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					                                                                Mercer (Australia) Pty Ltd
                                                                ABN 32 005 315 917
                                                                33 Exhibition Street Melbourne Vic 3000
                                                                GPO Box 9946 Melbourne Vic 3001
                                                                +61 3 9623 5555
                                                                Fax +61 3 8640 0800
                                                                john.ward@mercer.com
                                                                www.mercer.com.au




Manager, Contributions and Accumulation Unit
Personal and Retirement and Income Division
The Treasury
Langton Crescent
PARKES ACT 2600

Email address: recc@treasury.gov.au.
Fax number is 6263 3044.


4 October 2011

Subject: Mercer is pleased to comment on the Refund of Excess Concessional
Contributions Consultation paper

Dear Sir

Who is Mercer?

Mercer is a leading global provider of consulting, outsourcing and investment services, with more
than 25,000 clients worldwide. Mercer consultants help clients design and manage health,
retirement and other benefits, and optimize human capital. The firm also provides customized
administration, technology and total benefits outsourcing solutions including the running of the
Mercer Super Trust with over $15 billion of assets. Mercer’s investment services include global
leadership in investment consulting and multi-manager investment management. We also provide
a financial advice service which advises individuals as well as Self Managed Superannuation
Funds.

Executive summary

We consider that the processes outlined are a reasonable method of implementing the
Government’s policy, subject to the following five concerns being appropriately addressed:

       Implementing an appropriate approach which would provide sufficient time for those with
       excess concessional contributions to lodge a tax return (this is particularly relevant for
       those who may not otherwise need to lodge a tax return)
       Applying a practical approach (such as the approach recommended later in our
       submission) when a refund needs to be unwound or corrected
       Ensuring that the ATO adopts a reasonable and fair approach in allowing extensions to the
       28 day election period
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4 October 2011
Manager, Contributions and Accumulation Unit
The Treasury




        Ensuring that the ATO provides a clear explanation of the various options a member has in
        relation to the excess concessional contributions
        Confirmation that an identical approach will apply to excess concessional contributions
        which have arisen from notional contributions and allocations from reserves (including the
        provision of the 15% refundable tax offset)

We also note that we have serious concerns with the policy itself, including:

        the policy will result in additional complexity in an already extremely complex environment
        the policy will not solve the major problems arising from accidentally exceeding
        contribution caps including the imposition of taxes which can, in some circumstances, only
        be described as excessively penal
        the policy will not solve the problems which cause accidental excess concessional
        contributions

We expect that the number of excess concessional contribution cases will rise further due to:

        the expiry of the transitional provisions providing higher limits for those age 50 and above
        the implementation of the Government’s highly complex proposal to provide a higher limit
        for those age 50 and above with account balances of less than $500,000
        the proposed increases in the Superannuation Guarantee

In order to avoid an increase in excess concessional contribution tax assessments (and to make
the system more equitable), we recommend that the following changes should be adopted in
addition to the proposal covered in the Consultation Paper:

        Double the concessional contribution limit for all members aged 50 or more. Such a
        change should replace the Government’s proposal to increase the contribution limit for
        older members with an account balance of less than $500,000. (An alternative would be to
        significantly increase the concessional contribution limit at all ages).
        Amend the definition of Reportable Employer Superannuation Contribution (RESC) so that,
        where an employer and an employee agree to cap contributions to avoid excess
        concessional contributions, this does not trigger a requirement for the employer to treat
        contributions for other employees as RESCs (refer to the section on RESCs in the
        Appendix)
        Provide members with an option to avoid inadvertent triggering of the two year bring
        forward rule for non-concessional contributions
        Amend the SIS Regulations to widen the circumstances in which contributions can be
        refunded at the request of a member
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4 October 2011
Manager, Contributions and Accumulation Unit
The Treasury




We also recommend that the excess concessional contribution tax system needs to be made
more equitable by:

        modifying the concessional contribution provisions relating to successor fund transfers to
        minimise the risk of excess concessional contribution tax issues creating barriers to fund
        mergers
        resolving a number of other issues raised by the Institute of Actuaries of Australia where
        the legislation and its intent are unclear
        significantly reducing the rate of tax on excess non-concessional contributions, possibly in
        conjunction with a requirement to refund the balance of the excess (after deduction of the
        relevant tax) to the member

Comments on processes outlined in consultation paper

General approach

As indicated above, we consider that the processes outlined in the Consultation Paper represent a
reasonable approach to implementing the Government’s announced policy and appear to
minimise the impact on superannuation funds.

