Explanatory Statement

Issued by authority of the Treasurer

Tax and Superannuation Laws Amendment (2014 Measures No. 4) Regulation 2014

Subject - Section 266 of the Income Tax Assessment Act 1936

Section 266 of the Income Tax Assessment Act 1936 (ITAA 1936) and subsection 353(1) of the Superannuation Industry (Supervision) Act 1993 (SISA) provide that the Governor-General may make regulations prescribing matters required or permitted by the relevant Act to be prescribed, or necessary or convenient to be prescribed for carrying out or giving effect to the relevant Act.

The Tax and Superannuation Laws Amendment (2014 Measures No. 4) Regulation 2014 (Regulation) amends the Superannuation Industry (Supervision) Regulations 1994 (SIS Regulations) and the Income Tax Regulations 1936 (IT Regulations) as detailed below.

Pass-through of contributions data

The SIS Regulations contain data and payment standards (Standards) which apply to an employer that makes contributions to a superannuation fund on behalf of an employee. These contributions are generally made to:

•

a fund the employee has chosen to be a member of (a 'choice fund'); or

•

a fund which the employer provides as a default for employees who do not have a choice fund (a 'default fund').

An employer may have different default funds for different classes of employee.

From 1 January 2014, only a fund which offers a MySuper product can be a default fund.

When an employer makes a superannuation contribution to a fund on behalf of an employee, it is required to give the fund particular information about the employee and the payment ('contributions data'). The Standards determine the format in which this data must be given. The money that relates to the data flows separately through the payment and banking system and the fund reconciles it with the corresponding contributions data.

If employees belong to many different funds an employer often has to provide contributions data to each of those funds.

The purpose of the Regulation is to amend the SIS Regulations so that, from 1 July 2015, if:

•

an employer has a default relationship with a fund; and

•

the employer provides the fund with contributions data (in line with the Standards) relating to another fund; then

the fund must pass the contributions data on to the other fund.

The effect of this is that each employer will be able to deliver all of its contributions data to a single location and be certain that it will all be routed to the right destination, whether that is a default fund or any other superannuation fund.

Further details of these amendments are set out in the attachment.

Australian Defence Force - Operation HIGHROAD

Schedule 2 to the Regulation amends the IT Regulations to provide tax concessions to Australian Defence Force (ADF) personnel serving in Afghanistan as part of Operation HIGHROAD.

Section 23AD of the ITAA 1936 provides an exemption from income tax for pay and allowances paid to ADF members performing certain overseas duty. Subsection 23AD(1) of the ITAA 1936 exempts the pay and allowances earned by ADF members from income tax where there is a certificate in force, issued in writing by the Chief of the Defence Force, to the effect that the members are on 'eligible duty'. Subsection 23AD(2) of the ITAA 1936 provides that the regulations may declare that duty with a specified organisation, in a specified area outside Australia, and after a specified day, is 'eligible duty' for the purposes of that section.

Regulation 7A of the IT Regulations specifies duty with various organisations in various areas outside Australia and declares that duty to be 'eligible duty' for the purposes of section 23AD of the ITAA 1936.

Item 1 in Schedule 2 to the Regulation amend the IT Regulations to specify that eligible duty includes duty undertaken within Afghanistan as part of Operation HIGHROAD from 1 January 2015 to 30 June 2015.

Further details of these amendments are set out in the attachment.

Consultation

Public consultation was undertaken on the amendments to the SIS regulations between 1 August 2014 to 1 September 2014, with eight submissions being received. Subsequently, further targeted consultation took place from 24 October 2014 to 6 November 2014.

As a result of this consultation a number of technical changes were made to the amendments to ensure that the pass-through arrangements operate as efficiently as possible and are not unduly burdensome on superannuation providers. Additionally, the material in the explanatory statement was expanded to provide more guidance about how pass-through is expected to work in practice.

Consultation was undertaken with the Department of Defence on the amendments to tax concessions for ADF personnel. No public consultation was undertaken in respect of these amendments as they are both minor and technical in nature.

Revenue and compliance cost impacts

The amendments made by Schedule 1 to the Regulation relating to the pass-through of contributions data have no cost to revenue. The amendments made by Schedule 2 to the Regulation to tax concessions for ADF personnel have a cost to revenue of $5.1 million over the forward estimates.

All of the changes made by this Regulation are both minor and machinery in nature and have negligible compliance cost impacts.

Conditions and commencement

The SISA and the ITAA 1936 specify no conditions that need to be met before the power to make the Regulation may be exercised.

The Regulation is a legislative instrument for the purposes of the Legislative Instruments Act 2003.

The Regulation commences on the day after registration.

The Regulation applies between 1 January 2015 to 1 July 2015 insofar as it relates to Operation HIGHROAD and from 1 July 2015 onwards insofar as it relates to the pass-through of contributions data.

