House of Representatives

Superannuation (Objective) Bill 2016

Superannuation (Excess Transfer Balance Tax) Imposition Bill 2016

Superannuation (Excess Transfer Balance Tax) Imposition Act 2016

Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016

Explanatory Memorandum

(Circulated by the authority of the Treasurer, the Hon Scott Morrison MP and Minister for Revenue and Financial Services, the Hon Kelly O'Dwyer MP)

Chapter 4 Concessional superannuation contributions

Outline of chapter

4.1 Schedule 2 to the Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016 (the TLA Bill) reduces:

·
the annual concessional contributions cap to $25,000 (from $30,000 for those aged under 49 at the end of the previous financial year and $35,000 otherwise); and
·
the threshold at which high-income earners pay Division 293 tax on their concessionally taxed contributions to superannuation to $250,000 (from $300,000).

4.2 Schedule 2 also amends how concessional contributions are determined to ensure that contributions and amounts included in concessional contributions in respect of constitutionally protected funds and unfunded defined benefit superannuation schemes count towards an individual's concessional contributions cap.

4.3 All references in this Chapter are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise specified. All legislative amendments referred to in this Chapter are contained in the TLA Bill 2016.

Context of amendments

4.4 This measure forms part of the Government's Superannuation Reform Package announced in the 2016-17 Budget. It improves the fairness and sustainability of the superannuation system.

4.5 The current treatment of concessional superannuation contributions means high-income earners disproportionately benefit from the superannuation tax concessions. This is, in part, because they have the capacity to make greater superannuation contributions and also benefit more from these contributions being included in the income of the fund rather than in their assessable income. As high-income earners will generally save for their retirement, both within and outside the superannuation system, these concessions are poorly targeted.

4.6 Reducing the annual cap on concessional contributions will require high-income individuals to hold a larger portion of their savings outside the concessionally taxed superannuation environment. This reduces their ability to utilise the superannuation system as a tax advantaged savings vehicle.

4.7 Lowering the threshold at which the Division 293 tax applies ensures that the tax concession provided to those on high incomes is more closely aligned with the tax concession provided to low and middle-income earners.

Reducing the cap on concessional contributions

4.8 Prior to these amendments, the annual cap on concessional contributions to superannuation for a financial year was $30,000 for those aged under 49 at the end of the previous financial year and $35,000 otherwise (section 291-20 of the ITAA 1997 and section 291-20 of the Income Tax (Transitional Provisions) Act 1997 (IT(TP)A 1997)).

4.9 Further, any increases in the general concessional contributions cap were rounded down to the nearest $5,000 increment, with no increase applying if the increase would be less than $5,000. The $35,000 transitional cap was not subject to indexation, with the intention that eventually it would be overtaken by the general cap and at that time the same cap would apply regardless of age.

Lowering the threshold for Division 293 tax

4.10 Prior to these amendments, if the sum of an individual's:

·
income for surcharge purposes less reportable superannuation contributions for an income year (broadly their taxable income disregarding investment losses, plus any reportable fringe benefits); and
·
low tax contributions for the corresponding financial year (generally, their concessional contributions less their excess concessional contributions);

exceeded $300,000, the individual was required to pay Division 293 tax.

4.11 This income test provides a broader definition of income than some other income tests but is considered to more accurately reflect whether an individual is a high-income earner.

4.12 Division 293 tax was payable by the individual at a rate of 15 per cent on the lesser of:

·
the amount by which that sum exceeded $300,000; or
·
the individual's low tax contributions (see section 293-25).

4.13 This means Division 293 tax applied to the whole amount of an individual's low tax contributions if an individual's income (as modified above) exceeded $300,000. Otherwise the additional tax was only imposed on the portion of the contributions that took the sum of the individual's relevant contributions and income over $300,000.

Concessional contributions and constitutionally protected funds

4.14 Prior to these amendments, contributions to accumulation superannuation interests could not be concessional contributions if made to a constitutionally protected fund because they were explicitly excluded from counting as concessional contributions by subparagraph 291-25(2)(c)(iii). Contributions made to constitutionally protected funds also did not meet the requirements to be a concessional contribution in paragraph 291-25(2)(b) because constitutionally protected funds do not have assessable income.

