House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Treasurer, the Hon J. B. Hockey MP)

Chapter 1 - Fairer taxation of excess non-concessional contributions

Outline of chapter

1.1 The Tax and Superannuation Laws Amendment (2014 Measures No. 7) Bill 2014 (Bill) amends the Income Tax Assessment Act 1997 (ITAA 1997) and the Taxation Administration Act 1953 (TAA 1953) to make the taxation treatment of individuals with excess non-concessional contributions fairer.

1.2 The amendments allow a choice for individuals to release from superannuation an amount equal to their superannuation contributions in excess of the non-concessional contributions cap (cap) plus 85 per cent of an associated earnings amount, with the full earnings amount included in the individual's assessable income and taxed at the individual's marginal tax rate. The individual will be entitled to a non-refundable tax-offset equal to 15 per cent of the associated earnings amount.

1.3 All references to legislative provisions in this chapter are references to the ITAA 1997 unless otherwise stated.

Context of amendments

1.4 Non-concessional contributions are, broadly, contributions made to a complying superannuation plan that are not included in the assessable income of the complying superannuation provider. Generally, these contributions are made out of after-tax income.

1.5 Earnings from investing non-concessional contributions receive concessional tax treatment (a rate of up to 15 per cent tax) in the complying superannuation plan. The treatment is viewed as concessional as most taxpayers are subject to personal marginal tax rates greater than 15 per cent on their assessable income.

1.6 Under the existing regime, an individual is liable for excess non-concessional contributions tax on non-concessional contributions that exceed the individual's non-concessional contributions cap. It is imposed at the top marginal tax rate to provide a strong deterrent for exceeding the cap. The annual cap for non-concessional contributions for the 2014-15 financial year is $180,000. For the 2013-14 and earlier financial years the cap was $150,000 per year. There is a rule which allows individuals under the age of 65 to 'bring forward' their cap for the next two years.

1.7 The excess non-concessional contributions tax limits the superannuation contributions that can be made in a financial year that receive concessional tax treatment.

1.8 The Commissioner of Taxation (Commissioner) must make an assessment of an individual's excess non-concessional contributions tax for a financial year, and give the individual a notice of assessment.

1.9 As soon as practicable after making the assessment, the Commissioner must give the person a release authority in respect of their excess non-concessional contributions tax liability, which they must give to a superannuation provider. A release authority requires the provider to pay amounts from an individual's superannuation interest. Released amounts are generally paid to the Commissioner in satisfaction of the individual's excess non-concessional contributions tax liability.

1.10 The Commissioner has discretion to disregard non-concessional contributions or allocate them to another financial year for the purposes of excess non-concessional contributions tax. Excess non-concessional contributions tax is not imposed on contributions that are disregarded. The discretion can only be exercised in special circumstances and consistent with the object of the excess non-concessional contributions tax regime.

1.11 Excess non-concessional contributions that do not have to be released to pay the tax remain in the individual's superannuation interest, and the earnings on investments made with those contributions continue to be taxed at concessional rates (up to 15 per cent) as assessable income of the superannuation provider.

1.12 The existing treatment of excess non-concessional contributions may be regarded as punitive as the tax is applied to the excess contribution rather than the tax benefit received on the excess contribution, and the tax is applied at the top marginal tax rate, regardless of the individual's marginal tax rate. The same treatment applies to both intentional and inadvertent breaches of the cap. This treatment can also be seen as double-taxation, because the contributions have generally been made out of the after-tax income of the contributor.

1.13 In the 2014-15 Budget, the Government announced that it would allow individuals the option of withdrawing superannuation contributions in excess of the non-concessional contribution cap made from 1 July 2013 and any associated earnings, with these earnings to be taxed at the individual's marginal tax rate.

1.14 This measure delivers on the Government's election commitment to develop an appropriate process that addresses inadvertent breaches of contribution caps where the error would result in a disproportionate penalty.

1.15 Excess concessional contributions made since 1 July 2013 have been taxable as assessable income of the individual at the individual's marginal tax rate. Concessional contributions are, broadly, contributions made to complying superannuation plans that are included in the assessable income of the superannuation provider. An excess concessional contributions charge is imposed to ensure that individuals who have excess concessional contributions do not receive an advantage compared to individuals who have not exceeded their concessional contributions cap. In addition, individuals have the option of withdrawing 85 per cent of their excess concessional contributions from their superannuation interest.