ATTACHMENT - Details of the Tax and Superannuation Laws Amendment (2014 Measures No. 4) Regulation 2014

Section 1 - Name of Regulation

This section provides that the title of the Regulation is Tax and Superannuation Laws Amendment (2014 Measures No. 4) Regulation 2014 (Regulation).

Section 2 - Commencement

This section provides that the Regulation commences on the day after registration.

Section 3 - Authority

This section provides that the Regulation is made under the Income Tax Assessment Act 1936 and the Superannuation Industry (Supervision) Act 1993.

Section 4 - Schedule(s)

This section provides that each instrument that is specified in a Schedule to this instrument is amended or repealed as set out in the applicable items in the Schedule.

Schedule 1 - Pass-through contributions

SuperStream is a package of reforms designed to make the 'back office' of the superannuation system more efficient. Standardised formats for data transfers between superannuation funds and for payments from employers to superannuation funds are being introduced between 1 July 2013 and 1 July 2015.

For administrative convenience and to simplify security matters, a superannuation fund will use the services of one of a number of interconnected 'gateways' to facilitate the receipt of contributions data in compliance with its obligations under the Standards. Under these arrangements, generally, an employer will send contributions information to superannuation funds, by either:

•

sending a properly formatted SuperStream-compliant message into the gateway network via the default fund's gateway (also known as a 'Channel A' solution) (It may be the case that this delivery to a gateway occurs via a third party, such as a clearing house or software solution); or

•

using an online portal solution, which some superannuation funds offer, and which allows an employer to input contributions data directly to a fund through a web-based interface. These portal solutions are also known as 'Channel B' solutions (a fund that accepts contributions data through its portal and then forwards it on to other funds will most likely complete this distribution via the gateway network described in dot point one above)

Before SuperStream, most employers who have employees who are members of multiple superannuation funds have had to deliver contributions data to multiple destinations.

Schedule 1 to the Regulation amends the Superannuation Industry (Supervision) Regulations 1994 to requires that, if a fund is provided with contributions data (in line with the Standards) relating to another fund by an employer with which it has a default relationship, then it must pass that contribution data on to the correct fund. This allows employers to deliver all of their contributions data to a single point and be certain that it will reach the correct destination.

Generally, for the provision of data from an employer to a fund to be considered compliant with the Standards, that provision must have occurred through either a gateway or portal solution. These are generally known respectively as Channel A and Channel B solutions.

Practical Application

Gateway Delivery (Channel A)

The provision of access to a gateway for delivery of properly formatted SuperStream-compliant messages is an obligation created not by the Regulation, but by the Superannuation Data and Payment Standards 2012 made under subsection 34K(3) of the Superannuation Industry (Supervision) Act 1993.

By facilitating this gateway access for its default employers, a fund which receives employer contributions only via Channel A will be compliant with the Regulation.

In the scenario where a fund only receives contributions data from employers via Channel A, an employer can deliver properly formatted SuperStream-compliant messages directly into the gateway network. The messages will then be distributed to the relevant destination funds.

Portal Solutions (Channel B)

A fund that offers a portal solution for delivery of contributions data will have an additional obligation under the Regulation.

A default fund offering a portal solution that does not currently have the capacity to on-forward a default employer's contributions data relating to other superannuation funds will be required under the regulation to either:

•

develop the ability within the portal to receive data relating to other funds and to on-forward it to those funds via the gateway network; or

•

provide a facility in addition to the portal whereby an employer has the ability to provide - at a minimum - contributions data for members of other funds to a single point from which it will be routed to the correct funds via the gateway network. This may be facilitated through the provision of a data-only or combined data-and-payment clearing service. The terms on which this service is offered are a matter for the service provider, the fund engaging the service provider and employers who wish to use the service.

A default fund that currently provides an on-forwarding service as a part of a portal solution will have the requirement to do this formalised by the Regulation.

Clearing houses

A number of default funds already offer employers a clearing house service or something similar. In some cases these services are built into the fund's internet portal, in others they are provided by a fund administrator or other service provider. These services are often offered to employers at a very low or zero cost and it is expected that market forces will generally work to keep the price of these services low. The Regulation is not intended to alter these arrangements - nor is it expected that the Regulation will result in employers currently utilising these services to alter their behaviour, at least over the short to medium term. In scenarios similar to those outlined above, it is considered that the fund will have satisfied its pass-through obligation.

An employer is not obliged to take on the additional services provided through a full data-and-payment clearing model. If an employer chooses to take on these services it does so based on commercial considerations and would be subject to the operating terms and conditions of the clearing house.

Future innovation

The amendments made by Schedule 1 to the Regulation are not intended to inhibit innovation in the market. Any alternative model in addition to those mentioned above, or future innovation in delivery of data into the gateway network, could also be considered to have met the funds pass-through obligation if it provides employers with a single destination for contributions data. Given the existing solutions in the market, comparable services are also expected to be provided at low cost.

