Explanatory Memorandum
Circulated By the Authority of the Treasurer, the Hon Wayne Swan MpChapter 4 - Other amendments
Outline of chapter
4.1 This chapter outlines some of the other amendments being made in relation to First Home Saver Accounts (FHSAs).
Context of amendments
4.2 A number of minor changes are being made to the FHSA Scheme to ensure it operates as intended.
4.3 A number of minor consequential amendments are also being made to ensure that existing laws will interact with FHSAs appropriately.
Detailed explanation of new law
Anti-money laundering and counter-terrorism financing
4.4 To ensure consistency between various legislation, an amendment to the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 is being made to align the definition of 'contribution' to an FHSA in that Act with the definition of 'contribution' in the First Home Saver Accounts Act 2008 (FHSA Act). [Schedule 1, item 1, subsections 70(7A) and (7B) of the FHSA Act]
First Home Saver Accounts without a tax file number
4.5 In order to make post-tax contributions to superannuation, a valid tax file number (TFN) must be quoted. Various amendments are being made to ensure FHSAs without a valid TFN cannot be contributed to superannuation.
4.6 The requirement to close an inactive FHSA and contribute the balance to superannuation is being removed when the Commissioner of Taxation (Commissioner) is satisfied the FHSA holder does not have a valid TFN. [Schedule 2, items 17 and 18, paragraph 22(1)(a) of the FHSA Act]
4.7 An FHSA provider will not be able to contribute the balance of an FHSA to superannuation where the provider has received a notice from the Commissioner under section 67 of the FHSA Act (where the notice has not been revoked) that the FHSA holder does not have a valid TFN. [Schedule 2, item 24, paragraph 34(1)(c) of the FHSA Act]
4.8 Amendments are being made so that no-TFN notices that the Australian Taxation Office (ATO) gives to FHSA providers no longer need to refer to the requirement to close inactive accounts. [Schedule 2, items 26 and 27, subparagraphs 67(2)(c)(i) and (ii) of the FHSA Act]
Family law related amendments
Account balance cap
4.9 Currently, if an FHSA provider accepts a contribution which breaches the account balance cap, it can be returned to the FHSA holder within 30 days, and the FHSA provider will not commit an offence. This is not an appropriate outcome where the contribution is a result of a family law obligation.
4.10 An amendment is being made to allow the FHSA provider in such cases to return the contribution to the FHSA provider from which the contribution came. [Schedule 2, item 20, subsection 27(2) of the FHSA Act]
Treatment of family law payments
4.11 To ensure payments and contributions to superannuation made under a family law obligation are treated the same as other payments and contributions, a number of provisions are being modified to refer only to payments or contributions from an FHSA, rather than referring to the sections under which the payments or contributions are made. [Schedule 1, items 17 and 18, paragraphs 290-5(d) and 295-171(a) and item 23, subparagraph 7(1)(c)(v) of the Superannuation (Government Co-contribution for Low Income Earners) Act 2003]
Provision of information
4.12 In order to assist a spouse of an FHSA holder enter into a financial agreement under Part VIIIA or VIIIAB of the Family Law Act 1975 (Family Law Act), or to assist the spouse in connection with obtaining a court order under the Family Law Act, a spouse of an FHSA holder can make an application to the FHSA provider for information regarding the balance of the FHSA holder's FHSA. [Schedule 2, item 37, subsection126A(1) of the FHSA Act]
4.13 An application must be in the form approved by the Commissioner and must be accompanied by a declaration stating that the information will be used only for the purposes of:
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- entering into a financial agreement under Part VIIIA or VIIIAB of the Family Law Act; or
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- assisting the spouse in connection with obtaining a court order under the Family Law Act.
[Schedule 2, item 37, subsection 126A(2) of the FHSA Act and Schedule 4, item 1, paragraph 126A(2)(a) of the FHSA Act]
4.14 An FHSA provider must comply with such an application. Failure to do so is an offence and a penalty of up to 50 penalty units applies. [Schedule 2, item 37, subsection 126A(3) of the FHSA Act]
4.15 In order to protect the privacy of the FHSA holder and their spouse, an FHSA provider who receives an application must not:
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- provide to the spouse any address of the FHSA holder; or
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- notify the FHSA holder that such an application has been made.