Summary of new law

1.16 The Bill provides that an individual who has non-concessional contributions in excess of their cap in the 2013-14 or later financial years can elect to release an amount equal to those excess contributions plus 85 per cent of an associated earnings amount for those contributions from their superannuation. The full associated earnings amount will be included in the individual's assessable income in the year the excess contribution arose and will be taxed at the individual's marginal tax rate. The individual will be entitled to a non-refundable tax-offset equal to 15 per cent of the associated earnings amount that is included in their assessable income.

1.17 Excess non-concessional contributions tax will not be imposed on excess contributions to the extent that they are released from superannuation, or where the value of an individual's remaining superannuation interests is nil. Excess non-concessional contributions tax will be imposed on excess non-concessional contributions that remain in a superannuation plan.

Comparison of key features of new law and current law

Detailed explanation of new law

1.18 The Bill amends the excess non-concessional contributions tax regime for the 2013-14 and later financial years so that an individual whose non-concessional contributions for a financial year exceed their non-concessional contributions cap can choose to have an amount equal to those excess contributions plus 85 per cent of an associated earnings amount released from their superannuation in accordance with a release authority issued by the Commissioner.

1.19 Excess non-concessional contributions tax will not be imposed on excess contributions to the extent that an amount of those excess contributions is released from a superannuation interest in accordance with a release authority issued by the Commissioner or where the Commissioner directs that the value of an individual's remaining superannuation interests is nil. This direction prevents any amounts no longer in superannuation from being treated as excess non-concessional contributions.

1.20 Excess non-concessional contributions tax will be imposed on excess non-concessional contributions that are not released from a superannuation interest where the remaining value of all the individual's superannuation interests is not nil.

1.21 Individuals will have the full amount of the associated earnings for released contributions included in their assessable income for the income year corresponding to the financial year of the excess contributions. If the contributions that exceed the cap are not released because the value of the individual's superannuation interests is nil, the individual will still have the full amount of the associated earnings for the excess contributions included in their assessable income. Individuals will be entitled to a non-refundable tax-offset equal to 15 per cent of the amount included in their assessable income.

1.22 There is no change to the amounts that are non-concessional contributions or to the way that an individual's non-concessional contributions cap is worked out. For example, the two year bring forward rule still applies for individuals aged under 65 years. The Commissioner also still has discretion to disregard non-concessional contributions or reallocate them to another financial year in special circumstances and where doing so is consistent with the object of the excess non-concessional contributions tax regime.

Excess non-concessional contributions determination and election

1.23 The Commissioner must make a written determination for individuals who have non-concessional contributions in excess of their cap for the financial year. The determination states the amount of the excess contributions, the amount of the associated earnings for those contributions, and the total release amount. The total release amount is the amount of the excess contributions plus 85 per cent of the associated earnings amount. The total release amount is the amount that may be released from the individual's superannuation interests. A notice of a determination is given to the individual. The Commissioner may amend the determination. [ Schedule 1, item 44, section 97-25 of Schedule 1 to the TAA 1953]

1.24 Individuals who are notified of a determination can elect:

•

to release the total release amount stated in the determination, that is, the amount of the excess contributions plus 85 per cent of the associated earnings amount, from superannuation;

•

not to release any amount from superannuation because the value of all their superannuation interests is nil; or

•

not to release any amount from superannuation for another reason.

[Schedule 1, item 26, subsection 96-7(1) of Schedule 1 to the TAA 1953]

1.25 The election notice must be provided to the Commissioner in the approved form. [Schedule 1, item 26, subsection 96-7(5) of Schedule 1 to the TAA 1953]

1.26 If an individual elects to release the total amount, then the superannuation provider must release both the excess contribution and associated earnings amounts to the maximum extent possible. Only 85 per cent of the associated earnings amount must be released, as the superannuation provider may already have included the earnings on investments made with the excess contributions in the provider's assessable income and been taxed on those earnings (at a rate of up to 15 per cent). [Schedule 1, item 32, subsection 96-20(1A) of Schedule 1 to the TAA 1953]

1.27 Individuals cannot elect to release only a part of the total release amount stated in the determination. Individuals whose total superannuation interests are valued at less than the total release amount stated in the determination must still elect to release the total release amount to avoid excess non-concessional contributions tax.

