23 August 2002

The Manager
Superannuation Unit
Treasury
Langton Crescent
Parkes ACT 2600

Dear Sir/Madam

Splitting of Superannuation Contributions between Couples

CPA Australia and its Superannuation Centre of Excellence are pleased to provide a submission on the consultation paper relating to the Government's proposed policy to allow contributions splitting between couples.

General

We are supportive of this initiative and consider it will maximise the benefits available to superannuation. It will also provide a mechanism for spouses to share their superannuation benefits and will enhance the accessibility of superannuation to low income or non-working spouses. Feedback from our membership indicates that this initiative is supported by their clients and is seen as a positive change.

To ensure a more simplistic mechanism and to minimise costs, splitting should occur at the benefit end. This will avoid the need for two separate accounts incurring separate management fees once the splitting spouse transfers contributions to a separate account in the name of the receiving spouse. As well, members with defined benefits will be fully catered for and the administrative and associated burden on superannuation funds will not be as onerous.

We understand that the Government does not intend to pursue options at the benefit end as this would be inconsistent with the Government's election commitments and would involve a significantly higher cost to revenue. However, we believe that this option would provide a fairer splitting mechanism for all Australians including those with defined benefits and those who are approaching retirement and would be easier for funds to administer. We consider this option should be fully costed, with an emphasis on the cost to taxation revenue and the reduction of future social security outlays. The additional retirement income provided to those Australians who utilise this option and the administrative costs imposed on superannuation funds are important issues in any cost/benefit analysis.

The consultation paper notes that the general employment link between paid employment and the ability to contribute will be maintained. CPA Australia considers that the link between employment and superannuation should be comprehensively reviewed as it is not in keeping with the changes in working arrangements and demographic patterns. In particular, the employment link should be removed for Australians under the age of 65 with a simplified employment test imposed for those Australians aged 65 or more. This would also reflect the many recent changes made to superannuation such as spouse contributions and child contributions that do not require the employment test to be passed.

Terminology

The terminology used in the discussion paper is very loose and confusing. The use of the term 'spouse contributions' as outlined in the paper could potentially give rise to confusion with the current spouse contributions. Any legislative amendments should provide for a unique identifier (such as 'split contributions') and there should be consistency of language.

As a further point, it should be made clear what contributions are captured under the term 'deductible contributions'. Specifically, it should be made clear whether it is intended that all employer contributions will be included in this category. We believe that all employer contributions should be included in this term.

Discrimination

The proposals as outlined in the consultation paper cater for the traditional family unit by allowing spouses to share their superannuation benefits. The paper notes that the spouse definition will be consistent with the current definition of spouse contained in the Superannuation Industry (Supervision) Act 1993 (SIS Act) which covers married and de-facto couples. We are concerned that no similar initiatives and taxation concessions have been considered in respect of same sex partners.

Additionally, the self employed are not in the position to take full advantage of the splitting arrangements. Self employed must put in undeducted contributions where they wish to make maximum deductible contributions but cannot split the undeducted contributions under the proposed rules because they have personal deductible and undeducted contributions within the same fund. The argument that the self-employed are able to make these undeducted contributions as spouse contributions does not apply to these particular undeducted contributions. It should be noted that most employees are not required to make undeducted contributions and therefore, it is necessary to ensure that self-employed persons are not disadvantaged under the splitting arrangements.

Further, the options outlined provide more favourable arrangements for those people with multiple funds rather than one fund because of the rule allowing only deducted contributions to be split where a member has both deducted and undeducted contributions paid into the same fund. This will not create an incentive for persons to consolidate their benefits into one fund and discriminates against those persons who are only a member of one fund. The intention of this particular rule should be revisited.

The consultation paper provides that the superannuation provider can levy fees on the receiving spouse or the splitting spouse to cover the costs of giving effect to the split. We believe the cost of implementing this service to all members should be borne by the entire membership base, not just those taking advantage of the contribution split. We acknowledge that funds should be able to charge an administration fee to those members using the service. However, this fee should represent the actual cost associated with providing the service and not the costs of implementing the splitting regime.

As noted above, contribution splitting will only be available to those defined benefit funds that have an accumulation interest. We consider that further thought should be given to mechanisms that will allow defined benefit members with a defined benefit interest to be able to take full advantage of this initiative.

