The objective of the audit was to assess the effectiveness of the Tax Office's administration of the Superannuation Co-contribution Scheme.
The audit reviewed five key areas: governance arrangements; information technology systems and controls; co-contribution processing; compliance approaches; and communication with clients.
1. The role of the Australian Taxation Office (Tax Office) is to manage and shape taxation, excise and superannuation administrative systems that fund services for Australians, giving effect to social and economic policy. In fulfilling this role, the main task of the Tax Office is to administer legislation governing taxes, excise and superannuation.
2. Superannuation is a long-term savings arrangement that operates primarily to provide income for individuals in retirement. Superannuation involves employers, employees and the self employed making contributions over a period of time to a superannuation provider. The superannuation provider holds the contributions in trust for the member and invests them to increase the value of assets. These assets are then used to provide benefits to members when they retire or suffer a serious disability, or to a member's family if the member dies.
3. Superannuation is a large and complex area of taxation administration. The Tax Office's superannuation administrative responsibilities cover a diverse range of clients, ranging from individual employees through to large superannuation companies.
4. The Superannuation Co-contribution Scheme (the Scheme) was established by the Superannuation (Government Co-contribution for Low Income Earners) Act 2003 (Co-contribution Act). It is an initiative directed at increasing superannuation saving by low and middle income earners. Where a person is eligible and makes personal superannuation contributions, the Government will match their contributions with a superannuation co-contribution (co-contribution), subject to income limits.
5. To be eligible for a co-contribution, an individual must:
- make personal after-tax superannuation contributions by 30 June to a complying superannuation fund or retirement savings account and not claim a deduction for all of them;1
- have total income (that is assessable income plus reportable fringe benefits plus reportable employer superannuation contributions) less than the higher income threshold;2
- receive 10 per cent or more of total income from eligible employment;3
- be less than 71 years old at the end of the income year;
- not hold an eligible temporary resident visa at any time during the income year unless they are a New Zealand resident or holder of a prescribed visa; and
- lodge an income tax return for the relevant income year.
6. There have been substantial increases in both the value of co-contributions and number of beneficiaries of the Scheme since it was introduced.4 In 2008–09, the Tax Office determined that some 1.4 million individuals were entitled to approximately $1.2 billion in co-contribution payments. These increases have been partly due to changes to the Scheme, including: raising the income thresholds and maximum co contribution amount; the co contribution double payment measure;5 and Super Simplification reforms. Participation in the Scheme was around 15 per cent in 2008–09.6
7. Co-contribution legislation is specifically designed so that individuals do not claim a co contribution as they do most other tax concessions (such as deductions for personal contributions). Instead, the legislation places a responsibility on the Commissioner of Taxation to determine entitlement and make a payment to a nominated fund once he is satisfied that a co contribution is payable.
8. Tax Office systems automatically determine entitlement on an annual basis using:
- income and deduction information provided by an individual for income tax purposes in their annual income tax return (tax return); and
- details of personal contributions, as reported by the taxpayer's superannuation fund(s) via the Member Contributions Statement (member statement) or Self-Managed Superannuation Fund annual return.
9. The implementation of Superannuation Simplification measures from July 2007 and deployment into the Tax Office's new Integrated Core Processing (ICP) information technology system from February 2009 considerably changed the design of the supporting system. However, the fundamental process for determining eligibility and entitlements remained unchanged.
Audit objective and scope
10. The objective of the audit was to assess the effectiveness of the Tax Office's administration of the Superannuation Co-contribution Scheme.
11. The audit reviewed five key areas: governance arrangements; information technology systems and controls; co-contribution processing; compliance approaches; and communication with clients.
