CHAPTER 4
THE PROPOSED COLLECTION MECHANISM
Issues in relation to the proposed collection mechanism
4.1 Many of the submissions to the Committee, and witnesses before it,
addressed the surcharge's proposed collection mechanism. There was criticism
of the proposed collection mechanism focussing on the issues of complexity,
efficiency, and cost (encompassing the compliance costs to superannuation
providers, and employers' costs, and also the collection costs to the
Australian Taxation Office (ATO)). The Committee also received opinions
in relation to the advance instalments system.
4.2 Criticism of the proposed collection mechanism was frequently made
in the context of supporting an alternative collection mechanism. Alternatives
to the proposed collection mechanism are considered in Chapter 6. This
chapter firstly considers comment on the proposed collection mechanism
in relation to complexity, efficiency and cost. The chapter then turns
to the specific issue of the advance instalments system.
4.3 This chapter does not consider the proposed collection mechanism
for unfunded defined benefits schemes, which differs from that for other
schemes. In respect of unfunded defined benefits schemes it is proposed
that the surcharge liability will be accumulated, and will be payable
when the affected member's benefit commences to be paid. [1]
Surcharge cannot be collected from unfunded defined benefits schemes each
year as liability is assessed, as such schemes are not funded until the
benefit is paid. [2] The Committee examines
defined benefits schemes in Chapter 9.
Complexity
4.4 It was expressed to the Committee that simplicity should be a fundamental
objective of superannuation policy. Mrs Glenese Keavney of the Financial
Planning Association of Australia stated to the Committee that it:
... is important in broad policy that there should be simplicity where
possible or certainly the removal of undue complexity. We believe that
the complexity of the [surcharge] legislation means that few are going
to understand the operation of the surcharge, again damaging people's
confidence in the super system as they feel that they have no control
over their benefits. [3]
4.5 Mr Peter Downes of Jacques Martin drew attention to a speech by the
current Treasurer, the Hon. Peter Costello, MP, given in November 1995:
At that time, Mr Costello said he had three tenets for a superannuation
system under a Liberal government. They were: there should be certainty;
there should be confidence; and, above all, there should be simplicity.
I think they were admirable qualities in a superannuation system. But
if I was going to do anything at all to depart from those principles,
what I would do would be introduce a concept like this surcharge. [4]
4.6 The issue of complexity was seen as being relevant not only for large
superannuation providers, large employers or industry representatives.
Mr Ross Ramsay is a director of the trustee company of the superannuation
fund Bramex Super Pty Ltd, which is an excluded fund. Mr Ramsay told the
Committee that although the collection mechanism was a far more important
issue for large companies than for excluded funds:
I would qualify that remark to some degree, that is, operating an excluded
fund is no picnic. It requires a lot of attention to meet all the regulatory
requirements of the ISC and the tax office and to do the fundamental
thing of making sure the investment performs. All those are difficult
tasks, without having any additional regulatory requirements on top.
[5]
4.7 Mr Grahame Willis of the Metal Trades Industry Association of Australia
(MTIA) told the Committee that:
If as a community we are genuine in our pursuit of industrial competitiveness
in Australian industry, it is essential that we urgently reduce the
level and complexity of regulation presently imposed by government.
This is particularly true in relation to the small business sector....
Yet, rather than providing relief, this measure will add further complexity
and cost for employers and trustees. As an example of that problem,
in one area alone, the collection of tax file numbers, the initial government
guidelines run to almost 40 pages and they raise five separate legal
responsibilities for employers and trustees. [6]
Efficiency
4.8 A number of submissions and witnesses drew attention to the amount
of information required to flow between superannuation providers, members
and the ATO, as a result of the assessment of surcharge being carried
out by the ATO, rather than by self-assessment. Mr Philip Ho, a certified
practising accountant, submitted to the Committee that:
Our 'self assessment' system of income tax collection is recognised
as a cost effective and innovative system of revenue collection by foreign
governments. We should learn from what we have done right. [7]
4.9 The Australian Institute of Superannuation Trustees (AIST) submitted
to the Committee that:
Huge amounts of data will be unnecessarily collected and passed backwards
and forwards between the funds and the Australian Tax Office (ATO) for
fund members who will never legitimately have to pay the surcharge.
