House of Representatives

Tax Laws Amendment (2009 Measures No. 1) Bill 2009

Explanatory Memorandum

(Circulated by the authority of the Treasurer, the Hon Wayne Swan MP)

Chapter 6 Regulation impact statement

Introduction

12.1 The following regulation impact statement assesses the costs and benefits of a proposal to include certain 'salary sacrificed' contributions to superannuation in the income tests of means-tested government assistance programs. This proposal is discussed in Chapters 3, 4 and 5.

Problem

12.2 Generally, government support payments in the Australian tax and transfer system are means- or income-tested. This approach promotes the underlying principle of government support that individuals with greater means to support themselves receive less support than those with fewer resources or those in greater need of assistance. Income tests are generally comprised of different types of income, such as income from work-related activities or income from investments.

12.3 At present, there are some inconsistencies in the treatment of certain types of income to determine eligibility for government support payments. While many types of income are assessed, certain contributions to superannuation - for employees sometimes referred to as employer 'salary sacrificed' contributions to superannuation - that could have been received as present disposable income by individuals to support themselves are not assessed when determining eligibility to government support. This treatment produces inequity and inefficiency in the provision of government financial assistance. It allows individuals and families to access more government support payments than others with similar levels of resources or than would be possible if their total remuneration were paid as wages or salary income. Further, it favours those who have access to these types of remuneration arrangements over those who do not.

12.4 Remuneration arrangements of this kind have become more widespread over time. At present, there are an estimated 540,000 employees whose employers' salary sacrifice part of their income into superannuation. While not all of these individuals access government support, their number has increased substantially since these remuneration arrangements began in the early 1990s and is expected to increase further in the future.

12.5 It is estimated that the cost of inaction would be approximately $160-170 million each year over the period 2009-10 to 2011-12. This cost of inaction is expected to increase over time. It is inefficient because expenditure is directed at individuals and families with sufficient resources to support themselves. They are getting by without wage and salary income and are benefiting from programs designed to support those in genuine need of assistance. They are also benefiting from significant concessional tax treatment of their superannuation contributions.

12.6 The following government programs are affected by this treatment of income:

·
income support payments paid under the Social Security Act 1991 for people below age pension age (noting that payments paid to those of age pension age already define income as is proposed by this structural reform);
·
parental income tests for Youth Allowance and ABSTUDY;
·
Commonwealth Seniors Health Card;
·
Family Tax Benefit (Parts A and B);
·
Child Care Benefit;
·
Child Support;
·
Additional Boarding Allowance; Assistance for Isolated Children scheme;
·
dependency tax offsets;
·
mature age worker tax offset;
·
senior Australians tax offset;
·
offset for trustees under section 160AAAB of the Income Tax Assessment Act 1936 ;
·
pensioner tax offset;
·
Medicare levy surcharge;
·
Higher Education Loan Program and Student Financial Supplement Scheme;
·
deduction for personal superannuation contributions under Subdivision 290-C of the Income Tax Assessment Act 1997 ;
·
spouse superannuation contributions offset; and
·
Government superannuation co-contribution scheme.

12.7 There are other benefits in respect of employment that are commonly salary sacrificed. These include vehicles and some expense payments. Benefits, such as the former, are captured by the fringe benefits tax arrangements. They are considered reportable fringe benefits and are treated as income for most government support programs. Others, such as the latter, are non-reportable and not considered as income. 'Salary sacrificed' superannuation is exempt from fringe benefits tax and not assessed as income for means-testing purposes.

12.8 The consequences of not assessing certain 'salary sacrificed' contributions to superannuation as income impose a medium impact on the community. It creates inequity in the treatment of individuals and families with similar resources and inefficiency in the provision of government assistance.

Policy objective

12.9 The specific objective of the proposal to assess certain 'salary sacrificed' contributions to superannuation as income is to broaden the definition of income that is assessed in determining eligibility for government support programs.

Implementation options

12.10 Explicit government regulation is the only feasible option to deal with inadequate income-testing of government support programs. It is compared to the case of doing nothing.

No change option

12.11 At present, income that could have been used by individuals to support themselves may be instead sacrificed as contributions to superannuation. This income is not assessed for the purposes of determining entitlement to government support programs. This creates inequity among individuals and families with similar means as it allows some to access government support while others who receive their remuneration as wages or salary are unable to do so.

