House of Representatives

Tax Laws Amendment (2009 Measures No. 1) Bill 2009

Explanatory Memorandum

(Circulated by the authority of the Treasurer, the Hon Wayne Swan MP)

Chapter 3 Key concepts

Outline of chapter

6.1 Part 1 of Schedule 3 to this Bill amends the Income Tax Assessment Act 1936 (ITAA 1936), Income Tax Assessment Act 1997 (ITAA 1997) and Schedule 1 to the Taxation Administration Act 1953 (TAA 1953) to provide the key concepts and definitions that will apply as part of three means testing reforms announced in the 2008-09 Budget.

6.2 In particular, this Part defines:

·
'adjusted fringe benefits';
·
'reportable superannuation contributions';
·
'reportable employer superannuation contributions' (RESC); and
·
'total net investment loss', which draws on a new definition of 'financial investment' to be inserted in the ITAA 1997.

6.3 There are also definitions of 'rebate income' and 'income for surcharge purposes' which consolidate the components of income to be assessed in determining an individual's eligibility for particular offsets, and obligations to pay the Medicare levy surcharge.

Context of amendments

6.4 The 2008-09 Budget announced three measures to expand income definitions used for means-tested tax and transfer system programs. These measures enhance the fairness and integrity of the tax and transfer systems by removing inconsistencies in the treatment of non-wage remuneration and ensure better account is taken of certain losses.

6.5 One measure, Means testing of government support - expanded definitions of income to include certain 'salary sacrificed' contributions to superannuation will mean that particular 'salary sacrificed' superannuation contributions are assessed as income. As a result, those individuals that reduce their assessable income by electing to have salary contributed to superannuation will be treated on an equivalent basis to those who cannot access salary sacrifice.

6.6 Another measure, Means testing of government support - expanded definitions of income to include net losses from investments' , expands relevant income definitions to include net losses from 'financial investments', and net losses from rental property where appropriate.

6.7 Net rental property losses are currently added to income for a number of transfer programs including Family Tax Benefit, Child Care Benefit, and child support. This measure extends the government assistance programs that income test net rental property losses and also adds net financial investment losses to income for those programs where such losses are not included.

6.8 As a result, this measure ensures better account is taken of losses and removes inconsistencies in their treatment for income test purposes.

6.9 The third means testing reform announced in the 2008-09 Budget, Means testing of government support - expanded definitions of income to include reportable fringe benefits was to extend income definitions for particular tax offsets to include reportable fringe benefits. However, on 19 June 2008, as part of a decision to retain the inclusion of adjusted fringe benefits in the income test for family assistance programs, the Government announced that the Budget measure would be varied so that adjusted fringe benefits were added to income.

6.10 Adjusted fringe benefits are the 'grossed-down' amount of reportable fringe benefits paid to an employee. Under current arrangements, reportable fringe benefit amounts are 'grossed-down' by multiplying the reportable fringe benefits amount by 53.5 per cent.

6.11 Most transfer programs that assess fringe benefits as income assess the adjusted value of fringe benefits. However, tax programs that currently assess fringe benefits rely on the reportable fringe benefits amount. This is the 'grossed-up' amount of fringe benefits which is designed to capture what an individual would have been required to pay before tax to acquire the benefit. The effect of the 'adjustment' process means the 'cash value' of the fringe benefit is assessed as income.

6.12 The 2008-09 Budget means test reforms extend to most Australian Government tax and transfer programs that are income tested. Among the programs to be affected are those that currently assess taxable income only and programs that use adjusted taxable income.

6.13 Under the current law, the definition of income used to assess an individual's liability to pay the Medicare levy surcharge is derived from three pieces of legislation: the Medicare Levy Act 1986 (MLA 1986); the A New Tax System (Medicare levy surcharge - Fringe Benefits) Act 1999 (ANTS (MLS) Act 1999); and Part VIIB of the ITAA 1936.

