Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)Chapter 8 - Regulation Impact Statement
Removal of advance instalment of contributions surcharge
Specification of policy objective
8.1 To simplify and clarify the surcharge legislation and to enhance the overall operation and efficiency of the surcharge.
8.2 The proposed amendment to the Superannuation Contributions Tax (Assessment and Collection) Act 1997 was announced by the Assistant Treasurer in his Press Release No. 12, dated 23 March 1999.
8.3 The superannuation contributions surcharge was announced in the 1996 Budget as an equity measure to reduce the level of superannuation taxation concessions available to high income earners. The surcharge applies to all employer and personal deductible superannuation contributions of high income earners with adjusted taxable incomes above $75,856 (for 1998-99). The maximum rate of surcharge of 15% applies to people with adjusted taxable incomes of $92,111 and above (1998-99).
8.4 Liability to pay the surcharge is on the holder of the surchargeable contributions at the time the assessment is raised. In most instances, this will be the superannuation provider. A superannuation provider which is liable to pay the surcharge for a member is also liable to pay an advance instalment individuals are not liable to pay an advance instalment. The advance instalment is equal to 50% of the surcharge liability to be paid by the provider in a given year. The advance is intended to recover part of the following year's surcharge liability in the year contributions are actually made.
8.5 The Government now considers, after extensive consultation with industry, that the advance instalment is not an efficient taxation collection mechanism because:
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- it is selectively imposed depending on when data is lodged and when a member's tax file number is identified;
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- its imposition is based on the premise that a member's relationship with a fund is constant over time:
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- for example, changed circumstances can affect subsequent surcharge liability (ie. where a member's adjusted taxable income varies significantly resulting in a lower or no surcharge liability in the following year, the member must wait until the following year's assessment for a refund);
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- the entity which is levied and pays the instalment is not necessarily the entity which will be credited with the instalment:
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- includes the issues of: application of the advance to a later assessment where a member has partially transferred contributions (ie. the principle of attaching surcharge liability to current year contributions does not hold up where contributions are split between providers, but the advance remains with the first provider); and whether an advance can be applied if the provider paying the advance does not report for the member in the later year.
8.6 Many of the issues are administrative and revolve around payment of an advance which subsequently exceeds the member's surcharge liability. In these circumstances there are significant reverse workflows for both superannuation providers and the ATO.
Identification of implementation options
8.7 Options considered capable of meeting this objective are:
(i) No specific legislative change
Under this option, most issues would be dealt with administratively as they arise.
(ii) Amendments to address specific problems
This would involve policy 'housekeeping' amendments to address specific issues, for example, providing the ability to vary the amount of advance instalment.
(iii) Reduce level of advance instalment
Lowering the level of the advance instalment (to say 25%), to reduce the number of instances where the advance would exceed the subsequent surcharge liability.
(iv) Repeal the advance instalment provisions
Assessment of impacts (costs and benefits) of each option
8.8 The major impact groups which have been identified are: the Government; the ATO (responsible for administration of the surcharge legislation); the superannuation industry (compliance issues); and members of superannuation providers. Within the superannuation industry, the impact of the various options may vary between large providers (including corporate funds) and self-managed funds (including those administered by accountants).
Option (i) No specific legislative change
8.9 This option relies on providers submitting information on contributions early, and the ATO processing surcharge assessments as soon as possible after receipt of all relevant information. In general, this option would lead to additional costs and provide only limited benefits.
8.10 There would be no change in total surcharge revenue collected.
Some cost to Government would result from earlier repayments of amounts where the advance instalment exceeds subsequent surcharge liability. However, it is expected only a limited number of members would benefit.
8.11 To the extent possible, the ATO would seek to streamline surcharge administration to permit the timely processing of assessments lodged by providers (effectively self managed funds) immediately after the end of the financial year to obtain a refund of a previously paid advance.
8.12 There would be significant additional systems costs to the ATO in providing for the early processing of assessments for a limited number of providers. ATO processing schedules and lack of available time for additional assessment runs would affect the viability of this option.
