Draft Superannuation Contributions Ruling

SCR 97/D1

Superannuation contributions: actuarial method for the calculation of the notional surchargeable contributions factor

• Please note that the PDF version is the authorised version of this draft ruling.
  This document has been finalised by SCR 97/1.

FOI status:

draft only - for comment

Preamble

What this Ruling is about

1. This Ruling provides guidance to actuaries in relation to the preparation of actuarial certificates which deal with the notional surchargeable contributions factor required under the Superannuation Contributions Tax (Assessment and Collection) Act 1997 (the Act).

Class of person/arrangement

2. When finalised, this Ruling is relevant to actuaries who have been asked to prepare an actuarial certificate which advises a defined benefits superannuation provider of the notional surchargeable contributions factor(s) for a defined benefits superannuation scheme. Such advice is required for the purposes of the Act.

Background

3. Subsection 8(3) of the Act provides that the surchargeable contributions for a member of a defined benefits superannuation scheme are worked out using the formula: annual salary x notional surchargeable contributions factor.

4. Section 43 of the Act defines the notional surchargeable contributions factor as the factor applying to a member of a superannuation (defined benefits) provider for that year as certified by an eligible actuary according to Australian actuarial practice.

5. It is envisaged that actuarial advice regarding the factor will take the form of a certificate advising the superannuation provider of the rate or rates which should be applied in determining the surchargeable contributions for a member of a defined benefits superannuation scheme.

6. The Australian Government Actuary has prepared a draft method to assist actuaries who have been asked to prepare an actuarial certificate which advises a defined benefits superannuation provider of the notional surchargeable contributions factor(s) for a scheme.

Ruling

7. The approach contained in the Australian Government Actuary's draft method (at Attachment A) is an acceptable approach for an actuary to adopt in the preparation of an actuarial certificate dealing with the notional surchargeable contributions factor.

Date of Effect

8. This Ruling has effect from the date of its issue in final form.

Explanations

9. The draft method in the Attachment has been prepared by the Australian Government Actuary and the Australian Taxation Office in consultation with the Institute of Actuaries of Australia.

10. The draft method is issued to provide actuaries with guidance when providing certificates which advise on the notional surchargeable contributions factor for the purpose of the Act.

Your comments

11. If you wish to comment on this Draft Ruling, please send your comments by: 8 August 1997 to:

12. Comments on the Australian Government Actuary's draft method should be sent by: 8 August 1997 to:

13. Please note that the ATO will finalise this draft Ruling in August 1997. It is imperative that your comments be received by the closing date.

Commissioner of Taxation
30 July 1997

Method for the Calculation of Notional Surchargeable Contribution Factors for the purposes of section 8(3) of the Superannuation Contributions Tax (Assessment and Collection) Act 1997.

A note prepared by the Australian Government Actuary in consultation with the Institute of Actuaries of Australia.

This document is intended specifically for an actuarial audience. Other readersdealing with a specific problem or matter should not rely solely on this note but should get appropriate professional advice.

1. Introduction

The Superannuation Contributions Tax (Assessment and Collection) Act 1997 (the Act) provides for the determination of a member's surchargeable contributions for a financial year under Section 8 of the Act.

Section 8(3) of the Act defines "the surchargeable contributions for a financial year of a member of a defined benefits superannuation scheme" as "the amount worked out using the formula:

annual salary x notional surchargeable contributions factor"


The definition of a notional surchargeable contributions factor appears in section 43 of the Act as "a factor applying to a member for that year as certified by an eligible actuary according to Australian actuarial practice."

This note is provided as a standard for actuaries to follow in providing advice of the Notional Surchargeable Contribution Factor (NSCF) following Australian Actuarial Practice.

It is envisaged that NSCF advice will take the form of a certificate advising the trustee of superannuation scheme of the rate or rates which should be applied, how they should be applied to determine contribution amounts, and any other conditions which should be included on the certificate.

The methodology itself is contained in section 2 - Methods for Determining the Notional Surchargeable Contributions Factors (NSCF). This note provides commentary (in other sections and, specifically marked as boxed in section 2) which is intended to assist practitioners in their interpretation and application of the method as set out in the body of section 2.

