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The failure of the Superannuation Guarantee Amnesty to pass into law has led to a problem.
To recap, the Superannuation Guarantee Amnesty was to be available for the 12-month period from 24 May 2018 to 23 May 2019. To get the benefits of the amnesty (set out below) employers must during this 12-month period have voluntarily disclosed any superannuation guarantee (SG) underpayments that exist in the past (going as far back to when SG commenced in 1992). For an employer, the tax benefits of the amnesty were to be:
– The administration component of the Superannuation Guarantee Charge (SGG) is not payable (this is a $20 per employee, per quarter, for whom there is an SG Shortfall)
– All catch-up payments made during the 12-month amnesty period are tax deductible
By contrast, under the current law, when superannuation has been underpaid or paid late, SG Charge that must paid to the ATO is not deductible, and late contributions that an employer has made to an employee’s superannuation fund and has elected to offset against their SG Charge liability are also not deductible.
The government’s announcement of the amnesty, via a media release dating from May 2018, prompted many hundreds of (generally smaller) businesses to come forward on the expectation that the government’s stated position in its announcement would come into force.
But the amending legislation did not pass parliament, with the result that many employers have been left in the lurch. They have come forward on the expectation of enjoying the benefits of the amnesty, but now face an uncertain outcome.
The ATO has now published its position. This basically states that until the proposed amendments to the legislation are made law, the ATO will treat such employers as though they had made voluntary disclosures, and deal with these under the existing rules. It will however use what discretion it is afforded under those rules to waive penalties for employers that came forward under the impression they were applying for the amnesty (the legislation for which has now stalled).
Josh McMullen, Tax Writer at accounting, strategy and advice firm PT Partners in Brisbane, says that recent media reports (see here) on this matter appear to be a little off the mark.
“One article that I read said the ATO will waive penalties for hundreds of businesses,” he says, “but later the same article states that the ATO would treat the employers as though they had voluntarily reported themselves under existing rules, meaning they would have to repay unpaid superannuation (and get no deduction for this) as well as interest, and pay an administration charge of $20 per employee per quarter”
“Like many accounting firms, PT Partners has been told by the ATO over the phone that clients who disclose during the amnesty period” (24 May 2018 to 24 May 2019) “will get the benefits of the amnesty.”
Josh says however that it now seems the government has confirmed, as per media reports, that this will not be the case as the amending legislation has not passed. “This is technically the correct approach by the government,” Josh says. “The current rules (such as denying deductions for late contributions) are hard-wired into legislation, and therefore can’t be changed/waived/varied by the ATO without amending legislation.”
As Josh points out, a defining characteristic of the current penalty framework is the lack of discretion it affords the ATO. “The ATO has only very limited discretion to remit any part of the superannuation guarantee charge,” he says. This consists of:
– an admin fee of $20 per employee for which there has been a shortfall
– the shortfall
– 10% interest
– the SG charge being not deductible
– further penalties may be imposed for failure to keep records and other offences.
“This fifth component enables the ATO, at its discretion, to impose additional penalties of up to 200% of the super guarantee charge,” Josh says. “This is known as the Part 7 penalty under Section 62(3) of the SGAA, which can be imposed or waived at the discretion of the Commissioner on a case-by-case basis.”
Josh states that, by contrast, the first four components are automatic, and are as he puts it “hard-wired” into legislation. Only the fifth component is subject to ATO discretion.
“My take-out from somewhat confusing reports on this development is that the ATO is now saying that – despite being bound to apply the first four components – it will waive the fifth component for employers who have already disclosed superannuation guarantee shortfalls during the amnesty 12-month amnesty period,” Josh says. “This is the only component over which they have discretion. In other words, the ATO has decided to give these employers the only relief that it can in the absence of the amending legislation being passed.”
Under the superannuation downsizer scheme, from 1 July 2018, people aged 65 and older can make a non-concessional (post-tax) contribution of up to $300,000 from the proceeds of selling what was once their family home. Existing contribution caps and restrictions will not apply to the downsizer contribution.
The downsizer scheme was one of several measures announced in the May 2017 Federal Budget aimed at reducing pressure on housing affordability. Downsizing enables more effective use of housing stock, by freeing up larger homes for younger, growing families.
By enabling older Australians to make additional contributions to superannuation, the scheme also assists these individuals to better provide for their retirement, and also take advantage of the concessional taxation environment afforded to superannuation funds (including 15% tax on earnings, or tax-free when an account is in pension mode).
The key features of the downsizer scheme are as follows:
– The individual making the contribution must be aged 65 or over at the time they make a downsizer contribution (there is no maximum age limit)
– The contribution must be from the proceeds of the sale of an eligible Australian dwelling sold on or after 1 July 2018
– The dwelling must have been owned for at least 10 years
– The dwelling in whole or in part must have qualified for the main residence CGT exemption
– The contribution (or contributions) must be made within 90 days of the disposal of the dwelling
– The contribution must be no more than the lesser of $300,000 or the proceeds from the sale
– The individual must notify their superannuation fund in the approved form at the time the contribution is made that they wish to treat the contribution as a downsizer contribution
– The individual must not have previously made a downsizer contribution in respect of a different dwelling (but can make multiple contributions in respect of the same dwelling, provided that the 90-day time limit is met for each contribution).
Along with freeing up housing stock, the other benefit of the scheme is that it provides older Australians with greater capacity to contribute to superannuation. The reason why taxpayers must be over the age of 65 to contribute is that the scheme is designed as an exception to the existing contribution rules that restricted this cohort from making significant super contributions in the following respects:
– Work test – This test requires that taxpayers aged 65-74 who wish to make voluntary contributions to superannuation must be in gainful employment for at least 40 hours within a 30-day period during the year in which they make a contribution. By removing this requirement for downsizer contributions, older Australians who no longer work significant hours can now inject sizeable sums into superannuation when they sell the family home.
