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Print Chapter 4 (PDF 121KB) | < - Report Home < - Chapter 3 : Chapter 5 - > |
Impact of contributions tax
Taxation of benefits
Other taxation issues
Conclusions
Limits on superannuation tax concessions
Reasonable Benefit Limits
Age-based deduction limits
Conclusions
Impact of contributions tax |
4.1 | Superannuation contributions made by an employer on behalf of an employee, and contributions by unincorporated self-employed individuals, are taxed at 15 per cent in the superannuation fund. Superannuation contributions made by an employer include Superannuation Guarantee (SG) and salary sacrifice amounts. |
4.2 | Personal voluntary superannuation contributions or ‘undeducted contributions’ are not subject to the 15 per cent superannuation fund tax, having already been taxed at an individual’s marginal income tax rate. |
4.3 | Prior to 1988, contributions to a superannuation fund were not subject to tax. Lump sum payments from a fund attributable to post-30 June 1983 service were generally subject to a maximum marginal tax rate of 30 per cent. |
4.4 | Effective from 1 July 1988, the then government reduced the tax on the post-30 June 1983 component of a lump sum to 15 per cent, at the same time imposing a 15 per cent tax on the taxable income of the fund, including employer and deductible personal contributions. The government also introduced a rebate of 15 per cent to apply to income streams. |
4.5 | It has been suggested that in order to provide further incentive for people to make contributions and to ensure that the full value of contributed amounts is put to work for fund members (given the ‘magic of compound earnings’), that contributions should be tax exempt either for everyone, or at least the under 40s. |
4.6 | The Association of Superannuation Funds of Australia (ASFA) were among many to advocate the removal of contributions tax given it reduced the compounding on SG contributions from the outset:
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4.7 | ASFA estimated the cost to revenue of a full exemption to be $3.3 billion while Treasury estimated that it would be ‘appreciably higher’2. |
4.8 | Whether the actual number is $3.3 billion or appreciably higher, it is a lot of revenue. AMP Financial Services (AMP) made the following point:
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4.9 | Although the Small Independent Superannuation Funds Association (SISFA) pointed out that over time it is not a one way street:
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4.10 | Numerous submissions contended that the current nine per cent rate of SG is insufficient. While proposed targets ranged between 12 and 15 per cent (as a combination of both employer and employee contributions), it was calculated that the impact of removing the contributions tax would be to reduce the target savings rate by three percentage points. CPA Australia noted this:
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4.11 | The removal of contributions tax may enable some very high income earners to salary sacrifice much of their income and thereby minimise their marginal tax rates. On this scenario Australian Administration Services (AAS) commented:
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4.12 | AAS further noted:
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4.13 | The flipside of the argument to reduce or remove contributions tax is that superannuation is already concessionally taxed. At an estimated cost in 2005–06 of $15.9 billion, it is the Commonwealth Government’s largest tax expenditure.8 Treasury stated:
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4.14 | AMP made the following comment:
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4.15 | In an attempt to limit the impact on the Commonwealth budget, a number of suggestions were made that attempt to target tax cuts to those needing the most assistance and/or those requiring greater enticement to save in superannuation. The Industry Funds Forum (IFF) proposed a reduction in contributions tax for those on low incomes:
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4.16 | AAS suggested that consideration could be given to introducing an age-based tax deduction or rebate for voluntary contributions made to superannuation:
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4.17 | A number of witnesses believed that targeting concessions at particular age groups added complexity to an already complex system. In fact the AAS commented that it was ‘difficult/impossible to base contributions tax on age/income’.13 |
4.18 | Treasury commented that changes to the taxation of contributions, including a reduction in the tax rate, would generally increase complexity. |
4.19 | It was also pointed out that existing complexity tended to overshadow existing concessions. Mercer Human Resource Consulting stated:
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4.20 | SISFA agreed:
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4.21 | Tower Australia noted the disincentive to salary sacrifice to superannuation or for unincorporated self-employed persons to make contributions due to the lack of understanding about pre-tax and post tax contributions. Tower Australia stated in evidence:
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4.22 | Similarly, the Australian Chamber of Commerce and Industry (ACCI) felt that people did not understand the tax implications arising from investing in superannuation:
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4.23 | This divergence between perception and reality in relation to how contributions tax fits into the bigger picture was illustrated in a recent article written by Peter Haggstrom in the Australian Financial Review. |
4.24 | He makes the point that it is a ‘trivially true observation’ that a tax on contributions reduces the end benefit. There are a number of basic points that need to be included in the discussion that are continually overlooked or misunderstood. Haggstrom states:
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4.25 | This is due to a combination of rebates, such as the low income rebate, the Senior Australians Tax Offset and the 15 per cent pension rebate along with common financial planning strategies. Haggstrom noted:
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Taxation of benefits |
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4.26 | The government announced a number of proposed changes to the laws governing superannuation in the 2006–07 budget handed down by the Treasurer on 9 May 2006 . This included changes to the taxation of superannuation benefits, which were outlined in the government’s Plan to Simplify and Streamline Superannuation20 (superannuation plan). |
4.27 | The main effect of the proposal is that from 1 July 2007 superannuation benefits would be exempt income when paid to a person over the age of 60. This means they would not incur any tax nor would they push other income into higher tax brackets. Superannuation taxation is also simplified for those under the age of 60. |
4.28 | Prior to the budget a number of submissions recognised that the taxation of end benefits is complicated and quite often problematic. Rice Walker Actuaries submission, for example, recognised explicitly that the contributions stage is not the only point at which tax applies and that any changes to the taxation of superannuation need to be considered from a whole of system perspective:
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4.29 | Treasury also pointed out that a great deal of the complexity lies in how end benefits are taxed.
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4.30 | The Financial Planning Association (FPA) talked about this other end of the tax time line. They raised the tax treatment of investment bonds, whereby after a certain period of time, and assuming various rules are abided by, the benefit is tax free on withdrawal.23 |
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Other taxation issues |
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4.31 | While the vast majority of discussion on taxes involved the taxing of contributions and benefits, there was some discussion of other taxation issues. |
4.32 | A number of submissions, including the Australian Bankers Association, called for personal superannuation contributions to receive tax concessions. Personal superannuation contributions are those made after an individual’s marginal rate of income tax has been levied (undeducted contribution). The Australian Bankers’ Association support the idea of an individual being able to claim a tax deduction for their undeducted contributions:
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4.33 | Not all employers offer salary sacrifice arrangements so for many employees their only avenue to boost their superannuation savings beyond SG is to make post-tax, personal contributions. |
4.34 | It was suggested a number of times, that in terms of targeting age groups, education would be a more useful option than tax cuts. ASFA made the following comment:
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4.35 | Many of the submissions and witnesses focussed on the immediate benefits of reducing or removing tax on various elements of the superannuation system, for example, ‘the removal of tax on contributions would ensure that the full nine per cent SG contributions would experience the magic of compounding’. However very few talked about the net value gained for each public dollar. AMP was an exception:
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4.36 | AMP also questioned whether further tax concessions were needed at all:
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Conclusions |
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4.37 | Australia’s superannuation system enjoys significant tax concessions. These concessions will be considerably increased from 1 July 2007 under the government’s proposed Plan to Simplify and Streamline Superannuation, particularly for those who are aged 60 or over when they receive their benefits. |
4.38 | The committee broadly endorses the proposed budget amendments to the taxation of superannuation benefits, because they address two key barriers preventing under 40s from contributing to superannuation. The first barrier is the perception that superannuation is not concessionally taxed. The second related barrier is the reality that superannuation taxation is very complicated. |