4.15 Further, notional taxed contributions to defined benefit superannuation interests could not be concessional contributions if they related to a constitutionally protected fund. This is because Subdivision 291-C (which contains the rules counting certain amounts that relate to defined benefit interests as concessional contributions) did not apply for constitutionally protected funds (refer subsection 291-160(2)).

Concessional contributions and defined benefit interests

4.16 Subdivision 291-C contains rules that apply to determine concessional contributions for an individual with one or more superannuation interests that are defined benefit interests (broadly, interests where an individual's entitlement to a benefit is defined by reference to their remuneration or a fixed amount - see section 291-175). This is because contributions to defined benefit schemes may not be made specifically in respect of, or directly allocated to individual members. Rather, they are paid into a fund on an aggregate basis from which benefits are paid to members based on their final salary, length of service or other specified factors (rather than just an accumulation of contributions and earnings). Additionally, some defined benefit schemes are wholly or partially unfunded, meaning that the payment of the benefit to the individual is not sourced from contributions to the scheme.

4.17 If an individual has a defined benefit interest for an income year, their concessional contributions include the amount of their notional taxed contributions for a financial year in respect of that interest but no other contributions relating to that interest.

4.18 An individual's notional taxed contributions are determined using the approach set out in Subdivision 291-C of the ITAA 1997 and Subdivision 292-D and Schedule 1A to the Income Tax Assessment Regulations 1997. They are broadly equivalent to the contributions that would have been required in that year to fund the individual's expected final benefits. Notional taxed contributions are only calculated for defined benefit schemes to the extent that the schemes hold assets and are subject to tax. As a result, an individual's notional taxed contributions in respect of a defined benefit interest in a defined benefit scheme that is unfunded or a constitutionally protected fund are generally nil. Similarly, if a scheme is only partially funded, an individual's notional taxed contributions in respect of the scheme do not reflect the accrued benefit.

4.19 Transitional rules apply in determining an individual's notional taxed contributions for certain defined benefit interests that an individual held on 5 September 2006 or 12 May 2009 respectively. If an individual's notional taxed contributions for such an interest for a financial year would exceed the concessional contributions cap for that year, they will instead be treated as being equal to the cap (see Subdivision 291-C of the (IT(TP)A 1997)).

4.20 For Division 293 tax, an individual's low tax contributions do not include their notional taxed contributions, but instead include their defined benefit contributions. An individual's defined benefit contributions are defined, for most purposes, in Subdivision 293-DA of and Schedule 1AA to the Income Tax Assessment Regulations 1997.

4.21 The amount of an individual's defined benefit contributions is generally the same as the amount of their notional taxed contributions for funded defined benefit interests. However, the calculation of defined benefit contributions differs for unfunded defined benefit interests. The method used for calculating defined benefit contributions for these types of interests does not rely upon the scheme holding assets and paying tax. As a result, the amount of an individual's defined benefit contributions for such interests generally better reflects the benefits that accrue to the individual.

Summary of new law

4.22 The measure reduces:

·
the annual concessional contributions cap to $25,000 (from $30,000 for those aged under 49 at the end of the previous financial year and $35,000 otherwise); and
·
the threshold at which high-income earners pay Division 293 tax on their concessionally taxed contributions (otherwise referred to as low tax contributions in this Chapter) to superannuation to $250,000 (from $300,000).

4.23 The measure also amends how concessional contributions are determined to ensure contributions and certain other amounts relating to constitutionally protected funds and unfunded defined benefit schemes count towards an individual's concessional contributions cap in the same way as they would for other superannuation funds. Previously, these amounts did not count against a member's concessional contributions cap. This meant that members of these schemes were able to make additional concessional contribution to other superannuation funds. Counting these amounts against a member's cap means that additional contributions are only possible to the extent the member has remaining cap space. However, concessional contributions in respect of constitutionally protected funds and unfunded defined benefit schemes by themselves cannot result in a member's concessional contributions cap being exceeded. This is because these interests are subject to taxation in the benefits phase at marginal tax rates less an offset, unlike taxed accumulation scheme interests. However, members will have excess concessional contributions if they have other concessional contributions and as a result their total concessional contributions exceed the cap.

