Explanatory MemorandumCirculated By the Authority of the Treasurer, the Hon Wayne Swan Mp
Regulation impact statement
4.1 Under the Superannuation Guarantee (Administration) Act 1992 , all employers are required to make a prescribed minimum level of superannuation contributions to a complying superannuation fund on behalf of their eligible employees or else incur the superannuation guarantee (SG) charge. The minimum level of employer superannuation support required under the SG is 9 per cent of an eligible employee's earnings base. Eligible employees include foreign workers on temporary working visas in Australia who earn more than $450 in a month and are under the age of 70.
4.2 Superannuation is a concessionally taxed savings vehicle. SG contributions are generally concessionally taxed at the rate of 15 per cent and are tax deductible to the employer. Earnings are also generally concessionally taxed at 15 per cent. These tax concessions are estimated to be around $26.8 billion in 2007-08 and are designed to encourage citizens to save for their retirement thereby boosting retirement incomes and reducing reliance on the age pension.
4.3 The Government is concerned by the growing amount of superannuation which has been identified as lost over the last decade. Superannuation funds are required to report details of lost members to the Australian Taxation Office (ATO). These details are recorded on the Lost Members' Register to assist individuals in locating their accounts. The ATO's 2006-07 annual report shows the number of superannuation accounts reported on the Lost Members' Register grew from 5.7 million to 6.1 million in that income year. These inactive accounts total approximately $12 billion in assets. Temporary residents who depart Australia (after their visa has expired or been cancelled) and do not claim their superannuation contribute to the number of lost accounts.
4.4 Lost and inactive accounts impose operational costs on both the ATO and superannuation funds. The ATO manages the Lost Members' Register which requires supporting IT systems. In this role the ATO contacts individuals encouraging them to consolidate their lost accounts. The Lost Members' Register also places reporting obligations on funds. Funds are required to manage lost accounts. Member protection rules generally prevent superannuation funds deducting fees and charges on a member's account where the account balance is less than $1,000.
4.5 Since 1 July 2002 eligible temporary residents who have departed Australia have been able to access their superannuation benefits through the departing Australia superannuation payment. In most cases, a 30 per cent final tax is withheld from the payment.
4.6 The policy objective behind the introduction of the departing Australia superannuation payment system was to reduce the administrative and compliance costs that superannuation funds incur in preserving the superannuation benefits of temporary residents who have departed Australia and who will not be retiring in Australia. It was anticipated that the departing Australia superannuation payment entitlement would reduce the likelihood that temporary residents would lose track of their superannuation savings once they have departed Australia.
4.7 Despite the ability to claim their superannuation upon departing Australia and having an expired or cancelled visa, most temporary residents do not do so, thereby leaving behind significant amounts of small and lost account balances in Australia's superannuation system.
4.8 The previous government announced in the 2007-08 Mid-Year Economic and Fiscal Outlook a measure to require the future superannuation contributions and existing balances for temporary residents to be paid to the Australian Government, with effect from 1 July 2008.
4.9 The Government issued a public consultation paper on the proposal and sought submissions and comments from stakeholders by 26 May 2008.
4.10 The policy objectives are to:
- ensure that superannuation tax concessions are well targeted at individuals who will retire in Australia; and
- reduce the number of lost superannuation accounts.
4.11 Reflecting these considerations the Government does not consider it appropriate for temporary residents who have departed Australia (and whose visa has expired or been cancelled) to retain benefits in Australian superannuation funds. The Government considers amounts in superannuation funds that are unlikely to be claimed should be transferred to the Australian Government with the ability for individuals to claim amounts if later identified.
4.12 Following consideration of consultation outcomes, the Government considered two implementation options, detailed below.
Option 1 : Annual transfer and five - year claim period
4.13 Superannuation held on behalf of temporary residents (herein defined as temporary resident superannuation) will be paid to the Australian Government (through the ATO) on an annual basis.
4.14 The ATO will data match information provided by the Department of Immigration and Citizenship (DIAC) to identify superannuation funds that hold balances on behalf of current and former temporary residents. The ATO will notify funds of members who are temporary residents, and funds will pay superannuation they hold for those persons to the ATO within a specified time frame.
