Explanatory Memorandum(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)
The following abbreviations and acronyms are used throughout this explanatory memorandum.
|APRA||Australian Prudential Regulation Authority|
|ATO||Australian Taxation Office|
|ETP||eligible termination payment|
|ITA 1986||Income Tax Act 1986|
|ITAA 1936||Income Tax Assessment Act 1936|
|ITAA 1997||Income Tax Assessment Act 1997|
|RSA Act 1997||Retirement Savings Account Act 1997|
|RSA Regulations||Retirement Savings Account Regulations|
|SIS Act 1993||Superannuation Industry (Supervision) Act 1993|
|SIS Regulations||Superannuation Industry (Supervision) Regulations|
|SSAA 1995||Small Superannuation Accounts Act 1995|
|TAA 1953||Taxation Administration Act 1953|
General outline and financial impact
The Taxation Laws Amendment (Superannuation) Bill (No. 1) 2002 amends the ITAA 1936, ITAA 1997, TAA 1953, ITA 1986 and SSAA 1995.
The amendments provide that a special tax will apply to superannuation payments made to persons who have permanently departed Australia, where the payment is made under circumstances specified in the SIS Regulations and RSA Regulations. It is intended that the circumstances specified in the SIS and RSA Regulations will restrict these payments to those made to persons who entered Australia temporarily, on particular classes of visa, and have subsequently left Australia permanently. Similar payments made under the SSAA 1995 or by an exempt public sector superannuation scheme will also be subject to the special taxation arrangements.
Date of effect : The amendments will commence on the later of Royal Assent and Royal Assent of the related Income Tax (Superannuation Payments Withholding Tax) Bill 2002. The amendments will apply to payments made on or after 1 July 2002.
Proposal announced : The measure was foreshadowed in the Government's policy statement A Better Superannuation System on 5 November 2001, and clarified in Minister for Revenue and Assistant Treasurer's Press Release No. C301 of 27 December 2001.
Financial impact : This bill and the Income Tax (Superannuation Payments Withholding Tax) Bill 2002 are expected to result in increased revenue of $70 million in 2002-2003, $110 million in 2003-2004 and $75 million in 2004-2005.
Compliance cost impact : Superannuation fund trustees will have to ensure that the correct tax is withheld from the payments.
Impact : In conjunction with amendments to the SIS and RSA Regulations the measure will reduce ongoing administrative and compliance costs for superannuation funds in maintaining accounts for temporary resident members. Superannuation funds will have to ensure the correct tax is applied to the payments.
Main points :
- Superannuation benefits accessed under the new conditions will be subject to a special tax, which would be withheld by the superannuation fund and remitted to the ATO.
- Superannuation funds will face initial compliance costs associated with updating computer systems to reflect the new condition of release and to withhold the special tax levied on superannuation benefits accessed by departed temporary residents.
Chapter 1 - Taxation of superannuation payments made to certain persons who have permanently departed Australia
1.1 Schedule 1 to this bill will amend the ITAA 1936, ITAA 1997, TAA 1953, the ITA 1986 and the SSAA 1995. The amendments will:
- define a new payment called a departing Australia superannuation payment that is excluded from the definition of an ETP;
- create a tax liability for recipients of the departing Australia superannuation payment, with the tax to be withheld by superannuation funds at the time such a payment is made;
- ensure that the withholding by the fund is in effect a final tax as the departing Australia superannuation payment will not be included in the individual's assessable income;
- impose reporting requirements on funds with respect to the withholding; and
- provide that certain payments from the Superannuation Holding Accounts Reserve will also be classified as departing Australia superannuation payments.
1.2 Individuals departing Australia on a permanent basis generally only have access to their superannuation entitlements at or after preservation age (i.e. age 55 and retired). These restrictions are specified in the SIS Regulations and RSA Regulations.
1.3 Lump sum benefits paid from a superannuation fund are currently taxed as ETPs under the provisions of Part III, Division 2, Subdivision AA of the ITAA 1936.
1.4 The Government has announced that it will allow persons who have entered Australia on certain classes of visa (to be specified in the SIS and RSA Regulations) and who then permanently depart Australia, access to their superannuation benefits. The access being subject to withholding arrangements to return the tax concessions provided for the superannuation benefit.