Comparison of key features of new law and current law

New law Current law
Annual concessional contributions cap
The cap on concessional contributions for a financial year is $25,000 for all individuals.

The cap is indexed and increases in increments of $2,500 in line with average weekly ordinary time earnings (AWOTE).

The cap on concessional contributions for a financial year is:

·
$30,000 for individuals aged under 49 years at the end of the last financial year; and
·
$35,000 for individuals aged 49 and over at that time.

The $30,000 cap is indexed and increases in increments of $5,000 in line with AWOTE.

Division 293 tax threshold
Division 293 tax applies to an individual for an income year if the total of the individual's combined income for surcharge purposes and concessionally taxed contributions exceeds $250,000. Division 293 tax applies to an individual for an income year if the total of the individual's combined income for surcharge purposes and concessionally taxed contributions exceeds $300,000.
Concessional contributions - constitutionally protected funds and defined benefit schemes
Contributions and amounts in respect of constitutionally protected funds and unfunded defined benefit schemes count towards an individual's concessional contributions cap.

The amendments ensure concessional contributions included as a result of these amendments are not treated as excess concessional contributions and subject to tax.

However, counting such contributions towards an individual's concessional contributions cap limits their ability to make further concessional contributions. It may result in tax consequences for the individual in relation to their other concessional contributions.

Contributions to constitutionally protected funds do not count towards an individual's concessional contributions cap. Also no amount is included in concessional contributions in respect of a defined benefit interest in a constitutionally protected fund.

The rules for calculating a taxpayer's concessional contributions in respect of their defined benefit interests in unfunded defined benefit schemes result in the amount of these contributions being zero for the purpose of the concessional contribution cap.

Detailed explanation of new law

Annual concessional contributions cap

Cap amount and indexation

4.24 Schedule 2 to the TLA Bill reduces the concessional contributions cap for a financial year to $25,000 (from $30,000 for those individuals aged under 49 at the end of the previous financial year and $35,000 otherwise). This $25,000 concessional contributions cap applies regardless of an individual's age. [Schedule 2, items 1 and 9, paragraph 291-20(2)(a) of the ITAA 1997 and Subdivision 291-B of the IT(TP)A 1997]

4.25 The amount of the concessional superannuation contributions cap is set at $25,000 for the 2017-18 financial year. It is subject to annual indexation in later years (subject to rounding - see paragraph 4.26). Indexation applies to the cap for the financial year in accordance with the growth in the annual rate of full-time Average Weekly Ordinary Time Earnings (AWOTE). [Schedule 2, item 1, paragraph 291-20(2)(b) and Schedule 11, item 6, section 960-285]

4.26 Increases in the cap as a result of indexation are rounded down in increments. The amendments lower the increments at which the cap is increased as a result of indexation. Prior to the amendments, increases in the cap were rounded down to the nearest multiple of $5,000. Schedule 11 to the TLA Bill revises the indexation rules so that increases are instead rounded down to the nearest multiple of $2,500, resulting in more frequent increases. Accordingly, the cap increases only once indexation results in the threshold equalling or exceeding a multiple of $2,500. [Schedule 11, item 6, column 3 of item 2 in the table in section 960-285]

Example 4.1 : Concessional contributions cap During the 2017-18 income year, concessional contributions made by Oliver and his employer to Oliver's superannuation fund total $28,000. The concessional contributions cap is $25,000. Oliver's concessional contributions exceed this cap. Accordingly, Oliver has concessional contributions of $25,000 and excess concessional contributions of $3,000.The $3,000 is included in Oliver's assessable income and is taxed at his marginal tax rate. Consistent with the prior law, Oliver can elect to withdraw up to 85 per cent of the amount of these excess concessional contributions (the amount less the 15 per cent tax already paid by the fund), or retain the full amount in the superannuation system. He also receives a tax offset equal to 15 per cent of the amount of the excess concessional contribution, to compensate for the tax paid by his superannuation fund. Any excess concessional contribution amount retained in superannuation will be a non-concessional contribution and count towards Oliver's annual non-concessional contributions cap.