4.15 Employers would also be given the option to pay their SG contributions directly to the ATO.
4.16 Temporary residents who depart Australia and whose visas have expired or been cancelled will be able to claim amounts paid to the ATO, if they make a valid application within five years of departing, subject to the existing withholding tax arrangements. No interest will be paid on these amounts. Amounts not claimed within five years will be forfeited to the Commonwealth (including for previously departed temporary residents).
4.17 Temporary residents who become permanent residents would have their superannuation (with interest) transferred to a superannuation fund.
Option 2 : Departure model - transfer only if unclaimed after departure and unlimited claim period
4.18 The superannuation of departed temporary residents whose visas have expired or been cancelled will be paid to the Australian Government (through the ATO). That is, the payment of temporary residents' superannuation to the ATO will not occur until six months has elapsed after they have departed Australia and their visa has been cancelled or expired.
4.19 The ATO will data match information provided by DIAC to identify superannuation funds that hold balances for departed temporary residents. The ATO will notify these funds to enable them to pay any superannuation balances they hold for departed temporary residents to the ATO within a specified time frame.
4.20 Employers will not be given the option to pay any superannuation contributions directly to the ATO.
4.21 Temporary residents who depart Australia will be able to claim amounts paid to the ATO, less applicable tax.
4.22 Temporary residents who become permanent residents would have amounts paid to the ATO transferred into a superannuation fund. No interest will be paid under this option.
Table 4.1 : Comparison of the key features
|Option 1||Option 2|
|Accounts required to be paid to the ATO||All temporary resident superannuation accounts, including departed temporary residents and temporary residents currently working in Australia (ie, both active and inactive accounts).||Only departed temporary residents whose visas have expired or been cancelled who have not taken their superannuation benefits within a specified period after departing Australia.|
|Claim window for departed temporary residents||Five years.||Unlimited.|
|Interest paid on amounts held by the ATO||For those who become permanent residents only.||No.|
|Potential loss of insurance coverage while in Australia||Yes.||No.|
Impact group identification
4.23 Key stakeholders affected by the proposal include temporary residents, employers, superannuation funds and government agencies.
4.24 Temporary residents with amounts in superannuation will be affected.
4.25 The majority of temporary residents in employment comprise working holiday makers (such as backpackers) and students. However, there are a growing number of business visa categories that encompass highly paid and highly skilled temporary residents. These may include company executives, university appointments and individuals with unique skills such as artistic directors, and those in high demand skill categories such as doctors.
4.26 In 2006-07 there were over 134,000 working-holiday maker visas granted with work rights and 228,592 temporary student visas granted. Of the student visas 46 per cent went on to apply for Permission to Work. Since 26 April 2008, all student visa holders are granted permission to work with their initial student visa, no longer requiring students to apply separately for work rights.
4.27 There were over 87,300 business long-stay 457 visas issued. The average annual salary of a temporary resident on a business long-stay 457 visa is estimated to be $71,600.
4.28 Some 60 per cent of temporary residents on 457 visas who arrived five years ago are still in Australia, either on renewed 457 visas or having transitioned to permanent residency. This is in contrast to the approximately 5 per cent of working holiday makers who have not departed in the last five years.
4.29 Holders of retirement visas (subclasses 405 and 410) may also be affected as these visas are classified as temporary visas.
4.30 New Zealanders are excluded from the measure. This recognises the close economic relationship between Australia and New Zealand, including the ongoing work between the two countries to harmonise their superannuation systems via portability arrangements. New Zealanders are exempt from the existing arrangements for departing Australia superannuation payments.
Employers of temporary residents
4.31 Employers of temporary residents may be affected by the measure.
4.32 Superannuation funds that hold superannuation on behalf of temporary residents will be affected by the measure.
4.33 As there is no obligation on superannuation providers to report which members are temporary residents, there is no data available to indicate which funds hold benefits on behalf of temporary residents. However, it is expected that the vast majority of the estimated 550 large to medium funds would have members who are a current or departed temporary resident.