1.28 The election, once made, is irrevocable for the total release amount stated in the determination. The election must be made by an individual in the approved form within 60 days of the date of issue of the determination or a further period allowed by the Commissioner. The Commissioner must be notified of the election. [Schedule 1, item 26, subsections 96-7(5) and (8) of Schedule 1 to the TAA 1953]

1.29 An election to release the total release amount stated in the determination must specify one or more superannuation providers that hold an interest for the individual from which the total amount is to be released. Where more than one provider is specified the amount to be released from each provider must also be identified. [Schedule 1, item 26, subsection 96-7(4) of Schedule 1 to the TAA 1953]

1.30 An individual may elect not to release an amount from superannuation because the value of all of their superannuation interests is nil. This may occur, for example, if the individual has met a condition of release and has received all of their superannuation as a superannuation lump sum benefit before the Commissioner issues the excess non-concessional contributions determination. If the individual does in fact have money in superannuation but still makes this election, the election is invalid and taken not to have been made. [Schedule 1, item 26, paragraph 96-7(1)(b) of Schedule 1 to the TAA 1953]

1.31 An individual who has commenced a superannuation pension or income stream and continues to have an interest in such a pension or income stream is not taken to have superannuation interests with a value of nil. This is regardless of whether the pension or income stream can be commuted in order to pay a lump sum. This is also regardless of whether such a commutation (or partial commutation) in order to release an amount in accordance with a release authority issued in relation to an excess non-concessional contributions determination for this measure proves problematic or otherwise undesirable for the individual or the superannuation provider. An individual who has only a defined benefit interest is also taken to have a superannuation interest with a value greater than nil, regardless of whether or not the superannuation provider can release an amount from the interest in accordance with a release authority.

1.32 Regulations will be made to facilitate the release of money from superannuation interests.

1.33 An individual who receives a determination can elect not to release for another reason. This election will be irrevocable in relation to the total release amount stated in the determination. In these circumstances the individual's amount of excess non-concessional contributions is the amount by which their non-concessional contributions for the financial year exceed their cap. The Commissioner will issue an assessment to the individual for excess non-concessional contributions tax in this case. [Schedule 1, item 26, paragraph 96-7(1)(c) of Schedule 1 to the TAA 1953, item 8, section 292-85 of the ITAA 1997]

1.34 If no election is made, then no amount can be released from superannuation. The individual's amount of excess non-concessional contributions is the amount by which their non-concessional contributions for the financial year exceed their cap. The Commissioner will issue the individual with an excess non-concessional contributions tax assessment. [Schedule 1, item 8, section 292-85 of the ITAA 1997]

1.35 If a valid election to release the total release amount is made and the Commissioner gives notice to the individual that the superannuation provider did not release the amount specified, the individual will be able to make a further election to release the unreleased amount from another superannuation interest. This further election must be made within 60 days of the notice being issued or a further period allowed by the Commissioner. [Schedule 1, item 26, subsections 96-7(6) and (7) of Schedule 1 to the TAA 1953]

1.36 Excess non-concessional contributions tax is not imposed where the amount released is equal to the amount of excess contributions. However, excess non-concessional contributions tax will generally be imposed where the full amount is not released from superannuation (unless the value of all of the individual's superannuation interests is nil). [Schedule 1, item 8, section 292-85 of the ITAA 1997]

Associated earnings and offset

1.37 Individuals will have benefited from accruing earnings while the excess contributions remain invested in superannuation. Hence, an associated earnings amount calculated to approximate the amount earned from the excess contributions while they were held in superannuation is included in the individual's assessable income and hence specified in the excess non-concessional contributions determination. [Schedule 1, item 44, paragraph 97-25(1)(b) of Schedule 1 to the TAA 1953]

1.38 Elections to release are for the total of the excess non-concessional contribution amount and 85 per cent of this associated earnings amount. This recognises that earnings within superannuation may already be taxed at a rate of up to 15 per cent. [Schedule 1, item 26, subsection 96-7(1) and item 44, subsection 97-25(1) of Schedule 1 to the TAA 1953]

1.39 Where the amount of the excess contributions is released from superannuation or the Commissioner determines that the value of the individual's superannuation interests is nil, the associated earnings amount is included in the individual's assessable income. This removes a taxation benefit that would be obtained by making contributions in excess of the cap despite having them released under this regime or otherwise being removed from superannuation. [Schedule 1, item 7, section 292-20 and subsection 292-25(1) of the ITAA 1997]