Division 293 tax on high-income earners

4.27 Schedule 2 to the TLA Bill reduces to $250,000 (from $300,000) the threshold at which high-income earners pay Division 293 tax on their concessionally taxed contributions. The threshold continues to be based on the total of an individual's income for surcharge purposes for an income year (within the meaning of the income tax law) and their low tax contributions for the corresponding financial year. The amendments do not change the method for calculating these amounts other than the change to the level of the threshold. [Schedule 2, item 18, subsection 293-20(1)]

Example 4.2 : Division 293 tax During the 2017-18 income year, the sum of Tegan's income for surcharge purposes and her low tax contributions is $295,000. Tegan is therefore required to pay an amount of tax under Division 293.Tegan exceeded the $250,000 threshold by $45,000 ($295,000 less $250,000). Tegan's low tax contributions for 2017-18 are $25,000. Therefore her taxable contributions are $25,000, being the lesser of these two amounts.The Division 293 tax is applied at a rate of 15 per cent to Tegan's taxable contributions of $25,000. Accordingly, Tegan is required to pay $3,750 in Division 293 tax for the 2017-18 income year.

Concessional contributions - constitutionally protected funds and defined benefit schemes

4.28 Schedule 2 to the TLA Bill better targets government support for retirement savings by amending the income tax law to count contributions and certain other amounts in respect of constitutionally protected funds and unfunded defined benefit schemes towards an individual's concessional contributions cap.

4.29 The amendments also ensure concessional contributions included as a result of these amendments are not treated as excess concessional contributions and subject to tax. However, counting such contributions towards an individual's concessional contributions cap limits their ability to make further concessional contributions. This may result in tax consequences for the individual in relation to their other concessional contributions.

Constitutionally protected funds - accumulation interest

4.30 Schedule 2 to the TLA Bill makes amendments to treat a contribution to a constitutionally protected fund as a concessional contribution within the meaning of the ITAA 1997. This treatment also applies for amounts covered under subsection 291-25(3) (certain amounts in a complying superannuation plan allocated by the superannuation provider) in respect of a constitutionally protected fund.

4.31 This is achieved by removing contributions to constitutionally protected funds from the category of contributions that are specifically treated as not being concessional contributions. Further to this, a contribution to a constitutionally protected fund is treated as forming part of assessable income solely for the purposes of determining if it is a concessional contribution (see paragraph 291-25(2)(b)). Such contributions would otherwise not be concessional contributions because constitutionally protected funds do not have assessable income. These amendments ensure that such contributions by themselves do not result in excess concessional contributions and therefore do not have these tax consequences. Commensurate treatment of untaxed schemes is obtained by imposing tax in the benefits phase at marginal tax rates less an offset. Benefits from taxed accumulation schemes, in contrast, are generally tax free. [Schedule 2, items 2 and 3, paragraphs 291-25(2)(c) and (d) and subsection 291-25(4)]

4.32 Prior to these amendments, a contribution (and amounts covered by subsection 291-25(3)) did not count towards the member's concessional contributions cap if it was made in respect of a constitutionally protected fund. This allowed members of these funds to receive or accrue any amount of employer contributions, other contributions and amounts to such funds without affecting their ability to have concessional contributions made to other superannuation interests.

4.33 These amendments remove this advantage by treating such contributions and amounts in respect of constitutionally protected funds as concessional contributions.

Rules for defined benefit interests (including defined benefit interests in constitutionally protected funds)

4.34 Schedule 2 to the TLA Bill amends the rules for calculating a member's concessional contributions for a financial year in respect of a defined benefit interest and extends these rules to defined benefit interests in constitutionally protected funds. The amendments ensure that the calculation of notional amounts representing contributions to unfunded defined benefit schemes and both funded and unfunded defined benefit constitutionally protected funds accurately reflects the value of a member's accrued benefits. The amendments ensure individuals with such superannuation interests are not unduly advantaged in saving for retirement.