[8]
4.10 Ms Robyn Quinn of the New South Wales Premier's Department told
the Committee that:
Every superannuation fund member will pay a charge for the purpose
of sending the information about them to Canberra in order that someone
can assess that there is no surcharge payable". [9]
4.11 The Committee was provided with varying figures on the size of the
superannuation industry. These figures were nevertheless of the same order
of magnitude. The AMP Society submitted that the superannuation industry
administers 15-16 million superannuation accounts for over 7 million Australians
in approximately 140 000 superannuation funds. [10]
The Insurance and Superannuation Commission (ISC) has stated that at the
end of September 1996 there were 16.2 million superannuation accounts.
[11] According to the ISC there were
138 849 superannuation funds as at June 1996. [12]
4.12 Mr Deane Prior of the Treasurer's Office, South Australian Government,
told the Committee that:
Proposed surcharge administrative arrangements will not work because
of the huge amount of unnecessary information to be given to the tax
office. Under the proposal, it is proposed that the superannuation funds
provide detail to the tax office in respect of absolutely every member
of a superannuation fund. It is proposed that there be some matching
up, through the tax file system, of a person's accrual with the income
which is recorded in the tax office. The tax office then will report
back to the superannuation fund on who has a superannuation liability.
Quite frankly, we cannot see how this can work. [13]
4.13 Mr John Ward of William M. Mercer Pty Ltd., told the Committee of
one instance that made him question the matching exercise required by
the proposed collection mechanism:
I personally have already experienced the matching capability of the
tax office. A year or so ago I was advised by the child support arm
of the tax office that they had matched me with my supposed ex-wife
and supposed former children and that I had to pay them so many thousand
dollars a year for child support. They had matched me because I had
the same name as the delinquent husband and my birth date was reasonably
close to his. The fact that I had lived in Melbourne for many years
and my supposed wife and children were based in Queensland did not seem
to ring any warning bells. That particular case was almost a laughing
matter, although it could have been quite serious when my real wife
opened the mail. [14]
4.14 Mr Michael Forsdick of Coopers and Lybrand stated to the Committee
that:
... we believe that this system as currently proposed is inefficient
because of the requirement to match the data from nine million taxpayers
received separately via their tax returns to the ... records of those
140,000 funds in order only to determine a surcharge for some 350,000
people. It seems to be a sledgehammer cracking a nut, and it will have
major cost implications. [15]
4.15 Mr Peter Downes of Jacques Martin suggested to the Committee that
the proposed collection mechanism could be amended to make it more efficient
as follows:
We think it would be far more sensible if the tax office looked at
people who had, say, $45,000 of income in the previous financial year
and sought information from funds on just those people. They are the
people, almost exclusively, who are going to be caught by the surcharge.
[16]
Compliance costs of superannuation providers
4.16 The issue of the costs of compliance with the surcharge legislation
(compliance costs) for superannuation providers and employers' costs has
several facets. The Committee was provided with estimates of compliance
costs to superannuation providers. Employer organisations informed the
Committee of costs for employers, both because of the proposed collection
mechanism, and other potential additional costs. The Committee was made
aware of potential equity implications for members resulting from superannuation
providers' compliance costs. Concern was also expressed about the implications
of compliance costs for the liquidity of superannuation providers.
4.17 The Association of Superannuation Funds of Australia (ASFA) disputed
the statement in the Second Reading Speech to the Superannuation Contributions
Surcharge (Assessment and Collection) Bill 1997 that "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". ASFA claimed
that the "administrative processes which will need to be put into
place are essentially new". [17]
4.18 Several witnesses told the Committee that superannuation providers
would face significant administration costs in complying with the surcharge.
Mr Prior of the Treasurer's Office, South Australian Government, told
the Committee that in respect of S.A. Government superannuation funds:
We have not put a figure on it, but we know very clearly that it would
be a huge burden. [18]
4.19 Ms Quinn of the New South Wales Premier's Department told the Committee
that the estimated cost for N.S.W. Government employee schemes (not judges'
and parliamentarians' schemes) would be a million dollars in the first
year and approximately $200,000 per annum thereafter. [19]
4.20 Mr Richard Gilbert of the Investment Funds Association of Australia
(IFA) told the Committee that IFA estimated that the set-up costs for
its member companies would be $26 million. [20]
4.21 Mr Downes of Jacques Martin told the Committee that the proposed
collection mechanism:
...is an extremely expensive way of collecting government revenue.
We estimate that it would probably add something like 15 per cent of
the current cost of administration to lump sum schemes. For defined
benefit schemes, it may be more expensive again. [21]
4.22 Mr Ian Court of Australian Institute of Superannuation Trustees
(AIST) explained the information technology related costs which superannuation
providers would incur in complying with the surcharge:
...there will be significant systems modifications to deal with it.