6.14 This is because the MLA 1986 applies the Medicare levy surcharge against an individual's taxable income (as modified by the MLA 1986) and the ANTS (MLS) Act 1999 applies the Medicare levy surcharge against an individual's reportable fringe benefits total for the year (where applicable).

6.15 The ANTS (MLS) Act 1999 replicates the income test that is used in the MLA 1986 to determine an individual's Medicare levy surcharge liability. This adds to legislative size and complexity.

Summary of new law

6.16 Part 1 of Schedule 3 inserts a number of new definitions into the ITAA 1997 and the TAA 1953. For example, a new definition of 'reportable superannuation contributions' is inserted into the ITAA 1997 which captures the particular 'salary sacrificed' superannuation contributions to be added to income as a result of means testing reforms announced in the 2008-09 Budget.

6.17 A component of 'reportable superannuation contributions' is employer contributions to superannuation that the employee has influenced to be made in such a way that their assessable income is reduced. These contributions, to be known as 'reportable employer superannuation contributions', are to be defined in Schedule 1 of the TAA 1953.

6.18 The amendments also insert a new definition of an individual's 'total net investment loss' into the ITAA 1997. This definition captures net losses from 'financial investments', and net rental property losses. The amendments insert a new definition of 'financial investment' into the ITAA 1997 for the purposes of this definition.

6.19 A taxpayer's 'adjusted fringe benefits total', which are to be assessed as income for particular tax offsets as a result of the reforms, are to be defined in the ITAA 1936.

6.20 Also, the amendments insert two new definitions of 'rebate income' and 'income for Medicare levy surcharge purposes' into the ITAA 1936 and the ITAA 1997 for legislative simplicity in response to the income test reforms announced in the 2008-09 Budget.

6.21 These definitions will be used to determine eligibility for particular means-tested tax offsets and obligations to pay the Medicare levy surcharge.

Detailed explanation of new law

Key concepts and definitions

Adjusted fringe benefits total

6.22 Part 1 of Schedule 3 amends the ITAA 1936 to insert a definition of 'adjusted fringe benefits total' into subsection 6(1), which is the definitions section of the ITAA 1936. [Schedule 3, Part 1, item 1]

6.23 The amendments also repeal the current definition of 'reportable fringe benefits total' from subsection 6(1) of the ITAA 1936 and insert a definition that cross-references the Fringe Benefits Assessment Act 1986 .

6.24 The new 'adjusted fringe benefits total' definition is consistent with the definition of that concept in other legislation such as clause 4 of Schedule 3 to the A New Tax System (Family Assistance) Act 1999 and subpoint 1067G-F11(2) of the Social Security Act 1991 (SS Act 1991). The effect of the definition, having regard to the current rate of fringe benefits tax, is that an individual's 'adjusted fringe benefits total' will be their reportable fringe benefits for the income year multiplied by 53.5 per cent.

6.25 An individual's 'adjusted fringe benefits total' will be assessed in determining eligibility for the senior Australians tax offset and the pensioner tax offset as a consequence of the income definition for these programs being amended to 'rebate income' (explored below).

6.26 The beneficiary, and beneficiary's spouse's adjusted fringe benefits total (where appropriate), will also become relevant in determining a trustee's eligibility for the offset in section 160AAAB of the ITAA 1936.

Rebate income

6.27 Part 1 of Schedule 3 to this Bill also inserts a definition of 'rebate income' into the ITAA 1936. [Schedule 3, Part 1, item 2]

6.28 This 'rebate income' definition will be applied in determining an individual's eligibility for the senior Australians tax offset, the pensioner tax offset and a trustee's eligibility for an offset under section 160AAAB of the ITAA 1936. 'Rebate income' is inserted to consolidate the components of income that are to be assessed for these offsets.

6.29 This is because, as a result of the 2008-09 Budget reforms, the income tests for these offsets will expand to assess an individual's (and their spouse's where appropriate): taxable income; 'adjusted fringe benefits total'; 'total net investment loss'; and 'reportable superannuation contributions' for the year of income. Including a new definition of 'rebate income' that incorporates these income components reduces the need for unnecessary amendments.