The policy and procedures will, however, further increase the level of complexity.

Concern – requirement to lodge a tax return

Paragraph 16.4 of the Consultation Paper indicates that the refund option will only be available if
the member has lodged a tax return for the relevant year within one year of the end of that year.

Our interpretation of the process outlined in the Consultation Paper is that the ATO would defer
issuing an excess concessional contributions tax assessment notice until a tax return has been
lodged or the one year period has expired.

We note that the Government has proposed changes to personal income tax including a
significant increase in the tax free threshold. If these tax changes are implemented, the
Government has announced that an additional one million Australians will no longer need to lodge
a tax return.
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4 October 2011
Manager, Contributions and Accumulation Unit
The Treasury




In other words, a member who has legally not lodged a tax return may be unfairly excluded from
the refund option. Whilst it is unlikely that many low income earners (who do not need to lodge a
tax return) will have received excess concessional contributions, it is important to acknowledge
that this could arise. Consider a person who retires at age 62 on 30 June 2012. The member has
only a small level of taxable income in the 2012/13 year and no tax return is required. However
an excess concessional contribution could arise in that year. Some examples of how this could
occur are:

1. The person receives an additional discretionary defined benefit in July 2012 (or an allocation
   from the superannuation fund’s reserves. The additional benefit or allocation is counted as a
   concessional contribution in the 2012/13 year

2. Employer contributions relating to a member’s salary sacrifice contributions for the 2011/12
   year and SG contributions for the June 2012 quarter are received by the superannuation fund
   in July 2012 and hence are treated as concessional contributions in the 2012/13 year

Whilst we can understand why the policy would require the lodgement of a tax return, we are
concerned with the timing requirements. In particular, the member may not even be aware that an
excess concessional contribution has arisen until after the proposed time limit on lodging a tax
return has been passed. In many cases the member may be unaware of the excess until advised
by the ATO. Due to delays caused by late reporting by superannuation funds, amendments to
reporting and delays within the ATO, any notice issued by the ATO may not be received by the
member until after (or only shortly before) the proposed deadline for lodging a tax return.

One way of addressing this issue is, where the ATO consider that an excess concessional
contribution of up to $10,000 has arisen, the ATO should advise the member and a refund option
should also be available if a tax return for the relevant year is lodged within 3 months of any
advice (or such longer period as the ATO may determine). This period may finish (and potentially
even commence) after the one year period referred to in the Consultation Paper.

Concern – Unwinding and correcting

We agree with the statement in paragraph 50 of the Consultation Paper: “Where a refund or ECT
has already been paid, unwinding or correcting the transactions can be administratively and
practically complex.”
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4 October 2011
Manager, Contributions and Accumulation Unit
The Treasury




We are thus very concerned with the following statement: “Hence further consideration is being
given to how to most appropriately deal with these cases.”

Any approach which is adopted should be not result in additional administrative costs to
superannuation funds. We recommend the following approach:

        where it is later determined that the excess concessional contributions were initially
        understated then:
           if the total excess concessional contributions (including those already refunded) exceed
           $10,000 - any release must be allowed to stand
           if the total excess concessional contributions (including those already refunded) are less
           than $10,000 – the member should be able to claim a refund of the additional excess
           concessional contributions
        where it is later determined that the excess concessional contributions were overstated then:
           any release must be allowed to stand
           the member’s concessional contribution limit for a later year should be increased by the
           amount of any excess concessional contributions refunded

Concern re ATO discretion in extending election period

Our major concern is that, under the proposals, members will only have 28 days to determine
whether they should accept the offer to claim a contribution refund and respond to the ATO but
that the Commissioner may use its discretion to allow a longer period.

This standard 28 day period is not a long time for members to understand the implications and
make their decision, particularly where it may be important to obtain tax or other advice. The
shortness of this period will be exacerbated in cases where there are delays in the member
receiving the notification from the ATO, eg because they are travelling and unable to receive their
mail.

