Explanatory Memorandum(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)
Chapter 4 - Tax exempt entities that become taxable
4.1 Part 1 of Schedule 4 of the Bill will amend Schedule 2D, Division 57 of the Income Tax Assessment Act 1936 (the Act) to:
- ensure that a deduction is allowed to the transition taxpayer for a surplus in a defined benefit superannuation scheme that exists at the time of transition from exempt to taxable [item 3] ;
- insert a transitional provision to enable tax exempt entities, that have become taxable before this amendment comes into effect, to make an election in order to obtain a deduction for the surplus [item 9] ;
- ensure that the provision which establishes the amount of superannuation deductions to be disallowed, operates as intended [items 4 & 5] ;
- allow a deduction for all superannuation contributions made by the transition taxpayer after transition time to a defined benefit superannuation fund which is in surplus at the transition time [item 6] ;
- make minor technical corrections by inserting the word 'superannuation' before 'scheme(s)' at paragraphs 57-40(1)(b), 57-40(5)(c) and the heading to section 57-45 [items 1 & 2] ; and
- ensure that the amount of bad debt deductions to be disallowed is reduced where a debt is sold after the transition time [item 7] .
4.2 The purpose of the amendments is to ensure that:
- a deduction is allowed to a transition taxpayer for a surplus in a defined benefit superannuation scheme in the transition year;
- deductions are not allowed for superannuation contributions made by a taxpayer that relate to the period in which the taxpayer was exempt from tax;
- a deduction is not denied to the transition taxpayer where the taxpayer has a surplus in its superannuation fund and makes a contribution after transition that relates to the period before transition; and
- in the event of the sale at or after the transition time of a debt in existence immediately before the transition time, the amount of bad debt deductions to be disallowed is reduced accordingly.
4.3 The amendments will apply to entities that cease to be wholly exempt from tax on or after 3 July 1995.
4.4 Where a transition taxpayer has accumulated unfunded liabilities before the transition time, deductions are not allowable for contributions made after the transition time in respect of the unfunded liabilities (section 57-40 of the Act). Also, superannuation contributions generally, to the extent that they relate to employment of an employee during the exempt period, are not allowable (section 57-50 of the Act).
4.5 At transition time a defined benefit superannuation scheme may have funds in excess of the employer's actual obligations to contribute and thus have a surplus. The surplus may be available to the transition taxpayer to, among other things, meet future contributions. Where the surplus is used by the taxpayer to solely reduce future contributions, a deduction should be allowed. Section 57-50 purported to do this but there is some ambiguity about the effect of the relevant provisions.
4.6 Where a taxpayer makes contributions periodically in arrears, any contributions made after transition in respect of pre-transition time employment of an employee would be denied a deduction by section 57-50. However, where a taxpayer has a surplus in the fund, arrears contributions made after transition should not be denied a deduction because the taxpayer in such a situation has no unfunded liabilities. In fact, the taxpayer in such a situation has over funded its liabilities.
4.7 Section 57-65 denies deductions otherwise allowable for bad debts written off after transition time by an entity, to the extent of provision for doubtful debts at the transition time. This is defined in the section as the "pre-transition doubtful debt limit" (PTDDL). A debt recovered after transition would reduce the PTDDL by the amount of the appropriate transition time provision against the debt. Where a debt is recovered in excess of the net amount (ie. amount of the debt less provision for doubtful debt), paragraph 57-65(6) requires the reduction of the PTDDL by the amount of that excess.
4.8 Similarly, where a debt ceases to exist because of its sale, the PTDDL should be reduced by the amount of the appropriate transition time provision. Otherwise, a taxpayer is penalised by having a deduction disallowed, notwithstanding that the debt has been sold.
4.9 Item 1 omits reference to "defined benefit scheme" in paragraph 57-40(1)(b) and substitutes "defined benefit superannuation scheme".
4.10 Item 2 omits reference to 'defined benefit schemes' in paragraph 57-40(5)(c) and substitutes 'defined benefit superannuation schemes' and alters the heading to section 57-45 by inserting 'superannuation' after 'defined benefit'.
4.11 The purpose of items 1 and 2 is to make it clear that the section deals only with defined benefit superannuation schemes.