4.34 The great majority of self-managed superannuation funds are not expected to be affected by the measure as it is unlikely that they are established and maintained by temporary residents, given the residency requirements which must be satisfied in order to gain complying status.
The Australian Taxation Office and the Department of Immigration and Citizenship
4.35 The ATO will be responsible for the administration of this measure. DIAC will be required to provide information on temporary resident visa holders to the ATO.
Impact of options
Option 1 : Annual transfer and five - year claim period
4.36 This option meets the policy objective of reducing the number of lost accounts. However, there is potential that this model would exacerbate the problem of small accounts as account balances could be paid to the ATO while the accounts are still active. Small accounts can increase costs for superannuation funds. For example, funds may have to close and reopen accounts for the same member in order to continue to receive contributions for them in later periods. In addition, transferring amounts to the ATO annually would keep the balances low in perpetuity, therefore being more likely to trigger the member protection provisions which limit funds from charging fees on small accounts.
4.37 This option also meets the policy objective of ensuring that superannuation taxation concessions are targeted at those retiring in Australia.
4.38 However, this measure may not address the Government's concerns to minimise the impact on skilled labour shortages, and it may also increase the compliance burden on employers who elect to pay SG contributions direct to the ATO. It also imposes significant compliance costs on superannuation providers and the ATO and could have potential unintended impacts on holders of some visa classes.
4.39 The potential loss of benefits, interest and insurance cover for temporary residents, could affect employers ability to attract and retain qualified foreign staff under existing remuneration packages that feature superannuation benefits.
4.40 In order to take advantage of being able to pay their SG obligations directly to the ATO and not having to offer choice of fund to temporary residents, employers would need to be able to identify temporary residents. If employers incorrectly paid SG to the ATO they would risk incurring SG penalties. Given this risk, it is expected few employers would use this method. However the ATO would need to inform employers of this option, for example by amending their information products, and ensure their IT systems have the capability to accept employer payments.
4.41 This option does not include transitional arrangements for temporary residents who departed more than five years ago. That is, these amounts are immediately forfeited even where previously departed temporary residents had consciously decided to leave their superannuation in Australia.
4.42 This option, as originally announced, included no exemptions aside from New Zealand citizens. Temporary residents holding a retirement visa (subclasses 405 and 410) would be subject to the annual transfer and therefore would lose access to all of the savings they are expected to use to self fund their stay in Australia (at least until their visa expired, or was cancelled, and the individual left the country). These individuals cannot readily become permanent residents and generally do not depart Australia on a permanent basis.
4.43 This measure introduces significant implementation costs and ongoing costs for superannuation providers.
4.44 The implementation costs are estimated by the ATO as potentially $100,000 per superannuation provider. These costs represent the required IT systems changes to track temporary residents and report and make annual payments to the ATO and amendments to their product disclosure statements. This represents an estimated implementation cost to industry of potentially $90 million.
4.45 The ongoing costs are estimated by the ATO as $3,612 per superannuation provider. The ongoing costs represent the costs of closing and reopening accounts and remitting payment to the ATO. There may also be increased contact from members who query the fund's action of transferring their balances to the ATO. This represents an estimated annual ongoing cost to industry of almost $3.3 million.
4.46 Implementation and ongoing costs would also be significant under this option for the ATO and DIAC. The ATO and DIAC would be required to establish new processes to share information. The ATO would maintain records for superannuation held on behalf of temporary residents and pay amounts to departed temporary residents and temporary residents who become permanent residents. The ATO will face ongoing administrative costs associated with data matching and advising superannuation funds where they hold benefits on behalf of temporary residents. The ATO will also need to process the annual transfer from superannuation funds.
4.47 Provisions for costs of $10 million per annum for the ATO and $2 million per annum for DIAC over the forward estimates period were made in the 2007-08 Mid-Year Economic and Fiscal Outlook .
Option 2 : Departure model
4.48 This option achieves the policy objectives of reducing the number of small and lost accounts more effectively than option 1 as temporary resident superannuation is only transferred to the ATO after the temporary resident has departed Australia, which is when the likelihood of becoming a lost member is greatest.