The first thing is the receipt of the tax file numbers. The second thing
is the searching of member accounts to deduct the surcharge and sending
all of the information to the tax office, with the details of each member.
Where the surcharge is paid incorrectly and is subsequently returned,
it then has to incur further transaction costs to be placed back into
the member's account.
There is a range of these administrative systems issues which are going
to have a significant cost to them. To give you some order of scale,
and I am just thinking of some examples off the top of my head, to terminate
a member's account costs the fund about $28; to carry out a transaction
is somewhere between $5 and $10. These numbers can add up very significantly.
[22]
4.23 The AMP Society estimated that:
the implementation costs across the total membership of superannuation
funds is likely to exceed $100 million with an on-going cost of at least
$20-30 million". [23]
4.24 ASFA submitted that "current estimates for the cost of establishing
and administering the surcharge have ranged between $30 and over $100
million a year to the superannuation industry. [24]
Employers' costs
4.25 Costs to superannuation providers would flow on to some employers,
according to the Business Council of Australia (BCA). Mr Vernon Winley
of the BCA told the Committee:
... where funds are company sponsored, the employer generally bears
the administrative costs to the fund, so that the highly expensive implementation
approach proposed will increase the cost for employers, directly counter
to the government's stated intention of not increasing costs for employers.
[25]
4.26 ASFA claimed that the Government was trying to draw "a somewhat
artificial distinction ... between funds and employers" and submitted
that it "is common practice in many areas of corporate funds for
employers to assist in covering administrative costs associated with superannuation".
[26]
4.27 The BCA also noted that compliance costs would not be borne by employers
paying contributions to industry funds, creating "a significant horizontal
inequity among employers, based on the type of funds they pay contributions
to". [27]
4.28 Employer representatives stated that another potential cost could
arise from employees demanding that employers meet the surcharge. This
cost would not be specifically a compliance cost, but rather be a potential
additional cost due to the surcharge itself. Mr Willis of the MTIA told
the Committee that:
I would not want to foreshadow, on the available evidence, that there
is any possibility of substantial disputation on this issue, but I certainly
do not discount the strong possibility that in an enterprise bargaining
framework these issues will be discussed". [28]
4.29 Mr Willis added that this issue had already arisen in enterprise
bargaining involving MTIA members, but that, given that there was still
uncertainty as to the final form of the surcharge legislation, there was
no discernible pattern of outcomes so far. [29]
4.30 Mr Winley of the BCA also noted that there may be industrial disputation
to persuade employers to pay the surcharge for employees. [30]
Furthermore, Mr Winley stated that in respect of defined benefit funds
employers may (depending on the provisions of industrial instruments,
trust deeds or contracts of employment) be contractually or industrially
committed to making such payment. [31]
Superannuation providers' compliance costs - equity implications
4.31 The Committee was made aware of potential equity implications for
members resulting from superannuation providers' compliance costs. This
point was made by AIST as follows:
The costs of administering the surcharge will fall on all fund members,
not just those who have a responsibility to pay the surcharge. Costs
will be shared among all fund members, poor as well as rich. This is
an inequitable cross-subsidy which will be very much resented by millions
of fund members. [32]
4.32 The HOST-PLUS Superannuation Fund stated in its submission that:
HOST-PLUS draws its members from the hospitality industry. The majority
of members are employed on a part-time or causal basis. Full time members
would rarely receive in excess of $30,000 per annum - we would anticipate
no more of [sic] a handful of members who would attract a liability
for the surcharge.
In spite of this, HOST-PLUS will be forced to meet the costs involved
in obtaining Tax File Numbers, reporting to the ATO and to members,
calculating surcharge liability, debiting accounts and dealing with
requirements in relation to over and under-payment. [33]
4.33 In relation to the compliance costs for superannuation funds, Mr
Court of AIST told the Committee that:
One thing we emphasise very strongly is that, with superannuation funds,
all of the assets belong to the members and therefore any costs to the
fund must be deducted from members' accounts. So we want to make it
clear that it is not as if large superannuation funds have resources
to bear these sorts of costs independent of their members. [34]
4.34 The Committee received information on the issue of whether all members
would pay for the compliance costs of superannuation providers. ASFA submitted
that administration costs "will likely be borne by all members of
funds, not just by those for whom the surcharge will be payable".
[35] A number of other witnesses expressed
the same concern to the Committee.