6.30 The label 'rebate income' is used, even though the benefits to which it applies are more commonly known as 'offsets', because the ITAA 1936 refers to the benefits as 'rebates' so the references to 'rebate income' was preferred for consistency.

Income for Medicare levy surcharge purposes

6.31 The amendments also amend the ITAA 1997 to insert a new definition of 'income for surcharge purposes'. This definition will be used to determine an individual's liability to pay the Medicare levy surcharge. [Schedule 3, Part 1, item 7]

6.32 The new definition consolidates the current components of income assessed in determining an individual's Medicare levy surcharge liability and the new components which are to be assessed as a result of the Budget measures, so that there is less complexity in the law and reduced duplication.

Reportable superannuation contributions

6.33 Another definition to be inserted by Part 1 of Schedule 3 is 'reportable superannuation contributions'. This is the definition for the certain 'salary sacrificed' superannuation contributions that were announced as being for inclusion in income tests in the 2008-09 Budget.

6.34 'Reportable superannuation contributions' will be added to income for a range of programs across the tax and transfer systems. 'Reportable superannuation contributions' include the total of an individual's deductions under Subdivision 290-C of the ITAA 1997 and an individual's 'reportable employer superannuation contributions'.

6.35 The total personal contributions that are to be assessed are all contributions that are, or will be, deductible under Subdivision 290-C of the ITAA 1997. Under income test arrangements for income support payments paid under the SS Act 1991, these contributions are currently assessed as income.

Reportable employer superannuation contributions

6.36 A definition of RESC is inserted in Schedule 1 of the TAA 1953. The location for this provision is in the payment summary provisions which are relevant for RESC as, from 1 July 2009, employers will be required to report RESC on annual and part-year payment summaries. [Schedule 3, Part 1, item 11]

6.37 RESC are also defined in section 995-1 of the ITAA 1997 and subsection 6(1) of the ITAA 1936, which are the definitions sections for those Acts. The definition in section 995-1 of the ITAA 1997 cross-references the RESC definition in Schedule 1 of the TAA 1953. [Schedule 3, Part 1, items 4 and 8]

6.38 RESC are contributions to a superannuation fund or retirement savings account, made on behalf of an individual during an income year, by their employer or an associate of their employer. 'Employer' is defined in new subsection 16-182(3) of Schedule 1 to the TAA 1953 to have the expanded meaning of that term in section 12 of the Superannuation Guarantee (Administration) Act 1992 .

Associate of the employer

6.39 'Associate' is defined in section 318 of the ITAA 1936. In respect of an employer company, the definition would include the trustee of any trust of which the employer was a beneficiary, or of which their 'associate' were a beneficiary, and a subsidiary of the employer company.

6.40 One of the tests for whether contributions being made by a second entity, on behalf of an individual employed by the first entity, are RESC will be whether the first entity sufficiently influenced , or was sufficiently influenced by, the second entity (whether individually or in concert with another entity).

6.41 An entity is sufficiently influenced by a second entity, or other entities, if the entity is accustomed, under an obligation (whether formal or informal) or might reasonably be expected to act in accordance with directions, instructions or wishes of the second entity or other entities.

6.42 Relevant considerations in determining whether an entity is sufficiently influenced by a second entity will be the history of relations between the entities, including evidence of non-arms' length dealings.

6.43 Evidence that the directors or senior personnel of the different entities are the same, or associates, for the purposes of subsection 318(1) of the ITAA 1936 will be strong evidence that two entities are associates. It is also relevant if the directors of a second entity are former directors of the first entity.

Capacity to influence - size of the amount

6.44 The fact superannuation contributions have been made on behalf of an individual does not mean they are RESC. Only those contributions made on behalf of an individual in circumstances where the individual had some capacity, or might reasonably be expected to have some capacity, to influence the size of the contribution or the way in which the contribution was made are RESC.

