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2010-2011
THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA
HOUSE OF REPRESENTATIVES
TAX LAWS AMENDMENT (2011 MEASURES No. 4) BILL 2011
EXPLANATORY MEMORANDUM
(Circulated by the authority of the
Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP)
Table of contents
Glossary .................................................................................................. 1
General outline and financial impact ....................................................... 3
Chapter 1 Reduction in 2011-12 pay as you go instalments .......... 7
Chapter 2 Low-income taxpayer rebate ....................................... 11
Chapter 3 Disability superannuation benefits ............................... 15
Chapter 4 Amendments to reportable employer
superannuation contributions definition ...................... 23
Index ..................................................................................................... 31
Glossary
The following abbreviations and acronyms are used throughout this
explanatory memorandum.
Abbreviation Definition
Commissioner Commissioner of Taxation
GDP gross domestic product
IT(TP) Act Income Tax (Transitional Provisions)
Act 1997
ITAA 1936 Income Tax Assessment Act 1936
ITAA 1997 Income Tax Assessment Act 1997
PAYG pay as you go
RESC reportable employer superannuation
contributions
TAA 1953 Taxation Administration Act 1953
TPD total and permanent disability
1
General outline and financial impact
Reduction in 2011-12 pay as you go instalments
Schedule 1 to this Bill amends Schedule 1 to the Taxation Administration
Act 1953 to set the gross domestic product (GDP) adjustment for pay as
you go (PAYG) instalment taxpayers who use the GDP adjustment
method at 4 per cent for the 2011-12 income year, instead of 8 per cent.
Date of effect: This measure applies to PAYG instalment amounts for the
2011-12 income year that become due on or after the day after this Bill
receives Royal Assent. It does not apply where a taxpayer's 2011-12
income year commenced before 1 April 2011.
Proposal announced: This measure was announced in the 2011-12
Budget and in the Treasurer, the Assistant Treasurer and Minister for
Financial Services and Superannuation and the Minister for Small
Business' joint Media Release No. 049 of 10 May 2011.
Financial impact: This measure will have the following revenue
implications:
2010-11 2011-12 2012-13 2013-14 2014-15
Nil -$700m $700m Nil Nil
Compliance cost impact: Nil to Low.
Low-income taxpayer rebate
Schedule 2 to this Bill amends the Income Tax Assessment Act 1936 to
remove the ability of minors (children under 18 years of age) to use the
low income tax offset to offset tax due on their unearned income, such as
dividends, interest, rent, royalties and other income from property. This
will reduce the benefits of income splitting between adults and children
and protect the integrity of the income tax system.
Date of effect: This measure applies to assessments for the 2011-12
income year and later income years.
3
Tax Laws Amendment (2011 Measures No. 4) Bill 2011
Proposal announced: These amendments were announced in the
Assistant Treasurer and Minister for Financial Services and
Superannuation's Media Release No. 072 of 10 May 2011.
Financial impact: This measure has these revenue implications:
2011-12 2012-13 2013-14 2014-15
- $240m $250m $250m
Compliance cost impact: Low. This measure removes the ability of a
particular group of taxpayers to claim an offset on part of their income.
Disability superannuation benefits
Schedule 3 to this Bill allows the percentage of insurance costs for certain
total and permanent disability (TPD) policies that can be claimed as
deductions by superannuation funds to be specified in regulations. These
amendments will streamline the operation of the law for superannuation
funds and insurance providers.
This Schedule and Clause 4 also extend the current transitional relief for
the deductibility of TPD insurance premiums to funds that self insure their
liability to provide disability benefits.
Date of effect: The changes allowing the deductible proportion of
insurance costs for certain TPD policies to be specified in regulations will
have effect from the 2011-12 income year.
The extension of transitional relief to self-insured funds will apply to the
income years 2004-05 to 2010-11. This extension will benefit these funds
by providing them with greater scope to deduct the notional cost of
insurance cover commonly regarded as TPD insurance for these income
years.
Proposal announced: This measure has not been previously announced.
Financial impact: Nil.
Compliance cost impact: Nil.
4
General outline and financial impact
Amendments to reportable employer superannuation
contributions definition
Schedule 4 to this Bill amends the Taxation Administration Act 1953 to
exclude from the `reportable employer superannuation contributions'
definition certain employer contributions to superannuation made
pursuant to a requirement that employees cannot influence.
Date of effect: This measure applies to the 2009-10 income year and later
income years. The retrospective application of these amendments has no
adverse implications for taxpayers as the amendments exclude particular
contributions that would otherwise have been caught by the reportable
employer superannuation contributions definition and assessed as income
for certain means-tested tax and transfer system programs.
Proposal announced: This measure was announced in the former
Minister for Financial Services, Superannuation and Corporate Law's
Media Release No. 080 of 30 June 2010.
Financial impact: Nil.
Compliance cost impact: Low.
5
Chapter 1
Reduction in 2011-12 pay as you go
instalments
Outline of chapter
1.1 Schedule 1 to this Bill amends Schedule 1 to the Taxation
Administration Act 1953 (TAA 1953) to set the gross domestic product
(GDP) adjustment for pay as you go (PAYG) instalment taxpayers who
use the GDP adjustment method at 4 per cent for the 2011-12 income
year, instead of 8 per cent.
Context of amendments
1.2 Under the PAYG instalments system, taxpayers earning business
or investment income pay instalments during the year towards their final
tax liability for that income year. Taxpayers may pay their PAYG
instalments on the basis of GDP-adjusted notional tax (GDP adjustment
method) or on the basis of instalment income. Under either method
taxpayers can choose to vary their instalment amounts to more accurately
reflect their expected tax liability for the income year.
1.3 The GDP adjustment method is available to individuals,
multi-rate trustees and eligible small business entities. The method is also
available to self-assessment entities (primarily companies and certain
superannuation funds) with $2 million or less of instalment income for the
previous income year, or self-assessment entities with more than
$2 million of instalment income for the previous income year who are
eligible to pay an annual PAYG instalment but have chosen not to
(section 45-130 of Schedule 1 to the TAA 1953).
1.4 Taxpayers who pay PAYG instalments on the basis of the GDP
adjustment method are generally quarterly payers who pay four
instalments annually. However, primary production businesses and
special professionals are allowed to pay two instalments a year under the
GDP adjustment method (section 45-134 of Schedule 1 to the TAA 1953).