4.39 | The committee believes that one of the keys to encouraging greater investment in superannuation, particularly for the under 40s, is to simplify how it is taxed. The committee notes that the government’s budget proposals will largely achieve this goal. The next step, in the committee’s view, is to promote the simplified end benefit tax concessions so that they are more apparent to all people. |
4.40 | If people can more clearly understand the tax concessions that apply to their superannuation savings, they are more likely to contribute more money to superannuation. Emotive statements such as ‘superannuation is taxed three times’ are misleading at best, because they do not reflect the lower tax rates, the tax-free thresholds and rebates that apply to superannuation. To this end, the government’s simplification and streamlining of the tax on superannuation payments will be beneficial. |
4.41 | A change to the taxation of contributions may have the undesirable effect of further complicating the overall taxation regime from the point of view of both fund members and the administration of the fund itself. |
4.42 | Furthermore, the tax system is so complicated, that merely processing transactions in a particular order can result in a higher or lower tax liability on superannuation benefits. Similarly, the form in which superannuation benefits are accessed can impact on a person’s eligibility for the Age Pension and associated benefits. |
4.43 | The government has proposed removing the existing 50 per cent assets test exemption for certain income streams. Consistent treatment of all assets for Age Pension means test purposes will remove further complexity from the retirement income system. |
4.44 | Reducing system complexity should lead to financial advice being geared towards increasing savings rather than unravelling the complexity of tax concessions or contriving to qualify for age pensions. |
4.45 | Given that the taxation of contributions and earnings within a fund is already concessional, coupled with the 2006–07 budget’s proposed simplification of taxation of end benefits, the committee did not see the need to also reduce or eliminate the tax applying to contributions. |
4.46 | The committee believes that targeted incentives that do not further complicate the system for fund members, such as the co-contribution scheme (see Chapter 7), simplification of the superannuation tax system, and education (see Chapter 5), remain the most effective methods of increasing the superannuation savings of under 40s. |
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Limits on superannuation tax concessions |
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Reasonable Benefit Limits |
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4.47 | Because of the scale of superannuation tax concessions, limits apply to the amount of superannuation savings receiving these concessions. The reasonable benefit limit (RBL) is the maximum amount of retirement and termination of employment benefits that a person can receive over their life time at concessional tax rates. |
4.48 | However, the government’s superannuation plan would abolish RBLs from 1 July 2007. The proposals in the plan are subject to public consultation and being passed by parliament. As a result, the following paragraphs address the existing RBL system. |
4.49 | Currently, if more than half of a person’s benefits are withdrawn as a lump sum then their RBL is $648 946 in 2005–06. Any amount in excess of the lump sum RBL is taxed at either 38 per cent or 47 per cent depending on the components of the lump sum. |
4.50 | If more than half of a person’s benefits are withdrawn in the form of a certain type of annuity or pension28, then their RBL is $1 297 886. Any excessive amount will reduce the proportion of the pension that qualifies for the 15 per cent pension rebate. |
4.51 | Therefore, the way in which a person takes their end benefit of superannuation affects the amount of superannuation that is entitled to a concession. |
4.52 | A person on average earnings is unlikely to reach the lump sum RBL, let alone the pension RBL, without significant salary sacrifice, especially when undeducted contributions (those where income tax has already been paid) are not included in the calculation of excess benefits. Of the 308 000 lump sums paid in 2002–03, only 518 were in excess of the RBL.29 |
4.53 | There was conflicting evidence given on the impact that RBLs have on saving practices. Some suggested that due to the resource constraints on most under 40s the existence of the RBL is unlikely to affect their decision to make additional superannuation payments. |
4.54 | CPA Australia suggested that there were more transparent reasons that people under 40 were not contributing to superannuation:
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4.55 | Some said that the RBL was clearly a disincentive, including the Financial Planning Association (FPA):
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4.56 | While others questioned whether it was a disincentive at all. Tower Australia stated:
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4.57 | The FPA questioned how the government can at the same time encourage and limit the accumulation of retirement benefits:
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4.58 | The FPA also suggested that the existence of age-based deduction limits (see Age-based deduction limits below) removed the need for RBLs:
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4.59 | Representatives from Tower Australia Limited did go on to talk of the compliance burden involved with RBLs. Presumably this cost is passed on to members, including those under age 40:
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4.60 | While most suggestions regarding the removal of the RBL were based on the effectiveness of the age-based deduction limits, Rice Walker Actuaries suggested that the RBL and the age-based deduction limits (discussed below) both be replaced by a life-time deduction limit on contributions:
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4.61 | The Small Independent Superannuation Funds Association (SISFA) noted that RBLs would encourage the use of income streams (because the pension RBL is higher than the lump sum RBL):
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4.62 | AMP had a similar suggestion, however they also advocated simplification:
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Age-based deduction limits |
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4.63 | There is no limit to the amount of superannuation contributions that can be made by, or in respect of, a member in any one year. There is an age-based limit, however, to the amount that can be claimed as a tax deduction by each employer in respect of each employee, and that can be claimed by a self-employed person. |
4.64 | However, the government’s superannuation plan would abolish age-based deduction limits from 1 July 2007. They would be replaced with an annual limit for all individuals of $50 000 for deductible contributions and $150 000 for undeducted contributions. |
4.65 | The proposals in the superannuation plan are subject to public consultation and being passed by parliament. As a result, the following paragraphs address the current age-based deduction limits. |
4.66 | As at 1 July 2005 the maximum deductible contribution in respect of a person under age 35 was $ 14 603; between age 35 and under 50 was $ 40 560 and 50 and over was $100 587. |
4.67 | The maximum SG that is payable by an employer in respect of each employee is approximately $12 00039. Therefore an employer’s SG contributions are always fully deductible. |
4.68 | A person aged under 35 who earns a salary of $50 000 would have to salary sacrifice approximately $10 000 in a year in addition to the SG payment of $4500 to reach the tax deductible contribution limit. |
4.69 | However, a person who has turned 35 years of age, on the same salary, would have to salary sacrifice an additional $36 000 each year (above the SG contribution) before reaching their deduction limit. |
4.70 | Treasury provided evidence suggesting that t he age-based limits are not a barrier for the vast majority of individuals under age 40 to contribute voluntarily to superannuation.
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4.71 | A number of submitters to the inquiry have voiced concern that the age-based limit should be raised or removed as it provides a disincentive to place funds into superannuation for under 40s who have the capacity to make substantial voluntary contributions early in their retirement savings phase. |
4.72 | It has been proposed that the nature of some under 40s work is that they have the capacity to earn more when they are young because their income earnings are essentially linked to good health and youth. ACCI believes that these income earners are penalised for their ability to make early superannuation contributions in careers where their earnings are likely to trend down:
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4.73 | The trending down of disposable income was raised as an issue for women taking time out of paid work after having children. It was argued that the age-based limit restricted some females with large savings capacity to place more into superannuation when they could most afford to:
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4.74 | Treasury raised the issue of behavioural change if the limits were removed:
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4.75 | AMP said that these limits introduced complexity and disincentives when the potential for tax abuse was more effectively dealt with elsewhere:
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4.76 | ASFA agreed:
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4.77 | While ideally advocating their removal entirely, Mercer Human Resource Consulting suggested that if the deduction limits were to stay there should be an increase in the amount that under 35’s could contribute tax effectively:
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4.78 | AAS suggested a single annual deduction limit but also an alternative path based on remuneration:
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4.79 | CPA Australia and ACCI believe that a life-time contribution limit is more appropriate because it smooths when extra savings may be placed in superannuation in a tax concessional way at times when an individual can most afford to do so. One proposed model of the life-time limit used a flat limit per year across an individual’s working life of $40 000. CPA Australia also suggested a carry forward of unused limit amounts whereby:
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4.80 | Moving to life-time contribution limits would require the maintenance of life-long records and this may increase the Australian Taxation Office’s administrative resource requirements. |
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Conclusions |
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4.81 | The government’s 2006–07 budget superannuation plan to abolish RBLs addresses a number of concerns raised during this inquiry including the disincentive for under 40s to contribute for fear of eventually breaching the RBL, and administration expenses for superannuation funds in reporting payments. |
4.82 | However, the committee is concerned that when combined with additional tax concessions on benefits, particularly tax-free benefits for over 60s, significant tax concessions could be enjoyed by high wealth individuals. |
4.83 | The committee notes that this will be reduced to some extent by the proposed introduction of contribution limits on both deducted and undeducted contributions. |
4.84 | The proposed increase in the deductible contribution limit for people under 50 to $50 000, as announced in the 2006–07 budget, will also assist those under 40 whose income earning capacity, and therefore saving capacity, peaks in their younger years. |
1 | ASFA, Submission no. 16, p. 19. Back |
2 | Mr P Gallagher, The Treasury, Transcript, 10 February 2006, p. 64. Back |
3 | AMP Financial Services (AMP), Submission no. 48, p. 7. Back |
4 | SISFA, Submission no. 20, p. 3. Back |
5 | Mr M Davison, CPA Australia, Transcript, 10 February 2006, p. 14. Back |
6 | AAS, Submission no. 67(supplementary), p. 2. Back |
7 | AAS, Submission no. 67(supplementary), p. 2. Back |
8 | Commonwealth Government, Tax Expenditures Statement 2005, pp 113 and 163. Back |
9 | The Treasury, Submission no. 47, p. 17. Back |
10 | AMP, Submission no. 48, p. 7. Back |
11 | Industry Funds Forum, Submission no. 22, p. 16. Back |
12 | AAS, Submission no. 17, p. 5. Back |
13 | AAS, Submission no. 67(supplementary), p. 4. Back |
14 | Mercer Human Resource Consulting, Submission no. 44, p. 5. Back |
15 | SISFA, Submission no. 20, p. 3. Back |
16 | Mr G Evans, Tower Australia Limited, Transcript, 18 October 2005, p. 57. Back |
17 | ACCI, Submission no. 41, p. 7. Back |
18 | P Haggstrom, ‘Retirement is not really too taxing’, Australian Financial Review, 3 April 2006 , p .63. Back |
19 | P Haggstrom, ‘Retirement is not really too taxing’, Australian Financial Review, 3 April 2006 , p. 63. Back |
20 | The Treasury, A Plan to Simplify and Streamline Superannuation, Canberra, May 2006. Back |
21 | Rice Walker Actuaries, Submission no. 64, p. 12. Back |
22 | Mr J Lonsdale, Treasury, Transcript, 14 October 2005, p .3. Back |
23 | Ms A Esler, FPA, Transcript, 18 October 2005, p. 37. Back |
24 | Australian Bankers’ Association, Submission no. 28, p. 11. Back |
25 | Ms P Smith, ASFA, Transcript, 28 July 2005, p. 2. Back |
26 | AMP, Submission no. 48, p .2. Back |
27 | AMP, Submission no. 48, p. 5. Back |
28 | Among other things, the pension or annuity must: be payable for life or life expectancy; be paid at least annually; only be commuted in limited circumstances, and not have a residual capital value. Back |
29 | Australian Taxation Office (ATO), Tax Stats 2002-03, Canberra, 2005, p. 14. Back |
30 | CPA Australia, Submission no. 18, p .2. Back |
31 | Mr J Anning, Financial Planning Association, Transcript, 18 October 2005, p. 30. Back |
32 | Mr G Evans, Tower Australia Limited, Transcript, 18 October 2005, p. 59. Back |
33 | Mr J Anning, FPA, Transcript, 18 October 2005, p. 30. Back |
34 | Ms A Esler, Financial Planning Association (FPA), Transcript, 18 October 2005, p. 32. Back |
35 | Mr D Glen, Tower Australia Limited, Transcript, 18 October 2005, p. 60. Back |
36 | Rice Walker Actuaries, Submission no. 64, p. 9. Back |
37 | SISFA, Submission no. 20, p. 6. Back |
38 | AMP, Submission no. 48, p. 13. Back |
39 | If an employee’s salary or wages exceed the maximum superannuation contribution base of $33 720 for each quarter in 2005–06, SG is calculated on $33 720. Therefore the maximum SG payable for the year is ($33 720 x 4) x 9 per cent = $12 140. Back |
40 | The Treasury, Submission no. 47, p. 29. Back |
41 | ACCI, Submission no. 41, p. 5. Back |
42 | Mr S Woods, Transcript, 18 October 2005, p. 67. Back |
43 | Mr J Lonsdale, The Treasury, Transcript, 10 February 2006, p. 63. Back |
44 | AMP, Submission No. 48, p. 6. Back |
45 | Mrs P Smith, ASFA, Transcript, 28 July 2005, p. 4. Back |
46 | Mercer Human Resource Consulting, Submission no. 44, p. 10. Back |
47 | AAS, Submission no. 67 (supplementary), p. 3. Back |
48 | Mr M Davison, CPA Australia, Transcript, 10 February 2006, p. 23. Back |
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