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 7 - Deducting personal contributions
Outline of chapter
7.1 Schedule 5 to the Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016 (the TLA Bill) removes the requirement in the income tax law that an individual must earn less than 10 per cent of their income from their employment related activities to be able to deduct a personal contribution to superannuation thereby making it a concessional contribution.
7.2 All references in this Chapter are to the Income Tax Assessment Act 1997 unless otherwise specified. All legislative amendments referred to in this Chapter are contained in the TLA Bill.
Context of amendments
7.3 The measure forms part of the Government's Superannuation Reform Package announced in the 2016-17 Budget. This measure improves the flexibility of the superannuation system so that more individuals can make personal contributions to superannuation as concessional contributions.
7.4 Generally, personal contributions are non-concessional contributions (effectively 'after tax' contributions). These contributions are not usually taxed again in the superannuation fund unless the individual notifies the fund that they intend to deduct the contribution.
7.5 However, individuals can choose to deduct their personal contributions, if they satisfy certain requirements (see Subdivision 290-C). Deducted personal contributions are generally included in the assessable income of the superannuation fund, and become concessional contributions.
7.6 Prior to these amendments, the requirements for an individual to deduct a contribution included a requirement that, broadly, less than 10 per cent of the sum of the individual's assessable income, reportable fringe benefits and reportable employer superannuation contributions were attributable to employment or related activities (see section 290-160). Amounts that will generally be attributable to employment include salary, wages and benefits received from an employer. For example, an individual with total assessable income of $100,000 and no reportable fringe benefits or employer superannuation contributions would have been unable to deduct a personal contribution if they received a salary of $10,000.
7.7 This requirement disadvantages individuals who did not work for employers that offered salary sacrifice arrangements and individuals that were substantially self-employed but who received 10 per cent or more of their income from employment.
7.8 The other requirements include age related conditions (see section 290-165), a condition requiring the individual to provide a valid notice of intention to deduct and also have received an acknowledgement of this notice from the fund (see section 290-170), and a condition that the contribution must have been made to a complying superannuation fund (see section 290-155).
Summary of new law
7.9 This measure removes the requirement in the income tax law that an individual must earn less than 10 per cent of their income from employment-related activities to be able to deduct a personal contribution to superannuation making it a concessional contribution.
Comparison of key features of new law and current law
|New law||Current law|
|An individual is able to deduct personal contributions, making these contributions concessional contributions, regardless of whether they earn 10 per cent or more of their total income from employment or related activities.
Other restrictions apply to limit when an individual can deduct personal superannuation contributions, including new restrictions on deducting contributions to certain defined benefit superannuation funds and contributions that are not included in the taxable income of the superannuation fund.
|An individual is not able to deduct personal contributions if 10 per cent or more of their total income is from employment or related activities.
Other restrictions apply to limit when an individual can deduct personal superannuation contributions.
Detailed explanation of new law
7.10 The amendments made by Schedule 5 to the TLA Bill remove the restriction in the income tax law on individuals deducting personal contributions to their superannuation, which broadly required that, less than 10 per cent of the sum of an individual's:
- assessable income;
- reportable fringe benefits total; and
- reportable employer superannuation contributions;
7.11 This allows individuals that meet the other requirements of Subdivision 290-C to deduct the contribution resulting in it being a concessional contribution to superannuation.
7.12 This ensures that individuals receiving employment income are not dependent on whether their employers offer salary sacrifice arrangements should they wish to make contributions to their superannuation from, effectively, their pre-tax income.
7.13 This also ensures that self-employed individuals and individuals in receipt of passive income can make deductible personal contributions regardless of the amount of salary or wages they earn.
7.14 Entitlement to deductions for personal superannuation contributions still requires that individuals satisfy all other requirements for deducting personal superannuation contributions, including the new requirements discussed in paragraphs 7.15 to 7.33.
Example 7.1 Deduction for personal superannuation contribution Sarah is 23 years old and decides to start her own luxury chocolate business. She continues to work part time as a retailer where she earns $10,000 in the 2017-18 financial year, including a $950 superannuation contribution made by her employer. In the same financial year she earns $70,000 from her chocolate business. From Sarah's $80,000 assessable income, she makes a personal contribution of $15,000 to her complying superannuation fund. She has no other concessional superannuation contributions.Despite receiving more than 10 per cent of her income from employment, Sarah can deduct her $15,000 personal contribution, provided she satisfies the other relevant requirements in Subdivision 290-C.