Doing so is an offence and a penalty of up to 50 penalty units applies. [Schedule 2, item 37, subsections 126A(4) and (5) of the FHSA Act)]
Protection of First Home Saver Account providers
4.16 An amendment is made to ensure FHSA providers who act in good faith in relation to a family law obligation will not be liable for loss or damage. [Schedule 1, item 3, section 126C of the FHSA Act]
Tax amendments
Taxation of authorised deposit - taking income
4.17 An amendment is being made to ensure FHSA providers which are authorised deposit-taking institutions (ADIs) are unable to claim a deduction for amounts they credit to FHSAs. [Schedule 1, items 19 and 22, sections 295-495 (after item 4 in the table) and 345-25 of the ITAA 1997]
4.18 This change makes it clear that an ADI does not deduct FHSA interest credited as it would bank interest credited to an ordinary account. Although the assessable income of an ADI that provides FHSAs is determined in the normal way, earnings (or other returns) credited to FHSAs are not deductible to the ADI. The taxable income of the ADI is then split into the FHSA component and the standard component. The FHSA component is the amount credited to FHSAs less any fees charged by the ADI.
4.19 The standard component is determined by subtracting the FHSA component from the taxable income of the ADI. The standard component is taxed at 30 per cent. The FHSA component is taxed at 15 per cent.
4.20 This special tax treatment reflects the different tax treatment of FHSAs. Unlike interest on ordinary bank accounts for which the account holder pays tax, the ADI pays tax on the earnings of FHSAs (at concessional rates). If the ADI recouped this tax from FHSAs the recoupment would not be assessable income to the ADI.
Example 4.1
An ADI that provides FHSAs has total revenue of $1,110 million, which is the assessable income of the ADI. This includes fees charged to FHSA depositors of $10 million. The ADI also has expenses of $910 million which includes amounts credited to FHSAs of $410 million. This amount of $410 million is not an allowable deduction to the ADI. Therefore, assuming the remaining expenses are deductible, the deductions of the ADI are $500 million (ie, $910 million less $410 million).
As a consequence of the modification made by proposed section 345-25, the ADI's taxable income is $610 million, (ie, $1,110 million reduced by $910 million less $410 million).
The FHSA component is $400 million, (ie, $410 million less $10 million). The tax payable by the ADI on the FHSA component (at 15 per cent) is $60 million.
The standard component, which is derived by subtracting the FHSA component from the ADI's taxable income, is $210 million, (ie, $610 million less $400 million). The company tax payable by the ADI on the standard component (at 30 per cent) is $63 million.
4.21 An amendment is also being made to allow for the payment of tax from an FHSA. Amounts recouped from an FHSA for the payment of tax will be non-assessable non-exempt income in the hands of the ADI FHSA providers and will not need to be included in the FHSA activity statement given to the Commissioner. [Schedule 1, item 2, paragraph 31(1)(h) of the FHSA Act and Schedule 1, item 22, section 345-30 of the ITAA 1997 and Schedule 1, item 25, paragraph 391-5(1)(e) of the Taxation Administration Act 1953]
4.22 Generally, the tax paid by an Australian resident company is allocated to its shareholders by way of franking credits attached to the dividends the shareholders receive. This ensures the income of an ADI is not taxed twice. Amendments are being made so that ADIs which are FHSA providers will not receive a franking credit (or debit) for tax paid in relation to the FHSA component of their income. This ensures shareholders of the ADI do not get a refundable tax offset for tax paid in relation to FHSAs. To ensure parity between FHSAs and retirement savings accounts (RSAs), the same amendment is being made in relation to the RSA component for ADIs which are RSA providers. [Schedule 1, item 14, subsection 205-15(3), item 15, subsection 205-30(1) and item 16, subsection 205-30(2) of the ITAA 1997]
Fringe benefits tax
4.23 Amendments are made to ensure:
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- a reimbursement by an employer in respect of an employee's personal FHSA contribution; and
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- a contribution to an FHSA by an employer on behalf of an employee,