7
Tax Laws Amendment (2011 Budget Measures No. 4) Bill 2011
1.5 A quarterly payer who pays instalments on the basis of the GDP
adjustment method will pay the instalment amount determined and
advised by the Commissioner of Taxation (Commissioner). The
Commissioner works out the amount of the instalments taxpayers pay in
accordance with Subdivision 45-L of Schedule 1 to the TAA 1953.
1.6 The amount of the instalments payable depends on the
taxpayer's GDP-adjusted notional tax which is worked out by the
Commissioner (section 45-405 of Schedule 1 to the TAA 1953). Broadly,
the GDP-adjusted notional tax amount is worked out by increasing the
taxpayer's adjusted taxable income in the previous year by the GDP
adjustment factor, which is generally a ratio representing the rate of
nominal GDP growth between the previous two full calendar years.
1.7 For the 2011-12 income year, the GDP adjustment factor
calculated under the current law would be 8 per cent. These amendments
will set the GDP adjustment factor at 4 per cent for the 2011-12 income
year. This will provide eligible taxpayers (including eligible small
businesses) with a smoother transition from the 2 per cent GDP
adjustment factor that applied for the 2009-10 and 2010-11 income years
as the economy recovered from the global financial crisis.
1.8 Taxpayers whose 2011-12 income year commenced before
1 April 2011 are already paying PAYG instalments for the 2011-12
income year based on a 2 per cent GDP adjustment factor (calculated
under the statutory ratio). They will continue to do that for the rest of the
2011-12 income year.
1.9 Taxpayers may themselves vary their instalment amounts
calculated and notified by the Commissioner.
Summary of new law
1.10 The GDP adjustment factor to be used by the Commissioner to
work out the GDP-adjusted notional tax amount will be set at 4 per cent
for the 2011-12 income year.
8
Reduction in 2011-12 pay as you go instalments
Comparison of key features of new law and current law
New law Current law
A GDP adjustment factor of The GDP adjustment factor (which
4 per cent will be used by the would otherwise be required to be
Commissioner for the 2011-12 used by the Commissioner to
income year to calculate calculate GDP-adjusted notional tax
GDP-adjusted notional tax under for the 2011-12 income year under
section 45-405 of Schedule 1 to the section 45-405 of Schedule 1 to the
TAA 1953. TAA 1953) would be 8 per cent.
Detailed explanation of new law
1.11 These amendments will set the GDP adjustment factor to be
used by the Commissioner in calculating PAYG instalments for taxpayers
who pay quarterly instalments on the basis of the GDP adjustment method
at 4 per cent for the 2011-12 income year. The GDP adjustment factor for
income years after 2011-12 is to be based on the current methodology.
[Schedule 1, items 2 to 4, definition of `GDP adjustment' in subsection 45-405(3) and
subsection 45-402(1)]
Example 1.1
Aaron pays quarterly PAYG instalments on business and investment
income he earns on the basis of the GDP adjustment method.
In the 2010-11 income year Aaron has business and investment
adjusted taxable income of $50,000. If the current GDP adjustment
factor of 8 per cent were used, then Aaron's PAYG instalments would
be calculated using the adjusted taxable income of $54,000 for the
2011-12 income year.
However, applying the GDP adjustment factor of 4 per cent means that
the adjusted taxable income for the 2011-12 income year will be only
$52,000 and Aaron's PAYG instalments will be calculated on this
lower amount.
1.12 Taxpayers may still vary their quarterly instalments under
section 45-112 of Schedule 1 to the TAA 1953 if they consider their
income is expected to be lower or higher than the amount determined by
the Commissioner using the 4 per cent GDP adjustment factor.
1.13 To avoid leaving inoperative provisions in the tax laws well
after they cease to have effect, the provisions in the TAA 1953 that give
effect to a 4 per cent GDP adjustment factor for the 2011-12 income year
will be automatically repealed on 1 July 2016. [Schedule 1, items 9 to 11]
9
Tax Laws Amendment (2011 Budget Measures No. 4) Bill 2011
Application and transitional provisions
1.14 These amendments apply for the purposes of working out the
amount of an instalment that becomes due on or after the date of
commencement, which is the day after the Bill receives Royal Assent.
[Schedule 1, item 12]
1.15 However, the amendments do not apply to a small group of
taxpayers whose 2011-12 income year commenced before 1 April 2011.
These taxpayers will continue to pay PAYG instalments for the 2011-12
income year based on a 2 per cent GDP adjustment factor, which is
worked out under the statutory formula in subsection 45-405(3) of
Schedule 1 to the TAA 1953. [Schedule 1, item 12]
Consequential amendments
1.16 Consequential amendments are made to the sunsetting
provisions in Schedule 1 to the Tax Laws Amendment (2009 Measures
No. 3) Act 2009 (2009-10 instalment reduction). These amendments
reflect the changes made by this Bill to the wording of the provisions to be
automatically repealed on 1 July 2014 by Schedule 1 to the Tax Laws
Amendment (2009 Measures No. 3) Act 2009. [Schedule 1, items 5 to 8]
1.17 A minor amendment is made to ensure consistency in describing
the current year within the provisions for working out quarterly
instalments on the basis of GDP-adjusted notional tax. [Schedule 1, item 1,
subsection 45-402(1)]
10
Chapter 2
Low-income taxpayer rebate
Outline of chapter
2.1 Schedule 2 to this Bill amends the Income Tax Assessment
Act 1936 (ITAA 1936) to remove the ability of minors (children under 18
years of age) to use the low income tax offset to reduce tax due on income
subject to Division 6AA of Part III of the ITAA 1936.
Context of amendments
2.2 Special rules apply in calculating the tax payable on income of
minors. These rules have been in place since 1980 and are contained in
Division 6AA of Part III of the ITAA 1936. Under the rules, unearned
income (income from property such as dividends, interest, rent and
royalties) of minors over a certain level is taxed at the highest marginal
rate of tax (45 per cent in 2010-11 and 2011-12). Taxable income subject
to the special tax rates is called `eligible taxable income' in Division 6AA.