It will be critical that the ATO adopts a reasonable and fair approach in determining whether
extensions to the 28 day period will be allowed. A 60 day period might be more appropriate.
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4 October 2011
Manager, Contributions and Accumulation Unit
The Treasury




Concern – appropriate disclosure by ATO

It is also important that the ATO provides appropriate and clearly explained details on the options
available to the member. In particular, it is important that any ATO correspondence gives
appropriate weight to the member’s ability to:

        object to the ATO’s assessment
        request that the ATO apply its discretion to disregard a contribution or to allocate it to
        another year
        accept the refund option after those other channels have resulted in an unsuccessful
        outcome

Concern – notional contributions and contributions from reserves

We also note that the Consultation Paper does not comment on situations where the excess
concessional contribution arises due to notional taxed contributions or allocations from reserves.
We assume that the same process would be followed with the ATO issuing a release form in
respect of 85% of the excess even though no contribution tax may have been specifically paid in
respect of such notional contributions or allocations (it is likely that contribution tax would have
been paid at some stage in the past). We would be concerned if a more complex approach is
adopted to cover such situations.

Concern – adjusted taxable income

As indicated in paragraph 55 of the Consultation Paper, the refund of contributions would, unless
changes are made, potentially result in a double counting of this amount in adjusted taxable
income as used for various purposes. This will apply where the excess concessional contributions
have been reported as Reportable Employer Superannuation Contributions.

Such double counting would be unreasonable, and for simplicity we recommend that any refunded
contributions be excluded from adjusted taxable income and any other income definitions used to
determine Government benefits etc.

Of course, more complex adjustments could be considered (eg reducing adjusted taxable income
by the greater of the refund amount and the RESC) however this would add even greater
complexity.
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4 October 2011
Manager, Contributions and Accumulation Unit
The Treasury




Conclusion

We consider that the concerns raised above should be capable of being accommodated within the
policy framework.

As indicated above, our criticism is more based at the policy itself. We have elaborated on this in
more detail in the Appendix.

Please contact me on 03 9623 5552 or Paul Shallue on 03 9623 5061 if you would like to discuss
any of these issues in more detail.

Yours sincerely




John Ward
Manager,
Research and Information




J:\Library\R&I\JDW\2011\08 August 11\Excess conts tax final.doc
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4 October 2011
Manager, Contributions and Accumulation Unit
The Treasury




APPENDIX
Concerns with general policy

There are a number of problems with the current excess contribution rules including:

        The concessional contributions cap is too low
        The interaction with Reportable Employer Superannuation Contribution rules
        The rules for determining concessional contributions are too complex
        The automatic triggering of the two year bring forward rule is unreasonable and the ATO
        does not provide sufficient information to affected members
        The rate of tax on excess non-concessional contributions is too high (particularly where the
        non-concessional contributions include excess concessional contributions)
        The lack of provisions to enable members to correct errors

At best, the proposed policy as set out in the Consultation Paper is a very modest step which will
only go part of the way towards addressing the current unfair aspects of excess contributions tax.

Further, the relief is very limited in that:

        it provides once only relief and only in respect of excess concessional contributions
        arising from 1 July 2011
        it only applies to excess concessional contributions up to $10,000
        it does not provide relief from the extreme excess non-concessional contributions tax rate
        it does not provide relief from the extreme combination of excess concessional contribution
        tax and excess non-concessional contribution tax on excess concessional contributions
        where the excess concessional contribution exceeds $10,000.

Concessional contributions cap is too low

    The halving of the concessional contributions cap from 1 July 2009 has reduced the
    opportunity for Australians to make “catch-up” contributions later in life. This particularly
    impacts on those who have been out of the workforce for a significant part of their life and
    those who have had limited capacity to make additional contributions whilst they were raising a
    family or paying off a mortgage. Women, in particular are likely to be adversely affected due
    to their periods out of the workforce to raise children.
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4 October 2011
Manager, Contributions and Accumulation Unit
The Treasury




    It has also significantly increased the number of members who are likely to exceed the
    concessional contribution cap through the application of standard practices, such as a
    common employer contribution rate for all employees.

    We expect that the number of excess concessional contribution cases will increase further
    from 1 July 2012 when the current transitional provisions expire.

    Whilst acknowledging the Government’s proposed doubling of the cap for those over age 50
    with account balances under $500,000, we expect that the complications resulting from this
    policy will result in even more accidental breaches of the contribution cap.

    There are already far too many examples of inadvertent breaches of the contribution limits and
    the introduction of a further complication in the form of the proposed $500,000 eligibility test
    would be likely to worsen this problem.

    The Government’s proposed increases to the Superannuation Guarantee rate are also likely to
    increase the number of cases involving excess concessional contributions.