12. The Australian National Audit Office (ANAO) conducted fieldwork in the Tax Office's Hobart, Adelaide, Parramatta, Canberra and Brisbane offices between June and November 2009. The ANAO also consulted a number of superannuation funds and industry organisations, seeking their views on elements of Tax Office administration of the co contribution.7
13. As the Commissioner for Taxation determines eligibility and entitlement for a co-contribution without members making a claim, effective administration of the Scheme requires the Tax Office to compile accurate relevant data and promptly make co contribution payments, with minimal involvement of members and funds. On a process basis, effective administration requires the Tax Office to:
- use automated systems to process the large volume of member statements and tax returns promptly and in accordance with legislation, supplemented by manual arrangements as necessary;
- conduct activities to promote compliance with Scheme requirements;
- communicate effectively with stakeholders to inform them of key aspects of the Scheme and resolve queries; and
- govern these activities in alignment with other Tax Office and Superannuation arrangements.
14. The Tax Office has effectively administered the Scheme, typically providing accurate and prompt payment of the co-contribution, and accordingly has received relatively few queries and complaints from members and funds. However, this is against a background of only around 15 per cent of potential recipients participating in the Scheme, and a significant number of large funds not providing member statements required by the Tax Office to calculate entitlements.
15. The Tax Office itself has rated the administration as sound and the risks generally as low. Greater pressures have been placed on administration since 2007, with the extension of the Scheme to the self-employed, and in 2009 with deployment into the ICP system. The Tax Office has focussed on meeting these challenges, returning to high levels of timely and accurate processing in the peak period of late 2009 after some delays associated with ICP deployment. However, due to the deployment of income tax to ICP, co-contribution payments were temporarily suspended after this peak processing period. Many of the opportunities for further improvement in the administration of the co-contribution involve the Tax Office implementing strategies it has developed but not yet sufficiently implemented.
16. In regard to supporting information technology (IT) systems, the design of the co-contribution components of the ICP system has generally been sound, building on functionality of the initial system. Data capture and verification processes continued to be effective, as were eligibility and entitlement processing components, except for known problems arising from instances of potential technical non compliance with legislation. There is scope to increase the effectiveness of teams responsible for IT system support and maintenance by documenting end-to-end service delivery processes and defining roles and responsibilities of staff managing system changes.
17. The accuracy, completeness and timeliness of core processing underpin the efficient and effective administration of the Scheme. The Tax Office conducted this core processing effectively prior to the deployment into ICP, to the satisfaction of industry stakeholders contacted as part of the audit. While a number of problems were encountered with processing during the deployment into ICP between February and October 2009, reliable processing resumed in November 2009, enabling the Tax Office to manage peak co-contribution processing through to mid-January 2010. The Tax Office then suspended processing in January 2010 to provide for the planned deployment of income tax into ICP, and estimated 40 000 individuals would receive interest amounts because co-contribution payments had been delayed by more than 60 days.
18. The Tax Office generally has effectively mitigated known compliance risks and analysed potential risks. However, it needs to take further action to improve lodgment by key large APRA funds, as around 25 per cent of these funds did not lodge member statements in recent years. The extent of this non-lodgment raises the risk that significant numbers of individuals have not received a co-contribution to which they would otherwise be entitled. The Tax Office is addressing known problems arising from circumstances with the potential to result in overpayments and underpayments of co-contributions, albeit to a relatively small number of individuals. However, these problems had not begun to be effectively addressed until many years after they were first identified, and could have been avoided if the Tax Office had initially clearly informed the Department of the Treasury of data needs and associated compliance costs.
19. Fund and member representatives consistently advised the ANAO that the Tax Office has effective liaison activities through its relevant committees and working groups, and also has suitable contact mechanisms. The Tax Office website is the main source of co-contribution information for eligible taxpayers, and is comprehensive and generally clear. However, the relevant co-contribution pages could be better targeted to non-professional and younger audiences. In determining marketing and education strategies, the Tax Office should not be complacent about the level of participation in the Scheme, and could better align these strategies with known co-contribution risks. There is scope for the Tax Office to better use information from client contact channels—particularly complaints and interpretative assistance and advice—to more effectively administer the co contribution.
20. The Tax Office has a comprehensive framework for governing co-contributions. This framework incorporates organisational structures, planning, risk management and performance monitoring and is well integrated with the Tax Office's broader governance and superannuation arrangements. While the Co-contributions Product Team generally managed co-contribution risks effectively, there is scope for it to better link planning and risk mechanisms, improve liaison with some other relevant areas in the Tax Office and enhance internal measures of performance.
