Commonwealth of Australia Explanatory Memoranda Commonwealth of Australia Explanatory Memoranda[Index] [Search] [Download] [Bill] [Help]
2022
THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA
SENATE
PUBLIC SECTOR SUPERANNUATION SALARY LEGISLATION
AMENDMENT BILL 2022
EXPLANATORY MEMORANDUM
(Circulated by the authority of the Minister for Finance,
Senator the Hon Katy Gallagher)
PUBLIC SECTOR SUPERANNUATION SALARY LEGISLATION
AMENDMENT BILL 2022
General outline
The Public Sector Superannuation Salary Legislation Amendment Bill 2022 (the Bill):
• repeals paragraph 5(e) of the Superannuation (Salary) Regulations, which by being
renamed over time are now the Superannuation (CSS) Salary Regulations 1978 (the
Regulations), with effect from 1 July 1986; and
• provides that the effect of that repeal does not apply to individuals where limited
circumstances are satisfied.
Superannuation salary
The Superannuation Act 1976 (the 1976 Act) established the Commonwealth
Superannuation Scheme (CSS) from 1 July 1976 to provide retirement benefits for
Commonwealth employees and office holders.
Subsection 5(1) of the 1976 Act broadly prescribes a default salary, which applies
unless certain circumstances apply, including where an employee and their employer
have agreed that a different annual rate of salary will be the employee's annual rate of
salary for the purposes of the Act.
The default salary includes the value of any allowance that, under the Regulations, is to
be treated as salary for the purpose of the 1976 Act. Prior to 1 March 2022
paragraph 5(e) of the Regulations provided that the rent-free use by an eligible
employee of premises or quarters made available to them by reason that they hold a
particular office or perform particular duties or work (rent-free housing) was an
allowance that was to be treated as salary for the purpose of the 1976 Act.
As a result of a range of interconnected provisions in Commonwealth superannuation
legislation and employment instruments, the value of rent-free housing (as set out in
paragraph 5(e) of the Regulations) automatically flowed through to the default
superannuation salary for Public Sector Superannuation Scheme (PSS) members, Public
Sector Superannuation Accumulation Plan (PSSAP) members and superannuation
salary of members of non-Commonwealth choice funds whose entitlements under their
employment instrument are defined by reference to the default superannuation salary of
PSSAP members or PSS members. The elements that form part of superannuation
salary under the Commonwealth schemes are one factor in these complicated statutory
regimes.
Further, by reason of salary maintenance provisions in the relevant superannuation
schemes, once the value of rent-free housing was included in an employee's
superannuation salary, that employee's superannuation salary is maintained, even when
rent-free housing was no longer being provided. As a consequence, the posting of an
employee to a location where accommodation was expensive (e.g. Hong Kong or
London) could have maintained an employee's superannuation salary for years after
that posting ended (and perhaps even for the rest of their career). That could result in
such an employee receiving dramatically superior superannuation outcomes in
comparison to other equivalent employees who were posted at the same stage of their
careers to locations where accommodation was cheaper.
2
Possible unintended operation of paragraph 5(e) of the Regulations
At the time the Regulations were made in 1978, an employee's income was taken to
include the value of rent-free housing provided to him or her. Section 26(e) of the
Income Tax Assessment Act 1936 provided at that time that the assessable income of a
taxpayer included the value of the use of premises or quarters. In circumstances where
an employee's taxable income included the value of rent-free housing, it may have been
considered reasonable that it should also be superannuable.
With the introduction of the fringe benefits tax regime in 1986, the tax burden in
relation to rent-free housing was shifted from the employee to the employer. At that
time fringe benefits, including the value of rent-free housing, were excluded from
employees' assessable income for income tax purposes. In practice, that meant that it
was no longer necessary for employers to identify the value of rent-free housing in pay
slips issued to their employees. It is possible that this contributed to the subsequent
practice of not treating rent-free housing as part of an employee's salary for
superannuation purposes.
Whether or not that is the correct explanation, it appears that since 1986 the
Commonwealth has typically not treated rent-free housing as salary for superannuation
purposes. Since then, it appears, as a general rule, that neither employers nor employees
have made superannuation contributions that have taken account of the value of
rent-free housing.