    The current low level of the contribution cap is particularly concerning for:

        defined benefit members who are not eligible for the grandfathering protection rules
        to members of accumulation arrangements where the employer has committed to
        providing a benefit equivalent to that provided under a previous defined benefit
        arrangement

    (We have commented further on these two issues later in this Appendix.)

    We recommend that the concessional contributions cap should be doubled for all
    members age 50 and older. Alternatively, a higher contribution cap (eg $40,000) should
    apply at all ages.

Interaction with Reportable Employer Superannuation Contribution (RESC) rules

    Where a standard employer contribution exceeds the limit, the application of the RESC rules
    has made employers wary about allowing employees to request that the employer
    contributions for a particular employee be capped.
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4 October 2011
Manager, Contributions and Accumulation Unit
The Treasury




    For example, the employer may have agreed to a standard employer contribution rate of 14%
    of salary. As a “compulsory” rate for all employees, it would not be considered an RESC. By
    allowing contributions for a particular employee to be capped at $25,000 (or some lower
    amount to reflect potential contributions from other employers in the year) would potentially
    result in contributions in excess of any mandated contributions being treated as RESCs for all
    employees. This would adversely impact other employees as well as creating additional
    administrative work (in calculating and reporting RESCs) for the employer.

    We recommend that changes be made to the definition of RESC to enable employers
    and employees to cap contributions in order to avoid excess concessional
    contributions without triggering a requirement for the employer to treat contributions
    for other employees as RESCs

The concessional contribution tax rules are too complex

    It is often difficult for members of a superannuation fund to determine the level of contributions
    which they cannot control, eg employer contributions (which may vary from year to year due to
    changes in the time at which the employer makes contributions), allocations from reserves,
    notional taxed contributions (including one-off amounts relating from amounts W, X, Y and Z
    under Schedule 1A of the Income Tax Assessment Regulations 1997), any potential
    grandfathering provisions (or loss of such provisions), personal deductible contributions, some
    amounts transferred from overseas funds etc.

    In fact it is even difficult for trustees to determine the amount of concessional contributions
    made to a fund as there are numerous ambiguous provisions in the relevant legislation (refer
    to the Institute of Actuaries of Australia letters to Treasury dated 6 May 2010 and 4 March
    2011).

    We consider it important that these issues be resolved so that trustees can determine the
    relevant concessional contributions in a consistent manner.

Automatic triggering of the “Two year bring forward” rule

    Since its introduction in 2007, the application of the “two year bring-forward” rule has resulted
    in higher levels of excess non-concessional contributions tax than were expected.
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4 October 2011
Manager, Contributions and Accumulation Unit
The Treasury




    These situations have commonly arisen as a result of a member being unaware that the
    standard $150,000 non-concessional contributions limit has been breached in year 1. For
    example, non-concessional contributions of $150,020 were reported.

    This triggers the application of the “two year bring forward” rule. However, we understand that
    the ATO does not advise the member that the “bring forward” rule has been triggered.

    Unaware that the “bring forward” rule has already been triggered, the member then makes a
    non-concessional contribution of, say $440,000 in Year 2, expecting that the “bring forward”
    rule will be applied from Year 2 and unaware that his limit in Year 2 is only $299,980. The
    member subsequently receives an excess non-concessional contributions tax assessment for
    $65,109.30. This is a huge penalty for being only $20 over the limit in the previous year.

    The complicated nature of the excess contributions tax regime often makes it difficult for
    members to determine exactly what contributions have been counted in any year.

    The “bring forward” system could be made much fairer by a relatively minor change to the
    rules:

        In the first year that the non-concessional contribution limit has been exceeded, the
        member should be given the option of triggering the “two year bring forward” rule
        or paying any excess non-concessional contributions tax for that year. This would
        involve the ATO notifying the member that the $150,000 limit has been exceeded
        and requiring the member to make an election. If an election is not made, it would
        be assumed that the “bring forward” rule had been exercised.