4.12 Item 3 repeals paragraphs 57-45(a) and (b), substitutes new paragraphs (a) and (b) and inserts paragraph (c).
4.13 The new paragraphs require three criteria to be satisfied in order for a surplus to be an allowable deduction. Firstly, at transition time the accounts of the scheme must show that there is an amount available to meet liabilities to provide superannuation benefits. [New paragraph 57-45(a)]
4.14 Secondly, that amount must exceed the actuarially calculated value of the liabilities accrued up to transition time. [New paragraph 57-45(b)]
4.15 Thirdly, the transition taxpayer must make a written election before the transition time that the excess will be used solely to meet liabilities accruing after the transition time [new paragraph 57-45(c)]. New paragraph 57-45(c) ensures that there is no scope for the surplus to be used in any other way since it requires that the excess is actually used to reduce future liabilities.
4.16 There would be some tax exempt entities that have become taxable after 2 July 1995 but before the amendments in this Bill come into effect. Such entities would not be denied a deduction for a surplus in a defined benefit superannuation scheme fund where a written election is made within 28 days of the amending Act coming into effect. [Item 9 of Part 2]
4.17 Section 57-50 purports to be a mechanism for disallowing deductions for superannuation contributions made by a transition taxpayer which relate to the pre-transition period by calculating the transition taxpayer's undischarged superannuation liability amount (USLA) at the transition time and disallowing deductions for contributions until the total deductions disallowed equals the USLA. The USLA amount refers to the deficit in the transition taxpayer's obligations to make contributions in respect of its employees. The USLA is determined by way of a four step method in subsection 57-50(5). A net figure is reached for each employee after subtracting actual contributions in Step 2 from required contributions in Step 1. These individual figures are added together in order to arrive at the transtion taxpayer's total amount.
4.18 The wording in step 2 is ambiguous and may be interpreted to require the deduction of contributions in relation to a period of employment before the beginning of the transition year. This would clearly give a wrong result because it would both reduce the USLA and allow a deduction for a contribution in respect of pre-transition employment. The amendments to step 2 in subsection 57-50(5) ensure that contributions made in the period between the beginning of the transition year and the transition time are excluded from the calculation of the undischarged superannuation liability amount because such contributions are also deductible under section 82AAC. [Items 4 and 5]
4.19 Where a taxpayer has a surplus in a defined benefit superannuation scheme there are several options open to the taxpayer. By way of example, a taxpayer may opt to utilise the surplus to satisfy the required superannuation guarantee contribution amount(s) for a period of time. Alternatively, a taxpayer may opt to utilise the surplus to satisfy a reduced percentage of the required superannuation guarantee contribution amount(s), thus effectively spreading the benefit over several years.
4.20 If the latter option is taken, a payment made in arrears after transition time would technically be in respect of a period of employment before the transition. Consequently, section 57-50 would disallow a deduction because there would be a 'required superannuation contribution amount' which would be reducible by the payment. In these circumstances, a deduction should be allowed. New section 57-52 ensures that taxpayers who take the approach of spreading the benefit over several years are not penalised by providing that section 57-50 does not apply where there is a surplus in a defined benefit superannuation scheme fund at transition time.
4.21 Where a pre-transition time debt is recovered after transition, the pre-transition doubtful debt limit (PTDDL) is reduced by virtue of section 57-65 by the amount of the appropriate transition time provision against the debt. Where a debt is recovered in excess of the net amount (that is, the amount of the debt less provision for doubtful debt), paragraph 57-65(6) requires the reduction of the PTDDL by the amount of that excess.
4.22 There should be a similar reduction where a debt is sold after the transition time. If the debt no longer exists, there should be no provision in respect of that debt reflected in the PTDDL. New paragraph 57-65(7) ensures that, where a pre-transition debt, against which there is a specific provision, is sold after the transition time, the PTDDL is reduced by the amount of the appropriate transition time provision in relation to that debt.
4.23 Where the pre-transition time debt is sold after a partial write-off(s), then the PTDDL is reduced by the excess (if any) of the appropriate transition time provision against that debt, over the sum of the write-off(s) of that debt between the transition time and the time of the sale [new paragraph 57-65(7)(d)] . Where the debt is sold without any write-off having occurred after the transition time, the PTDDL is reduced by the amount of the appropriate transition time provision against that debt [new paragraph 57-65(7)(e)] .