4.49 This option also meets the policy objective of ensuring that superannuation taxation concessions are targeted at those retiring in Australia. However, temporary residents may have access to superannuation tax concessions while they work in Australia.
4.50 This option is not likely to have the unintended adverse impacts in relation to insurance and remuneration as outlined in option 1, and is estimated to be implemented at lower costs to superannuation providers and at no cost to employers.
4.51 Temporary residents would maintain their connection with their superannuation fund while in Australia and therefore have control over their superannuation and continued insurance coverage. The impact on the employment of foreign workers is likely to be negligible.
4.52 There would be lower implementation costs for superannuation providers. These are estimated by the ATO to be potentially $33,333 per superannuation provider. This represents an estimated implementation cost to industry of potentially $30 million.
4.53 Option 2 has lower annual ongoing compliance costs for superannuation funds as there would be approximately half the number of transactions per annum of option 1. The ongoing costs are estimated by the ATO as $2,508 per superannuation provider. This represents an estimated annual ongoing cost to industry of almost $2.3 million.
4.54 Implementation and ongoing costs for the ATO and DIAC are estimated to be the same under each option. The ATO and DIAC would be required to establish new processes to share information. Under this option the temporary resident retains the right to claim the benefit at anytime. Therefore, the ATO has an obligation to implement and maintain an information and payment system for the temporary resident to claim their entitlements. The ATO will also need to process transfers from superannuation funds under both options, however, option 2 will require the transfer of fewer amounts.
4.55 Provisions for costs of $10 million per annum for the ATO and $2 million per annum for the DIAC over the forward estimates period were made in the 2007-08 Mid-Year Economic and Fiscal Outlook .
4.56 On 5 May 2008, the Government released a consultation paper titled Temporary Residents and Superannuation seeking comments and submissions to assist in settling the final administrative and legislative design features of the measure. Submissions closed on 26 May 2008. As part of the consultation process, Treasury officials also conducted meetings with several industry groups from 19 to 22 May 2008 in Canberra, Sydney and Melbourne.
4.57 The Government received 47 written submissions through the consultation process. The overwhelming majority of submissions expressed strong concerns with the measure and its application. A number of submissions contended that the policy was inconsistent with the Government's broader policy agenda, particularly in relation to addressing skills shortages and encouraging private savings through superannuation.
4.58 Several submissions questioned the extent to which the measure under option 1 would achieve its stated policy rationale of minimising the proliferation of lost accounts. While many submissions acknowledged the importance of attending to the problem of lost superannuation, a number challenged the measure's effectiveness in this regard. Submissions also indicated that compliance costs for the measure were expected to be high.
4.59 Specifically, submissions expressed strong concern at the different treatment of temporary residents under the measure, including moving benefits to the ATO when the temporary resident was still an active member, the removal of choice of fund and the lack of interest on amounts held by the ATO. Also of concern was the potential loss of insurance coverage for temporary resident employees under option 1, particularly with industry funds supporting individuals working in high-risk industries such as mining, building and construction.
4.60 A number of industry associations proposed alternative models that reduced fund compliance costs and avoided the loss of insurance cover for temporary residents while working in Australia. Option 2 is based on the common features of the models put forward by industry.
Conclusion and recommended option
4.61 Option 2 better reduces lost and small accounts than option 1. Option 1 is marginally better at limiting temporary residents' access to superannuation tax concessions than option 2. However, option 2 imposes lower compliance costs on superannuation funds than option 1. Both options impose similar implementation and ongoing costs on the ATO and the DIAC.
4.62 Option 2 only applies after the temporary resident departs and their visa has expired or been cancelled where they have not taken their superannuation benefits within six months after departing Australia. It is at this time that the likelihood of becoming a lost member is greatest. This model allows temporary residents to maintain a connection with their superannuation while in Australia, thereby avoiding concerns about the loss of insurance and investment options. In addition, this model avoids imposing potential difficulties on employers recruiting foreign workers.