4.35 Mr Court of AIST questioned whether it was fair to spread the cost
over all members:
It just does not seem to me, as a trustee, to be fair or reasonable
to expect my lower income earning members to pay collection costs for
the higher income earners. So that will be the second major problem
for me as a superannuation trustee. [36]
Superannuation providers' compliance costs - liquidity implications
4.36 Concern was also expressed about the implications of compliance
costs for the liquidity of superannuation providers. ASFA submitted that
"superannuation funds will have less 'patient capital' for investment
purposes as they need to remain liquid to pay potential surcharge liabilities".
[37]
4.37 Mr Court of AIST told the Committee that requiring superannuation
funds to keep assets in cash would disrupt their investment strategies;
by diverting assets away from long term investments this would impose
an additional cost on all members. [38]
4.38 The Superannuation Contributions Surcharge (Consequential Amendments)
Bill 1997 would, as set out in Schedule 3 to the Bill, amend the Superannuation
Industry (Supervision) Act 1993. These amendments permit the trustee of
a regulated superannuation fund to borrow money in order to make a required
payment of surcharge or advance instalment which the trustee would otherwise
have not been able to make. Such borrowing must not be for a period exceeding
90 days and the total amount borrowed must not exceed 10 per cent of the
value of the assets of the fund.
4.39 The Committee was informed that liquidity problems associated with
the surcharge were accentuated by the application of the surcharge in
cases of non-availability of the Tax File Number (TFN, considered in Chapter
5), and by the surcharge's advance instalments system (discussed further
below).
4.40 The issue of liquidity appeared to be of significant concern to
public offer funds. Ms Melinda Howes of the IFA explained to the Committee
the effect of non-availability of TFNs in the first year of operation
of the surcharge (which would apply to all superannuation providers):
... if we get a 40 per cent response rate [to requests for TFNs] in
the first year, which is probably optimistic, then 60 per cent of the
fund will not have given us their TFN and 60 per cent of people will
have a surcharge liability of 15 per cent, plus another 7½ per
cent advance surcharge. That is 22½ per cent of each person's contributions
for 60 per cent of the fund. So that could quite potentially be more
than 10 per cent of the fund that the borrowing requirement allows.
[39]
4.41 Given the ATO's statements to the Committee in relation to the collection
of TFNs (which were made after Ms Howes' appearance), it may be that Ms
Howes' expectation of a superannuation fund paying surcharge liability
in respect 60 per cent of fund members in the first year should be revised.
[40] This issue is discussed in Chapter
5. Nevertheless, Ms Howes' evidence does draw attention to concern as
to how the TFN provisions will affect superannuation providers' liquidity,
and also how public offer funds in particular may be affected.
4.42 Dr Michaela Anderson of ASFA told the Committee that the advance
instalments system could affect liquidity as follows:
The surcharge is likely ... to lead to a liquidity problem for funds
because of the need to hold reserves to cover an advance instalment.
This would occur particularly at one point in the year where there is
the second group assessment and the advance instalment coming at the
same time. Around 15 June seems to be what we have called the 'double
whammy' time where many funds could have liquidity problems. [41]
ATO's collection costs
4.43 The ATO informed the Committee that its projected collection costs
for the surcharge are $3 million in the first year, $6 million in the
second year and $3 million the year after. Mr Michael Monaghan, First
Assistant Commissioner (Superannuation) advised that he expects these
resources to be sufficient for the present legislation. However, he indicated
that the ATO would have to re-evaluate the situation if any changes were
made. [42]
The advance instalments system
4.44 The Committee received expressions of view in relation to the advance
instalments system. The issue of the advance instalments system's potential
effects on liquidity is discussed above. Mr Downes of Jacques Martin told
the Committee that:
I do not know how funds are going to do their accounting, set allocation
rates and the like when we constantly have money coming and going through
the requirement to make provisional payments when people, let us face
it, could have left the scheme in the meantime. [43]
4.45 AIST submitted to the Committee that the advance instalments system:
...will impose financial disadvantage upon many men and women who because
of variable income patterns may have been liable to pay the surcharge
in one year, but do not have to pay the surcharge in the following year.
[44]
4.46 AIST recommended that the advance instalments system be deleted
from the Surcharge Bills, or if this was not adopted, that "a simple
variation be introduced to allow the advance payment to be varied in the
same way that Provisional Tax payments may be varied". [45]
4.47 Mr Murray Wyatt, representing the Australian Society of Certified
Practicing Accountants, considered that the multiple assessments associated
with the advance instalments system would impose a considerable administrative
burden on the funds. He explained:
In relation to the assessments, it is going to be really a matter of
endless ones. The surcharge assessments will be sent three times a year.
Depending on the size of your fund, if you have got a medium fund you
will get four tax assessments and three surcharge assessments so you
will have seven assessments to the fund in any given year.