Employer/Fund default arrangements

It is expected that an employer with more than one default fund will choose a fund (or funds) to handle its contributions in line with its commercial needs and the best interests of its employees. In many cases this may be via a data-and-payment clearing service provided by its largest default fund, but this is a commercial decision which an employer in this situation will need to consider.

An employer without an established default fund relationship that wants to take advantage of pass-through will need to consider developing such a relationship with a fund, or engage a third party service to handle the routing of their contributions data. This will be a commercial decision for the employer.

Timing

Schedule 1 to the Regulation applies from 1 July 2015.

Schedule 2 - Australian Defence Force - Operation HIGHROAD

Items 1 and 2 in Schedule 2 to the Regulation amend the Income Tax Regulations 1936 (IT Regulations) to provide tax concessions to Australian Defence Force (ADF) personnel serving in Afghanistan as part of Operation HIGHROAD.

Section 23AD of the ITAA 1936 provides an exemption from income tax for pay and allowances paid to ADF members performing certain overseas duty. Subsection 23AD(1) of the ITAA 1936 exempts the pay and allowances earned by ADF members from income tax where there is a certificate in force, issued in writing by the Chief of the Defence Force, to the effect that the members are on 'eligible duty'. Subsection 23AD(2) of the ITAA 1936 provides that the regulations may declare that duty with a specified organisation, in a specified area outside Australia, and after a specified day, is 'eligible duty' for the purposes of that section.

Regulation 7A of the IT Regulations specifies duty with various organisations in various areas outside Australia and declares that duty to be 'eligible duty' for the purposes of section 23AD of the ITAA 1936.

Operation HIGHROAD consists of duty with the ADF in Afghanistan, including within the land territory, internal waters, airspace and superjacent airspace of Afghanistan, replacing Operation SLIPPER.

Tax concessions for Operation HIGHROAD will be in effect from 1 January 2015 to 30 June 2015.

Statement of Compatibility with Human Rights

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

Tax and Superannuation Laws Amendment (2014 Measures No. 4) Regulation 2014

This Legislative Instrument 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 of the Legislative Instrument

Pass-through of contributions data

The Superannuation Industry (Supervision) Regulations 1994 (SIS Regulations) contain data and payment standards (the Standards) which apply to an employer that makes contributions to a superannuation fund on behalf of an employee. These contributions are generally made to:

•

a fund the employee has chosen to be a member of (a 'choice fund'); or

•

a fund which the employer provides as a default for employees who do not have a choice fund (a 'default fund').

An employer may have different default funds for different classes of employee.

From 1 January 2014, only a fund which offers a MySuper product can be a default fund.

When an employer makes a superannuation contribution to a fund on behalf of an employee, it is required to give the fund particular information about the employee and the payment ('contributions data'). The Standards determine the format in which this data must be given. The money that relates to the data flows separately through the payment and banking system and the fund reconciles it with the corresponding contributions data.

If employees belong to many different funds an employer often has to provide contributions data to each of those funds.

The Legislative Instrument amends the SIS Regulations so that, from 1 July 2015, if:

•

an employer has a default relationship with a fund; and

•

the employer provides the fund with contributions data (in line with the Standards) relating to another fund; then

the fund must pass the contributions data on to the other fund.

The effect of this is that each employer is able to deliver all of its contributions data to a single location and be certain that it will all be routed to the right destination, whether that is a default fund or any other superannuation fund.

Amendments to tax arrangements for overseas Defence Force personnel

Section 23AD of the ITAA 1936 provides an exemption from income tax of pay and allowances of Australian Defence Force (ADF) members performing certain overseas duty. Subsection 23AD(1) of the Act exempts the pay and allowances earned by ADF members from income tax where there is a certificate in force, issued in writing by the Chief of the Defence Force, to the effect that the members are on 'eligible duty'. Subsection 23AD(2) of the Act provides that the regulations may declare that duty with a specified organisation, in a specified area outside Australia, and after a specified day, is 'eligible duty' for the purposes of that section.

Regulation 7A of the ITAR 1936 specifies duty with various organisations in various areas outside Australia and declares that duty to be 'eligible duty' for the purposes of section 23AD of the Act.

Item 1 in Schedule 2 to the Legislative Instrument amends the Income Tax Regulations 1936 to provide tax concessions to Australian Defence Force (ADF) personnel serving in Afghanistan as part of Operation HIGHROAD between 1 January 2014 and 30 June 2015.

Human rights implications

This Legislative Instrument does not engage any of the applicable rights or freedoms.

The amendments to the SIS Regulations simplify the administrative process for employers to provide data to their employee's superannuation funds. It does not directly impact on individuals or result in any entity receiving contributions data that is not already required to be provided with this data.

The amendments to tax arrangements for overseas Defence Force personnel were a minor change that simply provides personnel serving with Operation HIGHROAD with comparable tax treatment to those afforded to other ADF personnel engaged in warlike service.

Conclusion This Legislative Instrument is compatible with human rights as it does not raise any human rights issues.