1.40 The Commissioner will include 100 per cent of the associated earnings amount in the individual's assessable income in the year corresponding to the financial year the individual had non-concessional contributions in excess of their cap. The earnings amount is subject to tax at the individual's marginal tax rate. However, the individual is entitled to a tax-offset equal to 15 per cent of the associated earnings amount included in their assessable income to account for the tax liability of the superannuation provider on the earnings. This offset is not refundable. [Schedule 1, item 7, sections 292-20, 292-25 and 292-30 of the ITAA 1997]

1.41 There may be circumstances where an individual elects to release the total release amount from superannuation but only part of the total release amount can be released and the value of the individual's superannuation interests is not nil. This may occur, for example, if the individual's only remaining superannuation interest is a defined benefit interest. In this case the amount of associated earnings included in the individual's assessable income will be calculated based on the amount of the excess contributions that are released. The individual will be entitled to a tax-offset equal to 15 per cent of the amount of associated earnings included in their assessable income. Excess non-concessional contributions tax will apply to the amount of the excess that cannot be released. [Schedule 1, item 7, sections 292-20, 292-25, 292-30 and 292-85 of the ITAA 1997]

1.42 The associated earnings amount is calculated using an average of the General Interest Charge (GIC) rate for each of the quarters of the financial year in which the excess contributions were made and compounds on a daily basis. [Schedule 1, item 44, subsection 97-30(1) of Schedule 1 to the TAA 1953]

1.43 Section 8AAD of the TAA 1953 specifies how GIC is calculated. The TAA 1953 sets the GIC rate as the 90 day bank bill rate plus a 7 per cent uplift factor. For the 2013-14 financial year the average GIC rate for the four quarters of the financial year is 9.66 per cent and the daily rate for the purposes of calculating the associated earnings amount is therefore 0.02646575 per cent.

1.44 An approximation is used for the calculation of this associated earnings amount to avoid the complexity that would be imposed on individuals and superannuation providers if calculations of actual earnings amounts on excess contributions for the actual period those contributions were in superannuation were required for this measure. Hence, the associated earnings calculated may be lower or higher than the actual earnings from the investments made with excess non-concessional contributions by the superannuation provider.

1.45 As GIC is on average higher than average superannuation fund returns, it incorporates a small but appropriate disincentive for individuals to exceed their non-concessional contribution caps.

1.46 However, the Treasurer will be able to specify an alternative proxy rate that is lower than the default rate (or indeed a zero rate) for any specified contributions year. For example, this would allow the Treasurer the option of setting a lower rate, possibly zero, where superannuation funds on average have made significant losses, such as occurred during the global financial crisis. [Schedule 1, item 44, subsection 97-30(2) of Schedule 1 to the TAA 1953]

1.47 The period the associated earnings amount is calculated for commences on 1 July of the financial year in which the excess contributions occurred (contributions year) and ends on the day that the Commissioner makes the first determination of excess non-concessional contributions for the relevant contributions year. This is similar to the period used for calculating the excess concessional contributions charge for excess concessional contributions. [Schedule 1, item 44, subsection 97-30(1) of Schedule 1 to the TAA 1953]

Example 1.1: Associated earnings

Belinda's non-concessional contributions for the 2014-15 financial year exceed her non-concessional contributions cap by $100,000. The Commissioner issues Belinda an excess non-concessional contributions determination on 1 November 2015. The amount of associated earnings stated on the determination is calculated as follows:

0.02646575% * ($100,000 plus the sum of the earlier daily proxy amounts) for the 489 day period from 1 July 2014 until 1 November 2015.

For the purposes of this example the proxy rate for the 2013-14 financial year has been used as the rate for the 2014-15 financial year is not yet available.

The result of this formula is that the associated earnings equal $13,814.

The total release amount stated in the determination for Belinda is $111,741, being the excess amount of $100,000 plus 85 per cent of the $13,814 associated earnings. If Belinda elects to release the total release amount, her superannuation provider would pay her $111,741 in response to the release authority issued by the Commissioner.

The Commissioner will amend Belinda's 2014-15 income tax assessment to include $13,814 as extra assessable income which will be taxed at her marginal tax rate and she will be entitled to a non-refundable tax offset of $2,073. If Belinda's marginal tax rate for this income was 37 per cent and she was liable for the 2 per cent Medicare levy then she would pay overall $3,314 in extra income tax ($5,387 in tax on the earnings less the $2,073 tax offset).