...if the fund has to have a poor income year, the surcharge amount
is going to go out of cash flow. So, in general, the impost on small
business and the paperwork created will push people. [46]
Government position
4.48 The Government view is that the administrative requirements for
the surcharge are essentially similar to processes which are already part
of superannuation funds' normal business operations.
4.49 The Hon. Chris Miles, MP, Parliamentary Secretary (Cabinet) to the
Prime Minister, stated in the Second Reading Speech to the Superannuation
Contributions Surcharge (Assessment and Collection) Bill 1997 that:
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.
[47]
4.50 The Government considers that reductions in compliance costs can
be achieved by aligning surcharge requirements with the normal operations
of superannuation funds, for example including seeking tax file numbers
(TFNs) for surcharge purposes in annual member statements. [48]
"Recent changes in superannuation administration (for example, extending
the use of TFNs for superannuation purposes, and electronic reporting
of member details to establish and operate the register of lost members)
will also reduce compliance costs". [49]
4.51 The Hon. Chris Miles, MP, stated in the Second Reading Speech to
the Superannuation Contributions Surcharge (Assessment and Collection)
Bill 1997 that alternative measures of collecting the surcharge have been
put to the Government, which has given careful consideration to those
suggestions.
4.52 The Government view is that the alternatives suggested all involve
an unacceptable increase in compliance costs for employers, small business
and all Australians. Mr Miles said that 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. [50]
4.53 The Government has stated that it:
...remains committed to ongoing consultation with the superannuation
industry to further reduce compliance costs associated with the surcharge
and other aspects of superannuation. [51]
[GO TO CHAPTER 5]
Footnotes
[1] Hansard, House of Representatives,
13 February 1997, p. 626.
[2] Hansard, House of Representatives,
13 February 1997, p. 626.
[3] Evidence, p. 114.
[4] Evidence, p. 28.
[5] Evidence, p. 246.
[6] Evidence, p. 155.
[7] Submission 13, Mr Ho, p. 3.
[8] Submission 6, AIST, p. 1.
[9] Evidence, p. 24.
[10] Submission 27, AMP Society, p.
1.
[11] Insurance and Superannuation Commission,
Insurance and Superannuation Commission Bulletin, September 1996,
p. 22. This figure was referred to by Jacques Martin and the Association
of Superannuation Funds of Australia (ASFA): Submission 10, Jacques
Martin, p. 3; Submission 23, ASFA, p. 10.
[12] Insurance and Superannuation Commission,
Insurance and Superannuation Commission Bulletin, September 1996,
p. 29.
[13] Evidence, p. 15.
[14] Evidence, p. 181.
[15] Evidence, p. 79.
[16] Evidence, p. 32.
[17] Submission 23, ASFA, p. 10.
[18] Evidence, p. 26.
[19] Evidence, p. 26.
[20] Evidence, p. 120.
[21] Evidence, p. 29.
[22] Evidence, p. 228.
[23] Submission 27, AMP Society, p.
1.
[24] Submission 23, ASFA, p. 10.
[25] Evidence, p. 210.
[26] Submission 23, ASFA, p. 12.
[27] Submission 32, BCA, p. 3.
[28] Evidence, p. 157.
[29] Evidence, p. 157.
[30] Evidence, pp. 218-219.
[31] Evidence, p. 218.
[32] Submission 6, AIST, p. 1.
[33] Submission 59, HOST-PLUS Superannuation
Fund, p. 1.
[34] Evidence, p. 224.
[35] Submission 23, ASFA, p. 10.
[36] Evidence, p. 229.
[37] Submission 23, ASFA, p. 7.
[38] Evidence, p. 227.
[39] Evidence, pp. 126-127.
[40] See Evidence, pp. 292-294.
[41] Evidence, p. 63.
[42] Evidence, p. 298.
[43] Evidence, p. 32.
[44] Submission 6, AIST, p. 3.
[45] Submission 6, AIST, p. 4.
[46] Evidence, p. 93.
[47] House of Representatives, Hansard,
13 February 1997, p. 625.
[48] Explanatory Memorandum to the Superannuation
Contributions Surcharge (Assessment and Collection) Bill 1997, p. 1.
[49] Explanatory Memorandum to the Superannuation
Contributions Surcharge (Assessment and Collection) Bill 1997, p. 2.
[50] Hansard, House of Representatives,
13 February 1997, p. 626.
[51] Explanatory Memorandum to the Superannuation
Contributions Surcharge (Assessment and Collection) Bill 1997, p. 2.
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