2.3 The rules apply to income derived by the minor directly or
through a trust. Where the minor is an Australian resident the special
rules do not apply if the eligible taxable income is $416 or less. Eligible
taxable income between $416 and $1,307 is taxed at 66 per cent on the
part of the relevant taxable income exceeding $416, thereby phasing in the
special tax rates. Eligible taxable income of $1,308 and more is taxed at a
flat 45 per cent.
2.4 A foreign resident minor is taxed at 29 per cent on the first $416
of unearned income, at 66 per cent on eligible taxable income between
$416 and $732 and at 45 per cent on relevant income of $733 and more.
2.5 The aim of these rules is to discourage income splitting within
families by directing income from adults to children to avoid higher
marginal tax rates.
2.6 In recent years the low income tax offset has increased
significantly as a means of providing targeted tax relief to low-income
earners. The low income tax offset has been available to all taxpayers
with incomes below its cut-out threshold, including minors. An
increasing amount of distributions from discretionary trusts have
subsequently taken advantage of this concession to direct an increasing
11
Tax Laws Amendment (2011 Measures No. 4) Bill 2011
amount of income from adults to minors in order to minimise tax. There
is a significant spike in distributions from discretionary trusts at around
the point where the effective tax-free threshold for minors has applied in
each recent tax year, and that spike has moved broadly in accordance with
increases to the effective tax-free threshold for minors.
2.7 Removing the eligibility of minors to use the low income tax
offset to reduce tax payable on their unearned income will discourage
families from splitting income with their children -- protecting the
integrity and improving the fairness of the income tax system.
2.8 Minors will still be able to use the low income tax offset to
reduce tax payable on their work income.
Summary of new law
2.9 This Schedule removes the ability of minors to use the low
income tax offset to reduce tax due on income subject to Division 6AA of
Part III of the ITAA 1936.
Comparison of key features of new law and current law
New law Current law
The low income tax offset cannot be The low income tax offset can be
used to reduce tax on income of the used to reduce tax on any income of
taxpayer that is subject to a taxpayer, including taxpayers
Division 6AA of Part III of the whose income is subject to
ITAA 1936. Division 6AA of Part III of the
The low income tax offset is still ITAA 1936.
available to reduce tax on other
income of the taxpayer.
Detailed explanation of new law
2.10 These amendments restrict the eligibility for the low income tax
offset of taxpayers with income subject to Division 6AA of Part III of the
ITAA 1936.
2.11 Item 1 of this Schedule includes a definition of `basic income
tax liability' in subsection 6(1) of the ITAA 1936. `Basic income tax
liability' has the meaning given to that term by section 4-40 of the Income
Tax Assessment Act 1997 (ITAA 1997). Basic income tax liability is
12
Low-income taxpayer rebate
worked out using the income tax rate or rates applying to the taxpayer for
the income year and any special provisions that apply to working out that
liability. [Schedule 2, item 1, subsection 6(1)]
2.12 Item 2 of this Schedule includes a definition of `eligible taxable
income' in subsection 6(1) of the ITAA 1936. `Eligible taxable income'
has the meaning given by section 102AD of the ITAA 1936.
Section 102AD defines which income is subject to Division 6AA of
Part III of the ITAA 1936 and is therefore taxed at the special rates of tax
that are applicable where Division 6AA applies. [Schedule 2, item 2,
subsection 6(1)]
2.13 Item 3 of this Schedule adds three new subsections to
section 159N of the ITAA 1936. These subsections provide that a
taxpayer who has income subject to Division 6AA of Part III of the
ITAA 1936 has a limited eligibility for the low income tax offset.
2.14 Where a taxpayer has income subject to Division 6AA of Part III
of the ITAA 1936 the taxpayer is not entitled to the low income tax offset
to the extent that the offset would be applied against the part of the
taxpayer's basic income tax liability that is attributable to the eligible
taxable income of the taxpayer for that year of income. (The eligible
taxable income of the taxpayer is that income that is taxed as unearned
income of the taxpayer.) [Schedule 2, item 3, section 159N]
Example 2.1
Fiona has income from part-time work of $10,000 and income subject
to Division 6AA of Part III of the ITAA 1936 (unearned income) of
$2,000. Her $10,000 of work income is subject to the normal income
tax rates and tax due on this income is $600. Her $2,000 of unearned
income is taxed at 45 per cent and tax due on this income is $900.
Fiona has a total gross tax liability of $1,500. Under the old rules
Fiona was able to use the low income tax offset to reduce tax on her
total income to zero. Under the new rules Fiona can still reduce tax on
her work income to zero by using the low income tax offset but is not
able to reduce tax on her unearned income. Fiona now has a net total
tax liability of $900.
2.15 In calculating tax on the taxpayer's income the taxpayer
may still apply the tax offset listed in item 15 in the table in
subsection 63-10(1) of the ITAA 1997 against that part of the taxpayer's
basic income tax liability that is attributable to the taxpayer's eligible
taxable income. This particular provision ensures that eligible taxpayers
are still able to use the pensioner tax offset, where applicable, to reduce
tax on their unearned income. It is only the low income tax offset that can
no longer be used to reduce tax on unearned income.
13
Tax Laws Amendment (2011 Measures No. 4) Bill 2011
2.16 Items 4 and 5 of this Schedule amend section 63-10 of the
ITAA 1997. This section has priority rules for applying tax offsets
against a taxpayer's basic income tax liability. Item 4 provides that the
low income tax offset is the fourth offset in order of priority for applying
tax offsets against a taxpayer's basic income tax liability, after the senior
Australians tax offset (applied both to individuals and to trustees) and the
pensioner tax offset. [Schedule 2, item 4, subsection 63-10(1)]
2.17 Currently the low income tax offset is covered by the category
of any tax offset not covered by another item in the table in section 63-10.
The low income tax ofset now ranks ahead of all such offsets.
2.18 Item 5 adds a note to section 63-10 providing that rules about
applying the low income tax offset are set out in new subsection 159N(4)
of the ITAA 1936. [Schedule 2, item 5, subsection 63-10(1)]
2.19 Item 6 refers to the application of this Schedule. [Schedule 2,
item 6]
Application and transitional provisions
2.20 These amendments commence on the day this Bill receives
Royal Assent.
2.21 These amendments apply to income tax assessments for the
2011-12 and later income years.