21. The ANAO made four recommendations that were aimed at strengthening the practical application of particular processes within robust frameworks for governance, IT systems, co-contribution compliance and communication with stakeholders.
Key findings by chapter
Governance arrangements (Chapter 2)
22. Two significant characteristics of the administration of co-contributions are the number of areas within the Tax Office with responsibility for some element of administration of the Scheme and the need for integration with other superannuation products that rely on information from member statements and tax returns. Given this context, the Tax Office has established an appropriate governance framework, which involves a range of operating, committee, reporting and consultation arrangements. There remains scope, however, to improve some interactions between the Co contributions Product Team and other areas in the Tax Office including Active Compliance, Communication and Marketing, and Interpretative Assistance.
23. The Tax Office had effectively aligned co contribution planning at the strategic level. However, the next level of planning, covering operational and IT activities were not as well aligned. Further, while relevant co-contributions product and portfolio plans covered the main identified operational risks, there was no explicit reference of these risks, which are contained in the Superannuation Product Risk Register (ANAO Recommendation No. 1 addresses this issue).
24. There is a comprehensive system for identifying, prioritising and managing co-contribution risks. This system involves the Compliance Sub-plan Executive Committee, as well as the Superannuation Product Committee and Superannuation Risk Sub committees, which bring together representatives from the Superannuation Business Line, Client Account Services and other areas involved in the delivery of the co-contribution.
25. The Tax Office uses a variety of forums to report on Co-contribution Scheme activities, including its annual report and prescribed quarterly and annual reports. Recent Commissioner of Taxation Annual Reports have reported appropriately against the agency's Portfolio Budget Statements in respect of co-contributions. Since the Scheme's inception, the Tax Office had also satisfied legislative requirements to provide the Minister with a co contribution report, for presentation to the Parliament, after the end of each quarter and financial year. These reports were in the appropriate format, and following advice from the ANAO during the course of the audit, were published online in accordance with relevant guidelines.
26. There is also a comprehensive system of internal monitoring and reporting of the performance of co-contribution administration, which is typically integrated with other Superannuation and Tax Office wide activities.
Co-contribution information technology systems (Chapter 3)
27. The co-contribution system is one component of the Tax Office ICP system solution architecture. Deployed into the ICP system from February 2009, the co-contribution system is now part of an organisation-wide system designed to achieve greater efficiency and accuracy by processing all business transactions in a fully automated manner.
28. Virtually all data submitted by funds was being sent electronically, and after resolution of initial ICP implementation problems, supported prompt and reliable capture and input to Tax Office systems. Data matching and verification systems have also generally been well designed for the co-contribution, which has supported effective processing.
29. Two key areas associated with the operation and maintenance of the co-contribution systems are user access management and IT operations management. The audit identified a number of users involved in the administration of the co-contribution whose combination of roles provided them with access to conflicting duties in the IT system.
30. Between June and October 2009 the Tax Office implemented a major restructure of how it delivered IT services within the organisation. At the time of the audit there was some confusion by staff over their roles and responsibilities in the new structure and particularly the end-to-end process for change (ANAO Recommendation No. 2 addresses this issue).
Co-contribution processing (Chapter 4)
31. Core Tax Office administration of the Co contribution Scheme involves Client Account Services (CAS) undertaking high volume and relatively low value transactional processing. For example, in 2007–08 CAS processed 16.1 million member statements and 12.7 million tax returns, resulting in 1.1 million co-contribution payments.
32. Co-contribution exceptions arise when an event occurring during processing prevents the Commissioner from making a determination, such as incorrect or missing data or a system error. The Tax Office has substantially reduced the number and impact of exceptions in recent years. As at 6 November 2009, only 0.2 per cent of all member statements for 2008–09 that contained personal contributions did not supply a tax file number, of which around one quarter (1027) were not matched. Further, the deployment of the ICP system contributed to a relatively low level of processing exceptions, which can be resolved through business as usual processes.