1.5 A new payment, called a departing Australia superannuation payment will be created in the ITAA 1936, such payments will be subject to special taxation and withholding arrangements. The new payment will not form part of assessable income. These arrangements will apply to persons who have entered Australia temporarily on a particular class of visa and have subsequently left Australia permanently.
1.6 Taxation rates for the departing Australia superannuation payment are to be specified in the related Income Tax (Superannuation Payments Withholding Tax) Bill 2002.
|New law||Current law|
|Under the proposed SIS and RSA Regulations, persons who have entered Australia temporarily on particular classes of visa, and have subsequently left Australia permanently may be eligible to receive a departing Australia superannuation payment. Such payments will be subject to special rates of taxation with the tax to be withheld by the superannuation fund when making the payment. This payment will not be classed as an ETP.||Payments of benefits made by superannuation funds to members are taxed concessionally as ETPs. Superannuation funds are not able to pay benefits solely because a person has permanently departed Australia.|
1.7 A new definition, departing Australia superannuation payment, is inserted. A departing Australia superannuation payment is defined as a payment that:
- normally would be considered an ETP (on the basis that it is paid from a superannuation fund);
- is paid to a person who has departed Australia; and
- is paid in accordance with either specified SIS Regulations, RSA Regulations, equivalent rules of an exempt public sector superannuation scheme or under the proposed section 67A of the SSAA 1995.
1.8 It is intended that regulations made under the SIS Act 1993 and RSA Act 1997 will restrict departing Australia superannuation payments to those made to a person who:
- entered Australia on an eligible temporary resident visa (eligible classes to be specified in the SIS and RSA Regulations);
- has a visa that has expired or been cancelled; and
- has permanently departed Australia.
1.9 Departing Australia superannuation payments will be excluded from the definition of an ETP. Among other things this means the payment will not trigger the reasonable benefit limit reporting requirements (section 140M of the ITAA 1936) or the ETP reporting requirements under the Income Tax Regulations. [Schedule 1, Part 1, item 3]
1.10 Under new section 27GA a person who receives a departing Australia superannuation payment is liable to pay tax on that payment at a rate decided by Parliament [Schedule 1, Part 1, item 4] . The rate proposed is set out in the related Income Tax (Superannuation Payments Withholding Tax) Bill 2002. Under that bill it is proposed that the rates be:
- for so much of the payment as represents an undeducted contribution or post-June 1994 invalidity component - nil;
- for so much of the payment as represents an untaxed element of the post-June 1983 component - 40%; and
- for the remainder of the payment - 30%.
1.11 The departing Australia superannuation payment will not be included in assessable income (but rather will be subject to final withholding arrangements). [Schedule 1, Part 1, item 4]
1.12 Existing definitions of withholding tax in the ITAA 1936 and ITAA 1997 are amended to make reference to the tax applying to a departing Australia superannuation payment. [Schedule 1, Part 1, item 1 and Part 2, item 5]
1.13 The entity (commonly a superannuation fund) that makes the departing Australia superannuation payment must withhold from that payment in accordance with the new Subdivision 12-FA of the TAA 1953. [Schedule 1, Part 3, items 6 and 7]
1.14 The amount to withhold will be specified in regulations [Schedule 1, Part 3, item 8] . The rates are to be the same as in the Income Tax (Superannuation Payments Withholding Tax) Bill 2002 (see paragraph 1.10).