are not fringe benefits but are included in the assessable income of the employee. [Schedule 1, item 4, paragraph 136(1)(hd) of the Fringe Benefits Tax Assessment Act 1986, item 13, section 15-80 of the ITAA 1997 and item 24, paragraph 12-1(3)(b) of the Taxation Administration Act 1953]
Separate net income
4.24 An amendment is being made to the definition of 'separate net income' in subsection 159J(6) of the Income Tax Assessment Act 1936 (ITAA 1936) to exclude returns on FHSAs and the Government FHSA contribution. Separate net income is used as an income test for a small number of tax offsets including the dependant spouse tax offset. [Schedule 1, item 6, paragraphs 159J(6)(aae) and (aaf) of the ITAA 1936]
Tax file number and Australian investment income reports
4.25 As FHSA income is not the assessable income of the holder, account providers will not need to report account holder details on the quarterly TFN report or Australian investment income report to the Commissioner. To achieve this result, the definitions of 'interest-bearing account', 'interest-bearing deposit' and 'unit trust' are amended to exclude FHSAs. [Schedule 1, items 7 to 9, section 202A of the ITAA 1936]
4.26 Amendments are also made to various tables to take into account the modifications elsewhere in the First Home Saver Accounts (Further Provisions) Amendment Bill 2008 (FHSA (Further Provisions) Bill). [Schedule 1, items 10 to 12, sections 10-5 and 11-55 of the ITAA 1997]
Deemed quotation of tax file number
4.27 An amendment is made to section 295-615 of the ITAA 1997 to ensure that where an FHSA provider quotes an individual's TFN to a superannuation provider in connection with a contribution from an FHSA, the quotation will also be made for the purposes of determining the provider's no-TFN contributions income. [Schedule 1, items 20 and 21, section 202A of the ITAA 1936]
Prohibition of certain uses of a First Home Saver Account
4.28 Similarly to superannuation, in order to ensure FHSAs are used to purchase a first home, and are not used as a means of financing other expenditure, FHSAs will be unable to be used as security for a borrowing.
4.29 Any term of a contract or other agreement which purports to provide for a charge over an FHSA will have no effect. Rights to the income of an FHSA are also unable to be assigned. In addition, providers are unable to recognise, encourage or otherwise sanction a charge being put over an FHSA. Doing so is an offence and a penalty of up to 50 penalty units applies. [Schedule 2, item 37, section 126B of the FHSA Act]
Amendments to the payment conditions
4.30 Amendments are being made to provide greater protection to individuals who are unable to meet the payment conditions due to circumstances which are genuinely beyond their control.
4.31 The amendments will provide that where the payment conditions have not been met, a person will not be subject to the misuse tax if:
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- the failure to meet the conditions is reasonable in the circumstances; and
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- it is reasonable to require the ex-FHSA holder do so, an amount equal to the payment or a reasonable lesser amount is recontributed to an FHSA as soon as is practicable.
[Schedule 2, item 10, paragraph 17(3)(b) of the FHSA Act]
4.32 In considering whether a failure to meet the payment conditions is reasonable, regard must be had to factors in subsection 17(4) of the FHSA Act. These are whether the circumstances were beyond control of the individual, whether the failure was reasonably foreseeable, whether the individual has failed the conditions on a previous occasion and any other relevant factor. [Schedule 2, item 11, subsection 17(4) of the FHSA Act]
4.33 When considering whether it is reasonable to recontribute money to an FHSA, a significant factor is whether the individual has lost a significant portion of the amount withdrawn because of the actions of a third party or some other circumstance which is out of the control of the individual. If they are able to recontribute, the expectation is that they would recontribute an amount within six months. If the six months has expired and an acquisition payment has been made, but perhaps settlement does not occur through no fault of the individual, then as soon practicable the individual should recontribute to another FHSA.
