Tax and Superannuation Laws Amendment (2015 Measures No.4) Bill 2015

I know how passionate and supportive Senator Smith is of these particular changes. He was able to sum those up very concisely.

But I am also a passionate supporter of these changes to our tax and superannuation laws—particularly laws to facilitate scrip-for-scrip rollover and assist firms that would like to merge. That is a very important part of our economy—to assist those aspects and also to help protect people with low balances in their superannuation accounts.

These are relatively small changes to our overall tax system, but they are important ones nonetheless. The coalition government is committed to fairness and sustainability in our tax and superannuation systems. We announced that we would deal with a backlog of tax measures when we came into government. Some of the decisions in this bill deal with decisions that were actually made by the previous Labor government. They were largely uncontroversial and ones that we were happy to support. But there was a very large backlog of measures that were there in our tax system which had not been dealt with when we came to government. So I applaud the government for bringing this forward and dealing with these issues.

This Tax and Superannuation Laws Amendment (2015 Measures No. 4) Bill 2015 incorporates changes that are covered in three schedules. The first schedule removes unintended consequences in the tax system, schedule 2 outlines protection for lost superannuation accounts with low balances and schedule 3 helps to ensure that everyone pays the right and correct amount of tax.

A large part of this bill ensures that our tax laws are robust and cannot be circumvented for an unfair personal or corporate gain. Of course, as situations change and new information comes to light our tax system should change accordingly. These amendments undertake tax changes that make our tax system fairer and more robust, and they are important integrity measures that will eliminate unintended consequences.

The overview of this bill incorporates three schedules, as I said. I will just expand a bit further on each of those. Schedule 1 includes improving the integrity of the scrip-for scrip-rollover provisions. These are provisions that tackle the tax treatment of equity transfers in a merger situation. Where two companies merge there is a potential transfer of equity ownership between the parties involved in the merger rather than a cash transfer per se. That, of course, makes it more difficult for the tax system to deal with those transfers. But we have laws to deal with scrip-for-scrip rollover issues at the moment, and these laws will help to improve the integrity of those processes in a merger situation.

Schedule 1 amends the scrip-for-scrip rollover rules to ensure they are better targeted and work as intended. The measure is an integrity measure which ensures that opportunities for entities to defer tax indefinitely are removed. Scrip-for-scrip rollover rules provide tax relief for certain merger and acquisition transactions. They apply where shares or interest in a company or trust are exchanged for similar shares or interests. A tax ordinarily payable at the time of the exchange is deferred until the new shares or interests are sold. This reduces the cost of takeovers and mergers, as the acquiring entity does not need to compensate the share or interest holders for tax that would otherwise be payable.

The rollover ensures that tax is not an impediment to merger and acquisition activity taking place in Australia. Merger and acquisition activity is an important element of a functioning capital market, and a functioning capital market is extremely important for our economic growth and development. Integrity rules in a scrip-for-scrip rollover prevent entities accessing the tax relief in some circumstances—generally where both the acquiring entity and the entity being acquired are controlled by the same person or group.

A recent court decision highlighted that these integrity rules are not operating as intended, and that they were able to be circumvented. This was done by temporarily suppressing the ownership rights of related parties through a fresh issue of instruments.

This measure in this bill strengthens these rules to ensure that entities cannot inappropriately access tax relief through this structure. These strengthened rules will help protect integrity and apply to both companies and trusts. Further, the measure also changes the treatment of some acquisitions—so-called 'downstream' acquisitions—which involve the use of debt to reduce an amount of tax payable.

These amendments are required to ensure that the rollover cannot be inappropriately accessed, to overcome issues with the use of debt in some transactions and to ensure that the rules apply to both company and trust restructures. These amendments are narrowly targeted and will impact only those merger and acquisition transactions which inappropriately access rollover relief. As a result, they are not expected to make restructures more difficult in Australia.

The Treasury's corporate and international tax division have advised that this measure is not expected to impact small businesses at all. There is an unquantifiable but potentially large revenue protection associated with these amendments. That protection will depend on the mergers that it does impact. They would be very difficult to estimate, because merger and acquisition activity goes up and down considerably and varies from year to year depending on the economic climate. But it is important to make sure that we keep the integrity of our tax system and build confidence that our tax system applies equally to everybody in our economy—companies, households, business that are merging—and this small measure will help to improve that integrity.