14
Chapter 3
Disability superannuation benefits
Outline of chapter
3.1 Schedule 3 to this Bill amends the Income Tax Assessment
Act 1997 (ITAA 1997) to allow the percentage of insurance costs for
certain total and permanent disability (TPD) policies that can be claimed
as deductions to be specified in regulations. These changes will apply
from the 2011-12 income year.
3.2 This Schedule and Clause 4 of this Bill also extend the current
transitional relief for the deductibility of TPD insurance premiums to
funds that self insure their liability to provide disability benefits. This
transitional relief will apply to the income years 2004-05 to 2010-11.
3.3 These amendments will streamline the operation of the law for
superannuation funds and insurance providers.
3.4 All legislative references in this chapter are to the ITAA 1997
unless otherwise stated.
Context of amendments
Background to the issue
3.5 With the Better Super changes in 2007, the provisions allowing
deductibility of TPD insurance costs incurred by superannuation funds
were rewritten and transferred from the Income Tax Assessment Act 1936
(ITAA 1936) to the ITAA 1997, with effect for the 2007-08 and later
income years.
3.6 The ITAA 1997 allows superannuation funds to deduct TPD
insurance premiums to the extent the policies have a connection to a
liability of the fund to provide disability superannuation benefits. In
broad terms, the definition of a `disability superannuation benefit' requires
medical certification that an individual is incapable of being gainfully
employed in any occupation for which they are reasonably qualified by
way of education, experience or training. This definition can be
contrasted with more generous forms of TPD insurance -- for example,
those which pay a benefit in the event an individual is unable to perform
15
Tax Laws Amendment (2011 Measures No. 4) Bill 2011
their own occupation, despite being capable of working in an alternative
occupation.
3.7 However, the operation of the ITAA 1997 did not accord with
industry practice under the ITAA 1936, which was to fully deduct the cost
of all policies insuring against some form of permanent disability. This
practice continued after the Better Super rewrite.
The transitional relief
3.8 Transitional provisions were enacted in 2010 with a view to
allowing lead time for industry practice to be brought into alignment with
the ITAA 1997. Specifically, the Superannuation Legislation Amendment
Act 2010 amended the tax law to provide transitional relief to complying
superannuation funds for deductibility of premiums for TPD insurance
policies for the income years 2004-05 to 2010-11.
3.9 Under this transitional relief, superannuation funds can claim tax
deductions for a broader range of TPD insurance premiums than would
otherwise be allowed for the relevant income years.
3.10 Industry has raised concerns regarding its ability to comply with
the relevant provisions of the ITAA 1997 when the transitional
arrangements expire on 30 June 2011. Industry's concerns include that
actuarial certification required to estimate the deductible portion of certain
premiums and self-insurance arrangements may not be obtainable due to a
lack of information.
Summary of new law
3.11 These amendments will allow the regulations to prescribe the
percentage of premiums for certain TPD insurance policies that can be
claimed as deductions.
3.12 Provisions are also enacted and inserted into the Income Tax
(Transitional Provisions) Act 1997 (IT(TP) Act) to allow superannuation
funds that self insure their liability to provide TPD benefits to their
members to claim deductions in respect of a broader range of insurance
policies for the income years 2004-05 to 2010-11.
16
Disability superannuation benefits
Comparison of key features of new law and current law
New law Current law
A superannuation fund may claim a A superannuation fund can claim a
deduction for the percentage of a deduction for so much of a
premium for a TPD insurance policy TPD insurance premium as is
specified in regulations. If the fund attributable to a liability to provide
claims a deduction in accordance disability superannuation benefits. If
with the specified percentage in the this proportion is not specified in the
regulations it does not need to obtain insurance policy, the fund must
an actuary's certificate. obtain an actuary's certificate in order
Self-insured funds can deduct the to claim the deduction.
arm's length cost of insurance to Self-insured funds can deduct the
cover the liability to provide amount the fund could reasonably be
disability superannuation benefits expected to pay in an arm's length
based on percentages specified in the transaction to obtain insurance to
regulations. The requirement to cover its liability to provide disability
obtain an actuary's certificate is not superannuation benefits. In order to
altered. claim the deduction, the fund must
obtain an actuary's certificate.
For the transitional period (2004-05 Current transitional arrangements
to 2010-11), self-insured funds may allow premium paying funds to claim
claim a deduction for TPD insurance deductions for TPD insurance costs
costs based on the expanded meaning based on an expanded meaning of the
of the concept of permanent concept of permanent disability for
disability. the income years 2004-05 to 2010-11.
The transitional arrangements are not
available to self-insured funds.
Detailed explanation of new law
Proportioning deductibility of insurance costs
3.13 This Schedule provides that the percentage of premiums and
costs of certain TPD insurance policies that can be claimed as deductions
may be specified in regulations.
3.14 Section 295-465 of the ITAA 1997 allows superannuation funds
to deduct the cost of insurance (including self insurance) which is
attributable to a liability of the fund to provide benefits referred to in
section 295-460. Section 295-460, inter alia, covers benefits which meet
the definition of a `disability superannuation benefit' in the ITAA 1997.
3.15 Item 6 in the table in subsection 295-465(1) allows a fund to
claim a deduction for so much of an insurance premium as is attributable
17
Tax Laws Amendment (2011 Measures No. 4) Bill 2011
to a liability to provide benefits referred to in section 295-460. Partial
deductibility can arise, for example, where the TPD definition contained
in a particular policy is broader than the definition of `disability
superannuation benefit' in the ITAA 1997, or where it is the same but the
insurance policy includes other (non-deductible) types of cover and the
TPD component of the premium is not specified. Subsection 295-465(3)
requires the fund to obtain an actuary's certificate in order to claim a
deduction under item 6.
3.16 For the purpose of deducting amounts under item 6 in the table
in subsection 295-465(1), new subsection 295-465(1B) provides that the
regulations may specify the proportion of a premium for a specified
insurance policy that may be treated as being attributable to the liability to
provide benefits referred to in section 295-460. If an insurance policy
held by a superannuation fund is of a type specified in the regulations, the
fund may deduct the specified proportion of the premium. Where the
fund claims a deduction in accordance with the regulations, an actuary's
certificate will not be required. [Schedule 3, items 1 and 2,
subsection 295-465(1B) and item 3, subsection 295-465(3A)]
3.17 A superannuation fund will retain the ability to deduct an
amount under item 6 in the table in subsection 295-465(1) without
recourse to the regulations. In that case, the requirement to obtain an
actuary's certificate will continue to apply.
