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Splitting of
Consultation Paper July 2002 Ó Commonwealth of Australia 2002 ISBN 0 642 74150 6 This work is copyright. Apart from any use as permitted under the Copyright Act 1968, no part may be reproduced by any process without prior written permission from the Commonwealth available from the Department of Communications, Information Technology and the Arts. Requests and inquiries concerning reproduction and rights should be addressed to: The Manager Copyright Services Info Access GPO Box 2154 CANBERRA ACT 2601 or by e‑mail: cwealthcopyright@finance.gov.au
Printed by Canprint Communications Pty Ltd This consultation paper canvasses a number of issues associated with the Government’s proposed policy to allow contributions splitting between couples. Submissions and comments on this paper are invited from all interested parties. Written submissions will be accepted up until 26 August 2002 and should be forwarded to:
Manager Alternatively, submissions in electronic form can be sent to: superannuation@treasury.gov.au Table of contents Invitation for public comment..................................................................... 1 Foreword.......................................................................................................... 2 1 Rationale..................................................................................................... 3 2 Key features................................................................................................ 4 3 Implementation options............................................................................ 4 Option 1: Prospective split............................................................................. 5 Option 2: Annual split...................................................................................... 6 Option 3: Joint accounts................................................................................. 7 4 Proposed policy design............................................................................ 8 4.1 Limitations on proportion of splitting...................................................... 8 4.2 Participation restrictions........................................................................ 9 4.3 Taxation matters.................................................................................... 9 4.4 Defined Benefit Funds (DBF).............................................................. 10 4.5 Self‑employed...................................................................................... 10 4.6 Eligible service periods........................................................................ 10 4.7 Mandatory............................................................................................. 10 4.8 Legislative changes............................................................................. 11 4.9 Timing.................................................................................................. 11 4.10 Related regulation................................................................................ 11
Contributions splitting is a key element of the Government’s superannuation reforms. It will assist families to maximise the benefits available in superannuation and provide an avenue for spouses to share their superannuation benefits. This is particularly important for families with one spouse working in the home or receiving a low income. Specifically, contributions splitting will assist spouses that stay home to care for a family to accumulate their own superannuation. This measure is expected to benefit women in particular. The Government is firmly committed to consulting widely on its policy to introduce contributions splitting to facilitate a well-considered and workable outcome that meets the Government’s objectives at minimum cost. The options outlined in this paper reflect the Government’s commitment that the administrative burden of this measure will not fall on employers. Employers’ Superannuation Guarantee obligations will not change as a result of this measure. Contributions splitting will instead be implemented by superannuation providers, where the administration costs can be shared by the beneficiaries. I strongly encourage members of the superannuation industry and other interested parties to share their views on the proposals contained in this consultation paper.
Senator Helen Coonan Superannuation has traditionally been seen as a means to encourage savings for the purposes of replacing employment income following retirement. Therefore, historically, superannuation contributions have generally only been allowed in respect of individuals in the workforce. However, to accommodate changing workforce patterns, social change and a growing appreciation of the need for all Australians to prepare financially for their retirement, eligibility to make superannuation contributions has been eased. While the general link between paid employment and the ability to contribute to superannuation will be maintained, the Government wishes to encourage more people to contribute to superannuation and provide for higher incomes in retirement. This Government has introduced a number of measures that have broadened the accessibility of superannuation to individuals who are outside of the workforce. For example, individuals are now permitted to make voluntary superannuation contributions on behalf of their spouse, even if that spouse has never worked. In particular, since 1997, spouses have been eligible for a tax rebate for contributions to superannuation made on behalf of a low-income spouse. The Government’s proposal to allow splitting of superannuation contributions will further build on the Government’s achievements in increasing the accessibility of superannuation. In particular, the ability to split employer superannuation contributions will assist couples that cannot afford to make voluntary contributions. It will also assist families to maximise the benefits available to them in retirement. In this context, superannuation contributions splitting will achieve the following objectives: · provide single income couples, including those not able to make voluntary contributions, with access to two ETP low‑rate thresholds and two RBLs in the same way as dual income families; and · provide low income or non‑working spouses with their own superannuation assets under their own control and their own income in retirement. Furthermore, superannuation contributions splitting may provide non-earning spouses with access to cost effective death and disability cover. Superannuation providers often offer this type of insurance to their members. Under the Government’s proposal, members of accumulation funds could split both personal and employer contributions with their spouse, including compulsory Superannuation Guarantee (SG) contributions. Contributions made on behalf of one spouse (the splitting spouse) could be transferred to a separate account in the name of the other spouse (the receiving spouse), with each spouse having access to their own eligible termination payment (ETP) low-rate threshold and Reasonable Benefit Limit (RBL). All future contributions made after 1 July 2003 will be eligible for splitting. The splitting spouse will be able to split a maximum of 50 per cent of deducted (or employer) contributions received over the relevant contributions period and up to 100 per cent of undeducted personal contributions. Existing superannuation balances and future earnings on those balances will not be eligible for splitting. Both married and ‘de facto’ couples will be eligible to participate in contributions splitting, consistent with the current definition of spouse in the Superannuation Industry (Supervision) Act 1993 (SIS). The decision to split contributions will be irrevocable once the split has been effected. Therefore, it will not be possible to transfer any amounts from the account of the receiving spouse back to the account of the splitting spouse at any time (other than through the operation of the Family Law Act 1975 which permits splitting as part of a property settlement). Contributions splitting has an estimated cost to taxation revenue of $11 million over three years from 2003‑04, as published in the 2002-03 Budget. This cost largely arises from lower superannuation tax revenue, reflecting the deductibility of costs incurred by providers in administering contributions splitting. In the long term, the cost to revenue arises from greater utilisation by the receiving spouse of his or her ETP low-rate threshold and RBL. The estimated cost to revenue in the financial years of 2020‑21 and 2040-41 is $25 million and $100 million respectively, in real dollars (that is, discounted for projected CPI inflation). There are three principal ways of implementing the Government’s superannuation contributions splitting proposal: 1. Prospective split: At the request of a member, the member’s superannuation provider would be required to split each future superannuation contribution received on behalf of the member. 2. Annual split: After the end of the financial year and at the request of a member, the member’s superannuation provider would be required to split contributions received during the previous year. 3. Joint accounts: Couples could open a joint superannuation or Retirement Savings Account (RSA) and each spouse would hold a 50 per cent interest in contributions and investment returns credited to the account. Given the Government’s election commitment that the administrative burden will not fall on employers, this paper does not canvass options that involve the employer. Options to split superannuation benefits, rather than superannuation contributions, have not been included because they are inconsistent with the Government’s election commitment to allow splitting of future contributions. Splitting of benefits would also come at a significantly higher cost to revenue than options to split contributions. The following pages describe each of the three options including their impact on stakeholders. References to superannuation providers include both superannuation funds and RSA providers. Option 1: Prospective splitA prospective split would involve members notifying their superannuation provider of an intention to split each future contribution received by the provider. The superannuation provider would then split each contribution received on behalf of that member. However, benefits could only be transferred to the receiving spouse’s account after contributions had first been credited to the splitting spouse’s account. The splitting spouse would need to provide their superannuation provider with details of their spouse’s superannuation account. There would be no obligation on superannuation providers to accept such spouse contributions. This would be a matter for each provider. A possible variation to this option would be to require contributions to be split at least once each calendar quarter, rather than on receipt of each contribution. This may reduce the administrative costs to superannuation providers of splitting contributions from employers that make more frequent contributions. Impact assessmentMembers and their spousesCouples gain the tax advantages and other benefits that flow from splitting superannuation contributions. As couples would require at least two superannuation accounts under this option, couples are likely to incur separate account management fees on each spouse’s account. The splitting spouse may also be levied with service fees by the provider effecting the split. Superannuation providersThis option would impose administration and systems development costs on superannuation providers, especially where the receiving spouse’s account is with a different provider or if the member is in receipt of frequent contributions (for example, fortnightly). Under a regime of quarterly Superannuation Guarantee contributions, there would be at least four contributions per annum and therefore at least four times of the year when contributions would be split for participating members. Superannuation providers may choose to recoup their costs through account management fees levied on the receiving spouse’s account or by charging the splitting spouse a service fee. Providers may also charge an additional administration fee if the receiving spouse’s account is with a different provider. EmployersThis option does not impose additional requirements on employers in making superannuation contributions. Option 2: Annual splitFollowing the end of the financial year and at the request of a member, a superannuation