A recent case before the Federal Court of Australia, Brendan Peace & Ors v
Commonwealth of Australia and Anor, has exposed differing views on the operation
and scope of paragraph 5(e) of the Regulations. The applicants in that case have argued
for an interpretation of paragraph 5(e) of the Regulations which, if accepted, would
mean that a large number of former and current Commonwealth employees (likely at
least thousands) could be entitled to have the value of rent-free housing treated as
salary for superannuation purposes.
This would have wide ranging consequences for the operation of the superannuation
legislation and the extensive and interconnected series of legislated rights and
obligations between Commonwealth employers, employees (as members of funds) and
the Commonwealth Superannuation Corporation (CSC). In particular, adjusting salaries
of current or former employees with respect to past events would create burdensome
and unjustified consequences, including:
(a) significant financial impacts for the Commonwealth because it would have to
meet the cost of increased unfunded benefits payable to members of the CSS
and PSS, and result in Commonwealth entities having to pay shortfalls of
employer contributions to the CSS, PSS, PSSAP and other non-Commonwealth
choice funds;
(b) creation of a range of inequitable results for former and current employees,
including unexpected windfall increases in superannuation benefits and
employer superannuation contributions for some employees and potentially
large and unexpected debts owing for unpaid member contributions for other
employees (potentially with minimal, or no, corresponding increase in their
ultimate superannuation benefit); and
(c) distortion of the rights of members of the PSS and CSS who never received
rent-free housing, to the extent that investment income needs to be diverted by
CSC to cover lost earnings on funded employer contributions resulting from the
retrospective adjustment of rights, to the detriment of all other fund members.
3
That magnitude of any financial impacts is presently unquantified and it is very difficult
to quantify, as it depends on the identification of each affected employee, and then
upon a case by case assessment of when rent-free housing was provided to that
employee, and the value of that housing at the time it was provided. In some cases, that
will require assessment of the value of housing that was provided to employees in
foreign countries several decades ago. Further, when that information is obtained, the
financial impacts vary depending on the superannuation scheme of which the employee
is a member, and in the case of retired employees upon whether their final salary
exceeded the final salary that they would have received had the allowance for rent-free
housing been taken into account as required by the salary maintenance provisions. The
administrative task involved in quantifying the financial impacts is therefore extremely
large.
The differing outcomes for different cohorts of employees would be inequitable, as
widely variable superannuation outcomes would result from factors unrelated to the
services provided to the Commonwealth, or to any other relevant differential, but would
instead depend on arbitrary factors such as the cost of housing in the particular
locations of postings, and the timing of postings within an employee's career (because
of the operation of the salary maintenance provisions in the schemes). The potential
windfall gains that could arise would be unjustified as they would in many cases
significantly increase retirement benefits otherwise than as a quid pro quo for services
rendered. Further, in some cases the result may be retirement benefits that would be
substantially out of line with community expectations.
The following are illustrations of potential inequitable and unjustified outcomes that
could result. These examples do not refer to actual employees.
Example 1:
A PSS member was posted as an EL2 to a country in Europe in 2002 with a base
salary of $71,232. The value of rent-free housing in that city at that time is
estimated to be $265,000 per annum. Including this value in the employee's
salary results in a corrected salary of $336,232.
The shortfall in member contributions for the employee, and accumulated debt
to the Commonwealth, for the period 2005-2021 is $493,351, which is
immediately due as a debt to the Commonwealth.
Because of the salary maintenance provisions in the PSS, this higher salary,
indexed annually, is maintained for the rest of the employee's career until their
retirement in 2033 at age 65.As a result of the adjustment of salary the
employee's final lump sum benefit accrual increases from $3,115,433 to
$5,483,727.
Example 2:
A PSS member was posted as an APS6 to a city in Asia in 2008, with a base
superannuation salary of $71,853. The value of rent-free housing in the city at
that time is estimated to be $60,000 per annum. Including this value in the
employee's salary results in a corrected superannuation salary of $131,853.
The member is required to pay a shortfall in contributions for the period
2008-2021 of $61,089, which is immediately due as a debt to the
Commonwealth.
4
The employee's subsequent career progression results in them being promoted
to the Senior Executive Service in 2028. At this time their actual salary
($200,000) exceeds their maintained superannuation salary under the PSS
Rules, and the inclusion of rent-free housing for their earlier posting no longer
affects the amount of their superannuation salary for PSS purposes. The
eventual amount of the employee's final superannuation benefit, and their
lifetime pension, is unchanged.