Personal contributions that are not deductible
7.15 Schedule 5 to the TLA Bill also prevents certain personal contributions to certain superannuation funds from being deductible, even if the relevant fund is a complying superannuation fund. The amendments apply to certain contributions to two categories of funds - defined benefit contributions to Commonwealth public sector superannuation schemes and contributions to superannuation funds that are not included in the income of the superannuation fund. Further categories may be prescribed by regulation . [Schedule 5, item 4, section 290-155]
Contributions to Commonwealth public sector superannuation schemes
7.16 The first category of fund is Commonwealth public sector superannuation schemes in respect of contributions by members with defined benefit interests. [Schedule 5, item 4, subparagraph 290-155(1)(a)(i)]
7.17 Prior to the amendments, Commonwealth superannuation funds that provided defined benefit interests to members were able to operate on the basis that personal contributions were unlikely to be deducted by members. This meant that the fund could operate on the basis that these contributions would not be concessional contributions and did not have to be included in the assessable income of the fund. These superannuation funds were generally those that linked accrual of benefits in a defined benefit interest to the period of employment of members while permitting or requiring personal contributions by members.
7.18 There would be significant costs if these funds needed to restructure their rules and benefit calculations to allow their members to choose to deduct such personal contributions.
7.19 Accordingly, to avoid imposing such costs on these funds, the amendments prevent contributions to Commonwealth public sector superannuation schemes in which an individual has a defined benefit interest from being deductible.
7.20 Members of these Commonwealth public sector superannuation schemes continue to be able to deduct personal contributions they make to other types of superannuation funds such as accumulation funds, provided that the contributions satisfy the other requirements to be deductible under the income tax law.
7.21 The second category of superannuation funds for which personal superannuation contributions are now not deductible are funds that do not include an amount in their assessable income under section 295-190 as a result of receiving a superannuation contribution (untaxed funds). [Schedule 5, item 4, subparagraph 290-155(1)(a)(ii)]
7.22 Without the amendment, a deductible personal contribution to an untaxed superannuation fund would not be taxed in the hands of either the fund or its members, providing such members with a benefit in excess of that available to members of other funds.
7.23 To prevent this anomaly arising, Schedule 5 to the TLA Bill ensures that a member of a fund cannot deduct a personal contribution to the fund that is not included in the assessable income of the fund (that is, the fund is an untaxed fund in relation to the contribution).
7.24 For this category of fund, the amendment applies only to contributions by members of such funds that are not included in the assessable income of these funds. It does not apply to contributions made to taxed funds or to other member contributions to such funds that are included in the assessable income of the fund.
7.25 In determining if a fund is an untaxed fund in respect of a contribution, amounts that are excluded from the assessable income of the fund due to Subdivision 295-D (such as transfers of liability for contributions to a life insurer or pooled superannuation trust) are disregarded. [Schedule 5, item 4, subsection 290-155(2)]
Prescribed funds and contributions
7.26 The amendments also provide that the regulations may prescribe further categories of funds and contributions to funds. This provides flexibility to include additional types of funds or contributions to funds if necessary to avoid such funds incurring excessive restructuring costs or other unintended consequences. [Schedule 5, item 4, subparagraph 290-155(1)(a)(iii) and paragraph 290-155(1)(b)]
7.27 This power would permit regulations to be made prescribing superannuation funds, including State and Territory public sector defined benefit schemes, and corporate defined benefit schemes, that request this treatment.
7.28 It also permits regulations to be made to prescribe all funds of a particular kind or certain contributions to all funds of a particular kind. For example, the regulations could prescribe all contributions to defined benefit interests in superannuation funds that have notified the Commissioner in the approved form that they wish for the prescription to apply.
Publication of information to members
7.29 The amendments also make changes to the law to ensure members are informed about the treatment of personal contributions to prescribed funds.
7.30 First, the amendments provide that the Commissioner may publish information about funds to which contributions may not be deductible because of these amendments. [Schedule 5, item 4, subsection 290-155(3)]
7.31 If the regulation making power is used to prescribe all funds of a kind, the application of the prescription may not be apparent to members of that fund. For example, if the regulations prescribed funds that notified the Commissioner in the approved form, members of the fund would have no way of knowing that this occurred.
7.32 It is expected that in most, if not all cases, the superannuation fund trustees would provide this information to their members. However, by allowing the Commissioner to publish this information, the amendments ensure that this information will be available to members.