4.35 The amendments provide that a taxpayer's concessional contributions for a financial year in respect of a defined benefit interest (including a defined benefit interest in a constitutionally protected fund) includes the amount by which the taxpayer's defined benefit contributions exceed their notional taxed contributions. This amount is intended to be a proxy for contributions that would have been needed to support unfunded defined benefits scheme interests accrued for that financial year. The amendments ensure employer contributions and notional contributions in respect of a defined benefit interest in a constitutionally protected fund are included as concessional contributions. A member's concessional contributions for a financial year will still include the amount of their notional taxed contributions in respect of their other defined benefit interests, as well as any amounts in respect of interests that are not defined benefit interests currently required to be included (see paragraphs 291-165(a) and (b)). [Schedule 2, items 4 to 7, paragraph 291-165(1)(c), subsection 291-160(2) and sections 291-160 and 291-165]

4.36 An individual's defined benefit contributions are defined, for most purposes, in Subdivision 293-DA and Schedule 1AA to the Income Tax Assessment Regulations 1997 (see paragraphs 4.20 to 4.21 above for more information). For the purposes of working out the individual's defined benefit contributions for a financial year, certain modifications to the meaning of defined benefit contributions must be disregarded. These modifications reduce these contributions to nil for most contributions to constitutionally protected funds and to interests established under the Judges' Pensions Act 1968 in subsections 293-150(3) and 293-195(2). These modifications must be disregarded as such amounts are not intended to be treated as nil for the purpose of the concessional contributions cap. [Schedule 2, item 7, subsection 291-165(2)]

Capping the value of newly included concessional contributions

4.37 The amendments (described in paragraphs 4.28 to 4.36 above) are designed to ensure that contributions and amounts in respect of constitutionally protected funds and unfunded defined benefit schemes count towards an individual's concessional contributions cap. This limits the ability of the individual to make further concessional contributions to other funds and ensures a consistent treatment with individuals that are not members of such funds.

4.38 The amendments are only intended to limit the ability of the individual to make other contributions (and are not intended to disadvantage individuals who have superannuation interests subject to the transitional rules described at paragraph 4.16 above).

4.39 The amendments achieve this by providing that the sum of the following amounts that are concessional contributions are treated as equal to an individual's concessional contributions cap for the financial year if they would otherwise exceed that cap for that year:

·
contributions for the individual for the financial year in respect of a constitutionally protected fund (see paragraphs 4.28 to 4.36 above);
·
their notional taxed contributions covered by the 2006 or 2009 transitional arrangements (see section 291-170 of the IT(TP)A 1997- refer to paragraph 4.19 above); and
·
the amount (if any) by which their defined benefit contributions (other than contributions covered by the first circumstance above) for the financial year exceeds their notional taxed contributions for the financial year (see paragraphs 4.34 to 4.36 above).

[Schedule 2, item 8, subsections 291-370(1) and (3)]

4.40 Amounts covered by paragraphs 291-165(1)(b) or (c), or subsection 291-25(3) are treated as contributions for the purposes of the first circumstance in the paragraph above. This means that contributions for an individual include amounts that are covered by subsection 291-25(3) relating to their interests in a constitutionally protected fund. These amounts will be included in the amount treated as being equal to the concessional contributions cap for an individual if they would otherwise be concessional contributions (including amounts that are concessional contributions because of paragraph 291-165(1)(a)). It also means contributions for an individual include amounts relating to their defined benefit interests in a constitutionally protected fund where the amounts are covered by paragraphs 291-165(1)(b) or (c). These amounts will also be included in the amounts treated as being equal to the concessional contributions cap for the individual to the extent those amounts would otherwise be concessional contributions. [Schedule 2, item 8, subsection 291-370(2)]

4.41 Concessional contributions made in excess of the concessional contributions cap would, but for the rule described in paragraph 4.39, be treated as excess concessional contributions. Excess concessional contributions are included in the assessable income of the individual (with a tax offset provided to account for the tax expected to have been paid by the fund). The individual may either elect to withdraw such contributions from the superannuation fund or retain the contributions as non-concessional contributions (sections 291-15 and 292-90 of the ITAA 1997 and Division 95 of Schedule 1 to the Taxation Administration Act 1953). They may also be subject to the excess concessional contribution charge (Division 95 of Schedule 1 to the Taxation Administration Act 1953). These amendments ensure that such contributions do not result in excess concessional contributions and therefore do not have these tax consequences.

