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Crucial time is passing as the industry waits to see whether laws will be passed to enact the proposed Division 296 tax, payday super, and other key measures.
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Little progress on superannuation and other measures
06 September 2024
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18 minute read
The uncertainties around Division 296 and payday super
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In recent times, the government has proposed major, sweeping changes to the superannuation system. Although the measures were initially announced with years of lead time, little progress has been made on their implementation into law and much-needed preparation time is steadily ticking away.
Division 296 tax
One such change is the proposed new Division 296 tax, due to commence on 1 July 2025. If enacted, Division 296 tax will impose up to an additional 15% tax on earnings on the proportion of superannuation balances exceeding $3 million. While legislation to implement the measure was introduced into Parliament late last year, the enabling Bill and the related imposition Bill remain before the House of Representatives.
These Bills have already been before the Senate Economics Legislation Committee, which handed down its report into the Bills in May this year, recommending that the measure be implemented, but progress is yet to be made in Parliament.
The Tax Institute and other professional associations have expressed strong concerns with key aspects of the proposed measure. In particular, the following aspects of the measure have drawn united criticisms:
- inclusion of unrealised gains in the calculation of taxable earnings, which would set an undesirable and inappropriate precedent in the tax system;
- lack of indexation of the $3 million threshold;
- inability to carry losses back and apply them only against future gains (in some cases, they may never be able to be recognised); and
- liquidity concerns to be able to fund the payment of Division 296 tax liabilities, notwithstanding the extended 84-day period in which to pay the tax.
The lack of progress is increasingly concerning considering the large administrative and programming changes required for superannuation funds and digital service providers (DSPs) to comply with the new law if enacted. With less than a year to go until the announced start date, superannuation funds and DSPs have been left in a state of flux, not having the certainty they require to be able to start investing in the changes needed to implement the law.
Payday super
Another major proposed superannuation reform that remains in limbo is Payday super (PDS). The substantial reform to the current quarterly superannuation guarantee (SG) regime was announced in May 2023 and will require employers from 1 July 2026 to pay their employees’ SG contributions at the same time as their salary and wages. While 1 July 2026 sounds like a long way off, the initial lead time of three years to design, enact and implement the new regime has quickly shrunk to less than two years until the announced start date.
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To date, we have seen extensive targeted consultation with key stakeholders, including The Tax Institute. The Joint Bodies made a submission in November 2023 in response to the public release of a consultation paper on key concepts and possible options, but no exposure draft legislation has yet been released. The PDS framework needs to be enshrined into law at least a year ahead of the announced start date so all stakeholders can ready themselves for the new regime. There is much to do between now and then for a successful implementation of PDS. In particular, DSPs need to invest in, and design to agreed specifications, the software needed by employers, payroll service providers, clearing houses, superannuation funds and other intermediaries. Understandably, such a financial commitment is likely to be made only with the certainty of enacted law.
Timing of Federal election
Compounding these challenges, a half-Senate election must be held by 24 May next year. Although the latest date for a House of Representatives election is 27 September 2025, it is expected to be held at the same time as the half-Senate election. Any legislation before the Parliament at that time, including the Bills proposing to implement the Division 296 tax, will lapse. This also means that the current government is running out of time to navigate the PDS bills through both Houses before the Federal election is called.
While Division 296 and PDS are the most significant outstanding superannuation measures, a range of other important measures are still pending.
Other announced but unenacted measures
The list of announced but unenacted measures (ABUMs) lengthens with each passing review, election and budget that generates new policies and retracts with the passage of new legislation. Some of the key ABUMs that have, in some cases, stretched into years of uncertainty, are discussed below.
Division 7A
Division 7A continues to be an area of significant complexity and confusion, set against the backdrop of around 25 legislative amendments and the issue of a similar number of ATO guidance products since its inception on 4 December 1997.
In response to the Board of Taxation (Board)’s 2014 post-implementation review of Division 7A, the government announced as part of the Federal Budget 2016–17 that it would make targeted amendments to Division 7A. An ensuing Treasury consultation paper released in October 2018 which has not progressed has only added to this confusion.
Most recently, the appeal of the Tribunal’s decision in Bendel and Commissioner of Taxation (Taxation) [2023] AATA 3074 was heard in the Full Federal Court on 22–23 August 2024. The court’s decision on whether a corporate beneficiary’s unpaid present entitlement (UPE) constitutes a Division 7A loan has been reserved. Depending on the outcome of the appeal, which may progress to a special leave application to the High Court, the decision may ultimately result in legislative amendments. In the meantime, the ATO’s position on UPEs remains unchanged, as outlined in its interim decision impact statement.
The Tax Institute’s view is that the government should progress with the amendments proposed by the previous government after engaging in sufficient and meaningful consultation with key stakeholders. This will ensure the changes are still appropriate in light of notable developments since 2017.