Example 3.1
Pandora Super Fund pays premiums to an insurance company for
TPD insurance cover for its members. The definition of permanent
disability contained in the insurance policy covers members for the
inability to perform their own occupation. The own occupation
definition of TPD specified in the policy is broader than the definition
of `disability superannuation benefit' in the ITAA 1997 -- that is, it
allows for a payout to be made in a broader range of circumstances.
Pandora can only deduct the part of the insurance policy premium that
relates to the liability to provide disability superannuation benefits.
For the purposes of this example, assume that own occupation TPD
insurance is a type of policy specified in the regulations. Under these
amendments Pandora can deduct the percentage of the premium it pays
for own occupation insurance that is specified in the regulations. If
Pandora claims a deduction in accordance with the regulations, there is
no requirement for it to obtain an actuary's certificate.
3.18 New subsection 295-465(1A) clarifies the link between items 5
and 6 in the table in subsection 295-465(1). Specifically, it clarifies that a
deduction can be claimed under item 6 for the remaining part of an
insurance premium for which a partial deduction has been claimed under
18
Disability superannuation benefits
item 5 (because part of the premium is specified in the policy as being
wholly for the liability to provide benefits referred to in section 295-460).
For example, if part of an insurance premium is specified in the policy as
being wholly for the liability to provide superannuation death benefits
(which are referred to in section 295-460), and the rest of the premium
does not wholly relate to section 295-460 benefits, the rest of the premium
falls under item 6 in the table. In such circumstances, if some of the
remaining part of the premium is attributable to the liability to provide
benefits referred to in section 295-460, the fund can claim a deduction
under item 6 in the table. The fund can determine the amount of the
deduction with reference to the regulations or by obtaining an actuary's
certificate. [Schedule 3, item 2, subsection 295-465(1A)]
3.19 Subsection 295-465(2) allows superannuation funds that self
insure their liability to provide disability benefits to deduct the amount the
fund could reasonably expect to pay in an arm's length transaction to
obtain insurance to cover the liability to provide benefits referred to in
section 295-460. An actuary's certificate must be obtained in order to
claim a deduction under subsection 295-465(2).
3.20 These amendments allow self-insuring funds to determine the
amount they can deduct under subsection 295-465(2) by using
percentages specified in the regulations. For example, where an actuary
has calculated the arm's length cost of an insurance policy which covers a
broader class of benefits than is referred to in section 295-460, and the
insurance policy is of a kind specified in the regulations, the fund can
apply the percentage specified in the regulations in respect of the policy to
calculate the amount it can deduct under subsection 295-465(2). This will
avoid the need for the fund to obtain further actuarial certification.
However, the amendments do not entirely remove the need for
self-insuring funds to obtain an actuary's certificate under
subsection 295-465(3) in order to claim a deduction. [Schedule 3, items 5 and
6, subsections 295-465(2A) and (2B)]
Example 3.2
Medusa Super Fund self insures its liability to provide TPD benefits to
members in accordance with its trust deed. Medusa's trust deed uses
the own occupation definition of permanent disability. This definition
is broader than the meaning of `disability superannuation benefit'
contained in the ITAA 1997.
Medusa has engaged an actuary to determine the amount it could
reasonably expect to pay in an arm's length transaction to obtain
insurance to cover its liability to provide own occupation TPD benefits
under its trust deed. However, Medusa cannot claim a deduction for
this amount, as subsection 295-465(2) of the ITAA 1997 requires that
19
Tax Laws Amendment (2011 Measures No. 4) Bill 2011
the amount must relate to the fund's liability to provide disability
superannuation benefits.
For the purposes of this example, assume that own occupation
TPD insurance is a type of policy specified in the regulations. Under
these amendments, Medusa can deduct a percentage of the amount the
actuary has determined it could expect to pay in an arm's length
transaction for own occupation insurance. The percentage is specified
in the regulations.
Transitional relief for self-insuring funds
3.21 This Schedule and Clause 4 of this Bill provide transitional
relief for deductibility of notional TPD insurance costs incurred by
superannuation funds that self insure their liability to provide disability
benefits. The transitional relief will provide these superannuation funds
with greater scope to deduct the notional cost of insurance cover
commonly regarded as TPD insurance for the income years 2004-05 to
2010-11.
3.22 Under section 295-466 of the IT(TP) Act the terms `disability
superannuation benefit' in the ITAA 1997, and `death or disability
benefits' in the ITAA 1936 have an expanded meaning for the period
2004-05 to 2010-11. Specifically, the meaning of these terms is
broadened to cover a benefit that is conditional on the disability of the
member, and the disability to which it relates is described as a permanent
disability in regulations made for the purpose of section 295-466.
3.23 New section 295-467 is inserted into the IT(TP) Act to allow
self-insuring funds to use the expanded meaning of the term `disability
superannuation benefit' in section 295-466 of the IT(TP) Act for the
income years 2007-08 to 2010-11. [Schedule 3, item 11, section 295-467 of the
IT(TP) Act]
3.24 Similarly, the stand alone provisions in this Schedule allow
self-insuring funds to use the expanded meaning of the term `death or
disability benefits' for the income years 2004-05 to 2006-07. [Schedule 3,
item 8]
3.25 The expanded meanings of `disability superannuation benefit'
and `death or disability benefits' apply for the purposes of
subsection 295-465(2) of the ITAA 1997 and subsection 279(2) of the
ITAA 1936 which allow self-insuring superannuation funds to deduct the
notional cost of TPD insurance. [Schedule 3, item 11, subsection 295-467(3) of
the IT(TP) Act and subitem 8(3)]
20
Disability superannuation benefits
Example 3.3
Zeus Super Fund self insures its liability to provide TPD benefits to
members in accordance with its trust deed. Zeus's trust deed uses the
own occupation definition of permanent disability. This definition is
broader than the meaning of `disability superannuation benefit' in the
ITAA 1997.