4.42 The amendments prevent any combination of the contributions and amounts described in paragraph 4.39 above by themselves causing the individual's concessional contributions for a financial year to exceed the concessional contributions cap of $25,000 (indexed annually) (see paragraphs 4.24 and 4.25 above). [Schedule 2, item 8, subsection 291-370(1)]

Example 4.3 : Contributions to constitutionally protected fund and unfunded defined benefit interest Marvin has employer contributions to a constitutionally protected fund of $20,000 for the 2017-18 financial year. Marvin also has defined benefit contributions of $22,000 and notional taxed contributions for that financial year of $18,000 in respect of defined benefit interests (which are also not interests in a constitutionally protected fund). The difference between Marvin's defined benefit contributions and his notional taxed contributions ($4,000) represents contributions in respect of unfunded defined benefit interests.Prima facie, Marvin's total concessional contributions for the financial year are equal to $42,000. This is worked out by applying the rules introduced by these amendments and the current law, which provide that Marvin's concessional contributions are the sum of his contributions to constitutionally protected funds, his notional taxed contributions and the difference between his defined benefit contributions and his notional taxed contributions ($20,000 + $18,000 + ($22,000 - $18,000)).However, as the sum of these amounts (which are all capped amounts described in paragraph 4.39) exceeds the concessional contributions cap of $25,000, the cap for newly included concessional contributions introduced by these amendments applies to treat the sum of these contributions as equal to the concessional contributions cap. Therefore rather than having concessional contributions of $42,000, Marvin is treated as having concessional contributions of $25,000. Hence, Marvin does not exceed the concessional contributions cap for the 2017-18 financial year.When benefits are paid from Marvin's constitutionally protected fund and his unfunded defined benefit scheme to him, they are subject to higher rates of taxation than his benefits paid from a taxed source.

4.43 These amendments are not intended to alter the outcomes for taxpayers that benefit from the existing transitional rules that apply to some defined benefit interests as described in paragraph 4.19. Instead, these amounts are included so that the interaction between these rules and the new cap does not result in individuals with interests affected by both arrangements being subject to excess contributions tax. For the purpose of these amendments, amounts are covered by the transitional rules where:

·
section 291-170 of the IT(TP)A 1997 applies to treat their notional taxed contributions as equal to their concessional contributions cap; or
·
section 291-170 of the IT(TP)A 1997 does not apply but would apply had the taxpayer's notional taxed contributions exceeded their concessional contributions cap (see paragraphs 291-170(2)(b) and 291-170(4)(b) of IT(TP)A 1997).

4.44 The following example illustrates how including these amounts prevents an anomalous outcome arising from the interaction between these transitional rules and the cap for concessional contributions now included by these amendments. [Schedule 2, item 8, paragraph 291-370(1)(b)]

Example 4.4 : Interaction between transitional cap and cap for newly included concessional contributions Anh has notional taxed contributions of $26,000 for the 2017-18 income year to a defined benefit superannuation interest which are covered by the transitional rules in section 291-170 of IT(TP)A 1997. Anh also has contributions to a constitutionally protected fund of $27,000.Under section 291-170 of IT(TP)A 1997, Anh's notional taxed contributions are treated as equal to her concessional contributions cap (that is, $25,000), as $26,000 exceeds this cap. Therefore prima facie, Anh's concessional contributions are equal to $52,000. This is worked out by adding her notional taxed contributions calculated under section 291-170 of IT(TP)A 1997 to her contributions to constitutionally protected funds ($25,000 + $27,000).However, as the sum of these amounts (which are all capped amounts described in paragraph 4.39) exceeds the concessional contributions cap of $25,000, the cap for newly included concessional contributions introduced by these amendments applies to treat the sum of these contributions as equal to the concessional contributions cap. Therefore rather than having concessional contributions of $52,000, Anh is treated as having concessional contributions of $25,000.If these amendments did not apply to include amounts capped under the transitional rules, Anh's notional taxed contributions would be treated as equal to $25,000 under section 291-170 of IT(TP)A 1997 and these amendments would then treat the $27,000 of contributions to the constitutionally protected fund as equal to $25,000. Therefore Anh would have had concessional contributions of $50,000 (twice the concessional contributions cap). The amendments ensure that this outcome does not occur.