12.12 The current situation provides perverse incentives for individuals to cost shift from private means to public funds. It is an inefficient use of government resources to provide support, which is intended for people in genuine need of assistance, to individuals who can afford to 'salary sacrifice' all or part of their income.

12.13 Inadequate and out-dated income-testing will continue to produce stress on government expenditure. Treasury estimates this expenditure to be around $160-170 million per year between 2009-10 and 2011-12.

Explicit government regulation - include certain 'salary sacrificed' contributions to superannuation in the income tests used to determine eligibility to government support programs

12.14 Explicit government regulation (black letter law) is the preferred regulatory approach to achieve the desired outcome due to the complexity and universality of the legislative definition required.

12.15 At the core of the proposal is the requirement to draft and implement a robust and workable definition of 'salary sacrificed' contributions to superannuation - those that could have been received by individuals as cash income - that should be assessed as income for a range of income-tests in the tax and transfer system (eg, adjusted taxable income, separate net income, net income from working). Mandated employer contributions to superannuation on behalf of employees will not be assessed as income as they could not have been received by employees as current income.

12.16 Universal application of the definition is required across different remuneration arrangements and industrial instruments. For example, some employers 'salary sacrifice' mandated contributions on behalf of their employees in addition to non-mandated contributions. Further, mandated arrangements can vary. The minimum stated in the superannuation guarantee legislation is 9 per cent of ordinary time earnings. However, many industrial instruments mandate higher levels of compulsory employer superannuation contributions.

12.17 The definition of 'salary sacrificed' superannuation contributions to be assessed as income will also have to take into account the different types of contributions to superannuation. In the case of defined benefit schemes, employer contributions, in addition to and sometimes well above those required under superannuation guarantee law, will not be assessed as these contributions could not have been taken by the employee as cash. However, in some defined benefit schemes, where post-tax contributions can be converted to pre-tax contributions, these will be assessed because they could have been used by the employee to support themselves.

12.18 The definition will need to anticipate contrived arrangements between employees and employers to circumvent the policy intent. There will remain incentive to minimise assessable income in order to maintain eligibility for government financial assistance.

12.19 Implementation of the proposal will require employers to record superannuation contributions that are assessed as income on the payment summaries of their employees. Employees in turn will record these amounts on their tax return. The Australian Taxation Office (ATO) will undertake information and education campaigns for employers, tax intermediaries and individuals. The ATO estimates that around 61,000 employers will be affected by the proposal.

12.20 The new definition of income will include deductible personal superannuation contributions as these contributions are conceptually similar to 'salary sacrificed' contributions made by employees. The proposal is due to commence from 1 July 2009 (2009-10 income year). Once implemented, the income tests of government support programs will be more comprehensive and treatment of income between those who receive their income as wages or salary and those who receive this income as contributions to superannuation will be more equitable.

Assessment of impacts

Explicit government regulation - include certain 'salary sacrificed' contributions to superannuation in the income tests used to determine eligibility to government support programs

12.21 The impact analysis of the proposed regulation has been compared to leaving the current situation unchanged, that is, where salary sacrificed contributions to superannuation are not assessed as income to determine government support program eligibility.

Impact group identification

12.22 The groups in the community that are affected by salary sacrificing remuneration arrangements are:

·
Individuals (employees and the self-employed). The ATO estimates that around 540,000 employees alone are salary sacrificing above 9 per cent employer superannuation contributions. There will also be self-employed people who contribute to superannuation.
·
Employers including small business. The ATO estimates that around 61,500 employers will be affected by the proposal, of which around 1,500 are large, 25,000 are small to medium in size and 35,000 are micro-sized (source: number of businesses lodging Fringe Benefits Tax returns, ATO statistics 2004-05).
·
Tax practitioners. The ATO estimates that a small proportion of the 22,000 tax practitioners would be affected by the proposal.
·
Other intermediaries (eg, software developers, payroll providers and financial planners). The ATO estimates that a proportion of the 7,000 financial planners will be affected, as will other intermediaries.
·
Australian Government. There will be additional administrative and compliance costs on the ATO and Centrelink, and additional departmental costs in affected government agencies.
·
The Australian community. The Australian people will benefit from the proposal through more effective targeting of government support programs to those they are designed to assist (eg, low- and middle-income individuals and families). The proposal promotes greater equity in the treatment of resources available to individuals and families to determine eligibility to support programs. It also treats the employment-related income of those with and without salary sacrifice superannuation arrangements in a like way.