Zeus has engaged an actuary to determine the amount it could
reasonably expect to pay in an arm's length transaction to obtain
insurance to cover its liability to provide own occupation TPD benefits
under its trust deed. Zeus can claim a deduction for this entire amount
for the income years 2004-05 to 2010-11. This is because the inability
of a member to perform their own occupation is described as a
`permanent disability' under the regulations made for the purpose of
section 295-466 of the IT(TP) Act.
Amendment of assessments
3.26 Section 170 of the ITAA 1936 limits the time period within
which the Commissioner of Taxation can amend tax assessments to four
years. By the time this extension of the transitional arrangements receives
Royal Assent, the four-year time limit on amending assessments will have
expired for certain years to which the amendments apply. Section 170
would therefore operate to prevent self-insuring superannuation funds,
which have claimed a deduction for past years in accordance with the
current law, from accessing the broader deduction allowed under the
transitional provisions.
3.27 The effect of the amendments in this Schedule is that
section 170 does not prevent the amendment of a tax assessment in a
previous year, where the purpose of the amendment is to allow funds to
take advantage of the extended transitional relief provided in this Bill and
the amendment is made within two years of this Bill receiving Royal
Assent. [Clause 4, Schedule 3, item 11, subsection 295-467(4) of the IT(TP) Act]
Minor amendments
3.28 The note in paragraph 295-460(b) of the ITAA 1997, alerting the
reader to transitional provisions in the IT(TP) Act, is amended to reflect
the extension of these provisions to self-insured funds. [Schedule 3, item 9,
paragraph 295-460(b)]
3.29 A note is inserted at the end of section 295-466 of the
IT(TP) Act alerting the reader to the fact that this provision will be
repealed on 1 January 2017. [Schedule 3, item 10, section 295-466 of the
IT(TP) Act]
21
Tax Laws Amendment (2011 Measures No. 4) Bill 2011
Application
3.30 The extension of the transitional relief applies to a
superannuation fund that is subject to current or contingent liabilities to
provide disability benefits to its members in any of the income years
2004-05 to 2010-11. [Schedule 3, subitem 8(1), item 11, subsection 295-467(1)]
3.31 The transitional relief will benefit self-insured funds by
providing them with greater scope to deduct the notional cost of insurance
cover commonly regarded as TPD insurance for the relevant income
years.
3.32 The amendments allowing superannuation funds to deduct the
cost of specified insurance policies in accordance with the regulations
apply to insurance policy premiums, or current or contingent liabilities, in
respect of the 2011-12 and later income years. [Schedule 3, items 4 and 7]
Commencement
3.33 These amendments commence on Royal Assent. [Clause 2, items 1
to 3 in the table]
Repealing provision
3.34 The amendments to the IT(TP) Act will be repealed on
1 January 2017. [Clause 2, item 4 in the table, Schedule 3, item 12]
22
Chapter 4
Amendments to reportable employer
superannuation contributions definition
Outline of chapter
4.1 Schedule 4 to this Bill amends the definition of `reportable
employer superannuation contributions' in the Taxation Administration
Act 1953 (TAA 1953) to exclude certain employer contributions to
superannuation made for the benefit of an employee where the amount of
additional contribution must be made pursuant to some requirement that
the employee cannot influence.
Context of amendments
4.2 The `reportable employer superannuation contributions'
definition was inserted into Schedule 1 to the TAA 1953 by the Tax Laws
Amendment (2009 Measures No. 1) Act 2009.
4.3 Reportable employer superannuation contributions are
employer contributions to superannuation in addition to the
superannuation guarantee charge of 9 per cent made for an individual's
benefit where the individual has or had some capacity, or might
reasonably be expected to have or have had some capacity to influence the
size of the contribution or the way in which the contribution was made so
that assessable income was reduced.
4.4 The contributions will typically be those made under effective
`salary sacrifice' arrangements. However, the definition also includes
other contributions made for an individual's benefit that the individual has
capacity to influence.
4.5 Reportable employer superannuation contributions have been
assessed as income in determining eligibility for a range of means-tested
government assistance programs in the tax and transfer system, since
1 July 2009.
23
Tax Laws Amendment (2011 Measures No. 4) Bill 2011
Summary of new law
4.6 Schedule 4 amends the `reportable employer superannuation
contributions' definition to clarify that it does not include any
contributions to superannuation that are made for an employee's benefit
pursuant to an `industrial instrument' as defined in section 995-1 of the
Income Tax Assessment Act 1997 (ITAA 1997) or the rules of a
superannuation fund.
4.7 The former Minister for Financial Services, Superannuation and
Corporate Law announced in Media Release No. 080 of 30 June 2010 that
the Government would amend the reportable employer superannuation
contributions definition to exclude additional employer contributions that
are prescribed in legislation or other requirement that neither the
employee nor their employer can directly control.
4.8 These amendments have effect from 1 July 2009, which is when
the definition was first enacted.
Comparison of key features of new law and current law
New law Current law
Contributions to superannuation that Additional employer contributions to
are required by an `industrial superannuation that are required by
instrument' or rules of a an `industrial instrument' or the rules
superannuation fund are expressly of a superannuation fund, the amount
excluded from the reportable of which can be influenced due to an
employer superannuation action or inaction taken by the
contributions definition to the extent employee, are included in the
that there is no capacity to influence reportable employer superannuation
the content of the requirement to contributions definition.
make the contribution or its size.
Detailed explanation of new law
4.9 These amendments clarify that the reportable employer
superannuation contributions definition extends to all applicable
contributions made for an individual's benefit in respect of an income
year irrespective of when they are made. This follows some uncertainty at
the scope of the phrase `amount contributed' in the initial wording of
subsection 16-182(1) of the TAA 1953.
4.10 The amendments mean that additional contributions made for a
person's benefit either before or after the end of an income year that are in
24
Amendments to reportable employer superannuation contributions definition
respect of the income year are reportable employer superannuation
contributions, as well as amounts contributed for the individual's benefit
during the year that are in respect of the year. [Schedule 4, items 1 and 2,
subsection 16-182(1)]
4.11 These amendments also confirm that an amount contributed
before or after the end of an income year that is in respect of the income
year and that the individual has or has had, or might reasonably be
expected to have or have had, capacity to influence to be made in such a
way that assessable income is reduced are reportable employer
superannuation contributions. [Schedule 4, item 3, paragraph 16-182(1)(d)]
Example 4.1
Michael is an employee of JYU Pty Ltd (JYU). Michael has entered
an effective salary sacrifice agreement with JYU that means 2 per cent
of his fortnightly pay is contributed to Michael's superannuation fund
in addition to the compulsory 9 per cent superannuation guarantee
contribution. JYU typically makes contributions to Michael's
superannuation fund on the 25th day of the month after the month in
which Michael's salary is paid. On this occasion, the 11 per cent
contribution made on Michael's behalf, including the 2 per cent `salary
sacrificed' contribution, is made on 25 July following the relevant
income year.