1.1 Table of Contents 1. INTRODUCTION 1 1.1 TABLE OF CONTENTS 2 2. METHODS FOR DETERMINING THE NOTIONAL SURCHARGEABLE CONTRIBUTIONS FACTORS (NSCF) 3 2.1 CALCULATION METHODOLOGY 3 2.1.1 The General Approach 3 2.1.2 Cliff Benefit Structures 3 2.1.3 `Negative' contributions in any one year 4 2.1.4 Benefit Accrual 5 2.2 PARAMETERS 5 2.2.1 Definition of Salary 5 2.2.2 Economic Parameters 6 2.2.3 Other Parameters 7 2.3 NOTIFIABLE EVENTS 8 2.4 ACCUMULATION ONLY BENEFIT MEMBERS 9 2.5 CONTENT OF CERTIFICATES 9 3. PRINCIPLES 11 3.1 PRINCIPLE : HORIZONTAL EQUITY 11 3.2 PRINCIPLE : MAXIMUM REDUCTION OF 15 PER CENT 11 3.3 PRINCIPLE : COST EFFECTIVE CALCULATIONS 12 3.4 PRINCIPLE : NON ACCRUING MEMBERS 12 3.5 PRINCIPLE : PAST ACCRUED BENEFITS 13 3.6 PRINCIPLE : ACTUARY NOT TO CHOOSE BASIS 14 3.7 PRINCIPLE : MEMBERS EARNING BELOW THE LOWER THRESHOLD SHOULD NOT PAY THE SURCHARGE 14 4. DEFINITIONS 15

2. Methods for Determining the Notional Surchargeable Contributions Factors (NSCF)

2.1 Calculation Methodology

The method is based on two approaches :-

1.

General Approach

This approach is intended to cater for most superannuation schemes.

2.

Cliff Vesting Benefit Structures

Where significant inequities could be created through the use of the general approach.

Comment : In theory, there are a number of methods which could be used by actuaries to determine particular contribution factors. The two approaches included in this note are intended to provide a structure which balances competing issues and establishes a approach which is appropriate in particular circumstances based on objective tests. The use of objective tests is consistent with section 3.6 - Principle : Actuary not to choose basis.

2.1.1 The General Approach

The Projected Unit Credit (PUC) Method is to be used. The calculations should bemade in the manner of calculating the cost of benefits accruing in the year of membership (along the lines of the 'service cost' calculation required under FAS87 calculations).

Application : The General Approach should be applied in all cases except where the approach specified under section 2.1.2 applies.

2.1.2 Cliff Benefit Structures

For schemes where the benefit structure includes a significant increase in benefit in a particular year (whether related to age or service or some other parameter), then the general approach needs to be adjusted.

The scheme benefit structure should be modelled by age at entry and duration of service considering the projected generally available benefit on voluntary withdrawal (whether this be resignation, early retirement, or age retirement). Each age at entry can then be examined as a separate group.

A cliff benefit group within a scheme is that age or group of ages at entry where the increase in projected generally available benefit on voluntary withdrawal in any single year of membership (but not a year of membership in the first 6 years of joining the scheme) exceeds the average increase in benefit for each of the years of membership prior to that year by 25 per cent, all values being considered in terms of a percentage of projected salary.

For those groups who are a cliff benefit group, then an adjusted new entrant normal approach should be used for the scheme for the NSCFs. For all other groups of members within the scheme, the general approach as specified in section 2.1.1 should be used.

Comment : A number of defined benefit schemes do not have an even progression of benefit from one year of membership to the next, and this is more accentuated for some schemes and for some members. It is also likely that such schemes will move naturally toward a more even progression of benefit as the Superannuation Guarantee increases to the 9 per cent maximum.

In such schemes for those members who do have a sharp increase in their benefit in a particular year, the application of the PUC method would be likely to lead to a spreading of notional contributions around the peak and, for members who leave service just prior to or after the peak, there may be inequitable and innocuous results.