33. The ANAO did not make any recommendations relating to Co-contribution processing but found a number of areas where the Tax Office was actively addressing specific issues. In this respect, the ANAO encourages the Tax Office to continue with strategies to mitigate risks associated with:
- administration of Payment Variation Advice notices;8
- the timely payment of co-contributions where the Tax Office can not readily determine where to send the entitlement amount; and
- the extent of co-contribution debt at the individual level.9
Compliance (Chapter 5)
34. Compliance by funds and members with their obligations under co-contribution legislation is critical for the effective administration of the Scheme. The main elements of the Tax Office's compliance arrangements for the co-contribution include:
- the co-contribution compliance framework;
- compliance activities for large funds,10 smaller funds and members; and
- compliance activities for the application of co contribution eligibility and entitlement rules.
35. As mentioned earlier, the Tax Office needs to take further action to improve lodgment of member statements by the 25 per cent of key large APRA funds that regularly do not lodge, to help ensure that all eligible individuals receive their co contribution entitlements.
36. Other main compliance risks involve the accuracy and completeness of lodging member statements. The Tax Office is undertaking projects to determine the accuracy of data contained in member statements, and plans to take action accordingly. The major ongoing compliance activity is the annual program of accuracy and completeness audits, mainly of large APRA funds. These audits are soundly based, although, as reflected in Recommendation No. 3, areas that would benefit from improvement include: fund selection; the use of computerised data analysis; and communication between the Co-contribution Product Team and the Active Compliance audit team.
37. The Tax Office is appropriately conducting and reviewing Self-Managed Superannuation Funds lodgment compliance activities, in response to major changes stemming from the Super Simplification reforms. While there have not been any tax return lodgment activities specifically related to co contributions, the Tax Office has undertaken a number of compliance projects which had considerable success in improving the accuracy of tax return lodgment for co-contribution purposes.
38. In recent years the Tax Office has identified the potential for overpayments and underpayments arising from circumstances whereby the calculation of co-contributions through its IT systems did not fully comply with legislation.11 The Tax Office obtained legal advice that indicated it had no legislative breaches in relation to potential overpayments of co-contributions. This position was reached because the legal opinion expressed the view that: overpayments made in good faith where the Tax Office did not knowingly make any individual overpayments at the time they were paid would not represent a breach of the Australian Constitution;12 and the Tax Office had a period of grace (expected to be to around July 2010) to analyse and rectify existing errors. The ANAO will continue to monitor this issue as part of the 2009–10 financial statement audit of the Tax Office.
39. The Tax Office has taken extensive actions to address the potential for breaches, but key actions have not yet been completed and may have been avoided this risk if commenced earlier. The main lesson to be learned from the treatment of this issue is the benefit of the Tax Office working more closely with Treasury when drafting Bills for the implementation of Government policy. In this instance, the Tax Office should have initially more comprehensively assessed and clearly outlined its data needs and the associated compliance costs, so that Treasury could more fully understand the implications of proposed legislation, and advise government accordingly.
Communication with clients (Chapter 6)
40. Representatives of superannuation funds and industry organisations consistently commented that the Tax Office had effective liaison activities. They noted the Tax Office's increasing use of committees as a positive means of incorporating industry input. APRA funds were generally satisfied with relevant documentation and other written material provided by the Tax Office, the exception being in the deployment of ICP, where Tax Office systems initially did not accept data according to the specifications provided. Some of the Self-Managed Super Fund professionals interviewed by the ANAO advised that much of the information relating to the co-contribution is overly legalistic and jargon laden and not ideal for the co-contribution target audience. Funds were satisfied with mechanisms to contact the Tax Office.
41. The Tax Office considers it has conducted effective communication strategies for members. However, as discussed in paragraph 6, given that participation in the Scheme is around 15 per cent of potential recipients, the Tax Office should not be complacent about participation rates when determining marketing approaches and resourcing. Further, co-contribution participation rates rise with income levels and only a relatively small proportion of lower income individuals access the Scheme.13 This illustrates the importance of the Tax Office tailoring education and marketing activities to lower income earners as well as different age cohorts.