Michael has capacity to influence the making of this additional
2 per cent contribution in a way that his assessable income is reduced
so that it is a reportable employer superannuation contribution.
Because the additional contribution made on 25 July is made in respect
of the preceding income year, it will be considered a reportable
employer superannuation contribution and included in income when
determining Michael's eligibility for relevant means-tested government
assistance payments for the previous income year.
4.12 These amendments also revise the reportable employer
superannuation contributions definition to ensure that it does not include
additional contributions to superannuation made on behalf of an employee
as a result of some action or inaction by the employee if the contributions
are required by an `industrial instrument' or rules of a superannuation
fund and the employee had or has no capacity to influence, and cannot
reasonably be expected to have or have had, capacity to influence, the
content of that requirement. [Schedule 4, item 4, subsection 16-182(5)]
4.13 Industrial instrument is defined in section 995-1 of the
ITAA 1997 as an `Australian law or an award, order, determination or
industrial agreement in force under an Australian law'.
4.14 Australian law is defined in section 995-1 of the ITAA 1997
and means a law of the Commonwealth Parliament or a state or territory
25
Tax Laws Amendment (2011 Measures No. 4) Bill 2011
parliament. It includes primary legislation and subordinate legislation,
being laws made by the executive arm of government with authorisation
of Parliament such as regulations, rules, by-laws, proclamations, deeds
and notices.
Example 4.2
Rodger's employer is required to make an employer contribution for
Rodger's benefit under the deed of the superannuation fund into which
Rodger's employer contributes. This deed is subordinate legislation
under a provision of state legislation. The amount of the contribution
is prescribed in the deed and is based on the amount of personal
superannuation contribution made by Rodger. For example, Rodger
can elect to contribute 0 per cent, 5 per cent or 8 per cent of his salary
as a personal after-tax contribution. The deed requires that if Rodger
elects to contribute 0 per cent, 5 per cent or 8 per cent, his employer
must contribute 9 per cent, 11.5 per cent or 13 per cent respectively.
Rodger elects to contribute 8 per cent of his salary as a personal
after-tax contribution. His employer contributes 13 per cent to
Rodger's superannuation as required.
None of the amount the employer contributes is a reportable employer
superannuation contribution as the additional employer contributions
are required by an Australian law. Neither Rodger nor his employer
has capacity to influence the requirement for the additional
contribution to be made or its size as the contribution and its amount
are determined by the deed. None of Rodger's personal after-tax
superannuation contributions are reportable employer superannuation
contributions as they are made from his assessable income.
4.15 `Australian law' also includes any international instrument that
has the force of law in Australia. Examples include international
conventions, model laws, international agreements or international rules
that are legislated as having the force of law by an Australian Parliament.
Additional contributions that must be made for an individual's benefit
under an international instrument as a result of some action or inaction of
the individual are not reportable employer superannuation contributions to
the extent the requirement for the contributions and their size are
prescribed in the instrument.
Example 4.3
Rani's employer is required to make a 6 per cent contribution for
Rani's benefit in accordance with an international agreement that has
the force of law in Australia where Rani makes a 7 per cent or greater
personal after-tax contribution. Rani has no capacity to influence, and
could not reasonably be expected to have capacity to influence, the
content of the requirement for this contribution to be made or its size
as the requirement is contained in an international agreement. The
international agreement was negotiated between Australia and other
26
Amendments to reportable employer superannuation contributions definition
foreign nations. None of the 6 per cent contribution made by Rani's
employer is a reportable employer superannuation contribution and
none of the 7 per cent personal after-tax contribution made by Rani is a
reportable employer superannuation contribution as the amounts are
included in Rani's assessable income.
4.16 The definition of `industrial instrument' includes `an award,
order, determination or industrial agreement in force under an Australian
law', which includes a modern award or enterprise agreement as defined
in the Fair Work Act 2009.
4.17 These amendments mean that the reportable employer
superannuation contributions definition does not include contributions that
are required by a modern award or enterprise agreement to the extent that
the individual has no capacity to influence the content of the modern
award or enterprise agreement as they relate to the requirement for the
contribution to be made or the size of the contribution. So long as the
employee has no capacity to influence the content of the requirement for
the additional contribution to be made or the size of the contribution, then
there will be no reportable employer superannuation contribution.
Example 4.4
Thomas is an employee of MHT Pty Ltd (MHT). Thomas'
employment conditions are governed by an enterprise agreement that
was negotiated between MHT and workplace and union
representatives. Thomas was not involved in the negotiations and had
no involvement in the preparation of the enterprise agreement, aside
from voting on it. The terms of the enterprise agreement provide that
MHT will make an additional 0.75 per cent, 1.75 per cent or 2.75 per
cent employer contribution if Thomas elects to contribute 3 per cent,
4 per cent or 5 per cent of his salary as a personal after-tax
contribution. Thomas elects to contribute a 5 per cent personal
after-tax contribution. MHT makes an additional 2.75 per cent
contribution as required.
None of the amount MHT contributes is considered a reportable
employer superannuation contribution as the additional 2.75 per cent
contribution is required to be made under an Australian law, being the
enterprise agreement entered between MHT and its employees. None
of Thomas' personal after-tax superannuation contributions are
reportable employer superannuation contributions as they are made
from his assessable income.
4.18 These amendments also mean the definition of reportable
employer superannuation contributions excludes additional contributions
that are required to be made for an individual's benefit by the rules of a
`superannuation fund' (as defined in section 995-1 of the ITAA 1997).
27
Tax Laws Amendment (2011 Measures No. 4) Bill 2011
4.19 However, a contribution remains a reportable employer
superannuation contribution to the extent that an individual has or has had
capacity to influence the content of the requirement for the contribution to
be made. Examples include additional employer contributions made
under a common law employment contract whose terms and conditions
the employee has influenced or additional employer contributions made
on behalf of an employee as part of some negotiated remuneration
package.