There are two alternatives to deal with this issue and the result can be considered more equitable either way depending on the perspective taken. This section settles the criteria for establishing the cliff membership to be determined by age at entry (as the extent of cliff can vary) and indicates that the rate will be determined based on limited spreading of the cliff year rather than the maximum spreading.

It can be expected that this approach gives the most effective result when any surcharge assessed is considered as a proportion of the eventual benefit regardless of the point at which the benefit is taken.

Retrospectivity : It will be necessary to define the accrued benefit for existing members when applying this approach. It will also be necessary to deal with members where they were members of the scheme prior to the announcement date but were not at the point of cliff vesting. In such cases it is acceptable to produce a separate set of NSCF factors for existing members.

2.1.3 'Negative' contributions in any one year

Methods should be interpreted such that a rate of zero is applied in a year where a calculation could otherwise be construed as resulting in a negative Contributions Factor.

That is, otherwise negative factors are spread over the period of accruing membership within the fund rather than averaged over a number of possible funds in a particular reporting period.

2.1.4 Benefit Accrual

An actuary should adopt the Actual Accrual Approach described in the Institute of Actuaries of Australia's Professional Standard 402.

In applying the approach, the actuary is to assume that the retirement benefit accruing in a year is determined in accordance with the plan's benefit specifications. Averaging of benefit accrual in plans where benefit level varies (either with different rates for different periods of service, for example, or a maximum benefit applying) should not occur. If a minimum benefit applies, the allocation to a particular year of service should assume that the minimum benefit is accrued over the period from entry to the plan until the earliest date when that benefit may be paid.

Other benefits should be allocated to a year of service consistently with the approach for retirement benefits. In particular, Death and Disablement benefits are to be allocated on the 'Accrued Retirement Benefit Approach' as described in paragraph 12(a) of the Professional Standard 402, but in relation to the current year of membership only.

2.2 Parameters

Comment : To perform calculations, it is necessary to determine values for certain parameters. This section discusses the parameters required and the manner in which they should be determined.

It is not intended that actuaries or others should interpret the particular parameters used for determining the NSCF as relevant for any other purpose. A basis for actuarial calculations is determined taking into account the purpose of the calculation. The determination of the NSCF has a particular purpose, that is, to permit the reporting of amounts to the ATO.

2.2.1 Definition of Salary

The Act specifies that the annual salary to which the NSCF is to be applied has a particular meaning (section 8(3) of the Act) as

(a)

if paragraph (b) does not apply - the amount that is the member's annual salary for the financial year; or

(b)

if another amount is taken to be the member's annual salary for the purposes of the scheme as it applies to the member for the financial year - that other amount.

If the annual salary as defined is not readily available as part of the scheme's administrative arrangements or as a consequence of the particular benefit structure of the scheme then the actuary may specify an alternative salary measure and reflect any expected differences in these measures in the preparation of the NSCF.

In the event that a scheme benefit structure is not salary based the actuary may specify an amount in the certificate so that, for the purpose of the Act, the NSCF is that amount divided by the annual salary however determined.

2.2.2 Economic Parameters

2.2.2.1 Discount Rates

The discount rate shall be the 10 Year Commonwealth Government Bond Rate as at the 30 June immediately preceding the earlier of

•

the first reporting period for the certificate; or

•

the date on which the certificate is prepared and signed by the actuary;

and rounded to the nearer 1/2 per cent per annum.

Comment : For the first reporting period, being for membership through the 1996-97 financial year the 10 year bond rate was 8.88 per cent per annum as at 30 June 1996 which, rounded, implies an assumption of 9 per cent per annum.

2.2.2.2 Rates of Future Salary or Wages Growth

The rate of salary or wages growth assumed for the purpose of projections should be equal to the discount rate specified in section 2.2.2.1 less 3 1/2 per cent per annum.

In any event, the rate assumed for salary or wages growth cannot be less than zero.