1.48 Where the Commissioner issues a direction that the value of all of an individual's interests remaining in superannuation is nil, then the full amount of associated earnings stated in the determination will still be included in the individual's assessable income, subject to taxation at the individual's marginal tax rate and they will receive a non-refundable tax offset equal to 15 per cent of that earnings amount. This will ensure that the integrity of the measure is maintained in relation to the treatment of associated earnings amounts. [Schedule 1, item 7, sections 292-25 and 292-30 of the ITAA 1997]

Release of amounts from superannuation

1.49 The Commissioner must issue one or more release authorities to either the superannuation providers that the individual specifies in their election or any other provider the Commissioner considers is holding a superannuation interest for the individual (or both). This will facilitate the release of as much of the total release amount stated in the determination as possible. Each release authority will state the amount to be released by the provider. [Schedule 1, item 29, section 96-12 of Schedule 1 to the TAA 1953]

1.50 The release authority requires the provider to pay amounts from the individual's superannuation interests (other than from a defined benefit interest). Making payments from a superannuation interest to the individual could otherwise breach regulations that prevent the early release of superannuation (conditions of release). Regulations will be made to ensure that the release authority for this measure satisfies a condition of release.

1.51 A superannuation provider that receives a release authority must pay to the individual the lesser of the amount stated in the authority and the sum of the maximum amounts that can be released from interests it holds for the individual within 21 days of the date of issue of the release authority or a further period allowed by the Commissioner. The Commissioner may allow a longer period of time where it is fair and reasonable to do so taking into account all relevant circumstances. [Schedule 1, item 32, subsection 96-20(1A) of Schedule 1 to the TAA 1953]

1.52 Where a superannuation provider has multiple interests for the individual and the value of those exceed the amount specified in the release authority, the provider can determine which interests to release money from. The provider may seek instructions in this regard from the individual.

1.53 Where the superannuation provider specified in the release authority only holds a defined benefit interest for the individual, the provider does not have to pay any amount in compliance with the release authority. [Schedule 1, item 33, subsection 96-20(3) of Schedule 1 to the TAA 1953]

1.54 Providers with defined benefit interests can voluntarily comply with the release authority to the extent that amounts can be released. [Schedule 1, item 36, subsections 96-25(2) and (3) of Schedule 1 to the TAA 1953]

1.55 However, if no amount is released and the individual has a superannuation interest or interests with value greater than nil, then no associated earnings amount will be included in individual's assessable income and excess non-concessional contributions tax will apply. [Schedule 1, item 7, sections 292-20, 292-25, and 292-30 and item 8, section 292-85 of the ITAA 1997]

1.56 The provider must notify the Commissioner of the amount released and any amounts unable to be released or that the provider does not need to comply with the release authority, because, for example, the superannuation interest is a defined benefit interest. The notification must be made in the approved form and within 21 days of the date of issue of the release authority or a further period allowed by the Commissioner. [Schedule 1, items 38, 39 and 40, section 96-35 of Schedule 1 to the TAA 1953]

1.57 The provider must also notify the individual of an amount released within 21 days of the date of issue of the release authority or such further period as the Commissioner allows. A penalty applies for failing to comply with this requirement. The provider is not required to give information to the individual about any unsuccessful release. [Schedule 1, item 41, section 96-42 of Schedule 1 to the TAA 1953 and item 46, subsection 286-75(2) of Schedule 1 to the TAA 1953]

1.58 The Commissioner will notify the individual if the provider did not release the full amount stated in the release authority. At the same time, the Commissioner will ask the individual to make a further election in respect of the unreleased amount. The individual may nominate another superannuation provider that holds an interest for them to which a release authority may be issued for the unreleased amounts or elect not to release the unreleased amount as the value of their remaining superannuation interests is nil. The individual must notify the Commissioner within 60 days of the date the Commissioner issues the notice of unsuccessful release. [Schedule 1, item 41, section 96-40, item 26, subsections 96-7(6) and 96-7(7) of Schedule 1 the TAA 1953]

1.59 The proportioning rule (which requires superannuation benefits to be treated as made from particular components of a superannuation interest in proportion to the overall composition of the interest) does not apply to release amounts. This is consistent with payments made in accordance with other release authorities.