Example 4.5
Charlotte has a common law employment contract with her employer,
KPT Pty Ltd (KPT). The contract governs the terms and conditions of
Charlotte's employment and was settled following negotiations
between Charlotte and KPT. KPT made it clear to Charlotte during
negotiations that she could influence the contents of the contract.
Under the contract, if Charlotte elects to make a 5 per cent personal
superannuation contribution from her assessable income, this will be
matched by a 2 per cent employer contribution from KPT (in addition
to the compulsory 9 per cent superannuation guarantee contribution).
Charlotte's 5 per cent contribution from assessable income is not a
reportable employer superannuation contribution. Because Charlotte
had capacity to influence the terms of the contract and the making of
the additional employer contribution, the additional 2 per cent
employer superannuation contribution is a reportable employer
superannuation contribution.
Example 4.6
Tina is one of two trustees of the Michaels Family self managed
superannuation fund. The other trustee is her husband, Peter. Tina is
also an employee of KJY Pty Ltd (KJY). Under the Michaels Family
self managed superannuation fund deed (deed), KJY is required to
contribute 15 per cent of Tina's fortnightly pay to the fund. The
contents of the deed were negotiated between Tina and Peter with the
assistance of their tax agent. Tina had full capacity to influence the
content of the deed as it relates to the requirement for the amount of
contribution exceeding the compulsory 9 per cent superannuation
guarantee contribution to be made (being 6 per cent).
Because Tina had capacity to influence the requirement in the deed for
this additional 6 per cent contribution to be made, the fact it is required
pursuant to the rules of a superannuation fund does not exclude it from
the reportable employer superannuation contributions definition. The
6 per cent contribution is a reportable employer superannuation
contribution.
4.20 These amendments also do not alter the application of
paragraph 16-182(1)(d) of the TAA 1953 of the reportable employer
superannuation contributions definition. That is, any contributions to
28
Amendments to reportable employer superannuation contributions definition
superannuation made on behalf of an employee that the employee has
influenced to be made in such a way that assessable income is reduced are
reportable employer superannuation contributions even if the requirement
for making of the contribution or their size are prescribed by or under an
`industrial instrument' or rules of a superannuation fund.
Example 4.7
Kurt is required to make a prescribed personal superannuation
contribution to his superannuation fund by a legislative instrument.
This instrument allows Kurt to elect to have the amount of the
contribution paid from post-tax salary or he can choose to enter into an
arrangement to `salary sacrifice' the prescribed personal
superannuation contribution and have his employer contribute the
amount from his pre-tax salary. Kurt has exercised the option to
`salary sacrifice' his required contribution and has it paid from his
pre-tax income. Because Kurt has influenced the way his
superannuation contribution is made so that it reduces his assessable
income, the amount of the contribution is a reportable employer
superannuation contribution. This is the case notwithstanding that the
amount of the contribution is required by a legislative instrument.
Example 4.8
Lana is an employee of ZXO Pty Ltd (ZXO). Lana's employment
conditions are governed by an enterprise agreement that was
negotiated between ZXO and its employees. Lana had no capacity to
influence the terms of this agreement. In particular, Lana had no
capacity to influence a clause of the agreement that requires 3 per cent
of all employees' fortnightly salaries to be contributed to the
employer's default superannuation fund. This contribution is in
addition to the compulsory 9 per cent superannuation guarantee
contribution.
Under the terms of the enterprise agreement, employees may elect to
have the 3 per cent contribution paid to them as assessable income.
Because Lana has capacity to influence the way the 3 per cent
contribution is made so that assessable income is reduced by electing
to have the contribution made to superannuation rather than receive
assessable income, the amount of the 3 per cent contribution is a
reportable employer superannuation contribution.
Application and transitional provisions
4.21 These amendments commence retrospectively from 1 July 2009,
which is the date the reportable employer superannuation contributions
definition commenced, so that the relevant contributions will never have
fallen within the definition. [Schedule 4, item 5]
29
Tax Laws Amendment (2011 Measures No. 4) Bill 2011
4.22 The retrospective application of these amendments has no
adverse implications for taxpayers as these amendments exclude particular
contribution amounts that would otherwise have been caught by the
reportable employer superannuation contributions definition and assessed
as income for certain means-tested tax and transfer system programs.
30
Index
Schedule 1: Reduction in 2011-12 PAYG instalments
Bill reference Paragraph number
Item 1, subsection 45-402(1) 1.17
Items 2 to 4, definition of `GDP adjustment' in subsection 45-405(3) 1.11
and subsection 45-402(1)
Items 5 to 8 1.16
Items 9 to 11 1.13
Item 12 1.14, 1.15
Schedule 2: Low-income taxpayer rebate
Bill reference Paragraph number
Item 1, subsection 6(1) 2.11
Item 2, subsection 6(1) 2.12
Item 3, section 159N 2.14
Item 4, subsection 63-10(1) 2.16
Item 5, subsection 63-10(1) 2.18
Item 6 2.19
Schedule 3: Disability superannuation benefits
Bill reference Paragraph number
Clause 2 3.33
Clause 4 3.27
Items 1 and 2, subsection 295-465(1B) and item 3, subsection 295- 3.16
465(3A)
Item 2, subsection 295-465(1A) 3.18
Items 4 and 7 3.32
Items 5 and 6, subsections 295-465(2A) and (2B) 3.20
Item 8 3.24
31
Tax Laws Amendment (2011 Measures No. 4) Bill 2011
Bill reference Paragraph number
Item 9, paragraph 295-460(b) 3.28
Item 10, section 295-466 of the IT(TP) Act 3.29
Item 11, section 295-467 of the IT(TP) Act 3.23
Item 11, subsection 295-467(3) of the IT(TP) Act and subitem 8(3) 3.25
Subitem 8(1), item 11, subsection 295-467(1) 3.30
Schedule 4: Reportable employer superannuation
contributions
Bill reference Paragraph number
Items 1 and 2, subsection 16-182(1) 4.10
Item 3, paragraph 16-182(1)(d) 4.11
Item 4, subsection 16-182(5) 4.12
Item 5 4.21
32
33