Schedule 2 of the bill is an amendment to incorporate the exemption of income earned in overseas employment. Schedule 2 will apply to those who are an Australian resident for income tax purposes while overseas. The measure removes an income tax exemption that is currently being accessed by Australian government employees who are posted overseas for more than 90 days to deliver official development assistance. The intent of this income tax exemption is to provide relief from double taxation, but it no longer has this effect. Instead, it now acts to provide a tax break for many Australians who are not liable to pay income tax on their foreign earnings in Australia or in the overseas country.

In the 2009-10 budget the former Labor government announced the tightening of the eligibility for this income tax exemption. This measure will go one step further by ensuring that all government employees who deliver official development assistance overseas are subject to Australian income tax on their pay and allowances. The change will take effect from 1 July 2016. This change will not affect the taxation arrangements for private sector aid workers or charity workers and it will not affect the Australian Defence Force and the Australian Federal Police. These groups will maintain their existing eligibility for an income tax exemption on income earned while working overseas. This particular measure was announced in last year's budget and expects to result in a gain to revenue of $6.7 million over the forward estimates.

We are lucky to have a tax system which generally works and a personal income tax system which applies in a progressive and in an overall fair way for most Australians. This income tax exemption was introduced for a valid reason—that is, to ensure that people who were working overseas were not taxed in the country that they were working in as well as in the country of their residence, Australia. But over time it has been highlighted that this tax exemption has become more of a tax break for certain Australians who travel overseas to work. It has particularly meant that government employees who claim this exemption have not been liable to pay income tax either in Australia or overseas. The practical effect is that some government employees are eligible for an income tax exemption on foreign earnings while others are liable to pay income tax. This bill will ensure that all government employees who deliver official development assistance are subject to Australian income tax on their pay and allowances. The amendment will take effect from 1 July next year and will standardise the tax treatment for government employees across the sector.

In the context of some of the controversy over the past year about the fairness of our tax system, largely involving large corporations, it is still important that we maintain the integrity of the system across individuals as well to ensure we all pay our fair share of tax, and this is a reasonable change that I hope will be supported.

Schedule 3 deals with small balances in superannuation accounts. It is important to first put some facts on the table about superannuation, particularly small superannuation balances that may be classified as lost. Under the current arrangements a super fund will not be considered lost, even if it has a small balance, if the individual holding the account has confirmed their current address within the previous two years of membership, taken a positive action such as deferring a benefit in the fund, or contacted their superannuation provider and indicated that they wish to continue to be a member. The unclaimed super rules do not apply to amounts above the threshold or to self-managed super funds or defined benefit funds.

Superannuation is important to all Australians. We are living longer and we can expect, given current actuarial tables, that if we make it to the ripe old age of 65 we will probably have at least another 20 years on this planet. People need to plan for that eventuality, and our superannuation system helps them do that. We do not have a crystal ball to show what may happen in the future, but we need to have superannuation policies that allow people to retire and have some money to support themselves and not rely simply on a government pension. Most super funds have put together a retirement standard, which one could use to calculate how much one would need to live off in retirement, that takes into account the usual expenses for a retiree who owns their own home. This is why the coalition government has introduced tax and superannuation laws to assist people to increase their superannuation account balances and to make it more accountable.

It is important that Australians keep track of their super. Many Australians who have changed their name, address or job have lost track of some of their super. Having several super accounts means they are not maximising their super and are reducing their overall superannuation investment through multiple fees and charges. If you are in this situation, you can use the SuperSeeker search tool to find out the balances that you currently have and ensure that they do not become lost.

This final schedule of the bill deals with these lost small superannuation account balances. If they are inactive for a certain period of time, they will be transferred to the Australian Taxation Office. This measure was announced by the former Labor government in the 2013-14 budget, the last budget of that government. However, they did not pass legislation for this measure. On 6 November 2013, not long after the new government was elected, we announced that we would enact this measure as part of a broader suite of measures that were previously declared but unlegislated by the parliament.