8.13 To benefit under this option, providers would experience substantial compliance costs in having to provide information earlier than required under the legislation. The notification date for providers in the initial reporting year (1997-98) was deferred from 31 October to 15 December 1997 after extensive consultation with the industry.
8.14 The reporting date was again deferred for this financial year (to 15 January), which indicates that the majority of providers could not provide the information early in a financial year without incurring substantial compliance costs.
8.15 In addition, there would only be a benefit in providing this information early if information on taxpayers' taxable income was also available at about the same time.
8.16 There would be little benefit under this option for self managed funds administered by accountants or tax agents who submit client tax returns under a lodgment program. As the program allows lodgment up to end February, there would not only be substantial compliance costs in preparing these returns early, but also costs from the potential bringing forward of payment of tax.
8.17 This option does not address the major concerns of the industry in respect of the surcharge.
8.18 It is unlikely that the benefits to the industry would be sufficient to effect any noticeable change in members' positions.
Option (ii) Amendments to address specific problems
8.19 Option (ii) would involve providing the ability to vary the advance. It would have the following costs and benefits for identified impact groups.
8.20 There would be minor financing costs to the Government under the proposal to provide for the variation of advance instalments. Under current legislative provisions, even if a member could demonstrate that there would be no surcharge in the relevant year, he or she must still pay the advance and then wait until assessments are sent out in the following year (up to 11months later), in order to recover the overpaid advance.
The Government would also have to provide additional funding to the ATO to cover the establishment of processes for, and the ongoing costs of, dealing with requests for variations of advance.
8.21 Significant additional administrative costs would be incurred by the ATO in handling requests for variation of advance instalment, dealing with objections, and in assessing and imposing penalties.
Any penalties imposed as a consequence of incorrect estimates of adjusted taxable income would be unlikely to offset ongoing costs of processing requests for variations.
8.22 To be able to apply for a variation it would be necessary, at the time the advance is payable, for a member or provider to have a reasonable idea of the member's surcharge liability in respect of that year. This requires knowledge of the member's likely taxable income and total surchargeable contributions for the income year.
8.23 Members of self managed funds would be the likely major beneficiaries generally the same accountant prepares the member's personal and the fund's returns and would therefore have this information readily available.
8.24 There may, however, be sizeable increases in compliance costs as the member/accountant would be required to calculate current year 'adjusted taxable income', apply for a variation, and potentially lodge an objection if the application was rejected.
8.25 Large superannuation providers (covering the bulk of members) would be unlikely to benefit from this option. To do so they would incur substantial additional compliance costs.
8.26 A number of significant issues would also need to be resolved, such as:
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- Who would apply for a variation - would this be the provider (which is liable for payment), or the member (who has the information necessary to determine surcharge liability).
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- Privacy concerns - for a provider to apply for a variation it would require information on members' adjusted taxable incomes. While this may not be an issue for self managed funds, members or their employer's corporate scheme are unlikely to provide this information.
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- Lack of information - providers are not currently required to give to other providers information on contributions made by their members. This information would be necessary to determine whether or not an application for variation of advance was justified. Requiring this data transfer between providers would involve significant compliance costs for both members and providers.
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- Systems for matching - matching of surchargeable contributions and adjusted taxable incomes is currently performed by the ATO. Providers may need to develop systems to perform this task if they are to apply for a variation of advance instalment.
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- Liability for penalties - if the member is permitted to apply for a variation, who would be liable for the penalty where a significant difference arises between the varied advance and 50% of the actual assessment? Under the legislation, the member is not generally liable for the surcharge, and it would be anomalous to impose a penalty on the provider as a consequence of events outside the provider's control.
For those providers able to utilise the ability to vary an advance instalment there will be an improved cash flow.
8.27 Compared with Option (i), this Option provides greater legislative certainty for the superannuation industry as a whole, however it would increase the complexity of the legislation and its administration.
8.28 Where a provider is able to obtain a variation on behalf of a member, the member will benefit from earnings on moneys which would otherwise have been paid to the Government.