1.15 The paying entity must report departing Australia superannuation payments on their annual withholding payment summary under the amended section 16-153 of the TAA 1953. [Schedule 1, Part 3, items 9 and 10]
1.16 The paying entity must also provide a payment summary to the recipient and the ATO within 14 days of making the departing Australia superannuation payment under the new section 16-166. [Schedule 1, Part 3, item 11]
1.17 If a paying entity is forced to pay a penalty for the failure to withhold tax it may recover the penalty from the individual. [Schedule 1, Part 3, item 12]
1.18 Crediting arrangements that normally apply in relation to amounts withheld will also apply in relation to amounts withheld from the departing Australia superannuation payment. [Schedule 1, Part 3, items 13 and 14]
1.19 A technical amendment clarifies that the ITA 1986 does not impose tax on departing Australia superannuation payments (as the tax is instead imposed under the Income Tax (Superannuation Payments Withholding Tax) Bill 2002). [Schedule 1, Part 4, item 15]
1.20 The SSAA 1995 will be amended to allow the release of account balances in the Superannuation Holding Accounts Reserve under similar circumstances to how superannuation funds will be able to make departing Australia superannuation payments. That is, accounts in the Superannuation Holding Accounts Reserve will be able to be released where the individual was the holder of an eligible temporary resident visa which has been cancelled or expired and the individual has permanently departed Australia. [Schedule 1, Part 5, items 16 to 20]
1.21 The measure will apply to payments made on or after 1 July 2002. [Schedule 1, Part 6, item 21]
1.22 Related amendments are contained in the Income Tax (Superannuation Payments Withholding Tax) Bill 2002.
1.23 Up until 1 July 1998, all individuals departing Australia on a permanent basis had access to their superannuation entitlements (which could be released on production of evidence that the individual was departing Australia permanently, such as a one way air ticket). Since then, a person who permanently departs Australia has only been able to access preserved benefits at or after preservation age. Early release of benefits may be possible, subject to the governing rules of the fund:
- where the person's preserved benefits in the fund are less than $200;
- if the benefits are taken in the form of a lifetime non-commutable pension or annuity; or
- if the benefits are unrestricted non-preserved benefits (which largely arise from deducted contributions in excess of the award or Superannuation Guarantee rate made prior to 1 July 1999).
1.24 There are approximately 275,000 individuals holding temporary residence visas (temporary residents) who are eligible to work in Australia at any given time. Treasury's Retirement and Income Modelling Unit estimates that the superannuation accounts of past and present temporary residents currently contain approximately $1.19 billion. This amount is expected to increase by approximately $300 million per year if there is no policy change.
1.25 Requiring superannuation funds to preserve temporary residents' superannuation benefits imposes ongoing administrative and compliance costs on the funds. These costs include complying with the member protection rules which require that fees charged on accounts with balances below $1,000 and lost member accounts do not exceed any investment gains. Any financial benefits that accrue to these temporary members are offset by additional administrative charges borne by other members. In addition, there is no justification on retirement income policy grounds for requiring the superannuation assets of temporary residents to be preserved as these individuals do not possess the right of retiring in Australia.
1.26 The policy objective is to reduce the administrative and compliance costs that superannuation funds incur in preserving the superannuation benefits of temporary residents who have permanently departed Australia and who will not be retiring in Australia.
1.27 This option would exclude salary and wages paid to temporary residents performing work in Australia from the SG.
Impact group identification
1.28 Employers will benefit from lower costs of employing temporary residents. Employment opportunities for Australian residents may be reduced as this option would be likely to give rise to labour market distortions by making temporary residents cheaper to employ than similarly skilled Australians.
1.29 This option would increase the costs incurred by the ATO in administering compliance with the SG arrangements by requiring identification of employees who are temporary residents.
1.30 Employers will face increased compliance costs if there are different rules for different categories of employees.
1.31 This option would result in a loss of superannuation taxation revenue which would have been payable on SG contributions made on behalf of non-residents.
1.32 This option would involve amending the existing preservation rules under the SIS Act 1993 to require superannuation fund trustees to allow temporary residents to access their superannuation benefits in cash on permanent departure. Similar amendments would apply to the RSA Act 1997.
1.33 Superannuation benefits accessed following departure by temporary residents will be subject to a special tax, which would be withheld by the superannuation fund and remitted to the ATO. The special tax would claw back Australian superannuation tax concessions which have only been made available on the proviso that the funds are used for genuine retirement purposes. An alternative to a special tax would be to tax the temporary resident's benefit at their marginal tax rate (adjusted for contributions tax already paid). However, this approach would be administratively complex as non-residents would be required to claim any excess tax withheld by their superannuation fund through the income tax system, so it has not been considered further. Australian citizens and permanent residents would remain subject to the existing preservation rules as they retain the option of retiring in Australia.