6.45 There are two amounts of superannuation contribution made on behalf of an individual that may be RESC. The first is any amount made where the individual has, or has had, or might reasonably be expected to have or have had, capacity to influence the size of the amount. The other example of RESC is any amount that an individual has, or has had, or might reasonably be expected to have or have had made in such a way so that his or her assessable income is reduced.

6.46 A key example of the first category of RESC are amounts that an individual has elected to have contributed to superannuation as part of a 'salary sacrifice arrangement'. These are arrangements between an employer and their employee to have prescribed amounts, or a prescribed percentage, of their salary contributed to superannuation.

6.47 In these circumstances, the amount of contribution in excess of the amount required to be made under superannuation guarantee law would be RESC.

Example 6.1 Lisa is an employee of FJH Pty Ltd (FJH). FJH contributes 9 per cent of Lisa's total remuneration (including her reportable fringe benefits total) to superannuation under an industrial agreement that was negotiated between FJH and the union representative. Lisa was not involved in these negotiations and had no involvement in the preparation of the agreement, aside from voting on it. As such, Lisa would have no capacity to influence this amount of contribution. However, under the agreement, employees may elect to have an amount of salary paid to superannuation. This is in addition to the 9 per cent contribution required under the agreement. During the year, Lisa approached FJH to have $5,000 contributed to her superannuation fund as part of an effective 'salary sacrifice' agreement. This $5,000 contribution is RESC.

6.48 A further example where RESC would exist is where contributions above the amount required under superannuation guarantee law are made pursuant to the terms of a common law employment contract or as a result of some agreement between an employee and their employer for increased superannuation contributions to be made on behalf of an employee as part of a remuneration package.

Example 6.2 Wei is an employee of TKU Pty Ltd (TKU). During negotiations of Wei's common law employment contract, TKU offered Wei increased contributions to superannuation as part of a range of employment-related benefits. These contributions, which equate to $10,000 of Wei's total remuneration, were provided as part of a remuneration package that Wei was allowed to consider and discuss with TKU. TKU made it clear to Wei that he could negotiate the contents of the additional incentives and that other benefits may be provided. These dealings are evidence to suggest Wei might reasonably have been expected to have had capacity to influence the amount of contributions being made on his behalf. The $10,000 contribution is in addition to contributions being made by TKU under superannuation guarantee law. TKU would be expected to record the $10,000 superannuation contribution as RESC.

6.49 Importantly, the definition of RESC does not capture that part of a contribution made by an employer that meets the employer's requirements under federal, state or territory legislation. That is, an amount of contributions equating to what an employer would have been required to make on behalf of an employee under the Superannuation Guarantee (Administration) Act 1992 would never be RESC.

6.50 This is because, to the extent an employer contribution meets the employer's requirements under law, or some other obligation, the employee cannot have, have had, or reasonably be expected to have or have had, capacity to influence the size of the contribution.

Example 6.3 Owen is an employee of KZP Pty Ltd (KZP). KZP pays 9 per cent of Owen's ordinary time earnings to superannuation in accordance with the Superannuation Guarantee (Administration) Act 1992 . This amount is the minimum amount required to be contributed by KZP on Owen's behalf so Owen would not have, and could not reasonably be expected to have, capacity to influence this amount. Because Owen has not influenced further superannuation contributions to be made on his behalf by KZP or influenced any contributions to be made in such a way that his assessable income is reduced, Owen has no RESC for the income year.

6.51 It is not necessary for contributions to be compelled by law for them to fall outside the definition of RESC. To the extent that an employer makes contributions above those mandated by law for administrative or other considerations, over which the employee has no, and could not reasonably be expected to have, capacity to influence, then those contributions will not be RESC.

Example 6.4 Aparna is an employee of GKU Pty Ltd (GKU). Aparna's ordinary time earnings are $100,000 but Aparna has earned $1,000 in overtime during the income year. GKU's payroll system calculates superannuation contributions on Aparna's total income of $101,000. However, GKU is only compelled, under superannuation guarantee law, to make superannuation contributions on $100,000. GKU's payroll system does not allow for superannuation contributions to be made on an employee's ordinary time earnings alone. Because Aparna has not influenced further contributions to be made on her behalf or influenced contributions to be made in such a way that her assessable income is reduced, Aparna has no RESC for the income year.