Option (iii) Reduce level of advance instalment
8.29 Option (iii) would involve reducing the size of the advance instalment from 50% of the surcharge payable in a given financial year to a lower figure, say 25%. This would potentially reduce the number of instances where an advance payment exceeds a subsequent surcharge liability (but does not address the issues mentioned above).
8.30 There would be a deferral in the collection of revenue.
8.31 There would be minor savings through a reduction in reverse workflows, ie. limited to those circumstances where a person's subsequent year surcharge and advance liability is less than the current year's advance payment calculated on the 50% basis, but greater than that calculated on the lower (eg. 25%) basis.
However, there would be no reduction in system development costs associated with imposition of the advance.
8.32 Reduction in the rate of the advance would lead to an improved cash position for providers. This benefit would be passed onto members.
There would also be minor savings through a reduction in reverse workflows.
8.33 However, this option does not address the major issues raised, in consultations, concerning the application of the advance instalment. These concerns include changes to a member's circumstances and transfers by members between superannuation providers.
8.34 There would therefore be a negligible improvement in the efficiency of the surcharge system for superannuation providers, and only minor cost savings.
8.35 There would be a benefit to members paying the surcharge through increased earnings from moneys which would otherwise have been paid to the Government.
Option (iv) Repeal the advance instalment provisions
8.36 Option (iv) would have the following costs and benefits for identified impact groups.
8.37 Removal of the advance from 1998-99 assessments would have no impact on revenue in 1999-00, but would defer revenue by $120million in 2000-2001 (the first year FBT is included in adjusted taxable income). Smaller deferrals in subsequent years are estimated at $10million or less a year.
8.38 There would be administrative savings for the ATO resulting from a reduction in reverse workflows around members who having paid an advance one year, are not surchargeable in the next.
Superannuation providers
8.39 The complexity that currently exists concerning how the advance is to be applied in certain specific situations (eg. application of the advance to a later assessment where a member has partially transferred contributions), would not arise. Providers would therefore benefit from increased certainty in the operation of the surcharge.
8.40 Superannuation providers would further benefit from a reduced compliance burden. For example, where a member is surchargeable in one year, but is not surchargeable the following year, the provider at present is required to make adjustments to that member's account as a consequence of the advance payment.
Removal of the advance will also lead to an improved cash position worth an estimated $13million for the funds. This benefit would be passed onto members.
8.41 Those surchargeable members whose accounts are debited for surcharge (and advance) would benefit from increased earnings on the higher balance in their account.
8.42 Comments were sought from the Department of the Treasury on the proposal to remove the advance instalment.
8.43 The ATO has engaged in consultation with the superannuation industry to ensure that all the industry concerns have been considered.
Conclusion and recommended option
8.44 Option(iv) proposing repeal of the requirement for an advance instalment of surcharge is the preferred option.
8.45 Option (i) does not offer any significant change that would reduce alleged complexities with the legislation. The option does not provide any legislative certainty for the industry or members.
8.46 Option (ii) is not considered viable. There would be no benefits to providers and increased costs to Government and the ATO. There would be only minor benefits to a limited range of members.
8.47 A number of significant issues would need to be addressed such as, who would be able to vary the advance, and who would be liable if the varied amount proved to be inaccurate.
8.48 Legislative amendments to provide for variations of advance would add significantly to the length and complexity of the surcharge legislation. The provisions themselves would add to the administrative costs of superannuation providers.
8.49 Option (iii) would result in a sizeable deferral in Government revenue, with only limited benefits to the ATO, superannuation providers and members.
8.50 On the other hand, Option (iv) would remove a significant compliance issue for the industry, streamline the ATO's administration of the legislation, and benefit members.
8.51 Removal of the legislative requirement for payment of an advance instalment will not add to the regulatory burden on superannuation providers. In practice, the efficiency of superannuation providers and administrators should be improved.
8.52 However, given the sensitivity of issues surrounding the surcharge, the ATO will monitor and consult with superannuation providers and administrators with experience following implementation of the measure.
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