    We have considered two other options to solve the current problem:

    •   Requiring the ATO to advise the member that the “bring forward” has been triggered.
        However such advice may be too late to stop the member making excess contributions in
        the following year
    •   Allowing the member to withdraw the excess non-concessional contributions without
        incurring tax. This would be more consistent with the Government’s policy to allow excess
        concessional contributions to be refunded. However, it would be more complicated and,
        assuming that a maximum refund was imposed, may not solve the problem. (However, a
        variation on this theme is considered under the following heading.)
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4 October 2011
Manager, Contributions and Accumulation Unit
The Treasury




Non-concessional contribution tax rate is too high

    Currently the tax applied to excess non-concessional contributions is 46.5%. However this is
    in addition to other taxes which have already been applied. For instance, most non-
    concessional contributions are made from after-tax earnings. As such, the earnings from
    which they have been derived have already been taxed at rates up to 46.5%. A further 46.5%
    tax on excess contributions could therefore be considered extreme.

    This extreme tax penalty is also illustrated in relation to cases where excess concessional
    contributions are also considered to be excess non-concessional contributions and taxed as
    follows:

    Standard contribution tax:          15%
    Excess concessional contributions tax:     31.5%
    Excess non-concessional contributions tax: 46.5%
    Total:                     93%

    We consider that such a high rate of tax on excess non-concessional contributions
    made for a member’s retirement is draconian and the excess non-concessional
    contribution tax rate should be reduced to say 15% or 25%.

    We understand that the Government may be concerned that a lower rate of tax may not be a
    sufficient disincentive to stop deliberate breaches of the non-concessional contributions cap.

    However, if imposed in conjunction with a requirement to refund the whole of any excess non-
    concessional contributions, we consider that a 15% tax rate would be more than sufficient.

    We recommend that, as an alternative to just reducing the tax rate applied to non-
    concessional contributions, that:

            the tax rate on excess non-concessional contributions be reduced to 15%; AND
            the balance of 85% of the excess contributions should be paid to the member as
            soon as practicable where this is possible from accumulation accounts
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4 October 2011
Manager, Contributions and Accumulation Unit
The Treasury




Inability to correct “errors”

    As a fund administrator, we receive a number of requests from members wishing to obtain a
    refund after they realise that the contribution limits may be exceeded. However, it is generally
    not possible for a member to obtain such a refund due to restrictions imposed by the SIS
    Regulations.

    We recommend that the SIS Regulations be amended to widen the ability of trustees to
    refund contributions. This would enable members to, say, obtain refunds in the year
    the contribution was made and hence reduce the number of excess contribution
    assessments.

Defined benefit members

    The legislation currently provides a “grandfathered” cap on notional taxed contributions for
    defined benefit arrangements, subject to certain rules being met.

    This provides some protection for members covered by such arrangements provided the
    relevant rules continue to be satisfied. However, such protection is not available to defined
    benefit members who joined the arrangement after 12 May 2009 and to members who have
    lost the grandfathered protection for one reason or another. Such members are in a difficult
    position as they may have no control over the level of notional taxed contributions applied and
    may have no accumulation benefits from which any excess concessional contribution tax can
    be paid. Thus they may be required to pay any assessment from after tax income which is not
    only tax inefficient but creates further inequities.

    Any grandfathered protection can potentially carry over to a successor fund. However the
    carry over provisions in the legislation are inadequate and do not fully achieve their aim. This
    can create a significant barrier to the rationalisation of superannuation funds – refer to the
    letter dated 6 May 2010 from the Institute of Actuaries of Australia to Treasury.

    Whilst changes to the Regulations in relation to successor fund transfers are necessary, the
    more general problems for defined benefit members not eligible for grandfathering would be
    considerably reduced if the concessional contribution limit was increased.
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4 October 2011
Manager, Contributions and Accumulation Unit
The Treasury




Pre-existing employer contribution commitments

    We have become aware of a number of relevant cases where an employer has (prior to the
    announcement of the Simpler Super regime or prior to the halving of the concessional
    contribution limits) arranged for the conversion of a defined benefit superannuation fund to an
    accumulation fund whilst providing the existing members with a guarantee that the employer
    will (if necessary) make an additional contribution prior to retirement to ensure that the
    member receives a benefit at least equal to what the defined benefit would have been.
    Following the fall in asset values during the Global Financial Crisis, these top-up contributions
    have sometimes become very large. The cost to the employer of honouring its commitment or
    contractual obligation is then further exacerbated because of the high levels of tax (up to 93%)
    on the required contributions.

    These problems have been exacerbated by the halving of the concessional contribution limit.
    The problems would be considerably reduced by increasing the concessional contribution limit
    and by reducing the tax rate on excess non-concessional contributions.

				
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