1.60 The amount paid to the individual by the superannuation provider in accordance with a release authority is a superannuation lump sum benefit of the individual, but the amount itself does not have income tax consequences for the individual as it is non-assessable non-exempt income. However an associated earnings amount is still included in the individual's assessable income. [Schedule 1, item 16, section 303-17 and item 7, sections 292-20 and 292-25 of the ITAA 1997]

Example 1.2: Full release

In the 2014-15 financial year Reginald makes non-concessional contributions that result in him exceeding his non-concessional contributions cap by $100,000. The Commissioner determines that the associated earnings amount is $19,000. The Commissioner gives him a notice of excess non-concessional contributions determination stating his excess contributions amount of $100,000, an associated earnings amount of $19,000 and a total release amount of $116,150 ($100,000 plus 85 per cent of the associated earnings amount of $19,000).

Reginald makes a valid election to release the total release amount of $116,150 from his superannuation interests by notifying the Commissioner and specifying a superannuation provider that holds an interest for him.

The Commissioner issues Reginald's superannuation provider with a release authority requiring the provider to make a payment to Reginald of $116,150 from his superannuation interest.

That amount is paid to Reginald by his superannuation provider in compliance with the release authority. The amount is non-assessable non-exempt income in his hands.

The superannuation provider notifies the Commissioner and Reginald of the payment of $116,150 made in accordance with the release authority.

As a result of the release of the amount from his superannuation interest, Reginald no longer has excess non-concessional contributions, and so is not liable for excess non-concessional contributions tax. The associated earnings amount of $19,000 is included in his assessable income for the 2014-15 income year and taxed at his marginal tax rate. Reginald is also entitled to a non-refundable tax-offset of $2,850, being 15 per cent of $19,000.

Example 1.3: Partial release

In the 2014-15 financial year Archibald makes non-concessional contributions that result in him exceeding his non-concessional contributions cap by $100,000. The Commissioner determines that the associated earnings amount is $19,000. The Commissioner gives him a notice of excess non-concessional contributions determination stating his excess contributions amount of $100,000, an associated earnings amount of $19,000 and a total release amount of $116,150. The total release amount is the excess contributions amount of $100,000 plus $16,150 (85 per cent of the associated earnings amount of $19,000).

Archibald makes a valid election to release the total release amount of $116,150 by notifying the Commissioner and specifying a superannuation provider that holds interests for him.

The Commissioner issues a release authority to the specified superannuation provider which holds a defined benefit interest for Archibald as well as an accumulation interest. The maximum amount that can be released from the accumulation interest is $60,000. Archibald has no other superannuation interest with this or any other superannuation provider.

In compliance with the release authority the superannuation provider pays the $60,000 to Archibald. The provider does not have to release any amount from Archibald's defined benefit interest and does not do so. The provider notifies the Commissioner and Archibald of the amount released. The provider also notifies the Commissioner of the amount unable to be released and the reason the amount was unable to be released.

The Commissioner notifies Archibald that the full amount of the release authority issued has not been successfully released and asks Archibald to either:

•

nominate another superannuation provider for release of the unpaid amount of $56,150, being the amount of the release authority issued less the amount that was released; or

•

elect not to release the unpaid amount because the value of his superannuation interests is now nil.

Archibald cannot nominate another superannuation provider as he has no other superannuation interests. The value of his superannuation interests is not nil so Archibald cannot make that election. He notifies the Commissioner of this situation.

Archibald's amount of excess non-concessional contributions for the financial year is $40,000, being the excess contributions amount stated in the determination less the released amount. The Commissioner issues Archibald an assessment for excess non-concessional contribution tax on $40,000.

An associated earnings amount of $11,400 being the associated earnings amount for the $60,000 of excess contributions released, is included in Archibald's assessable income for the 2014-15 income year. He receives a non-refundable tax-offset of $1,170, being 15 per cent of the amount of associated earnings of $11,400 included in his assessable income. The amount of associated earnings included in Archibald's assessable income is calculated in the same way as the associated earnings amount stated in the determination, but uses the released amount instead of the amount of his excess contributions for the financial year. As a result, this amount is less than the $19,000 associated earnings amount originally calculated by the Commissioner.

Commissioner's direction if value of superannuation interests are nil

1.61 Individuals who make non-concessional contributions in excess of their cap for a financial year may have already been paid some or all their superannuation benefits by the time they receive a determination from the Commissioner.

