More Bills and Senate Committee Report
On 7 February:
- new Simplification Bills were introduced into the House of Representatives; and
- the Senate Standing Committee on Economics (Committee) released its report "Inquiry into the provisions of the Tax Laws Amendment (Simplified Superannuation) Bill 2006" (Report).
Developments in the New Bills
The new bills1 complement - and make some minor and consequential amendments to -the Tax Laws Amendment (Simplified Superannuation) Bill 2006 and supporting Bills (referred to in the Treasurer's Explanatory Memorandum as the main Bill).
The main Bill is the subject of the Committee's deliberations.
It perhaps is to be expected that the new Bills are not at all "simple". However, in summary, the major points are as follows:
Unclaimed Superannuation moves to the ATO
The Bill details the new rules for administering "lost superannuation" from 1 July 2007. As mentioned in previous ClearLaw articles, this activity will move from the States and Territories to the Australian Taxation Office (ATO). The ATO's website will enable a member to combine various accounts into one account.
Capital Gains Tax (CGT) Concessions -transitional rules to 1 July 2007
Taxpayers who are able to take advantage of the existing CGT sale of business superannuation rollover concessions may contribute up to $1m from sale proceeds at any time from 10 May 2006 to 1 July 2007. The CGT concession is preserved in the context of Simplification.
In the absence of this transitional rule, the current rules require persons who sell their business to contribute the proceeds to super within 7 days in order to gain CGT concessions. The Government accepted industry concerns that many such people had missed the 7 day window because they were waiting for the simpler super laws to be finalised.
Also, from 1 July this year the period after the sale of business in which the contribution can be made has been extended from 7 days to 30 days. This will enable taxpayers to obtain appropriate advice about their options.
Personal Injury Settlements - 100% can go to super
If a taxpayer receives a personal injury settlement, then no limit is imposed on the amount of that settlement that they may contribute to superannuation. However, as from 1 July 2007, the contribution must be made within 90 days of receiving the settlement amount.
Over 75's can contribute after tax income
A person who turned 75 between 10 May 2006 (the last budget) and 5 September 2006 (the publication of the Treasurer's Outcomes of Consultation paper) is allowed to contribute after-tax income to superannuation. However, they will need to pass the work test.
...but wait, there's more!
There are many other aspects of the Bill which are important and require close consideration. Here are some of the highlights:
- consequential amendments are made to the Bankruptcy Act 1996 to ensure consistency with Simplification;.
- clarifying provisions are included to provide that contributions may be made, and benefits may be paid, by way of transfers of property.
- newprovisions are inserted reflecting the change from the concept of eligible termination payment to employment termination payment.
- if a taxpayer tells their employer their tax file number (TFN) on or after 1 July 2007, then they will be taken as authorising the employer also to provide the TFN to the superannuation provider or RSA to which their employer is making contributions. This will overcome some (but not all) of the difficulties that have been identified by the industry under Simplification for non-quotation of TFNs.
Generally, the Committee endorsed the policy intent of the main Bill. The Report deals with the following broad categories of issues, the more interesting parts of which we have summarised below:
- taxation of superannuation benefits;
- employment termination payments (ETPs);
Transitional Arrangements for Concessional Contributions
The Committee reported that the package presented by the main Bill struck the right balance to encourage both greater saving for retirement and prolonged workforce participation. Accordingly, the Committee did not recommend any changes to the proposed transitional arrangements for concessional contributions.
Transfer of Foreign Superannuation Benefits - potential penal tax rates
The Bills contain an aggregated non-concessional contributions cap of $450,000 on a person who transfers overseas superannuation benefits to Australian funds. Consequently, depending on individual circumstances, there may be very significant overall tax rates which effectively are penal in nature.
The Committee considered various submissions - including one from Treasury that anti-avoidance measures were needed. The Committee's view is that there are some cases in which individuals may, in good faith, wish to transfer overseas superannuation benefits to Australian funds that would breach the aggregated non-concessional contributions cap of $450,000.
Even so, the Committee thought that rather than delay passage of the main Bill, the Government be urged to further consider the issue once the main Bill was enacted.
Excess Contributions Tax Debits - timing inconsistency remains
Submissions were made to the Committee concerning the difference between:
- the 21 days a taxpayer has to remit an excess contributions tax debt; and
- the 30 days that person's fund has to process a request for an amount of money from their super account to meet that debt.
The Committee thought the member could pay the tax liability from other sources and then be reimbursed from superannuation savings once the release authority was processed by the Fund.
In addition, the Committee noted that the Commissioner of Taxation has a discretion in special circumstances to disregard or reallocate contributions if it would be "unjust, unreasonable or inappropriate to impose the liability for excess contributions tax".
Deductibility of Superannuation Contributions - "10% deductibility rule" remains
CPA Australia and the Institute of Chartered Accountants in Australia proposed to the Committee that the "10% deductibility rule" be abolished. The rule means that to claim a deduction for personal superannuation contributions, a person must have employment income of less than 10% of their assessable income.
The Committee believes that no changes to the deductibility arrangements for superannuation contributions were warranted given that employees generally (even without salary sacrificing) have access to the non-concessional contributions cap of $150,000 annually).
Former Employees - committee recommends changes to allow more contributions
The Committee recommended that the Government consider amendments to allow employers to claim a deduction for contributions legitimately made on behalf of a former employee for a period of service during which the person was an employee. The current Bills limit contributions to those required to meet an SG obligation and a one-off salary sacrifice payment. The Committee recommended that Treasury consult with the superannuation industry to determine suitable limits.
It seems that there is still some way to go in determining the precise parameters of any suitable limits to deductibility in these circumstances.