4.45 The amendments do not prevent a taxpayer from exceeding their concessional contributions cap as a result of having amounts other than those described in paragraph 4.39 above (uncapped contributions), or as a result of having some combination of uncapped contributions and amounts described in paragraph 4.39 above (capped contributions).

4.46 The following examples illustrate situations where an individual can exceed their concessional contributions cap as a result of having a combination of uncapped and capped contributions.

Example 4.5 : Contributions to unfunded defined benefit scheme and accumulation fund Ruby has a defined benefit interest in an unfunded superannuation scheme. Her defined benefit contributions in respect of the fund for the 2017-18 financial year exceed her notional taxed contributions for the financial year by $30,000. This gives her a capped contribution amount of $30,000.Ruby also makes concessional contributions of $15,000 in the same financial year to a superannuation fund (that is not a constitutionally protected fund) in which she has an accumulation interest. This gives her an uncapped contribution amount of $15,000.Her capped contributions exceed the concessional contributions cap of $25,000. However, the amendments treat these contributions as being equal to the concessional contributions cap of $25,000. The total of Ruby's additional contributions to her accumulation interest of $15,000 is therefore treated as being in excess of her concessional contributions cap. Accordingly, these are excess concessional contributions.

Example 4.6 : Contributions to unfunded defined benefit scheme and accumulation fund Assume the same facts as Example 4.5 except that Ruby's defined benefit contributions exceed her notional taxed contributions for the financial year by $20,000. This gives her a capped contribution amount of $20,000.As Ruby also makes uncapped superannuation contributions of $15,000 her total concessional contributions are treated as being $35,000. Accordingly, contributions of $10,000 are treated as being in excess of her concessional contributions cap and are excess concessional contributions.

Consequential amendments

Concessional contributions annual cap and Division 293 tax

General

4.47 Schedule 2 to the TLA Bill makes a number of consequential amendments to the income tax law and the Taxation Administration Act 1953. [Schedule 2, items 14-19, sections 293-1, 293-5, 293-10 and subsections 293-155(1) and 293-200(1) of the ITAA 1997 and the note to subsection 133-15(1) in Schedule 1 to the Taxation Administration Act 1953]

Maximum contribution base

4.48 Part 3 of Schedule 2 also amends how the maximum contribution base is determined under the Superannuation Guarantee (Administration) Act 1992.

4.49 The maximum contribution base is the cap on the amount of an employee's salary and wages that is taken into account in determining an employer's liability for the superannuation guarantee charge for a quarter. In effect, employers do not need to make mandatory superannuation contributions in relation to the amount of an employee's ordinary time earnings that exceeds the maximum contribution base.

4.50 The maximum contribution base is $51,620 per quarter in the 2016-17 financial year. Accordingly, the effective cap on contributions required to avoid being subject to the superannuation guarantee charge for a quarter in the 2016-17 financial year is $4,903.90 (the maximum contribution base multiplied by the charge percentage for the quarter divided by 100 or $51,620 multiplied by 0.095). Extended over an income year, this would result in annual contributions for 2016-17 totalling $19,615.60.

4.51 Indexation of the new concessional contributions cap under these amendments is subject to different rounding rules than the maximum contribution base. This will result in the contributions required for an employee with ordinary time earnings equal to or more than the maximum contribution base exceeding the concessional contributions cap within a number of years. The amendments ensure that mandatory employer contributions cannot by themselves result in employees having excess concessional contributions.

4.52 To address this issue, Part 3 of Schedule 2 provides that if the maximum contribution base for a quarter effectively requires contributions to be made that, if paid over the year, would result in the employee's concessional contributions exceeding the concessional contributions cap, the maximum contribution base is instead reduced to the amount that would not result in excess concessional contributions. This is determined by the following formula:

Concessional contributions cap * [100 / charge percentage] * [1/4]

[Schedule 2, item 21, subsections 15(5) and (6) of the Superannuation Guarantee (Administration) Act 1992]

4.53 This means that an employer will not be subject to the superannuation guarantee charge if they do not make contributions that would be excess concessional contributions for an employee. With the new concessional contributions cap and charge percentage as at 1 July 2017, this would occur if the maximum contribution base for the quarter is greater than $65,789.47.