Comment : For example, where a discount rate specified under section 2.2.2.1 is 7 1/2 per cent per annum then the rate of assumed salary or wages growth should be 7 1/2 percent less 3 1/2 per cent, ie 4 per cent per annum. For the 1996-97 financial year this rate is, therefore 9 per cent less 3 1/2 per cent, ie 5 1/2 per cent per annum.

2.2.2.3 Rates of Promotional Salary Growth

No separate salary promotional scale should be used in calculations of the NSCF.

Comment : The rate of salary or wages growth assumed for the purpose of projections is determined in section 2.2.2.2 and is intended to take into account both general salary increases and the potential, where this could be otherwise assumed, for separate allowance for promotional increments.

2.2.2.4 Rates of Increase in Price Indexes

For some schemes, benefits are linked at some stages to the increase in a price index. The rate of increase in price indices for the purpose of projections should be equal to the discount rate specified in section 2.2.2.1 less 5 1/2 per cent.

In any event, the rate assumed for price index increases cannot be less than zero.

Comment : For example, where a discount rate specified under section 2.2.2.1 is 7 1/2 per cent per annum then the rate of assumed price index growth should be 7 1/2 per cent less 5 1/2 per cent, ie 2 per cent per annum.

Where the rate of increase in the price index is capped as part of the benefit structure then the rate should be adjusted to allow for the cap. For example, where pensions are specified in the trust deed or rules of the scheme to increase at a rate equal to the CPI but not exceeding 5 per cent per annum then the CPI specified in this section would be assumed whilst the rate under section 2.2.2.1 is 10 1/2 per cent per annum or less but would be taken as 5 per cent where the rate under section 2.2.2.1 exceeded 10 1/2 per cent per annum.

For the 1996-97 financial year this rate is, therefore 9 per cent less 5 1/2 per cent, ie 3 1/2 per cent per annum.

2.2.3 Other Parameters

2.2.3.1 Rates of Decrement

It is necessary to consider the other parameters made in performing actuarial calculations of this nature. An actuary will establish rates of decrement as part of the trienniel investigation into the financial condition of the superannuation scheme.

The rates used at the most immediate actuarial valuation with a valuation date prior to the start of the financial year to which the certificate first applies should be used for the determination of the NSCF.

Where the trienniel review made separate assumptions for male and female members, the arithmetic average of the two assumptions should be used except where qualification for benefit varies with age between male and female members, in which case only the parameters related to the particular benefit should be used separately.

Comment : For the first certificate, this has the effect of requiring the assumptions used in the trienniel valuation with valuation dates up to 30 June 1996 to be used. As these valuations are required to be completed within 12 months of the valuation date then all assumptions have been established, in effect, at this stage.

2.2.3.2 Death and Disability benefits

The cost of death, disability and related risk benefits is to be incorporated by

•

where the scheme insures the benefits, adding the cost of the insurance based on the average rate (as a percentage of salaries) of actual insurance costs which have been applied over the last three years of the fund's operations, or

•

where the scheme does not insure the benefits, and a non zero assumption for rates was made at the last valuation, adding the cost of death cover based on the decrement rates assumed provided that these were non zero, or

•

where the scheme does not insure the benefits and no assumption was made or a nil assumption was made at the last valuation, adding the cost of death cover based on an assumed set of decrement rates for death and disability published by the Institute of Actuaries of Australia for the purpose of the defined benefit formula for minimum requisite benefit determinations (refer Quarterly Journal of the Institute of Actuaries of Australia June 95 pages 40- and, paragraph 7.2. in particular).

2.2.3.3 Expenses

Assumed costs of fund administration should be equal to the average rate (expressed as a percentage of salaries) which has applied over the last three years of the fund's operations, according to the fund's audited accounts. In the event that a fund does not have a three year history then a rate of 1/2 percent of salaries should be used.

2.2.3.4 Contributions Tax

The NSCF should be grossed up for the full scale of ('contribution') tax which thefund would normally pay.

Thus, if a fund is not paying tax due to (say) tax losses brought forward, or due to full offset by Funding Credits, the NSCF should be grossed up by a 'notional' full 15% tax rate (net of expenses and insurance deduction effects).