Currently the law states that lost member super accounts with less than $2,000 must be transferred from superannuation funds to the ATO as unclaimed superannuation money. This measure will increase the $2,000 threshold in two phases—first, to $4,000 from 31 December 2015 and then to $6,000 from 31 December 2016. Lost super is a super account held by a super fund where the fund has lost contact with the member or the account has been idle for more than five years.

We know that when employees get into super about 70 per cent are members of the default fund offered by their employer. When people switch jobs they often end up with a new super account and fail to consolidate these existing accounts. As a result, many people end up with more superannuation accounts than they want or need. According to the ATO, 45 per cent of working Australians have more than one superannuation account. In many cases members are not even aware that they have lost super accounts.

For super accounts with smaller balances, the cost of fees and charges and insurance premiums can exceed investment returns. This can be particularly problematic for lost super accounts because, in most cases, the members are not aware that they have these accounts and they can end up losing money that was meant for their retirement.

Transferring lost super accounts with low balances to the ATO helps protect such accounts and preserves their value until they can be reunited with the member. The ATO does not charge any fees for maintaining these accounts. Individuals are able to reclaim their super money from the ATO at any time and are paid interest calculated in accordance with the consumer price index when they reclaim this money.

In the 2015-16 budget the government announced six measures that will reduce red tape for superannuation funds by removing redundant reporting obligations and by streamlining some of the lost and unclaimed superannuation administrative arrangements. These include updating the definition of 'uncontactable' to account for contemporary forms of member communication—for example, to include online communication; supporting eligible rollover funds; proactively consolidating lost accounts; and allowing direct payments of lost super accounts held by the ATO to persons with a terminal illness. These changes will make it easier for individuals to be reunited with their lost and unclaimed superannuation.

The ATO has a range of strategies in place which aim to reunite members with lost and unclaimed superannuation accounts and reduce the number of unnecessary and inactive accounts in the superannuation system. Some of the strategies are matching superannuation accounts to an individual, providing this information on an online portal, and proactively working with super funds to ensure that they have updated addresses and contact details for their lost members. The estimated total fiscal impact of this measure is $483.9 million over the forward estimates. These strategies are very important to make sure that people are kept in contact with, and that is why it was announced that we would continue these measures and would continue to improve transparency in our tax system.

I would also say that the issue of multiple superannuation accounts is one that the government has taken some action on since coming to government. We have made it easier for small businesses to have their superannuation forms consolidated and filled out by the Australian Taxation Office, not themselves. One of the issues with multiple superannuation accounts is that sometimes small businesses suffer under large amounts of red tape when they need to allocate their component of superannuation payments to different accounts. Now they can apply to the ATO so that the ATO will handle that amount of red tape. They simply have to transfer the appropriate superannuation guarantee amounts to the tax office, which will handle it from there.

I think that this can be built on in the future. I agree with Peter Strong from the Council of Small Business Australia that it is unusual and a little strange that each of us when we start a job—my first job was at McDonald's—gets put in a superannuation account. As I said, more than 70 per cent of Australians just go with a default account. That is what I did at the time. And you end up with these small super accounts all over the place, connected to different employer superannuation funds. It is strange that a system that is meant to take into account my retirement and that of other Australians is handled so much by the employer, not me, so that the superannuation account depends on the employer you work for, not who you are and what your individual savings plan for your retirement might be. So, it seems to me to make a lot of sense that when an individual starts work they are perhaps put in a default fund, not necessarily connected to an employer. There are now MySuper accounts and other small and basic superannuation accounts that could perhaps serve that purpose. And then I, the employee, would decide whether I wanted to change from that account at any particular time. Just because I moved after a year—I was not very good at flipping burgers; I did not get the sack, but I left McDonald's and went to work at a car wash—why should my superannuation change just by doing that? It should change only if I make the decision to change it, and there is no reason we could not have a system whereby you are in a default account at any particular time and if you want to change it is not about changing your job; it is about simply changing those details with the Australian Taxation Office.

And we could build on that system we have introduced to ensure that businesses themselves would therefore not have to be interfaced with the superannuation system. They can get back to their job, which is about providing a service, producing a product, and employing people, and all they then need to worry about is transferring the relevant superannuation amounts to the taxation office, which would then put them in the appropriate accounts according to what an individual wanted and needed.

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