provider would split contributions received during the previous year. This option simplifies Option 1 by requiring superannuation providers to effect a split only once per year and by allowing members to notify their provider of their intention to split contributions after those contributions had been made. However, a member’s request could also be made prospectively to cover contributions to be received in the current or next financial year. Members would have a one‑off window of opportunity between 1 July and 31 January to advise their superannuation provider of their desire to split contributions made during the previous financial year. (Notification provided in advance of the end of the financial year would be deemed to take effect on 1 July following the end of that year.) As of 1 July, any notification of a splitting arrangement in the hands of a provider and in respect of the previous financial year could not be revoked or amended. Superannuation providers would have 90 days to effect the split after they received notification from a member or, for members that provide advance notice, 90 days from 1 July following the end of the relevant financial year. A split could not be effected in respect of an earlier year. As a part of their reporting to members, superannuation providers could notify members of the maximum amount of benefits they could potentially transfer to their spouse and remind members of the 31 January notification date to participate in contributions splitting. The splitting spouse would need to provide their superannuation provider with details of their spouse’s superannuation account. There would be no obligation on superannuation providers to accept such spouse contributions. This would be a matter for each provider. Impact assessmentMembers and their spousesCouples gain the tax advantages and other benefits that flow from splitting superannuation contributions. As couples would require at least two superannuation accounts under this option, couples are likely to incur separate account management fees on each spouse’s account. The splitting spouse may also be levied with service fees by the provider effecting the split. However, as the administration costs incurred by superannuation providers are expected to be lower under this option than under Option 1, the fees paid by splitting members are also expected to be lower. Superannuation providersThis option would impose administration and system development costs on superannuation providers. However, because providers would effect a split only once per year, costs are expected to be lower under this option than under Option 1. Superannuation providers may choose to recoup their costs through account management fees levied on the receiving spouse’s account or by charging the splitting spouse a service fee. Superannuation providers may also charge an additional administration fee if the receiving spouse’s account is with a different provider. EmployersThis option does not impose additional requirements on employers in making superannuation contributions. Option 3: Joint accountsMembers that wished to split superannuation contributions would open a joint account with their superannuation provider in the names of both spouses. At the request of the splitting spouse, the superannuation provider would deposit all (or part) of the splitting spouse’s contributions into this account. Because existing benefits are not eligible for splitting, superannuation providers could only accept contributions made after 1 July 2003 into the joint account — transfers or roll‑overs could not be accepted. Each spouse would hold a 50 per cent interest over contributions and investment returns credited to the account. Each spouse could transfer their accumulated share of the benefit from the joint account to an account in their name. Alternatively, payment of a superannuation benefit could be made directly to the relevant spouse, providing that spouse had satisfied a condition of release. Preliminary legal advice obtained by the Government raised a number of issues regarding the legislation required to implement this option. The Government is currently considering this advice. Potentially, there would be some significant and complex changes required to superannuation and taxation laws. Impact assessmentMembers and their spousesCouples gain the tax advantages and other benefits that flow from splitting superannuation contributions. Couples would be required to open a new account under this option. If each spouse already had their own superannuation account then couples would be required to maintain at least three accounts between them — one in the name of each spouse, and the joint account. Maintaining an additional superannuation account and paying an extra set of account keeping fees is expected to reduce the retirement income benefits of splitting, particularly for low income couples. Superannuation providersThis option would impose administration and system development costs on providers. However, because providers would not be required to split regular contributions, costs may be lower than under Options 1 and 2. However, superannuation providers would need to establish and maintain a new type of account. Superannuation providers may levy a fee at the time of the split to recoup administration costs incurred by the provider. EmployersThis option does not impose additional requirements on employers in making superannuation contributions. 4.1 Limitations on proportion of splittingThe splitting spouse could transfer to the receiving spouse up to a maximum of 50 per cent of his or her deducted (or employer) contributions received over the relevant contributions period. There are a number of reasons for limiting the proportion of employer contributions that could be split: · Limiting the proportion of splitting would ameliorate the potential problem of there being insufficient funds in a superannuation account after splitting to cover a member’s superannuation surcharge liability. Such a situation may arise if a member opened a new account and was allowed to split a high proportion of their contributions (for example, 100 per cent). · To provide the non-working or low income spouse with their own superannuation assets under their own control as early as possible by encouraging couples to commence splitting early in life, rather than splitting a larger proportion closer to retirement. Where a member had both deducted (or employer) and undeducted contributions, they could elect to split deducted contributions only. Members can already make undeducted contributions on behalf of their spouse and therefore do not need to utilise contributions splitting to make such contributions. 