7.33 Secondly, the amendments change the rules around the validity of notices so that notices in respect of these contributions are not valid notices. This ensures that trustees are not required to acknowledge a notice to deduct a contribution that they know the member cannot deduct. [Schedule 5, item 6, paragraph 290-170(2)(e)]
Example 7.2 Personal contributions that are not deductible Hannah is a public servant who makes fortnightly personal contributions totalling $10,000 in 2017-18 to a Commonwealth public sector defined benefit scheme.She also works part-time in a retail store on weekends and receives superannuation guarantee contributions in an industry-based accumulation fund. She makes a $5,000 personal contribution to this fund in February 2018.Hannah cannot deduct her personal contributions to the Commonwealth defined benefit scheme. However, she can deduct the $5,000 contribution she makes to the accumulation fund in her 2017-18 tax return, provided she satisfies the other requirements in income tax law.
7.34 Schedule 5 to the TLA Bill also makes a number of consequential amendments to the income tax law, including guide material, to reflect the substantive amendments. [Schedule 5, items 1and 2 , subsections 280-10(1) and (2) and Schedule 11, item 7, the definition of 'Commonwealth public sector superannuation scheme' in subsection 995 1(1)]
7.35 These consequential amendments include an amendment to subsection 290-165(1). Currently, this subsection refers to income attributable to, among other things, activities within the meaning of subsection 290-160(1). As this Schedule repeals section 290-160 as part of removing the maximum earnings as an employee condition, it also removes the reference in subsection 290-165(1) and instead inserts the relevant definition of activities into that subsection. [Schedule 5, item 5, paragraph 290-165(1)(b)]
7.36 The definition is also simplified. Previously, it applied to activities consisting of:
- holding an office or appointment;
- performing functions or duties;
- engaging in work; or
- doing acts or things;
if those activities resulted in the individual being treated as an employee for the purposes of the Superannuation Guarantee (Administration) Act 1992 (disregarding subsection 12(11) of that Act).
7.37 In moving this provision, it was identified that 'doing acts or things' encompassed all possible matters that would result in an individual being treated as an employee and the list of specific activities was unnecessary.
7.38 The rewritten provision omitting the list of activities and simply refers to any activities or circumstances that resulted in the individual being treated as an employee for the purposes of the Superannuation Guarantee (Administration) Act 1992 (disregarding subsection 12(11) of that Act). This amendment clarifies the law without resulting in any change to outcomes.
Application and transitional provisions
7.39 The amendments commence from the start of the first day of the first quarter to begin after the day the TLA Bill receives Royal Assent . [Item 2 of the table in clause 2 of the TLA Bill]
7.40 The amendments apply to personal superannuation contributions made in the 2017-18 income year and later income years. [Schedule 5, item 7]
7.41 In determining whether the amendments apply to a contribution, it only matters in which income year the contribution was made. To the extent that a contribution is made before 1 July 2017, the amendments do not apply even if it is reported on or after that date.
STATEMENT OF COMPATABILITY 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
7.42 Schedule 5 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.
7.43 Schedule 5 to the Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016 removes the requirement in the income tax law that an individual must earn less than 10 per cent of their income from their employment related activities for them to be able to claim a tax deduction for personal contribution to superannuation.
7.44 Deducted personal contributions are generally taxed in the fund at a flat rate of 15 per cent rather than the individual's marginal tax rate, and become concessional contributions.
7.45 Prior to these amendments, individuals were not able to deduct personal contributions for an income year and have them treated as concessional contributions unless they satisfied a number of requirements. This includes a requirement that, broadly, less than 10 per cent of the sum of the individual's assessable income, reportable fringe benefits total and reportable employer superannuation contributions were attributable to employment or similar activities (see section 290-160 of the Income Tax Assessment Act 1997 ). Income from employment broadly refers to income received in salary, wages and benefits from an employer.
7.46 This requirement disadvantaged individuals who did not work for employers that allowed them to make salary sacrificed concessional superannuation contributions or those that were substantially self-employed but who received 10 per cent or more of their income from employment.
7.47 Schedule 5 to the Bill also prevents personal contributions from being deductible when made to certain superannuation funds (such as Commonwealth public sector superannuation schemes, untaxed funds and prescribed funds). This ensures that such funds do not have to incur significant costs to restructure their scheme rules and systems as result of the measure. However, members of these funds can, subject to their concessional contributions cap, make contributions to other superannuation funds that are not subject to these restrictions.
7.48 This measure improves the flexibility of the superannuation system so that more individuals can make personal contributions to superannuation as concessional contributions up to their concessional contributions cap.
Human rights implications
7.49 This Schedule does not engage any of the applicable rights or freedoms because it reduces tax payable on personal superannuation contributions.
7.50 This Schedule is compatible with human rights as it does not raise any human rights issues.