2.2.3.5 Benefit Adjustments for the Surcharge

If an employer agrees to absorb the cost of the surcharge (rather than reduce benefits) in whole or part, the actuary should specify that the amount of absorbed surcharge for a particular year should be added to the contribution otherwise reported in that year plus an allowance for contribution tax on the amount absorbed.

Comment : For example, if an NSCF is 10% for a particular member, producing a surchargeable contribution of $8,000, and the employer agrees to absorb, in that year, a surcharge of $500 relating to the assessment for a previous year, the surchargeable contribution for that year should be increased to $8,500 for that year (and grossed up for tax on the amount absorbed).

2.3 Notifiable Events

In the preparation of the certificate, the actuary should specify such notifiable events as is required to preserve the validity of the certificate.

A notifiable event can either lead to an addendum to the certificate or can cause the expiry of the certificate requiring replacement.

In particular, the augmentation of benefits, sometimes referred to as retrospective benefit improvements, should require the replacement of the certificate.

2.4 Accumulation Only Benefit Members

Benefits which are in the form of additional accumulation benefits, or for members who have an accumulation style benefit only, within a defined benefit scheme should be measured on a basis consistent with the Act's treatment of accumulation schemes.

2.5 Content of Certificates

NSCF advice should take the form of a certificate advising the superannuation scheme of the rate or rates which should be applied, how they should be applied to determine contribution amounts, and any other conditions which should be included on the certificate. The certificate should define :-

•

The commencement and expiry dates of the certificate

•

The name and qualifications of the certifying actuary.

•

The name of the superannuation scheme.

•

The identification of non accruing and accruing categories for NSCF purposes.(see section 3.4).

•

The definition of Salary for the purpose of the certificate. (see section 2.2.1).

•

The treatment of members whose salary is adjusted during the reporting period.

•

The treatment of members who join the scheme part way through the reporting period.

•

The treatment of members who become eligible to leave the scheme, and for members who receive their benefits during the reporting period.

•

The treatment of members who change from one category to another during the period (particularly from an accruing category to a non accruing category - see section 3.4).

•

The treatment of members whose benefit is only provided in accumulation form.(see section 2.4)

•

The table of rates.

Other Comments:

Commencement Dates:

The commencement and expiry dates of the certificate. Theactuary can determine these dates but the duration of the certificate cannot exceed five years. The certificate cannot be signed by the actuary more than 12 months ahead of commencement of the first financial year to which it is to be applied

Tables of rates

Decimal places : Rates expressed as percentages should be rounded to the nearer 1/100th of one percent.

All periods should be expressed in whole years rather than any shorter period.

Where rates are similar, they can be taken as grouped by age or period of service (Broad banding) such that they are accurate to 1/10th of one percent.

3. Principles

In preparing this note, various statements and principles have been considered based on the Government's policy intent and on advice provided to the Government during consultation phases.

The principles are provided to assist practitioners in the application of the document and should not be interpreted in conflict with the rest of the document.

3.1 Principle : Horizontal Equity

Consistency of treatment between superannuation schemes providing equivalent benefits was considered by the Actuarial Advisory Committee and it was decided that this would be a desirable outcome. That is, where two employees are members of different schemes but have identical characteristics then they should receive equivalent treatment.

This desire for consistency, and other reasons, led to the view that the NSCF should not take account of the actual contributions being made by the employer in a particular year or of the underlying surplus or deficiency in the superannuation scheme.

Rather, the NSCF would consider the provision of benefits to the member assuming an opening position in equilibrium.

3.2 Principle : Maximum Reduction of 15 per cent

The Surcharge applies at the rate of 15 per cent on assessable contributions (generally contributions which attract a tax deduction for the contributor).

As a result, it would be reasonable to expect that a superannuation scheme member who

•

joins a scheme after 20 August 1996;

•

has taxable income in excess of the upper threshold throughout their period of membership; and

•

incurs an equitable reduction in benefit reflecting the full surcharge outcome;

will see their employer financed benefit reduced by 15 per cent from that which would apply before the surcharge is considered.

