.
2.59 The provisions in this part set out a number of standard requirements
for:
- evidence;
- access to premises;
- obtaining information and evidence;
- record keeping requirements;
- application of the criminal code; and
- regulations.
Termination Payments Surcharge Imposition Bill
2.60 This is a short Bill that imposes the surcharge on termination payments.
It provides for a method of determining the rate at which termination
payments surcharge must be paid that is similar to that in the Superannuation
Contributions Surcharge Imposition Bill.
Superannuation Contributions Surcharge (Application to the Commonwealth)
Bill
2.61 This Bill is intended to ensure that the superannuation contributions
surcharge applies to all non-contributory superannuation schemes operated
by the Commonwealth. In particular, the Bill is intended to address the
circumstances of judges appointed by the Commonwealth. The Bill provides
that the trustee of such a scheme is not to be taken to be an officer,
authority or agent of the Commonwealth.
2.62 This Bill also provides that the Minister for Finance may give directions
in relation to the discharge of superannuation contributions surcharge
liability of the trustee of certain Commonwealth unfunded defined benefit
superannuation schemes. Compliance with a direction by the Minister for
Finance in relation to the discharge of surcharge liability is taken to
be a payment of surcharge by the trustee. [9]
Superannuation Contributions Surcharge (Application to the Commonwealth
- Reduction of Benefits) Bill
2.63 The Bill provides that the trustee of a Commonwealth non-contributory
unfunded defined benefits superannuation scheme may reduce a member's
benefits to pay a superannuation contributions surcharge liability.
2.64 The provisions of this Bill are particularly intended to address
provisions of the Constitution that protect the remuneration of a current
judge from reduction during his or her continuation in office. This Bill
ensures that new appointees are subject to the surcharge and is intended
to ensure that the application of the surcharge does not result in a contravention
of the Constitution. [10]
[GO TO CHAPTER 3]
Footnotes
[1] House of Representatives, Hansard,
13 February 1997, p. 625.
[2] Superannuation Contributions Surcharge (Assessment
and Collection) Bill 1997, Part 1.
[3] House of Representatives, Hansard,
13 February 1997, p. 625.
[4] Financial Review, 18 March 1997.
[5] House of Representatives, Hansard,
13 February 1997, p. 625.
[6] House of Representatives, Hansard,
13 February 1997, p. 627.
[7] House of Representatives, Hansard,
13 February 1997, p. 627.
[8] Explanatory Memorandum
[9] House of Representatives, Hansard,
6 March 1997, p. 1818.
[10] House of Representatives, Hansard,
6 March 1997, p. 1819.
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