6.52 There is also the circumstance where an employer makes superannuation contributions on behalf of an employee under the terms of an industrial agreement. Provided this agreement has been made at arms' length with the employee and that employee has no capacity to influence, and could not reasonably be expected to have capacity to influence, the terms of the agreement, then the amount would not be RESC. This includes if an employer is paying more than the amount required under the agreement for administrative reasons and the employee could not reasonably be expected to have capacity to influence the amount of contributions being made on their behalf.

Example 6.5 Costa is an employee of PQZ Pty Ltd (PQZ). Costa's employment conditions are governed by an industrial agreement that was negotiated between Costa's employer and the union representative. Costa was not involved in the negotiations and had no involvement in the preparation of the agreement, aside from voting on it. The terms of the agreement require PQZ to contribute 15 per cent of Costa's ordinary time earnings to superannuation. However, PQZ's payroll system pays 15 per cent of Costa's total remuneration (including overtime). PQZ's payroll system does not allow for superannuation contributions to be made on an employee's ordinary time earnings alone. Because Costa has not influenced further contributions to be made on his behalf or influenced contributions to be made in such a way that his assessable income is reduced, Costa has no RESC for the income year.

6.53 However, for a contribution to be excluded from the RESC definition when made pursuant to the terms of an industrial agreement, it must be demonstrated that the employee had no capacity to influence the terms of the agreement and could not reasonably be expected to have capacity to influence those terms.

6.54 If an employee is related to their employer in the sense that they are an associate of the employer for the purposes of section 318 of the ITAA 1936, or an 'attributable stakeholder' of their employer company or trust for the purposes of the SS Act 1991, then there is a rebuttable presumption that the employee had capacity to influence the amount of contributions being made on their behalf to the extent that those contributions exceed the amount is required by law.

6.55 In these circumstances, the burden of proving that an employee had no capacity to influence falls on the employer. Relevant considerations in demonstrating whether an employee had capacity to influence will be the relationship of the employee to their employer, the involvement of the employee in the negotiations concerning the terms of any industrial agreement governing the employee's work conditions, and the size of the amount contributed on the employee's behalf relative to what amount would be required by superannuation guarantee law.

Example 6.6 Tula is an employee of MGK Pty Ltd (MGK). Tula's employment conditions are governed by an industrial agreement that was negotiated between Tula and the other employees of MGK (Tula's husband, Tony and their adult children, Michael and Rena). There was no external involvement in the negotiations of the agreement and it was not made at arms' length. The agreement requires MGK to contribute an amount equating to 15 per cent of employee total remuneration (including overtime) to superannuation. In Tula's case, her total remuneration is $66,000 per year but ordinary time earnings is only $60,000 per year. Tula's annual contribution from MGK is $5,940. However, under superannuation guarantee law, MGK is only compelled to pay $5,400 on behalf of Tula, being 9 per cent multiplied by $60,000. Because the contributions made on behalf of Tula and her fellow employees are required under the terms of an agreement that was not negotiated at arms' length, and which Tula had capacity to influence, then MGK must report the difference between the amount compelled by law and the amount paid under the industrial agreement as RESC. That amount is the difference between $5,940 and $5,400 (being $540).

6.56 However, an employer must only report an amount contributed in excess of that required by law as RESC to the extent that the employee had capacity to influence that amount. That is, if an employee would not have capacity to influence an amount above that compelled by law because it is the minimum amount that may be contributed under the employer's payroll system, and the employee does not have, has not had, and could not reasonably be regarded as having capacity to influence that minimum amount, then the employer must only report the contribution to the extent that the employee had capacity to influence its size or the way the contribution was made.

Capacity to influence - form of contribution

6.57 The other category of contributions that fall within the RESC definition are contributions that an 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 the individual's assessable income is reduced.