Extension of $20,000 instant asset write-off to 30 June 2025
Following the announcement in May 2023 of a temporary increase in the small business instant asset write-off (IAWO) threshold to $20,000 for 2023–24, extensive parliamentary delays meant the enabling Bill was legislated on the third last day of that income year.
Small businesses and their advisers do not want a repeat of this uncertainty. Yet the proposed measure announced in May 2024 to extend the $20,000 IAWO by 12 months to 30 June 2025 is still not legislated. The enabling Bill remains before the Senate more than two months into the current income year. Providing certainty on this is important because, without legislative change, the IAWO threshold reverts to $1,000 from 1 July 2024.
If enacted, the extension to 30 June 2025 will be the seventh time since 12 May 2015 that the IAWO threshold will have changed. For many years, The Tax Institute has suggested enshrining a permanently increased IAWO threshold for businesses with an aggregated turnover of less than $50 million for assets costing less than $30,000. This policy impacts investment and planning decisions for small businesses and it is essential to have certainty ideally before the start of, or at least early in, the income year so businesses can plan accordingly and make full use of the immediate deduction. It is hoped that the passage of the enabling Bill will be well before the end of the 2024–25 income year.
Corporate tax residency rules
Changes to the corporate tax residency rules to clarify the residency status of companies incorporated outside Australia were announced on 6 October 2020 as part of the Federal Budget 2020–21. This followed the High Court’s decision in Bywater Investments Limited v Commissioner of Taxation [2016] HCA 45. While industry welcomed the proposed changes in this complex area, nothing has progressed. The Tax Institute considers this measure should be progressed as a priority to improve clarity and reduce uncertainty.
Subject to any future legislative amendments, taxation ruling TR 2018/5 and practical compliance guideline PCG 2018/9 provide the ATO’s existing view on the central management and control test of corporate residency. The ATO’s transitional compliance approach in PCG 2018/9 ended on 30 June 2023, despite the progression of the proposed amendments remaining uncertain.
Individual tax residency rules
The Board’s self-initiated 2016 review of the individual tax residency rules concluded that the current rules are no longer appropriate and require modernisation and simplification, especially as they do not represent global work practices. In response to the Board’s recommendations in 2017, the government announced proposed reforms to the rules on 11 May 2021 as part of the Federal Budget 2021–22. A Treasury consultation paper for the new framework was released in July 2023. The object of the consultation was to inform the development of robust principles that will underpin the framework. However, no further progress has been made and this remains a highly grey area of the law.
Pillar Two legislation
The Pillar Two reforms are another example of slow progress. The government proposed to introduce the Pillar Two rules years ago, as part of its 2022 election promises. In the Federal Budget 2023–24, the government committed to:
- a now retrospective application date for the ‘domestic minimum tax’ and the ‘income inclusion rule’ which are proposed to apply to fiscal years beginning on or after 1 January 2024; and
- a prospective application date for the ‘undertaxed payment rule’ which is proposed to apply for fiscal years beginning on or after 1 January 2025.
The package of enabling bills is currently before the Senate, having recently passed the House of Representatives. The package of bills deals with setting up the framework, the imposition of tax and consequential amendments while the rules on the substantive computation of the top-up taxes will be introduced by way of subordinate legislation (draft rules). Treasury consulted on the most recent draft rules until May 2024 but has not released its findings or provided an updated version.
Administrative measures
Two relatively minor administrative measures with significant consequences also remain in abeyance.
Penalty units
An enabling Bill which gives effect to the government’s Mid-Year Economic and Fiscal Outlook (MYEFO) 2023–24 announcement to increase the amount of a penalty unit in the Crimes Act 1914 (Cth) from $313 to $330 from 1 July 2024 remains before the House of Representatives.
Denying deductions for ATO interest charges
No progress has been made on the MYEFO 2023–24 measure to deny deductions for the general interest charge (GIC) and shortfall interest charge (SIC) incurred in income years starting on or after 1 July 2025. While the commencement of this measure is more than nine months away, a looming Federal election could disrupt the smooth progress of the enabling legislation.
Closing comments
The article discusses only some of the many dozens of ABUMs. The ABUM issue is broader than the measures themselves. As a matter of system maintenance, the government really needs to address the systemic issue of this extensive list so the ABUMs can be better managed going forward. Clarity is needed so greater certainty can be provided to taxpayers and their advisers.
Taxpayers who choose to anticipate new law in line with an announcement that is not enacted may need to request an amendment from the ATO.
About the Author
Robyn Jacobson is the Senior Advocate at The Tax Institute.
About The Tax Institute
The Tax Institute is the leading forum for the tax community in Australia. Our reach includes membership of over 10,000 tax professionals from commerce and industry, academia, government and public practice and 40,000 Australian business leaders, government employees and students. We are committed to representing our members, shaping the future of the tax profession and continuous improvement of the tax system for the benefit of all, through the advancement of knowledge, member support and advocacy. Read more at taxinstitute.com.au
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