– Age restriction – Taxpayers over the age of 75 generally cannot make voluntary personal contributions to superannuation (unless made within 28 days of turning 75). There is no maximum age cap on making a downsizer contribution.
– Non-concessional, bring forward cap – Individuals aged 65 or over cannot use this cap, which allows younger taxpayers to bring forward up to three years’ worth of non-concessional, after-tax, contributions (otherwise limited to $100,000 per year) by contributing up to $300,000 over a three-year period depending on their total super balance on 30 June at the previous financial year. For example, if you were under age 65 on 1 July 2018, had not triggered the bring forward cap in any of the previous two financial years and had a total super balance of less than $1.4 million at 30 June 2018, you are permitted to make a $300,000 contribution in 2018-19 but no more contributions for the following two financial years until 2021-22 without exceeding your bring forward cap.
Additionally, downsizer contributions are not subject to the $1.6 million total superannuation balance restriction. Since 1 July 2017, individuals cannot make non-concessional (after-tax) contributions to a superannuation account if they have a total superannuation balance of $1.6 million or more.
While the above contribution restrictions have been lifted in respect of downsizer contributions, the retirement phase transfer balance cap remains in place. That is, the $1.6 million limit on the amount of superannuation savings that an individual can have in tax-exempt income streams still applies. Therefore, if an individual has reached their $1.6 million transfer balance cap, while they can still make a downsizer contribution, that contribution must be allocated to an accumulation account (whereby earnings are taxed at 15%, rather than tax-exempt).
Inheriting a home, or at least a legal interest in one, could be the largest windfall gain that many Australians ever experience – a gain which can be maximised by the CGT exemption under the “sale within two years” rule. In this respect, a new ATO guidance on the matter, which allows a taxpayer to “self-assess” if the Commissioner’s discretion should be exercised to allow an extension of this two year period, is of some significance.
Key feature – safe harbour rules
The key feature of the new guidance is that it outlines “safe harbour” rules that will enable the taxpayer (ie an LPR or a beneficiary, as the case may be) to “self-assess” whether the Commissioner would favourably exercise the discretion.
There are five crucial safe-harbour rules, and all five of which must be satisfied. They are as follows:
1/. During the two-year period after the home is acquired by the taxpayer, more than 12 months must have been spent in addressing any one or more of the following matters that has otherwise delayed the sale or disposal of the dwelling within the required two-year period:
– the ownership of the home, or the will itself, is challenged;
– a life or equitable interest given over the home under the will delays its sale or disposal;
– the complexity of the deceased estate delays the completion of its administration; or
– settlement of the sale of the home is delayed or falls through for reasons outside of the taxpayer’s control.
(These are the same factors that the Commissioner will consider in deciding whether to exercise the discretion where an application is made to the ATO to extend the 2 year period.)
2/. The home must be listed and actively managed for sale as soon as practically possible after such matters have been resolved.
3/. The sale of the home must be “settled” within six months of its listing.
4/. The delay in the sale or disposal of the home cannot be due to any of the following matters:
– the taxpayer waiting for the property market to pick up;
– refurbishment of the home to improve its sale price;
– “inconvenience” on the part of the LPR or beneficiary to organise the sale; or
– unexplained periods of inactivity by the LPR in attending to the administration of the estate.
5/. The taxpayer must not require more than a 12-month extension to self-assess an extension. If a longer period is required, a formal application must be made to the Commissioner.
Of course, when the guidelines are finalised, it may well contain major changes from the draft – in which case nothing will substitute for a thorough reading of the final text itself.
It is also necessary to note several other things about the operation of the sale within two years rule.
Firstly, the rule also applies to any “dwelling” that was acquired by the deceased prior to 20 September 1985, regardless of how it was used by the deceased. On the other hand, an inherited post-CGT home must meet the requirement of being the deceased’s “main residence at their date of death and not then being used to produce assessable income”. But in the common case where the deceased resided in a nursing home before their death, the absence concession can be used to meet the requirement of the home “being the deceased’s main residence at their date of death”.
Secondly, even if a sale or disposal is not realised within the required two years (or such further time as allowed) all is not lost — the taxpayer who inherits the home will still get a “cost base” equal to the home’s market value at the deceased’s date of death to calculate any CGT liability (see s 128-15(4), Item 3). And with the benefit of the 50% CGT discount (and the CGT small business concessions, if relevant), any such liability may be quite minimal.
Thirdly, the CGT exemption for sale within two years does not just apply to an inherited home per se. It also applies to an inherited “interest” in a home. This means that a person who, say, inherits 50% of a home may well obtain the exemption while the beneficiary in respect of the other 50% interest may not. This typically occurs where a 50% joint owner sells their interest to the other 50% owner within two years, but the other party does not dispose of their inherited interested within that time.
Fourthly, an LPR or a beneficiary can also acquire a full CGT exemption under s 118-195 if, from the time of the deceased’s death until its sale etc, it was the main residence of a surviving spouse, a person with a right to occupy the dwelling or the beneficiary who inherits it. And like the sale within two-year rule, it requires that the inherited home was either a pre-CGT dwelling of the deceased or their main residence at their date of death and was not then being used for producing assessable.
Finally, if a full CGT exemption is not available under the rules in s 118-195, then the rules in s 118-200 automatically apply to work out the amount of any partial CGT exemption.
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