Example 3:
A PSS member was posted as an EL2 to a city in Asia in 2005 with a base
superannuation salary of $140,000. The value of rent-free housing in the city at
that time is estimated to be $1,300,000 per annum. Including this value in the
employee's superannuation salary results in a corrected superannuation salary
of $1,440,000.
The shortfall in member contributions for the employee, and accumulated debt
to the Commonwealth, for the period 2005-2021 is $2,210,000, which is
immediately due as a debt to the Commonwealth.
Because of the salary maintenance provisions in the PSS, this higher
superannuation salary, indexed annually, is maintained for the rest of the
employee's career until their retirement in 2035 at age 65. Unable to make the
annual member contributions at the maintained superannuation salary, the
employee elects to pay zero percent member contributions after 2021. The
employee's final benefit is $11,322,262, resulting in a lifetime pension of
$1,132,262.20 per annum.
Importantly, these outcomes are a consequence of the reliance by all relevant parties on
a view that rent-free housing did not form part of superannuation salary. Had the effect
of paragraph 5(e) of the Regulations advanced in the Peace case been understood by
employers and employees at the time that housing was provided, reasonable
administrative options would have been available to avoid the outcomes described
above. For example, Commonwealth entities could have required a rental contribution
(so that the housing was not 'rent-free'), or entered into agreements with posted
employees about the amount of their salary for superannuation purposes (which would
have displaced the default superannuation salary), to ensure consistent superannuation
benefits could have been provided between employees irrespective of their postings.
Additionally, in circumstances where the Commonwealth did provide rent-free housing,
employees could have adjusted their nominated contribution rates and planned for the
expenditure, and CSC would have had additional contributions available to invest at the
time, thus avoiding the negative impact on current scheme members whose funded
employer contributions are invested in the PSS or CSS Fund.
Retrospective repeal of paragraph 5(e) of the Regulations
Retrospectively repealing paragraph 5(e) of the Regulations regularises the past
administrative practice of employers and employees by effectively restoring the
position with respect to rent-free housing that all relevant parties have treated as
governing these highly complex schemes since 1986. It avoids the unintended and
inconsistent outcomes for the Commonwealth, Commonwealth entities and individuals
that would arise if the Federal Court decides in Peace that rent-free housing provided to
the applicants is a superannuable allowance. Specifically, it will ensure that
Commonwealth employees in otherwise similar circumstances do not receive wildly
5
disparate superannuation outcomes, with some employees receiving large windfalls,
others incurring unexpected debts, and still others experiencing poor returns as a result
of the need of the CSS and PSS to cover the lost earnings on late paid employer
contributions.
The repeal of paragraph 5(e) of the Regulations will commence from the date of the
introduction of the fringe benefits tax regime, and therefore to regularise the change in
practice that apparently occurred after that time. Employees who received rent-free
housing before 1 July 1986 would have been required to pay income tax on the value of
that housing, which would have minimised the potential for the value of rent-free
housing to be overlooked.
Individuals exempted from the effect of the retrospective repeal of paragraph 5(e) of the
Regulations
As the purpose of the retrospective repeal of paragraph 5(e) of the Regulations is to
regularise the long-standing practice of employees and employers, the Bill makes
provision for cases, if there are any, in which paragraph 5(e) of the Regulations was
applied historically in particular employment relationships in a way that included the
value of rent-free housing in superannuation salary. If and when this occurred, that
limited cohort of individuals will be excluded from the effect of the retrospective repeal
of paragraph 5(e) of the Regulations. In such cases, no-one was acting pursuant to a
mistake; that is, the exception applies where it was clear from the actions of both the
employer and employee that the value of the rent-free housing received by the
employee was to be included in their superannuation salary as evidenced by
contributions (employer, member or both) having been made on that basis in the period
1 July 1986 to 28 February 2022. To apply the repeal of paragraph 5(e) to cases of that
kind, if there are any, would be to disturb a mutually understood aspect of the
employment relationship, rather than to confirm the mutual understanding of the parties
(which would be the result of the retrospective repeal of paragraph 5(e) in all other
cases).
The relevant period ends on 28 February 2022 because paragraph 5(e) of the
Regulations was repealed with prospective effect from 1 March 2022 by the
Superannuation (CSS) Salary Amendment (Housing Allowance and Rent-fee Housing)
Regulations 2022.
