Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)Chapter 4 - Removal of standard superannuation contribution limit
Overview
4.1 The amendments contained in Schedule 4 to the Bill will ensure that employers, in calculating their maximum allowable deductions in relation to superannuation contributions they make for the benefit of their employees, use the age based limits specified in subsection 82AAC(2A) of the Income Tax Assessment Act 1936 (the Act) rather than the standard contribution limit specified in subsection 82AAC(2D). The amendments achieve this by repealing subsection 82AAC(2D).
Summary of the amendments
4.2 The amendments will remove the ability for employers to elect to use the standard contribution limit in calculating the upper limit of deductions allowable in relation to superannuation contributions they make for the benefit of their employees.
4.3 The amendments will effectively apply to contributions made after 7.30 pm by legal time in the Australian Capital Territory on 20 August 1996. The amendments achieve this by:
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- repealing the relevant provisions with effect from the 1997-98 year of income (or the 1996-97 year of income where a taxpayer uses a substituted accounting period that has 20 August 1996 falling in his or her 1995-96 year of income); and
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- applying a transitional arrangement to the 1996-97 year of income (or the 1995-96 year of income where a taxpayer uses a substituted accounting period that has 20 August 1996 falling in that year). [Items 3 and 4]
4.4 The effect of the application and transitional provisions on taxpayers will generally be that they will not be able to use the standard contribution limit to calculate the maximum amount of deduction they can claim for superannuation contributions they make for the benefit of their employees for the 1996-97 year of income. The effect of the transitional provision is explained in greater detail in paragraph 4.14 below.
Background to the legislation
4.5 The Taxation Laws Amendment (Superannuation) Act 1992 (Act No. 208 of 1992) amended the Act to specify the maximum deduction allowable to employers for contributions paid to superannuation funds for the benefit of their employees.
4.6 Act No. 208 of 1992 provided two methods for employers to calculate their maximum deduction. The first, specified in subsection 82AAC(2A) of the Act, was an aged based limit for each employee. That is, deductions would be allowable up to certain limits which vary depending upon the employee's age.
4.7 The second method, provided for in subsection 82AAC(2D) of the Act, allowed the employer to elect to determine the maximum amount of the allowable deduction by using the standard contribution limit. The standard contribution limit was only available to employers who have ten or more employees and provides that an employer's maximum possible deduction is a standard amount (irrespective of the age of employees) multiplied by the number of employees.
4.8 The Act does not prescribe how this total amount should be allocated between employees. This provides the opportunity for employer contributions made on behalf of a selected employee or selected employees to exceed the age based deduction limits. That is, the standard contribution limit allows some employees to receive employer superannuation contributions well in excess of the age based limits provided the total of such deductions does not exceed the standard amount multiplied by the number of employees.
4.9 The Government considers that the standard contribution limit has been subject to abuse by some employers. In these cases some employees are benefiting from employer contributions well in excess of the applicable age based limits. Accordingly, in the 1996-97 Budget the Government announced that, given this abuse and the cost to revenue, the standard contribution limit could no longer be justified.
Explanation of the amendments
4.10 Schedule 4 of the Bill removes the right of employers to calculate the maximum limit of their allowable deduction in relation to superannuation contributions made for the benefit of their employees using the standard contribution limit. It does this by repealing subsection 82AAC(2D), which is the provision allowing employers to elect to use the standard contribution method. [Item 2]
4.11 Employers will need to use the age based limits specified in subsection 82AAC(2A) to calculate the maximum deduction allowable for superannuation contributions made by them for the benefit of their employees, except where they meet the conditions specified in the transitional arrangements (outlined in paragraph #.14 below).
4.12 As a consequence of repealing subsection 82AAC(2D), subsections 82AAC(2E), (2F), (2G) and (2H) are also repealed as they are all explanatory provisions for subsection 82AAC(2D). [Item 2]
4.13 A minor cross-referencing amendment is necessary to subsection 82AAC(2) to reflect the repeal of subsection 82AAC(2D). [Item 1]
4.14 The transitional provision will largely have the effect of denying employers the option of using the standard contribution limit for the year of income in which 20 August 1996 occurs (usually the 1996-97 year of income). However, the transitional provision will allow a deduction to an employer using the standard contribution limit method provided certain conditions are met. These conditions are:
- (i)
- the employer has made a contribution for the benefit of an employee or employees that exceeds the applicable age based limit for that employee but is within the standard contribution limit; and
- (ii)
- the contribution was made at or before 7.30pm on 20 August 1996; and
- (iii)
- the employer elects to use the standard contribution limit method for the year of income. [Item 4]
4.15 Where the employer makes such a contribution or contributions and such an election, the total amount of deductions allowable to the employer under subsection 82AAC(1) cannot exceed the standard contribution limit.
4.16 The following examples illustrate the operation of the transitional arrangements. For the purpose of the examples the following assumptions are made:
- (i)
- an employer has 10 employees comprising six under 35 years (employees A, B, C, D, E & F) , three aged 35 to 49 years (employees G, H & I) and one over 50 years (employee J) ; and
- (ii)
- the employer elects that subsection 82AAC(2D) applies for the year of income in which 20 August 1996 falls.
4.17 The standard contribution limit for the 10 employees for the income year would be $271 700 (as calculated under subsection 82AAC(2D) of the Act).
4.18 Age based limits for the 1996-97 income year are:
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- under 35 years $9 782
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- 35 to 49 years $27 170
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- 50 years and over $67 382
Example 1
The employer made a contribution of $100 000 for employee J at or before 7.30 pm by legal time in the Australian Capital Territory on 20 August 1996, and made contributions for J and the other employees after that date.
The $100 000 is an allowable deduction because that contribution was made by the employer at or before 7.30pm on 20 August 1996 and, even though it is in excess of J's age based limit, it is within the standard contribution limit. But the employer will have no further entitlement to a deduction for employee J for the rest of the income year because employee J's age based limit has been exceeded.
The age based limits will apply to employees A to I, subject to the total claim for the income year (including contributions made on behalf of J) being within the maximum standard contribution limit of $271 700.
Example 2
The employer made a total contribution of $200 000 ($20 000 for each employee) at or before 7.30 pm by legal time in the Australian Capital Territory on 20 August 1996.
Because the amount is within the standard contribution limit, it is allowable.
The employer will have no further entitlement to a deduction for employees A to F for the rest of the income year because the employer has been allowed more than their age based limit.
The employer will be entitled to a further deduction of $7 170 each for employees G, H & I, and a further deduction of $47 382 for employee J, as the total contributions for the year by the employer would be within the standard contribution limit, and the individual contributions for employees G, H, I and J within their age based limits.
Example 3
The employer made a contribution of $271 700 to J only, at or before 7.30 pm by legal time in the Australian Capital Territory on 20 August 1996.
The $271 700 is deductible because the amount is within the standard contribution limit. However, the employer will not be entitled to any further deduction for any other contributions made during the year because the standard contribution limit for the year has been reached.