Analysis of costs/benefits

Individuals

12.23 Individuals, who claim government support at present, will no longer be entitled to that support if their income including salary sacrificed contributions to superannuation is above means-test thresholds. These individuals will need to re-evaluate their remuneration arrangements. Some may need to use private income in lieu of government assistance to support themselves. In cases where private income from other (non-employment) sources is unavailable, retirement savings in the form of salary sacrificed contributions to superannuation may decrease. It is possible that some people will lose access to government financial assistance and concessional tax treatment on their superannuation contributions which they can no longer afford to make.

12.24 Receiving parents and their children will benefit from the proposal through increased child support payments from paying parents, whose more comprehensive measure of available resources will now be taken into account when determining these child support payments.

12.25 Some low- and middle-income individuals may receive greater support under the proposed changes. This will occur in programs with a phase-in threshold, such as the mature age worker tax offset and the government co-contribution scheme. Whether individuals receive greater government support overall will depend on what other programs they access.

12.26 Individuals, whose employers do not provide access for them to, or they themselves cannot afford to, salary sacrifice income into superannuation will not be affected by the proposal. They will continue to receive government support if their assessable resources permit.

12.27 Individuals that enter into salary sacrifice remuneration arrangements with their employers will be required to report the total amount of 'salary sacrificed' superannuation contributions on their annual income tax returns. This information will be provided by employers on (annual) payment summaries.

12.28 Self-employed people will continue to report their annual personal superannuation deductions on their income tax return. Individuals with both employee and self-employed income in any given year will need to report both components of superannuation in their annual tax returns.

Employers (including small business)

12.29 There will be a medium-implementation burden and medium-ongoing impact on employers who offer these remuneration arrangements. Employers will need to be aware of the change and understand its potential implications as they will be a key contact for their employees. Employers will need to understand the distinction between mandated and greater-than mandated contributions to superannuation so that they can report the latter on employee payment summaries. Employers with a mix of employees entitled to different levels of mandated contributions will face added complexity. Employers will need to update their software and systems by 1 July 2009 to report salary sacrificed contributions on employee payment summaries for the 2009-10 income year. Employers will have ongoing procedural and record-keeping costs.

12.30 There may be a relatively disproportionate burden on small businesses that offer these arrangements to their employees.

12.31 There is no direct benefit to employers. Those that offer these arrangements will continue to receive a tax deduction in respect of these contributions.

Tax practitioners and other intermediaries

12.32 Tax practitioners and other intermediaries (eg, software developers, human resource service providers, financial planners) will need to be aware of the change and understand its potential implications for their clients.

Australian Government

12.33 The cost to the Government of administering the proposal is estimated at around $5.5 million per year from 2008-09 to 2011-12 for the ATO alone. The cost to Government reflects a large implementation cost of $10 million in 2009-10, around $8 million of which will be spent on stakeholder education. Ongoing costs beyond the forward estimates are expected to be around $2.8 million per year. These are comprised of processing, client contact, debt collection and compliance costs.

12.34 There will be additional administration costs in Centrelink and other affected agencies. The Government will need to provide information and conduct education campaigns for individuals, employers and other stakeholders.

12.35 The fiscal impact of the proposal is a saving of around $160 million to $170 million each year from 2009-10 to 2011-12.

Australian community

12.36 The Australian community stands to benefit from the proposal through more equitable provision of government support and more efficient redistribution of income collected by government.

Risks

12.37 It will be difficult to prescribe in legislation the definition of superannuation contributions that should be assessed as income for government support programs. At present, there is no legislative definition of these contributions and there are many superannuation contribution arrangements between employers and employees. There is a risk that employees and employers may enter into contrived remuneration arrangements to circumvent the policy intent.

Tax Compliance Cost Calculator

12.38 The ATO has assessed the potential compliance-cost impact to be medium, which is comprised of a medium-implementation impact and a medium-ongoing impact. It has identified that significant system changes may be required by employers.