6.58 For some funds, particularly defined benefit funds, members are required to make contributions from their assessable income (known as 'member contributions'). These contributions are typically a certain percentage although members may elect the relevant percentage of contribution they would like to make.

6.59 New subsection 16-182(2) of Schedule 1 to the TAA 1953 provides that all contributions made from an individual's assessable income for the income year are excluded from the RESC definition. As a result, notwithstanding that they may have capacity to influence the amount of contributions being made, employees that vary their member contribution rate will not have any increased superannuation contribution assessed as income.

6.60 However, if an employee has capacity to 'salary sacrifice' a member contribution under the rules of a defined benefit scheme then the amount of any contribution they have influenced to be paid, or might reasonably be expected to have influenced to be paid, in such a way that their assessable income is reduced, will be RESC.

Example 6.7 Rhonda's employer makes superannuation contributions on Rhonda's behalf to a defined benefit fund. The employer contributions are applied to a pool to fund the liability of the entire fund. In addition, the rules of the fund require Rhonda to make a member contribution equal to 7 per cent of ordinary time earnings. Ordinarily, this member contribution would be made from Rhonda's assessable income. However, the rules of the defined benefit fund were recently amended so that individuals may elect to contribute their member contribution from pre-tax salary or wages. Rhonda exercises this option and the 'grossed-up' amount of her member contribution is deducted from her pre-tax salary or wages so that Rhonda makes the same net contribution to her employer's defined benefit fund as she would have made if the member contribution were made from assessable income. The total 'grossed-up' amount of the contribution is RESC because it represents the amount that Rhonda has elected to have made from pre-tax salary with the effect that her assessable income is reduced.

Financial investment

6.61 Part 1 of Schedule 3 inserts a new definition of 'financial investment' into section 995-1 of the ITAA 1997. This definition will be relevant for the purposes of the 'total net investment loss' definition. [Schedule 3, Part 1, item 6]

6.62 The new 'financial investment' definition includes shares in a company (whether those shares are in an Australian company or foreign company), and interests in a managed investment scheme for the purposes of the Corporations Act 2001 . This means that the requirement for the managed investment scheme to have more than 20 members, which is an element of the 'managed investment scheme' definition in the ITAA 1997, does not apply.

6.63 Paragraph (e) of the 'financial investment' definition also captures investments of a 'like nature' to shares and managed investment schemes. Relevant considerations in determining whether an investment is of a 'like' nature to the other investments are whether the investment is traded in a manner similar to the other investments and the similarities between the type of investors in that investment, and other investments in the 'financial investment' definition.

6.64 Given the relevance of the 'financial investment' definition to the concept of an individual's 'total net investment loss', it will also be relevant if the particular investment involved is the subject of an investment loan arrangement. It is intended that the 'financial investment' definition capture as many investments subject to investment loan, or margin loan arrangements as is appropriate.

Total net investment loss

6.65 Part 1 of Schedule 3 also inserts a definition of 'total net investment loss' into the ITAA 1997, which is referenced in a new definition of the concept in the ITAA 1936. [Schedule 3, Part 1, items 5 and 10]

6.66 The 'total net investment loss' definition rationalises the various definitions of net rental property loss that are currently in applicable legislation and recognises them in one definition. This ensures the definition of net rental property losses added to income for means-tested assistance programs is consistent across tax and transfer legislation.

6.67 The definition also captures net losses from 'financial investment' with a definition of 'financial investment' to be inserted in section 995-1 of the ITAA 1997.

6.68 An individual will have a 'total net investment loss' where their deductions for the relevant income year from financial investments and rental property exceed the individual's gross income from those activities for the year. Deductions in respect of a financial investment may be claimed for expenses such as the costs of borrowing to invest in the financial investment or management fees charged on the investment.

Application and transitional provisions

6.69 These amendments will commence the day after Royal Assent.

6.70 The amendments apply in relation to income years starting on or after 1 July 2009.


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