1.62 Once those benefits are paid from the superannuation system, they no longer receive concessional tax treatment.

1.63 The Commissioner must make a direction if he is satisfied that the value of all the individuals remaining superannuation interests is nil following the release of any amount stated in an excess non-concessional contributions determination, or where the individual elects not to release any amount from superannuation because the value of their superannuation interests is nil. The direction will mean an individual will not have excess non-concessional contributions that will be subject to excess non-concessional contributions tax for the financial year to which the determination relates. [Schedule 1, item 15, section 292-467 and item 8, section 292-85 of the ITAA 1997]

1.64 Subsection 33(3) of the Acts Interpretation Act 1901 allows the Commissioner to revoke the direction. For example, the Commissioner may revoke the direction if he receives information after making the original direction from a superannuation provider that holds a superannuation interest for the individual.

1.65 Where this direction is made the full associated earnings amount for the excess non-concessional contributions calculated by the Commissioner is included in the individual's assessable income. This is done to reduce any tax benefit obtained by an individual exceeding the cap. The individual will be entitled to a non-refundable tax-offset equal to 15 per cent of the associated earnings amount included in their assessable income. [Schedule 1, item 7, subsections 292-20, 292-25 and 292-30 of the ITAA 1997]

1.66 This direction is separate and in addition to the Commissioner's existing discretion under section 292-465 to disregard an individual's non-concessional contributions or reallocate them to a different financial year in special circumstances, consistent with the object of excess non-concessional tax.

Example 1.4: Non-concessional contributions where value of superannuation interests are nil

In the 2014-15 financial year Regina makes non-concessional contributions that result in her exceeding her non-concessional contributions cap by $100,000. The Commissioner determines that the associated earnings amount is $19,000. The Commissioner gives her a notice of excess non-concessional contributions determination stating her excess contributions amount of $100,000, an associated earnings amount of $19,000 and a total release amount of $116,150 ($100,000 plus 85 per cent of the associated earnings amount of $19,000).

Before receiving the determination Regina was paid a superannuation lump sum benefit of her entire balance of her only superannuation interest.

Regina makes a valid election to not release any amount from superannuation as the value of her superannuation interests is nil.

The Commissioner is satisfied that the total value of all Regina's superannuation interests is nil, and notifies Regina that he has made a direction that the value of all of her superannuation interests is nil.

As a result of this Regina does not have an excess non-concessional contributions tax liability for the 2014-15 financial year.

The amount of associated earnings calculated by the Commissioner of $19,000 is included in Regina's assessable income for the 2014-15 income year and taxed at her marginal tax rate. She is entitled to a non-refundable tax-offset of $2,850, being equal to 15 per cent of the amount included in her assessable income.

Example 1.5: Non-concessional contributions where value of superannuation interests is nil after partial release

The Commissioner calculates that Paul's non-concessional contributions for the 2014-15 financial year exceed his non-concessional contributions cap by $100,000. The Commissioner calculates that the associated earnings amount is $19,000. At this time the Commissioner has no information that the value of Paul's superannuation interests is nil. The Commissioner gives Paul an excess non-concessional contributions determination stating his excess contributions amount of $100,000, an associated earnings amount of $19,000 and a total release amount of $116,150 ($100,000 plus 85 per cent of the associated earnings amount of $19,000).

At this time, Paul knows that the total value of all of his superannuation interests is less than the total release amount of $116,150. However he cannot make an election to not release the total release amount from superannuation because the value of his superannuation interests is nil. Paul elects to release the total release amount stated in the determination of $116,150 by notifying the Commissioner and specifying a superannuation provider that holds an interest for him.

The Commissioner issues a release authority to the specified superannuation provider which holds a superannuation interest for Paul. The total value of that superannuation interest is $60,000. Paul has no other superannuation interest with this or any other superannuation provider.

In compliance with the release authority the superannuation provider pays the $60,000 to Paul, the maximum amount that can be released by the provider. The provider notifies the Commissioner and Paul of the amount released. The provider also notifies the Commissioner of the amount unable to be released and the reason the amount was unable to be released.

The Commissioner notifies Paul that the full amount of the release authority has not been successfully released and asks Paul to either:

•

nominate another superannuation provider for release of the unpaid amount of $56,150, being the amount of the release authority issued less the amount that was released; or

•

elect not to release the unpaid amount because the value of all of his superannuation interests is now nil.

Paul notifies the Commissioner of his election not to release the unpaid amount because the value of his remaining superannuation interests is now nil. The Commissioner is satisfied that the value of Paul's remaining superannuation interests is nil and makes a direction that the value of all of Paul's superannuation interests is nil. The Commissioner notifies Paul of the direction. As a result, Paul has no excess non-concessional contributions for the financial year.

