Second Reading SpeechMr Frydenberg (Assistant Treasurer)
I move: that this bill be now read a second time.
Today I introduce a bill that amends various laws to implement a range of improvements to Australia's tax and superannuation laws.
This government is committed to fairness and sustainability in Australia's tax and superannuation systems. The bill I am now introducing demonstrates that commitment by making some important changes to remove unintended consequences in the tax system and protect lost superannuation accounts with low balances until they can be reunited with individuals.
It is imperative that everyone pays the right amount of tax. A large part of this is ensuring that our tax laws are robust and cannot be circumvented for an unfair personal or corporate gain.
As the times change, so too should our tax system. This bill will make two tax changes that make our tax system fairer and more robust. These changes are important integrity measures that will eliminate unintended consequences to make sure that the right amount of tax is paid.
The government is also committed to ensuring that Australians have adequate retirement savings. This bill will make an important amendment to the superannuation law to protect lost superannuation accounts with low balances from being eroded by fees and charges.
The first change in this bill will strengthen the integrity of the scrip for scrip tax roll-over, which applies to companies and trusts involved in mergers and acquisitions activity.
The scrip for scrip roll-over rules provide tax relief when a company takes over, or merges, with another company. Where shares or interests in one company are exchanged for similar shares or interests in a new company, the tax payable is deferred. This reduces the costs of takeovers, and ensures that tax impediments do not prevent restructures taking place.
Special integrity rules apply to ensure that this tax relief will not apply where the same person or group controls both the acquiring company and the company being acquired. In those circumstances, companies could structure their affairs to obtain an inappropriate tax benefit.
A court decision has found that these special rules were not operating as intended. A company was able to issue new interests as part of a takeover which prevented the integrity rules from operating. They were also able to use debt as part of their restructure to avoid paying tax.
This is outside the policy intent of denying the tax roll-over in these circumstances-and creates a situation where tax could be indefinitely deferred.
This schedule resolves this issue, and amends the special rules to ensure they cannot be circumvented, by changing certain definitions, and introducing new, stronger, integrity rules.
Similar issues arise with acquisitions or mergers of trusts. The schedule will further amend the scrip for scrip rules to ensure they apply correctly to trusts.
This change is an important integrity measure for companies and trusts. Integrity in the tax system is also of high importance for individuals.
That is why schedule 2 will amend the Income Tax Assessment Act 1936 to remove an income tax exemption for government employees who work overseas for more than 90 days delivering official development assistance.
As a general rule, Australian residents are taxed in the Australian personal income tax system on their worldwide income. This income tax exemption was introduced to ensure that Australians who earned income while working overseas were not subject to double taxation-once in the overseas country and then again in Australia.
However, over time, this tax exemption has become more of a tax break for certain Australians who travel overseas to work. This has meant that government employees who claim this exemption have not been liable for income tax in either Australia or the overseas jurisdiction.
The practical effect is that some government employees are eligible for an income tax exemption on foreign earnings while others are liable to pay income tax.
This bill ensures that all government employees who deliver official development assistance overseas are subject to Australian income tax on their pay and allowances. This amendment will take effect from 1 July 2016.
This will standardise the tax treatment of government employees who deliver official development assistance overseas.
Australian Defence Force and Australian Federal Police personnel, as well as individuals delivering official development assistance for a charity or private sector contracting firm, will maintain eligibility for the exemption.
This amendment will result in a gain to revenue of $6.7 million over the forward estimates.
The final amendment in this bill I bring forward today, in schedule 3, will increase the account balance threshold below which small lost superannuation accounts must be transferred to the ATO.
Firstly, let me explain what lost super is.
In general, lost super is a super account where the fund has either lost contact with the member or the account has been idle for more than five years.
When we look at how people get into super, we know that around 70 per cent of employees are members of the default fund offered by their employer. Individuals are generally far less engaged with their superannuation than they are with their bank accounts.
When many people switch jobs, they often end up with a new super account and fail to consolidate existing accounts. As a result many people end up with more superannuation accounts than they want or need.
According to the ATO, 45 per cent of working Australians have more than one super account.
In many cases, members are not aware that they have lost super accounts.
For super accounts with smaller balances, the cost of fees and charges and insurance premiums can exceed investment returns. This can be particularly problematic for lost super accounts because, in most cases, the members are not aware that they have these accounts and can end up losing money that was meant for their retirement.
I have said before that competition in the superannuation system is important. Research by the Grattan Institute in 2014 has found that there is not strong competition based on fees in the super sector.
The problem of high fees is exacerbated because many Australians have unnecessary superannuation accounts, which means they could be paying significant amounts in needless fees every year.
The Australian Prudential Regulation Authority estimates that the median total fee paid by Australians for a low-cost super account is around $532 per year.
Transferring lost super accounts with low balances to the ATO will help protect these accounts from fee erosion and preserves their value until they can be reunited with the member.
The ATO does not charge any fees for maintaining these accounts. In fact, individuals are able to reclaim their super money from the ATO at any time and are paid interest calculated in accordance with the consumer price index on this money. The process for reclaiming these moneys is quick and simple.
Currently, lost member super accounts with less than $2,000 must be transferred from funds to the ATO as unclaimed superannuation money. This bill will increase the $2,000 threshold in two phases-first to $4,000 from 31 December 2015 and then to $6,000 from 31 December 2016. This is different to unclaimed banking where no maximum monetary threshold applies.
In the 2015-16 budget the government announced six measures that will reduce red tape for superannuation funds by removing redundant reporting obligations and by streamlining some of the lost and unclaimed superannuation administrative arrangements.
These include: updating the definition of 'uncontactable' to account for contemporary forms of member communication, for example on-line communication; supporting eligible rollover funds proactively consolidating lost accounts; and allowing direct payments of lost super held by the ATO to persons with a terminal illness.
These changes will make it easier for individuals to be reunited with their lost and unclaimed superannuation.
The ATO also plays an important role in assisting individuals to keep track of their super.
The ATO has a range of strategies in place to reunite members with lost and unclaimed superannuation accounts and reduce the number of unnecessary and inactive accounts in the superannuation system.
The ATO uses its own data as well as data from other sources to maximise the number of super accounts matched to an individual.
Individuals can access their super account information online through the government's myGov web service or through SuperSeeker. These services allow individuals to consolidate lost superannuation to their chosen superannuation fund. They also allow individuals to transfer any ATO held superannuation to their superannuation account.
In the 2014-15 financial year, over 450,000 accounts worth nearly $2 billion have been consolidated using ATO services.
The ATO also proactively works with super funds to ensure that they have updated addresses and contact details for their lost members.
I note that this lost super measure was first announced by Labor but was not enacted.
In November 2013, the government announced that it would deal with a backlog of tax and superannuation measures that had not been legislated. Consistent with that commitment, the government is introducing this bill to enact the measure. The government recognises that for many Australians their superannuation savings will form a significant part of their retirement income. With this bill, the government will help ensure that Australian's retirement savings are protected from fee erosion.
The three measures presented in this bill represent important updates to our tax and superannuation law.
The government is committed to seeing all Australians paying their fair share of tax. The two tax changes presented in this bill make our tax system more robust so that companies, trusts and individuals cannot unfairly avoid tax in a way that was never intended.
The government is also committed to ensuring that money Australians have saved for their retirement through superannuation is preserved rather than depleted by account fees and charges.
These changes represent important updates that are consistent with the government's values of fairness and sustainability, with full details contained in the explanatory memorandum.