Example 4.2
Tracy withdraws her FHSA money to purchase a home. Tracy is unable to find a home she likes. She does not therefore acquire a home within the six months as required by the FHSA payment conditions. Tracy also does not recontribute the funds. Later that year the ATO identifies that Tracy has not purchased a home. Tracy has no reason beyond her control for not recontributing the FHSA funds and meeting the payment rules. In this example Tracy would be in breach of the FHSA payment rules as it would have been reasonably possible for Tracy to recontribute to a new FHSA within six months.
4.34 Also, it will be relevant to consider whether it is reasonable for the person to be able to reopen an FHSA, that is, whether they meet the eligibility requirements.
Example 4.3
Amanda did purchase a home within six months of withdrawing her FHSA money. Shortly after Amanda moves into her home it is destroyed by a natural disaster. Amanda is therefore unable to meet the six-month occupancy rule. For financial reasons, Amanda was unable to rebuild and she sold the land. She is ineligible to recontribute to an FHSA as she has already lived in a dwelling that she has owned. In this case it would be unreasonable for Amanda to recontribute to an FHSA and she will be deemed to have met the payment rules.
4.35 A significant factor would be where an individual incurs expenses associated with acquiring a qualifying interest in a dwelling which were unavoidable. In such cases it would be reasonable for them to contribute the amount withdrawn less the unavoidable expenses.
4.36 An individual may also lose some of the amount withdrawn due to fraud or theft in relation to acquiring an interest in a dwelling. It may therefore be reasonable for them to recontribute the balance of their FHSA, less the amount lost.
4.37 Losses or expenses not associated with acquiring an interest in a dwelling are not intended to be taken into account when assessing whether contributing a lesser amount is reasonable.
Example 4.4
John finds a new apartment development project he likes and withdraws his FHSA money to pay the deposit. The developer has asked for a long settlement period. However, six months later the developer goes in to liquidation and is unable to fulfil the contract. John's full deposit is returned to him. John decides to use some of the deposit money on an overseas holiday. John then decides to recontribute to an FHSA several months after receiving his refund. The amount recontributed is the deposit less his holiday expenses.
In this case it would not be reasonable for John to recontribute a lesser amount to an FHSA. John did not act as soon as practicable and had no reason to recontribute a lesser amount to the new FHSA. John would be in breach of the FHSA payment rules.
4.38 When recontributing an amount, an individual must declare they meet the conditions described above. A recontribution will not be a personal FHSA contribution. [Schedule 2, items 6 and 15, subparagraphs 11(3)(c)(ii) and 19(1)(b)(iii) of the FHSA Act]
4.39 The term 'recontribution of FHSA home acquisition payment after failure to occupy a dwelling' is being removed from a number of sections to reflect the fact that FHSA home acquisition payments can be recontributed in a wider range of cases (eg, failure to meet the occupancy rules). [Schedule 1, items 5, 8 and 21, subparagraph 11(3)(c)(ii), paragraph 15(2)(a) and paragraph 28(2)(b) of the FHSA Act]
4.40 An amendment is also being made to ensure individuals who transfer from one FHSA provider to another are unable to make use of the various provisions in the Corporations Act 2001 mentioned in subparagraph 31(1)(d)(ii) which allow individuals to access their money in certain limited circumstances. These circumstances will now only apply to the first FHSA which an individual opens. [Schedule 2, item 23, paragraph 31(1)(da) of the FHSA Act]
Unauthorised trustees
4.41 APRA would be able to seek court injunctions against unauthorised trustees to prevent them from purporting to issue FHSAs. This provision protects would-be account holders from unauthorised trustees. [Schedule 2, item 34 of the FHSA (Further Provisions) Bill]
4.42 The Superannuation Industry (Supervision) Act 1993 (SIS Act) regulatory framework has been applied to FHSA trustees and their trusts where it is appropriate to do so. In addition, APRA's power to seek court injunctions under section 315 of the SIS Act would be applied to unauthorised trustees, purported FHSA trusts and purported FHSAs. This provision is consistent with APRA's powers to seek injunctions under the SIS Act.
Application and transitional provisions
4.43 The tax-related amendments and the protection for FHSA providers in relation to family law obligations in Schedule 1 to the FHSA (Further Provisions) Bill apply from 1 October 2008. [Schedule 1, item 26 of the FHSA (Further Provisions) Bill]