The effect of the direction made by the Commissioner that the value of Paul's superannuation interests is nil does not affect the non-concessional contributions of $60,000 that were already released in accordance with the release authority. The effect of both the amount released and the Commissioner's direction is that Paul does not have excess non-concessional contributions for the financial year. The associated earnings amount included in Paul's assessable income is the total associated earnings amount of $19,000 stated in the determination made by the Commissioner. Paul also receives a non-refundable tax offset of $2,850, being 15 per cent of the associated earnings amount included in his assessable income.

Review rights

1.67 An individual who is dissatisfied with: an excess non-concessional contributions determination made in relation to them; an income tax assessment to include an offset or to include associated earnings in assessable income (or both); a decision not to make a direction that section 292-467 applies; a decision to exercise the discretion to disregard an individual's non-concessional contributions (or a decision not to exercise the discretion) can object to the relevant decision in the manner set out in Part IVC of the TAA 1953. [Schedule 1, item 44, section 97-35 of Schedule 1 to the TAA 1953, item 15, subsection 292-467(4) of the ITAA 1997]

1.68 If an individual who makes one of the objections above on a particular ground and also makes, or could make, another one or more of the above objections on the same ground, the taxation decisions to which the objections are made are treated, for the purposes of Part IVC of the TAA 1953, as a single taxation decision. [Schedule 1, item 18, section 14ZVC of the TAA 1953]

1.69 This simplifies objection processes by allowing the individual to make a single objection to a number of taxation decisions they are dissatisfied with, where the grounds of objection are the same.

1.70 Individuals remain able to object to excess non-concessional contributions assessments and determinations to disregard or reallocate non-concessional contributions (or decisions not to make a determination).

Consequential amendments

1.71 A number of consequential amendments are made a result of the items in the Bill referred to above. [Schedule 1, items 1 to 6, 9 to 14, 17, 19, 21 to 25, 27, 28, 30, 31, 34, 35, 37, 42 to 45 and 48]

1.72 A paragraph reference is also corrected so that a person who fails to give a superannuation provider a release authority for the payment of excess non-concessional contributions tax is liable to an administrative penalty. [Schedule 1, item 47, section 288-90 of Schedule 1 to the TAA 1953]

Application and transitional provisions

1.73 The amendments made by the Bill apply in relation to non-concessional contributions for the 2013-14 and later financial years. [Schedule 1, item 49]

1.74 This measure was announced in the acting Assistant Treasurer's Media Release titled 'Superannuation excess contributions tax' of 13 May 2014. While these changes apply retrospectively, the Bill ensures that no taxpayer need face a disproportionate penalty for exceeding their excess non-concessional contributions after the date of announcement.

1.75 As taxpayers have the choice of whether to make an election and withdraw their excess contributions and associated earnings or continue to be subject to the existing excess non-concessional tax arrangements, taxpayers will not be adversely affected.

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Tax and Superannuation Laws Amendment (2014 Measures No. 7) Bill 2014 - Fairer taxation of excess non-concessional contributions

1.76 This Schedule is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

1.77 Currently, excess non-concessional contributions tax is imposed at the top marginal tax rate on non-concessional contributions in excess of an individual's cap. This results in individuals incurring a disproportionate penalty, especially as these contributions are made out of after-tax income and are generally made inadvertently.

1.78 Non-concessional contributions are, broadly, contributions made to a complying superannuation plan that are not included in the assessable income of the complying superannuation provider.

1.79 Excess non-concessional contributions tax will not be imposed on excess contributions to the extent that they are released from superannuation, or where the value of an individual's remaining superannuation interests is nil. Associated earnings on released amounts are included in the individual's assessable income and taxed at the individual's marginal tax rate. Individuals will also be entitled to a non-refundable tax offset equal to 15 per cent of the earnings that are included in the individual's assessable income.

1.80 As a result, individuals who exceed their non-concessional cap and withdraw the excess contributions and associated earnings or no longer have money left in superannuation will no longer face a disproportionate penalty.

1.81 Excess non-concessional contributions tax will be imposed on excess non-concessional contributions that remain in a superannuation plan.

Human rights implications

1.82 The Schedule does not engage any of the applicable rights or freedoms.

Conclusion

1.83 This Schedule is compatible with human rights as it does not raise any human rights issues.