Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)Chapter 2 - Under 18 superannuation contribution deduction work test
Outline of chapter
2.1 Schedule 1 to this bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to provide an additional condition that needs to be satisfied by taxpayers below the age of 18 in order to claim a taxation deduction for personal superannuation contributions.
Context of amendments
2.2 One of the measures contained in the Treasurer's Press Release No. 011 of 25 February 2004, titled A more flexible and adaptable retirement income system, was the removal of the superannuation contribution work test for those people below age 65.
2.3 As a result of this removal some taxpayers who will now be able to make personal superannuation contributions will now also be able to claim a taxation deduction for these contributions.
2.4 Whilst the work test removal has the policy objective of improving equity of access to the superannuation system, for integrity reasons the Government also decided to implement an additional condition for claiming such taxation deductions by people below the age of 18.
Summary of new law
2.5 This bill amends the ITAA 1997 to provide an additional condition that needs to be satisfied by taxpayers below the age of 18 in order to claim a taxation deduction for personal superannuation contributions.
2.6 The additional condition will be that persons below the age of 18 will need to have derived eligible employment or business income in the income year in which the taxation deduction is being claimed.
Comparison of key features of new law and current law
| New law | Current law |
|---|---|
| From 1 July 2004 persons under age 65 will not have to satisfy a work test in order to make personal superannuation contributions.
In addition to being an eligible person, in order to claim a tax deduction for these contributions, a person under 18 a years of age will now have to derive eligible employment or business income in the income year in which the taxation deduction is being claimed. |
A work test is required before a person below the age of 18 can make personal superannuation contributions, the test being gainful employment of 10 hours in a week in the two years prior to making the contribution.
To claim a taxation deduction for that contribution the person must be an eligible person in the income year. However, if a person below the age of 18 wants to claim a taxation deduction for such personal superannuation contributions, that person does not need to be employed in the income year in which the taxation deduction is claimed. |
Detailed explanation of new law
2.7 The additional condition that needs to be satisfied by taxpayers below the age of 18 will be inserted after paragraph 26-80(3)(a) of the ITAA 1997.
2.8 This condition will apply to persons who were under the age of 18 at the end of the income year in question. It will provide that they must have derived eligible employment or business income during the income year in question. The meanings of 'eligible employment' and 'business' are the same as those in subsections 82AAS(1) and 6(1) respectively of the Income Tax Assessment Act 1936. [Schedule 1, item 3, paragraph 26-80(3)(aa)]
Application provisions
2.9 The amendments will apply to assessments for the 2004-2005 income year and subsequent income years. [Subclause 4(1)]
Regulation impact statement
Policy objective
2.10 The measures contained in the Treasurer's Press Release No. 011 of 25 February 2004, titled A more flexible and adaptable retirement income system have the objective of simplifying the operation of the superannuation system and reducing compliance costs for superannuation providers associated with administering the current superannuation work tests.
2.11 The measures also have other policy objectives, including improving equity of access to the superannuation system. One part of the superannuation system that is to be simplified is the work test relating to contributions made by persons under the age of 65.
2.12 This is intended to improve equity of access to the superannuation system by allowing all Australians under this age to save for their retirement in a prudentially regulated, concessionally taxed and preserved environment.
Background
2.13 The existing work test for contributing to superannuation which applies to members under the age of 65 means that to be eligible to contribute to superannuation or to have voluntary employer contributions made on their behalf, a member under the age of 65 generally must have worked for 10 hours in any week in the last two years.
2.14 No work test applies in respect of mandated employer contributions (typically SG contributions) on behalf of a member regardless of their age.
2.15 In recent years, a number of Australian Government initiatives have created exceptions to the work tests, allowing access to the superannuation system by groups other than the gainfully employed.
2.16 Issues relating to the work test for contributing to superannuation for those under the age of 65 years were canvassed in the Senate Select Committee on Superannuation's 2002 report Superannuation and standards of living in retirement.
2.17 A number of submissions to the inquiry called for a widening of access to superannuation, including through changes to the work test. In particular, the Investment and Financial Services Association proposed that the removal of the work nexus for personal contributions be explored.
Implementation options
2.18 The Government's option to remove the superannuation contribution work test for those people under the age of 65 will be achieved primarily by amendments to the relevant contribution acceptance regulations.
2.19 As a result of this work test removal some of the persons who can now personally contribute into superannuation without regard to a work test will be eligible to also claim a taxation deduction for these personal superannuation contributions.
2.20 For integrity reasons the Government also decided to impose an additional condition for claiming such taxation deductions by people less than 18 years of age, namely that these persons have worked at least 10 hours in the income year in which the deduction is being claimed.
Assessment of impacts
2.21 Changes to the work test for those under 65 mainly affects self-employed persons and persons contributing to superannuation while currently out of the workforce. A removal of the work test will also impact on superannuation fund administrators.
2.22 The removal of the contribution work test for those under the age of 65 will reduce compliance costs for superannuation providers by removing the need for monitoring of whether members have worked in the past two years.
2.23 As a result, self-employed persons and persons currently out of the workforce will be able to make or receive superannuation contributions without restriction, and without a need to comply with any work test evidentiary requirements from providers.
2.24 Currently, superannuation providers are required to monitor, at the time of accepting a personal contribution from an individual, whether the person has been gainfully employed for at least 10 hours at sometime in the past two years. The method is left open to providers to decide.
2.25 This measure involves the complete removal of this requirement on superannuation providers and members and therefore all compliance costs associated with monitoring the existing work test.
2.26 The Government does not have information available on the current costs and therefore cannot estimate the benefit of the reduced compliance costs. As such, it is very difficult to estimate the probable savings for the superannuation industry of removing the work test for people under age 65.
2.27 The Productivity Commission Review of the Superannuation Industry (Supervision) Act 1993 and certain other Superannuation Acts found that there is only very limited quantitative information available on the magnitude of compliance costs that are imposed by the Superannuation Industry (Supervision) Act 1993.
2.28 The responsibility for monitoring the additional work test for people under the age of 18 claiming a taxation deduction will be with the Australian Taxation Office (ATO). Whilst this measure may increase administration costs for the ATO it will not impose any burden on the superannuation providers or the taxpayers. There will be no additional compliance costs placed on the superannuation industry as a result.
2.29 The under 18 work test is intended to ensure that the opportunity of making personal contributions without a work test for all those under the age of 65 is not abused by those under the age of 18 and thereby reduces any potential risk to the revenue from such abuse.
Consultation
2.30 Consultation prior to the decision making stage in relation to this measure was not regarded as necessary, as it is an integrity measure.
2.31 Targeted confidential consultation with the superannuation industry on implementation issues associated with this measure has taken place following their announcement. As a result of these consultations some minor changes were made to the type of work test that will be administered by the ATO.
Conclusion and recommended option
2.32 This measure is aimed at addressing specific deficiencies in the access to the superannuation system and reducing sources of compliance costs in the superannuation regulatory arrangements, whilst protecting the integrity of the system for contributions made by persons under the age of 18 years.
2.33 As this option meets the policy objectives of this measure, the approach in this bill is recommended.