Impact group identification
1.34 Superannuation funds will benefit from reduced ongoing administrative and compliance costs incurred in maintaining accounts for temporary resident members. These costs include complying with the member protection rules, which require that fees charged on accounts with balances below $1,000 and lost member accounts do not exceed any investment gains, and the administrative procedures required to be followed in attempting to contact lost members. Superannuation fund members will benefit to the extent that these lower costs result in lower fees and charges.
1.35 Temporary resident members of superannuation funds who have permanently departed Australia will benefit by reducing the likelihood that they will lose track of their superannuation savings once they have departed Australia. Hence, there will be fewer lost members in the Australian superannuation system.
1.36 A temporary resident member who seeks to access their superannuation benefits would need to provide the fund with verification that they have met the requirements for such access. It is proposed that the Department of Immigration and Multicultural Affairs administer the verification system. A fee could be charged to recover any resultant administrative costs incurred by the Department of Immigration and Multicultural Affairs. Consideration will also be given to a more streamlined verification process, potentially involving accounts with very low balances.
1.37 Superannuation funds would face initial compliance costs associated with updating computer systems to reflect the new condition of release and to withhold the special tax levied on superannuation benefits accessed by departed temporary residents.
1.38 Government revenue will increase as withdrawals will be subject to a special tax in order to claw back Australian superannuation tax concessions which have been made available on the proviso that the funds are used for genuine retirement purposes.
Table 1.1: Estimated revenue impact ($ million)
1.39 This option would be similar to option 2 but would require the superannuation benefits of temporary residents to be transferred directly to an overseas pension fund where they would continue to be preserved.
Impact group identification
1.40 This option would be likely to result in inequitable treatment for different individuals from different countries, as some individuals will be able to locate a suitable fund into which their superannuation can be transferred while others will not.
1.41 Given the vast array of differing schemes and funds subject to differing rules (or types of funds or countries in which they operate), it would be a complex, resource intensive and ongoing task to monitor overseas funds to ensure transferred benefits continue to be preserved. If this option was implemented, it would be likely that this task would fall on the APRA.
1.42 This option would be administratively complex for superannuation funds, who would be required to ensure that the superannuation benefits of temporary residents are transferred directly to an overseas fund where they will continue to be preserved. There would be no formal mechanism for the exchange of information with other countries on the rules governing overseas pension funds that would be required to verify that transferred benefits will continue to be preserved in the overseas fund.
1.43 Consultations have been undertaken with industry bodies, including the Australian Chamber of Commerce and Industry, the Association of Superannuation Funds of Australia, Industry Funds Forum, professional organisations including, the Institute of Actuaries of Australia, Certified Practicing Accountants Australia and the Institute of Charted Accountants in Australia, the administrators of Commonwealth and State public sector superannuation schemes and the American Chamber of Commerce in Australia.
1.44 Most groups consulted indicated their in principle support for option 2. A minority indicated their initial preference was for option 1. However, there was also some recognition among these groups that option 1 could lead to labour market distortions and/or tax avoidance opportunities.
1.45 With regard to option 2, the Department of Immigration and Multicultural Affairs is being consulted on the development of verification requirements for temporary residents who wish to access their superannuation benefits. The ATO has been consulted on the special tax to claw back superannuation tax concessions and APRA has been consulted on modifying the preservation requirements.
1.46 Considering the costs and benefits set out above it is recommended that the Government endorse option 2.
1.47 Option 1 would be likely to result in labour market distortions by making temporary residents cheaper to employ than similarly skilled Australians and would reduce Government revenue.
1.48 Option 2 is recommended as it does not impose unnecessary compliance or administration costs, would not affect the hiring decisions of Australian employers and would apply uniformly and consistently to all temporary residents. Additionally, option 2 will increase Government revenue.
1.49 Option 3 involves significant administrative difficulties. While these difficulties are not insurmountable, this option would impose unnecessary costs on APRA and would not apply to all temporary residents. Option 3 may also reduce Government revenue, depending on whether the transferred amount is subject to a claw back of tax concessions.