2. Taxation of Superannuation Benefits
Again, the Committee dissected this issue into a number of issues. These were as follows:
- taxes on death benefits;
- treatment of benefits from untaxed funds;
- treatment of the tax-free component of existing pension payments; and
- calculating the tax exempt benefit component.
Taxes on Death Benefits - recommended not extending tax free status
The tax on death benefits has gained significant press and comment - particularly the discrepancy of the treatment of benefits withdrawn before death and those paid as a death benefit. In particular, if a person aged 60 or over dies and the superannuation benefit passes to a non-dependant for tax purposes and:
- if the benefit consists of tax components, then the benefit would be taxed at the rate of 15%; but
- if the benefit consists of untaxed components, it is taxed at the rate of 30% (for example, proceeds of a life insurance policy held by the Trustee of the Fund).
The most striking example here is the position of adult non-dependant children.
The Committee also noted the various concerns raised over the proposal to prevent non-dependants (for tax purposes) from receiving a reversionary income stream on the death of a pensioner. Under Simplification, these types of death benefit payments for non-dependants need to be made as a lump sum.
In the Committee's view, it was not the intention of Simplification to make superannuation death benefits tax-free for non-dependants. The Committee thought this measure would carry obvious fiscal implications. Accordingly, the Committee did not support extending the tax-free status of such benefits to non-dependants for tax purposes.
Interestingly, the Committee did not comment on the many issues raised with the new provision that prevents non-dependants for tax purposes being reversionary beneficiaries on the death of a primary pensioner.
Treatment of Benefits from Untaxed Funds - inconsistent treatment of income streams remains
The Committee received a number of submissions in respect of the distinctions between taxed and untaxed funds. Under Simplification, if an untaxed fund pays a benefit with an untaxed element, then the benefit is subject to tax. However, under the main Bill:
- the arrangements are more generous than those currently existing for persons receiving a lump sum in excess of the current low rate threshold; and
- untaxed benefits received by way of income stream by persons 60 and over receive the advantage of a 10% tax offset, which does not currently apply.
In particular, it was put to the Committee that the new rules operated as a de facto RBL on untaxed benefits and that there was inconsistent treatment of income streams.
The Committee noted these points, but thought that the relatively high threshold ($1 million for concessional tax treatment) was reasonable to ensure overall equity between members of the two types of schemes.
Tax on Additional Assessable Income - separate assessment recommended
The distinction between members of taxed and untaxed scheme creates some inequities - for example:
- pension recipients from untaxed funds are taxed at marginal rates (with a 10% offset for those aged 60 and over); but
- for members of taxed schemes, any additional income is taxed at a marginal rate from a starting point of zero. Accordingly, such a member is able to take advantage of tax-free thresholds and the progressive nature of the tax system.
Accordingly, the Committee recommended that the Government should consider a separate assessment for tax purposes of superannuation income streams and additional assessable income.
Calculating the Tax Exempt Benefit Component - administrative burden remains
A number of submissions were received concerning clarification of the calculation process and the timing for determining the amount to be crystallised as a pre-July 1983 component (until 30 June 2008).
The Committee saw no need to amend the main Bill. It did acknowledge that this requirement proposed an administrative burden on funds. However, the Committee thought that allowing an open-ended timeframe for completion of this was inconsistent with the intent of Simplification.
3. Tax File Number Issues
A range of issues was dealt with by the Committee in this context. These issues were as follows:
- collection of TFNs;
- imposition of no-TFN tax on funds;
- deadline for providing TFNs.
Collection of TFNs - threshold increase recommended
Under the main Bill, if a person's annual contributions are $1,000 or less, then there is an exemption from the no-TFN tax (if relevant). The Committee thought that this threshold was too low and recommended the Government should consider a higher threshold for the exemption to the no-TFN tax (if the individuals were not engaged in any form of avoidance of contribution limits).
mposition of No-TFN Tax on Superannuation Funds - new administrative bill recommended
The Committee thought that there were a range of administrative issues identified in the evidence submitted to it. However the Report indicates that this should be included in a further Bill containing further amendments to deal with administrative matters.
Deadline for Providing TFNs - remains the same
Under the main Bill, there is an end of financial year deadline for the provision of TFNs. A number of issues were identified in submissions to the Committee. These focused on it being preferable for the timeframe to be extended until the Fund became liable to pay tax in respect of the financial year. However, the Committee thought that a change to the deadline was not warranted.
Even so, perhaps this issue will be considered as part of a subsequent administrative amendments Bill.
4. ETPs - clarification recommended
Under the main Bill, ETPs must be made no later than 12 months after termination. Various issues were raised in submissions put to the Committee, including:
- the comparatively short timeframe in some industries (such as the construction industry) to effect payment;
- the complexity of transitional rollover provisions; and
- problems of ETPs on death where there might be disputes as to entitlements which could delay payment.
The Commissioner of Taxation will have power to grant an exemption to the 12 month limited limit. However, the Committee thought that there was potential confusion over the circumstances in which the Commissioner might exercise this power favourably. The Committee considered that clarification from the Government on this issue would be appropriate.
The Committee's Qualified Endorsement - next steps
The Committee recommended that the Senate pass the Bills - as long as the recommendations in its report were implemented.
Importantly, the Committee recommended that the Government introduce a subsequent amendment Bill before 30 June 2007 to address any issues that require further consultation. As noted, there are a range of administrative measures identified in the Report, which the Committee thought fell within this category.
There is even more to come as "administrative" issues are to be resolved between industry and Treasury and a new Bill is to be introduced legislating any outcome after the main Bill is passed.
For more information, please contact Maddocks in Melbourne on 03 9288 0555 or Sydney on 02 8223 4100 and ask for a member of our Superannuation Team.