12.39 Table 6.1 contains a summary of potential direct compliance-cost impacts only and is a partial estimate of the potential compliance-cost impact. The compliance costs are mainly borne by employers with a small impact on individuals. The cost to employers in different market segments is higher. For example, a large company would have a start-up cost of $9,114 and an ongoing cost of $702 each year. The start-up and ongoing costs for small and medium enterprises and micro-employers are $648 and $33, and $504 and $27 respectively. Ongoing costs to individuals are assumed to be nil. However, supporting evidence is weak as firm data is not available, requiring estimates to be made.

12.40 Data used in calculating suggested times (average hours) are informed by ATO expertise and information derived from the ATO-ATAX compliance-cost survey; New Zealand SME survey; ATO time-box form data; and post-implementation reviews conducted by the Board of Taxation.

Table 12.1: Estimated cost of regulation to taxpayers and employers, Australia, 2008
Client type Number of clients Cost per client Total potential cost of regulation
($ per year) ($ per year)
Implementation cost
Individuals 540,000 18 9,719,999
Large businesses 1,473 9,114 13,424,922
Small to medium businesses 25,000 648 16,200,000
Micro businesses 35,000 504 17,640,000
Total implementation cost 601,500 95 56,984,921
Ongoing cost
Individuals 540,000 0 0
Large businesses 1,473 702 1,034,046
Small to medium businesses 25,000 33 825,000
Micro businesses 35,000 27 945,000
Total ongoing cost 601,500 5 2,804,046

Cumulative regulatory burden

Individuals

12.41 There is a small increase in regulatory burden for employees that have entered this type of remuneration arrangement with their employer. These employees will be required to report 'salary sacrificed' superannuation contributions on annual tax returns. Employees will report the amount recorded by employers on annual payment summaries. The self-employed already report personal deductible contributions on tax returns.

12.42 Some individuals will need to review their remuneration arrangements. Some may be inclined to seek arrangements which circumvent the policy to maintain access to government support.

Businesses

12.43 There will be a medium increase in regulatory burden for employers. On implementation, they will face a medium burden as they will be required to update their systems by 1 July 2009 to record employer contributions to superannuation - to be defined in legislation - made on behalf of their employees. Employers will also have a medium-ongoing regulatory burden in the form of continued procedural and record-keeping costs.

12.44 Employers are already required to report total employer contributions to superannuation made on behalf of each employee to superannuation funds. However, this amount does not discretely identify the various components of these contributions (eg, mandated contributions, salary sacrificed contributions).

Data sources, assumptions and data gaps

12.45 Personal income tax data (2004-05) and superannuation surcharge (2004-05) data has been used to obtain estimates of deductible superannuation contributions. The Treasury's STINMOD model, which uses Australian Bureau of Statistics' Survey of Income and Housing data (2002-03 and 2003-04), has been used to estimate fiscal impacts on income support and family assistance programs. A range of employer data has been used to estimate employer burden.

Consultation

Who has been consulted?

12.46 The affected Government agencies have been consulted, namely:

·
Treasury;
·
Department of Finance and Deregulation;
·
Department of Families, Housing, Community Services and Indigenous Affairs;
·
Department of Education, Employment and Workplace Relations;
·
Department of Human Services;
·
Department of Health and Ageing;
·
Child Support Agency;
·
Department of Veterans' Affairs;
·
Department of Agriculture, Fisheries and Forestry;
·
ATO; and
·
Centrelink.

What are their views?

12.47 All relevant agencies support the policy.

12.48 Treasury has developed the policy and appropriate mechanism for putting the policy into practice. Treasury has also highlighted the challenges in drafting effective legislation.

12.49 The ATO has also highlighted complexities for particular groups (eg, self-employed, transition to retirement) and noted the legislative difficulty.

12.50 Centrelink applies the policy to people of age pension age.

12.51 The Department of Finance and Deregulation has cleared the program (administered) and departmental costs.

What was the consultation process?

Policy development

12.52 Treasury prepared a discussion paper outlining the rationale and mechanism for the policy proposal in consultation with the Department of Families, Housing, Community Services and Indigenous Affairs. Treasury and the Department of Families, Housing, Community Services and Indigenous Affairs consulted affected line agencies to seek comment and support.

12.53 Treasury consulted internally to refine the policy and in particular the mechanism for change (eg, superannuation contributions to be reported on payment summaries). Treasury also consulted the ATO and Centrelink to determine the integrity of the proposal and seek advice on compliance and administrative costs.