Administration

To varying degrees, the options outlined will all impose costs on superannuation providers. Included are, start up expenses encompassing system changes, ongoing costs in providing this service, changes to reporting mechanisms and potential increase in inquiries and complaints.

In particular the superannuation provider will have to include a new identifier for pre and post 1 July 2003 contributions in order to identify the contributions and earnings attributable to those contributions made post 1 July 2003.

Although the superannuation provider will have the option of not accepting the spouse as a member, it is mandatory to provide the option to split contributions for those members that only have an accumulation interest. With the introduction of employee choice of fund consideration should be given to allowing the funds to determine whether or not to provide this service. Individuals who wish to take advantage of contribution splitting would be able to choose a fund that offers the service.

We note that the transfer of any contributions to a spouses account will be treated as an Eligible Termination Payment (ETP) roll-over. Clarification is needed as to what this will involve in terms of process and associated documentation. It should also be noted that the current surcharge reporting for non-self assessing funds will need to be modified if the split contributions are to be included in the adjusted taxable income calculations of the splitting spouse.

As outlined in the consultation paper, self employed persons who want to split contributions and claim a deduction will need to provide notice to their superannuation provider of their intention to claim a deduction before the provider effected the split. Once the contribution has 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 a split amount. This rule should be reconsidered to ensure self-employed persons are not presented with arrangements that are overly restrictive.

As indicated above, the fact that the surcharge liability remains attached to the splitting spouse will effect the surcharge reporting mechanism for superannuation providers. System changes and reporting arrangements are required to ensure that the surcharge liability is not attached to those contributions that have been transferred to the receiving spouse. As a further point, the fund will be required to report their contributions for the year to the ATO.

There are also issues in terms of the timing of member benefit statements with the splitting of contributions. The option that is ultimately used should limit confusion to members and complaints to funds where members do not understand how the splitting regime impacts the reporting of their benefits and the timing of the contribution splitting. For example, member benefit statements for 30 June 2004 must be issued by 31 December 2004. However under the annual splitting option, members would have until 31 January 2005 to notify the fund of the splitting requirement for the 2003/2004 contributions and the fund would have a further 90 days to split those contributions.

Superannuation contributions may provide the receiving spouse with access to cost effective death and disability cover. It is unclear how death and disability insurance will be provided to the splitting spouse. For instance, what premiums will be charged in respect of a spouse that is involved in a 'high risk' activity.

We note that the receiving spouse must be less than the age of 65 and has not satisfied a condition of release. It is a common situation where a spouse is over 55, has worked before, is no longer working, is not looking for work and intends not to be gainfully employed again. Further guidance is required in relation to the requirement that the receiving spouse should not be able to take the split contributions in cash immediately and to ensure consistency with the current preservation rules.

Alternative Option

In terms of the options outlined in the paper, consideration should be given to adopting a hybrid approach based on options 1 and 2. That is, the member must lodge a prospective nomination of their intention to split before 30 June. The superannuation fund should determine the frequency of the split – whether it occurs monthly, quarterly or annually. The effective date of the split will be 30 June. This combined approach provides the flexibility of prospective splitting while reducing the administration burden on funds and ensuring that member benefit statements at 30 June reflect the true position of the member and spouse's superannuation benefits.

Self employed persons should be given the option of providing a notice of intention to claim a tax deduction with their notice of intention to split prior to 30 June. The requirement that self employed provide a 82AAT notice prior to the splitting of the contributions should be removed as the member is unable to control when the fund will split the contributions.

This option would have the benefit of curtailing administration and systems development costs on superannuation providers. In doing so costs would be limited, which would translate to lower management fees levied on the receiving spouse or splitting spouse.

CPA Australia does not favour Option 3 – Joint Accounts. This particular option would give rise to administrative complexities. For instance, it would be difficult to ascertain when a benefit payment would be triggered. Further it is unclear how the fund would give effect to investment strategy choice for the joint accounts.

Should you have any queries or require further information, please contact CPA Australia's Superannuation Policy Adviser, Ms Jane Barrett on Tel: +61 3 9606 9656.

Yours sincerely

Greg Larsen, FCPA
Chief Executive