3.3 Principle : Cost Effective Calculations

Whilst a range of theoretical options exist for the determination of the NSCF, it is important that the solution not be unduly complicated and that the cost of determining the NSCF should be limited.

As a result all approaches, when compared to the work an actuary would normally do

•

do not require an analysis of assets and past superannuation scheme investment returns,

•

do not require individual membership data to be provided to and verified by the actuary.

The table of rates would depend on attained age and completed service, or age at entry and completed service. Separate tables would be prepared for other member characteristics (such as benefit category, contribution status, etc.).

The calculations should be made on the basis of each new member year of age, and (if appropriate) at each year of duration of future service. The resulting matrix of factors should be applied to the current membership of the scheme for each financial year as required by the Act without specific regard to the actual history of the individual members. For small schemes it is unnecessary to provide a full table covering years of age outside the range of the existing membership.

3.4 Principle : Non Accruing members

Where a member is not accruing additional benefits at any time during the reporting period, then a contribution of nil should be applied for these members. These 'non-accruing members' would be members who

•

whilst continuing to be members of the superannuation scheme, have accrued their benefits in full before the commencement of the period as long as the rules of the superannuation scheme provide that the benefit is either

•

not increased at all in nominal terms;

•

increased at a rate reflecting price increases (the CPI);

•

increased at a rate reflecting the general level of salary growth (AWE or AWOTE);

•

increased at a rate reflecting the superannuation scheme earning rate, provided only the rate is in line with the rate determined for the superannuation scheme as a whole; or

•

increased at a regular rate (or rate based on a formula) which the actuary expects will be not more than the greatest of those listed above;

and is considered by the actuary not to represent a subsidy to those members in the long term;

•

remain members of the superannuation scheme as pension beneficiaries in payment whose pension payments are either fixed in dollar terms or are indexed at rates which are consistent with the conditions (price indexation or capping thereof) assumed in the NSCF certificates produced while they were considered accruing members or (where the pension commenced prior to the first certificate for the superannuation scheme) the current certificate.

•

maintain a preserved benefit in the superannuation scheme, as long as the rules of the superannuation scheme provide that the benefit is either

•

not increased at all in nominal terms;

•

increased at a rate reflecting price increases (the CPI);

•

increased at a rate reflecting the general level of salary growth (AWE or AWOTE);

•

increased at a rate reflecting the superannuation scheme earning rate, provided only the rate is in line with the rate determined for the superannuation scheme as a whole; or

•

increased at a regular rate (or rate based on a formula) which the actuary expects will be not more than the greatest of those listed above;

and is considered by the actuary not to represent a subsidy to those members in the long term;

Where a member was not a non-accruing member at the start of the reporting period but changed status to a non-accruing member during the reporting period then the actuary would be expected to specify how the NSCF should be determined in such cases in the certificate. See section 2.5 - Content of Certificates.

3.5 Principle : Past Accrued benefits

Benefits accrued prior to the 20th August 1996 (the announcement date) are not affected by the surcharge.

Members whose benefit entitlement does not increase after this date are non accruing members.

3.6 Principle : Actuary not to choose basis

Many parts of an actuarial basis are determined with reference to the judgement of the actuary giving consideration to the purpose of the calculations to be carried out using the basis.

In some cases, there is little impact on results but room for variation in results. There is neither cause or need for variation in establishing a basis for the determination of NSCF values and, as a result, the major parameters used for the NSCF are established in a more prescriptive fashion.

When considering otherwise identical defined benefit funds where the NSCF is to be determined by different actuaries, this principle is also consistent with section 3.1 - Principle : Horizontal Equity.

3.7 Principle : Members earning below the lower threshold should not pay the surcharge

The surcharge is imposed on a scheme, but the payment of the surcharge should be arranged so that the benefits of members earning less than the threshold are not affected by any surcharge liabilities assessed with respect to other members.

4. Definitions

References

ATO references:
NO 97/6543-3

Legislative References:
SCT(AC)A 8(3)
SCT(AC)A 43