Financial impact
The Bill would negate the unquantifiable revenue and expenditure costs to the
Commonwealth of an adverse Federal Court decision.
Statement of Compatibility with Human Rights
The Bill does not engage any of the human rights or freedoms recognised or declared in
the international instruments listed in section 3 of the Human Rights (Parliamentary
Scrutiny) Act 2011. Consequently, the Bill is compatible with those human rights and
freedoms. See the Statement of Compatibility with Human Rights, paragraphs 25 to 28.
6
PUBLIC SECTOR SUPERANNUATION SALARY LEGISLATION
AMENDMENT BILL 2022
Notes on clauses
Clause 1 - Short Title
1. Clause 1 provides for the Act to be cited as the Public Sector Superannuation Salary
Legislation Amendment Act 2022 (the Act).
Note: The clauses in the Bill will become sections of the Act on Royal Assent.
Clause 2 - Commencement
2. Clause 2 sets out the commencement provisions for the Act. Commencement
details for specific provisions are included in the table in subclause 2(1).
3. Item 1 of the table provides that sections 1 to 3 commence on the day after the
Act receives Royal Assent.
4. Item 2 of the table provides that Schedule 1 commences on 1 July 1986.
5. Item 3 of the table provides that Schedule 2 commences on the day after the Act
receives Royal Assent.
6. The note at the end of the table in subclause 2(1) clarifies that the table only
relates to provisions of the Act as originally enacted, and that it will not be amended to
deal with any later amendments of the Act.
7. Subclause 2(2) clarifies that the information in column 3 of the table is not part
of the Act.
Clause 3 - Schedules
8. Clause 3 provides that legislation specified in a Schedule to the Act is amended
or repealed as set out in the applicable items in the relevant Schedule. It also provides
that any other item in a Schedule to the Act has effect according to its terms.
9. Note 1 under clause 3 informs the reader that over time the name of the
Regulations has changed. When originally made in 1978 the Regulations were named
the Superannuation (Salary) Regulations. Since being made in 1978 they were:
(a) renamed as the Superannuation (CSS) Salary Regulations by Statutory
Rules 1995 No. 275; and
(b) subsequently renamed as the Superannuation (CSS) Salary Regulations
1978 by the Superannuation (CSS) Salary Amendment Regulations 1999
(No.1).
10. Note 2 under clause 3 informs the reader that the Act repeals paragraph 5(e) of
the Regulations and that this is relevant to:
(a) the annual rate of salary of members of the CSS;
(b) the recognised allowances of members of the PSS, which form part of
their default salary for the purposes of contributions and benefits under
the PSS; and
(c) the recognised allowances of members of the PSSAP, which form part of
their default superannuation salary (fortnightly contribution salary); and
7
(d) Commonwealth employees who belong to other superannuation funds
and whose entitlements are calculated by reference to the superannuation
salary (fortnightly contribution salary) that would be applicable if the
employees were members of the PSS or PSSAP, for example under a
provision of an enterprise agreement.
11. Note 3 informs the reader that the provisions of the Regulations amended by the
Act, and any other provisions of those regulations, may be amended or repealed by
regulations made under section 168 of the 1976 Act.
12. Note 3 also refers the reader to item 2 of Schedule 1 to the Act and
subsection 13(5) of the Legislation Act 2003 which provides that the amendment of a
legislative instrument or notifiable instrument by an Act does not prevent the instrument,
as so amended, from being amended or repealed by a person who is currently authorised
under the enabling legislation for the instrument to make instruments of the same kind.
Schedule 1 - Amendments
Superannuation (Salary) Regulations
13. Item 1 repeals paragraph 5(e) of the Regulations on 1 July 1986. This will
ensure that individuals who were provided with rent-free housing on and after
1 July 1986 will not have the value of that housing included in their default
superannuation salary. This will not apply where an individual is covered by item 1 of
Schedule 2.
14. As paragraph 5(e) will be repealed on 1 July 1986 this will override the effect of
the Superannuation (CSS) Salary Amendment (Housing Allowance and Rent-free
Housing) Regulations 2022, which repealed paragraph 5(e) on 1 March 2022.
15. As indicated in note 2 under clause 3 of the Bill, paragraph 5(e) of the
Regulations is also relevant to the calculation of default superannuation salary for PSS
members, certain members of the PSSAP and the superannuation salary of certain
employees who are members of non-Commonwealth choice funds.