42. The Tax Office's website is the primary means of conveying messages to fund members. The ANAO viewed the content and presentation of co contribution web pages and found them to be comprehensive and clear. The audit tested the accuracy of the co-contribution calculator and found two types of calculation error, which the Tax Office subsequently rectified. The ANAO suggests that Tax Office reconciles business rules applied in calculators with those in processing systems, to reduce the incidence of calculator errors.
43. Contact between members and the Tax Office about co-contribution issues are typically part of broader Tax Office processes and primarily include: phone calls to call centres; reviews of determinations and interpretative advice; and complaint resolution mechanisms. There is scope for the Co-contribution Product Team to better utilise information from these sources to support the effective administration of the co-contribution. Audit Recommendation No. 4 is designed to strengthen the Tax Office's use of this information.
44. The ANAO made four recommendations aimed at improving the Tax Office's approach to managing Superannuation Co-contribution Scheme. The Tax Office agreed to all of the four recommendations made.
Summary of agency's response
45. The Tax Office's summary response to the report is reproduced below.
I welcome the report and agree to the recommendations, as outlined in Appendix A to this letter. It is encouraging that changes already being implemented are consistent with the general tenor of the recommendations and suggested actions.
It was pleasing to see that overall, the ANAO found that the ATO has effectively administered the scheme, typically providing accurate and prompt payment of co-contributions, with relatively few queries and complaints.
We appreciate the recognition of the greater pressures placed on the administration of Co contributions, with Super Simplification and the deployment of our new processing systems and your acknowledgement of the return to high levels of timely and accurate processing in the peak period of late 2009.
We note the suggested actions and learnings included in the report and they will be considered along with other organisational priorities.
1 For the purposes of this report, superannuation providers are referred to as funds. These include superannuation funds and also all other financial arrangements eligible to receive co contribution payments, including retirement savings accounts.
2 As part of Super Simplification reforms, from 1 July 2007 certain self-employed individuals became eligible for the co contribution. From 1 July 2009, reportable employer superannuation contributions were included as part of total income when calculating co-contribution entitlement.
3 Also as part of Super Simplification reforms, from 1 July 2007 the employment income criteria were broadened to require 10 per cent or more of total income to be from eligible employment, running a business or a combination of both.
4 The 2004–05 income year was the first year entitlements were paid, and these were for contributions made in the 2003–04 income year.
5 The co-contribution rate was doubled for the 2005–06 income year, with a maximum co-contribution of $3000.
6 While around 1.4 million people eligible for a co-contribution in 2008–09, this represented only 15 per cent of the 9.2 million individuals that lodged tax returns and were under the higher income threshold for the Scheme in that year.
7 The ANAO interviewed representatives of four funds or administrators with a total of over 11 million members, one Self-Managed Superannuation Fund and three industry associations covering the majority of superannuation members.
8 Where a fund is not able to credit a co-contribution entitlement into the member's account within 28 days of payment, the fund is obliged to repay the entitlement by lodging a Payment Variation Advice notice.
9 Individual debt arises where an individual's circumstances have changed, but the overpaid amount is not held by a super fund; either because it has been paid out to the individual as a benefit, or it was originally paid directly to the individual.
10 The critical superannuation fund segment is large APRA funds, as they comprise around 98 per cent of all members. This category relates to large funds regulated by the Australian Prudential Regulation Authority.
11 These instances have been categorised as alignment issues and incorrect business rules. Alignment issues arise where insufficient information is captured from individuals' income tax returns to enable calculations required to satisfy relevant co-contribution legislation and other tax law. Incorrect business rules arise where sufficient information is available from income tax returns, but the system rules are incorrectly written to meet legislative requirements.
12 The Tax Office had not knowingly made any individual overpayments at the time of audit fieldwork.
13 In 2006–07, the co-contribution take-up rate rose from only 2.6 per cent of individuals with total income of less than $6 000 to 25.7 per cent of taxpayers with total income of $50 000 to $55 000.