12.54 Consultation did not occur with individuals, businesses and other stakeholders as the proposal was being developed and put forward in the context of the 2008-09 Budget.

Draft legislation

12.55 Public consultation on draft legislation giving effect to this proposal and other reforms to income tests announced in the 2008-09 Budget took place from 5 November 2008 to 7 December 2008 from the Treasury website (www.treasury.gov.au). Stakeholders were advised via email when the consultation period commenced. There was also a reminder of a final opportunity to submit comments sent via email on 12 December 2008.

12.56 Key stakeholders were identified following consultation with relevant agencies. The ATO also notified members of its stakeholder committees that the consultation period had commenced and details of the changes are available from the ATO and Centrelink websites.

Conclusion and recommended option

12.57 Government support programs in the Australian tax and transfer system are generally means-tested to target them to groups with certain levels of resources. However, many income tests omit important components of remuneration and other income. In the case of 'salary sacrificed' contributions to superannuation, this is a relatively modern form of remuneration and one that has been increasing in popularity.

12.58 The inclusion of 'salary sacrificed' superannuation contributions in income is a structural reform of the tax and transfer system, which broadens the concept of remuneration. It treats this type of income in the same way as other forms of income, such as salary and wages. Further, it treats people with access to this type of remuneration equally to those without access to these arrangements. More equitable treatment of government support recipients means that those with similar levels of private resources receive similar levels of government support.

12.59 Explicit government regulation defined in legislation is the recommended approach due to the complexity and universality of the definition required to achieve the desired outcome. To leave the current situation unchanged would most likely make the problem of inequitable treatment of income more widespread as salary sacrificed superannuation arrangements are used by greater numbers of individuals to access government support payments. The recommendation has support from agencies (eg, ATO, Centrelink) that will administer the proposal. Centrelink already assesses this type of income for people of age pension age. The Department of Veterans' Affairs also assesses this type of income for its clients.

12.60 There is some risk that the proposal will be compromised where individuals enter into contrived remuneration arrangements to circumvent the policy.

Implementation and review

12.61 'Salary sacrificed' superannuation contributions made on behalf of employees will need to be recorded and reported by employers on employee annual payment summaries. The proposal will increase the reporting burden on employers, but its design is similar to other employee entitlements already reported by employers on payment summaries (eg, reportable fringe benefits). Employees will report these amounts on annual tax returns. The ATO will determine eligibility for the government support programs it administers when it undertakes individual assessments. The ATO will forward this information to the Child Support Agency and Centrelink. The ATO has estimated administration costs of around $20 million over four years from 2008-09 to 2011-12, though around half of these costs occur in the implementation year 2009-10. Future administrative costs are estimated to be around $2 million per year.

12.62 Centrelink clients will provide details of 'salary sacrificed' contributions to the agency when they apply for government support programs administered by it (eg, income support payments, family assistance). At present, Centrelink collects this information from clients of age pension age only. The proposal extends collection to clients below age pension age.

12.63 The proposal will be implemented from 1 July 2009 (2009-10 income year) to enable individuals, businesses and government agencies to update their systems over the preceding 13 months. The ATO will inform individuals of the changes to ensure they have sufficient time to make changes to their arrangements if they wish. The ATO will also communicate to individuals in the lead up to Tax Time 2010. The ATO will also inform employers of the changes well before 1 July 2009 to ensure they will be able to capture necessary data for contributions made from 1 July 2009. The ATO will inform employers of their obligations in relation to payment summaries in the lead up to 30 June 2010. The ATO will also inform intermediaries such as software developers, payroll providers and salary packaging providers of the changes.

12.64 The ATO will undertake some compliance work in relation to correct reporting by employers on payment summaries as part of its existing employer compliance framework. This would add time to a review or audit and may also require some targeted selection for reviews in the first few years.

12.65 While there is no formal review mechanism foreshadowed, the design of the proposal enables its effectiveness to be assessed in the future. The proposal relies on individuals self-reporting their salary sacrificed contributions to superannuation (as recorded by their employers). Employers make employer contributions to superannuation funds, which in turn provide the information to the ATO on individual member contribution statements. While not part of this proposal, it would be possible for the ATO to match information on annual tax returns with that obtained through member contribution statements.


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