16. Therefore, item 1 will also have the effect of consequentially ensuring that
rent-free housing does not form part of salary for PSS and PSSAP members and certain
members of non-Commonwealth choice funds.
17. Item 2 provides that the amendment of the Regulations by item 1 of Schedule 1
does not prevent those Regulations, as so amended, from being amended or repealed by
regulations made under section 168 of the 1976 Act.
Schedule 2 - Exemptions
1 Exemptions - rent-free use of premises or quarters
18. It is intended that there be a limited exclusion (exemption) from the application
of the repeal of paragraph 5(e) of the Regulations to cover individuals in relation to
whom during the period 1 July 1986 to 28 February 2022 the value of rent-free housing
was understood to be included in their superannuation salary and contributions were
made on that basis. This limited exclusion is put in place by item 1 of Schedule 2. That
exclusion is appropriate because, unlike the cases in which the repeal of paragraph 5(e)
will apply, if the paragraph applied in those cases, rather than correcting a mistake it
would disturb the basis upon which the parties to the employment relationship actually
conducted that relationship.
8
19. Item 1 of Schedule 2 provides that the repeal of paragraph 5(e) of the
Regulations by item 1 of Schedule 1 of the Act does not apply to certain individuals in
the period starting on 1 July 1986 and ending on 28 February 2022 (relevant period)
where certain tests (circumstances) are all satisfied as set out in clause 1 of the item.
20. Clause 1 of item 1 provides that the tests (circumstances) are
(a) a superannuation contribution was made by, or in respect of, an
individual during the relevant period; and
(b) the superannuation contribution was calculated:
i. to any extent, directly or indirectly, on the basis that
paragraph 5(e) of the Regulations was applicable to the
individual; and
ii. on the assumption that paragraph 5(e) was in force; and
(c) the rent-free use by the individual of premises occurred during the
relevant period.
21. Clause 2 of item 1 provides that for the purposes of the item, superannuation
contributions are defined as meaning:
(a) a contribution for the purposes of:
i. the CSS (within the meaning of the 1976 Act);
ii. the PSS (within the meaning of the Superannuation Act 1990); or
iii. the PSSAP (within the meaning of the Superannuation Act 2005);
or
(b) a contribution that:
i. was made to a superannuation fund or superannuation scheme;
and
ii. was made in accordance with an agreement or instrument made
under a law of the Commonwealth; and
iii. was not covered by paragraph (a).
22. Clause 3 of item 1 provides that to avoid doubt a reference in item 1 to the
Regulations:
(a) is a reference to those regulations as originally made and as amended
from time to time; and
(b) without limiting paragraph (a) of clause 3 of item 1, includes a reference
to those regulations:
i. renamed as the Superannuation (CSS) Salary Regulations by
Statutory Rules 1995 No. 275; and
ii. subsequently renamed as the Superannuation (CSS) Salary
Regulations 1978 by the Superannuation (CSS) Salary
Amendment Regulations 1999 (No.1).
23. Item 1 does not apply to a person who received the use of rent-free housing
between 1 July 1986 and 22 February 2022 but in relation to whom no contribution was
made to their superannuation fund in that period which was calculated on the basis that
their superannuation salary included the value of the rent-free housing. It only applies if
9
the employer and employee understood rent-free housing to form part of superannuation
salary and acted accordingly.
24. This means the repeal effected by item 1 of Schedule 1 will apply to these
persons even where it has now been or is later decided (such as through a decision in the
Peace case), that the value of the rent-free housing provided to them during the relevant
period should have been included in their superannuation salary.
Statement of Compatibility with Human Rights
Prepared in accordance with Part 3 of the Human Rights (Parliamentary
Scrutiny) Act 2011
Public Sector Superannuation Salary Legislation Amendment Bill 2022
25. This Bill is compatible with the human rights and freedoms recognised or
declared in the international instruments listed in section 3 of the Human Rights
(Parliamentary Scrutiny) Act 2011.
Overview of the Bill
26. This Bill repeals paragraph 5(e) of the Superannuation (Salary) Regulations with
effect from 1 July 1986 and provides that the effect of the repeal does not apply to
individuals where limited circumstances are satisfied.
Human rights implications
27. This Bill does not engage any of the applicable rights or freedoms.
Conclusion
28. This Bill is compatible with human rights as it does not raise any human rights
issues.
10