4.2 Participation restrictionsA couple could only participate in contributions splitting if the receiving spouse was aged less than 65 at the time the contributions were split. This is consistent with the current age requirement for contributions made on behalf of a non-working spouse. It is also proposed that a member could not split contributions if, at the time of the split, the receiving spouse had satisfied a condition of release, which would enable them to cash their benefit immediately. Contributions could continue to be split up until the day the receiving spouse satisfied a condition of release such as ceasing work after reaching preservation age. This is because superannuation tax concessions are provided to assist people save for their retirement, not to fund present-day consumption. This requirement will ensure that the receiving spouse uses contributions splitting to continue to accumulate superannuation savings. 4.3 Taxation mattersThe ability to split superannuation contributions is not intended to provide members with a means for avoiding the superannuation surcharge. It is therefore the Government’s intention that the decision to split superannuation contributions will not affect the superannuation provider’s superannuation surcharge liability. Accordingly, surchargeable contributions will continue to be wholly attributed to the splitting spouse. Under a splitting arrangement, it is conceivable that a member’s surcharge liability could exceed their account balance. However, the splitting limit of 50 per cent of employer contributions is expected to ameliorate this risk. No changes are proposed to the arrangements for collecting superannuation taxes. The superannuation provider of the splitting spouse would pay contributions tax on all of the splitting spouse’s employer contributions. Any amount subsequently transferred to the receiving spouse’s account under a splitting arrangement would, for taxation purposes, be treated as an ETP roll‑over and would not be subject to additional contributions tax. Fund reporting may need to be reviewed in light of the interaction of contributions splitting with the Government’s superannuation co-contribution measure. The splitting spouse would still be subject to his or her age-based limit and would have all deducted contributions made on his or her behalf (including split amounts) assessed against this limit. 4.4 Defined Benefit Funds (DBF)The Government’s election commitment was to allow splitting of superannuation contributions for members of accumulation funds. There are a number of additional complexities and issues in extending contributions splitting to defined benefit members with a defined benefit interest. Therefore, the Government does not propose to extend contributions splitting at this time to defined benefit interest members. The Government will give further consideration to the matter. However, splitting could apply to members of a defined benefit fund that have an accumulation interest in the fund only, and not a defined benefit interest. Allowing contributions splitting to these people is consistent with the Government’s policy intent. 4.5 Self‑employedA person who has made a contribution to a fund may provide notice to their superannuation provider that the person intends to claim a deduction under Section 82AAT of the Income Tax Assessment Act 1936. There are provisions in the Act for the person to vary the amount in notice. For administrative reasons, self‑employed persons who wanted to split contributions and claim a deduction would need to provide notice to their superannuation provider before the provider effected the split. Once a contribution had been split, a self‑employed person would not be able to make a new election to claim a deduction or amend an existing election in respect of the split amount. 4.6 Eligible service periodsBecause contributions splitting only applies to contributions made after 1 July 2003, eligible service periods would not carry over to the receiving spouse under a splitting arrangement. Hence the receiving spouse’s eligible service period would not change as a result of participating in contributions splitting. 4.7 MandatoryThe Government considers it important that all members of accumulation funds are able to split their superannuation contributions if they wish. Accordingly, the Government intends to require all superannuation providers to provide contributions splitting to members that have only an accumulation interest with that provider. This requirement relates only to fund members in receipt of regular contributions. There would be no obligation on superannuation providers to accept contributions on behalf of the receiving spouse. This would be a matter for each provider. 4.8 Legislative changesImplementation of contributions splitting will require amendments to the SIS Act and/or Regulations and the RSA Act and/or Regulations. Some consequential amendments to taxation legislation may be required. 4.9 TimingThis initiative is proposed to take effect on 1 July 2003. 4.10 Related regulationThe Family Law Legislation Amendment (Superannuation) Act 2001 was passed by the Parliament on 18 June 2001 and received Royal Assent on 28 June 2001. The Act amends the Family Law Act 1975 to allow separating or divorcing couples to divide, as a part of their property settlement, payments from a superannuation provider in which one of them holds an interest. If the couple is unable to agree on a settlement, the Court will have the power to order a payment split. This reform will assist separating couples to resolve their financial arrangements. It was stated earlier that split contributions could not be transferred back to the splitting spouse. However, for separating or divorcing couples, this does not in anyway preclude all superannuation benefits being considered and divided as necessary in the property settlement.
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