4.54 This change affects whether an employer will be subject to the superannuation guarantee charge if they do not make superannuation contributions or sufficient contributions for an employee. It does not limit employers from making contributions or alter the terms of an employee's remuneration.

Concessional contributions - constitutionally protected funds and defined benefit schemes

4.55 These amendments include guidance material for Subdivision 291-CA of the ITAA 1997 and notes to assist users of the legislation. [Schedule 2, items 7, 8, 10 and 11, section 291-165 of the ITAA 1997 and subsections 291-170(2) and (4) of the IT(TP)A 1997]

4.56 These amendments ensure that the 2006 or 2009 transitional arrangements (described at paragraph 4.19 above) do not apply in relation to a defined benefit interest in a constitutionally protected fund. [Schedule 2, item 12, subsection 291-170(6) of the IT(TP)A 1997]

Application and transitional provisions

4.57 The amendments in Schedule 2 to the TLA Bill commence on the first day of the first quarter after Royal Assent. [Item 2 in the table in section 2 of the TLA Bill]

4.58 Part 1 of Schedule 2 to the TLA Bill applies in relation to the financial year starting on 1 July 2017 and later financial years. This means that the amendments will apply in relation to superannuation contributions made on or after 1 July 2017. [Schedule 2, item 13]

4.59 Part 2 of Schedule 2 to the TLA Bill applies in relation to the 2017-18 income year and later income years. [Schedule 2, item 20]

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

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

Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016

4.60 Schedule 2 to the Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016 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

4.61 Schedule 2 reduces the annual cap applying to concessional contributions made to superannuation in a financial year to $25,000 (from $30,000 for those aged under 49 at the end of the previous financial year and $35,000 otherwise).

4.62 Savings invested in superannuation are not generally taxed at an individual's personal tax rate. Instead, concessional contributions and earnings are generally taxed at a concessional, flat rate of 15 per cent (below most individuals' personal tax rate) in the accumulation phase.

4.63 To ensure that the fiscal cost of these concessional contributions and earnings are sustainable, annual caps are placed on the amount of concessional contributions that an individual can make without being subject to higher rates of tax under the excess contributions tax provisions.

4.64 Schedule 2 also reduces the tax concession that individuals with income and superannuation above $250,000 receive on their concessionally taxed superannuation contributions by lowering the Division 293 income threshold from $300,000 to $250,000.

4.65 Schedule 2 also amends how concessional contributions are defined to ensure that contributions, including notional contributions, to constitutionally protected funds and unfunded defined benefit superannuation schemes count towards an individual's concessional contributions cap.

4.66 The Parliamentary Joint Committee on Human Rights has previously noted that the area of superannuation are likely to engage the right to social security in article 9 and the right to an adequate standard of living in article 11 of the International Covenant on Economic, Social, and Cultural Rights.

4.67 Australia's retirement income system consists of three elements commonly referred to as the three pillars: the age pension, compulsory superannuation contributions, and voluntary savings including voluntary contributions to superannuation.

4.68 The first pillar, the age pension, provides for a minimum safety net of income in retirement, and is the primary method through which Australia meets its obligations under article 9 of the International Covenant on Economic, Social, and Cultural Rights and article 11 as far as it relates to income in retirement.

4.69 Concessional superannuation contributions fall within the pillars of mandatory and voluntary superannuation contributions.

4.70 The existing taxation treatment of concessional contributions disproportionately benefits high income earners both because they have more savings and because the relative discount on their marginal tax rate is greater. These changes are modest reductions in existing tax concessions, and will not prevent affected individuals from using superannuation to support an adequate standard of living in retirement.

Human rights implications

4.71 Schedule 2 does not engage any of the applicable rights or freedoms because it reduces, but does not remove, the generous superannuation tax concessions available to higher income individuals and does not affect lower income earners.

Conclusion

4.72 Schedule 2 is compatible with human rights as it does not raise any human rights issues.


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