Wednesday, 9 November 2016
Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016; Second Reading
That this bill be now read a second time.
This bill implements the government's election commitment to improve the fairness, sustainability, flexibility and integrity of our superannuation system.
We want superannuation to keep working for all Australians in their retirement as we move through the 21stcentury and grapple with some key challenges, including the ageing of our population and the need to return the budget to surplus.
The legislation I introduce today will not only improve the fairness and sustainability of the superannuation system, it will also improve its flexibility and its integrity. This will make it possible for Australians to manage their superannuation and plan their retirement with confidence. This is a plan to improve and modernise our superannuation system.
The government also wants to be clear about the purpose of the superannuation system and why tax concessions are made available to encourage saving for retirement.
That is why, as part of this package of reforms, the government is enshrining in legislation the objective of superannuation, which is 'to provide income in retirement to substitute or supplement the age pension'.
Enshrining that objective has been an important anchor for the development of the superannuation reforms set out in this bill. The measures will increase the ability of many Australians to improve their superannuation savings—to increase their income in retirement.
The measures also reduce the extent to which the superannuation system can be used for tax minimisation and estate planning.
But the changes recognise that in a modern economy, working patterns are changing across the population and over the course of people's lives.
That is why our reforms will allow the system to work more flexibly for Australians; it will reflect their changing work-life patterns, particularly for those whose work patterns and incomes vary over time.
The majority of the four per cent of individuals that are adversely affected by these changes are unlikely to rely on the age pension in retirement.
While some measures place limits on the amount of contributions that can be made to superannuation or amounts that will receive tax-free earnings status, at the same time these measures target the tax concessions to ensure they are fairer and more fiscally sustainable.
Let me go through the elements of this package in detail.
Transfer balance cap
A key change to ensure the sustainability of the superannuation system is the introduction of the transfer balance cap, which is contained in schedule 1 to this bill. This introduces a $1.6 million cap on the total amount of superannuation savings that can be transferred from an 'accumulation account', where earnings are concessionally taxed, to a 'retirement account', where earnings are tax free.
Let me be very clear about what superannuation tax concessions are intended to do.
Superannuation tax concessions are intended to encourage people to save and provide an income stream to support them in their retirement.
They are not intended to provide people with the opportunity for tax minimisation, estate planning or capital preservation. It is about providing a retirement income stream, drawing on both earnings and capital over time.
Because the earnings from retirement phase superannuation accounts are tax free, they are obviously a very desirable investment choice for individuals.
We understand that.
But the transfer balance cap will not only make the superannuation system more fiscally sustainable by 'means testing', effectively, access to tax-free earnings, it will also increase confidence that the policy settings are consistent with the objective of superannuation.
As our population ages, it is simply not sustainable to have ever increasing earnings generated from very high superannuation balances being completely tax free. Doing so would mean the generations of Australians who themselves are working hard every day to try and be self-funded in their own retirement would have to pay higher taxes to make up the difference.
Importantly, the cap only limits the amount that can be transferred into the tax-free environment; once there, that amount can continue to grow through investment returns.
During consultation stakeholders raised concerns that if a macroeconomic shock were to significantly reduce superannuation balances, the transfer balance cap may unreasonably limit some people's ability to replenish their retirement accounts.
The government has already announced that a significant macroeconomic shock will prompt a review of other superannuation settings, namely minimum drawdown requirements. Consistent with that, the government commits to reviewing the impact of the transfer balance cap should there be a macroeconomic shock that substantially affects retirement incomes. The review would be expected to seek advice from the Council of Financial Regulators to understand the magnitude and financial market implications of the macroeconomic shock, and actuarial advice from the Australian Government Actuary to inform what response, if any, may be required at that time.
Amounts in excess of the cap will be able to be held in an accumulation account, where the earnings will continue to be concessionally taxed, at 15 per cent.
To ensure people do not transfer excess amounts into the tax-free earnings retirement phase, the Superannuation (Excess Transfer Balance Tax) Imposition Bill 2016 will impose a tax on the earnings of retirement phase transfers that exceed the transfer balance cap.
Let me point out that the $1.6 million transfer balance cap is around twice the level at which access to the age pension ceases on account of an individual's assets—not including the family home. This illustrates that the transfer balance cap has been set at a level to support retirement income streams well above that provided by the age pension.
Over time, the transfer balance cap will index in $100,000 increments in line with the consumer price index, just like the age pension assets threshold does. It will be the same treatment for both schemes.
Less than one per cent of fund members will be affected by the transfer balance cap in 2017-18, it is estimated.
Reducing the concessional and non-concessional cap
On top of introducing the transfer balance cap, the government is also lowering the non-concessional and concessional contribution caps. These changes are necessary because the superannuation system continues to be a highly concessionally taxed environment.
As we look ahead, we want the superannuation system to give individuals strong incentives to make additional savings over the course of their working lives. At the same time, we want to make sure that these tax concessions are better targeted. This involves changes to both non-concessional and concessional contribution arrangements.
In short, non-concessional contributions might include contributions from take-home pay, inheritances, spouse contributions, proceeds from sales of residential property or shares, and contributions above the concessional limit.
Schedule 3 to this bill lowers the annual non-concessional contributions cap from $180,000 per year to $100,000 (or $300,000 every three years).
Further, individuals with a balance of $1.6 million or more will no longer be eligible to make non-concessional contributions.
As with the existing annual non-concessional contributions cap, people under 65 will still be eligible to bring forward up to three years of non-concessional contributions. Those with balances near $1.6 million will have limited access to bring forward arrangements.
Transitional arrangements will apply for those who have triggered the bring forward before 1 July 2017 to reflect the new annual caps.
Less than one per cent of fund members will be affected by the changes to the non-concessional contribution rules.
Concessional—or before-tax—contributions include compulsory superannuation guarantee contributions, voluntary salary-sacrificed contributions and voluntary personal contributions where a tax deduction is claimed.
We are changing the approach to concessional contributions in several ways: lowering the annual cap; lowering the income threshold where people pay higher tax on their contributions; improving access; and improving flexibility.
A lower annual concessional contributions cap of $25,000 will apply from 1 July 2017 to all individuals, and will index in line with wages growth in $2,500 increments.
As with all caps that form part of the government's superannuation reforms, the concessional cap continues to be set at levels well above the average and median contribution levels. For example, the median Australian worker currently receives annual concessional contributions to their superannuation of around $4,200 per year.
Only around 3.5 per cent of fund members will be affected by the lower concessional cap. Those 3.5 per cent will have average incomes of around $200,000 and average superannuation balances of around $760,000. These are people who are least likely to rely on the age pension going forward.
Reducing the d ivision 293 threshold
We are also reducing the income threshold above which high-income individuals are required to pay 30 per cent tax on their concessional superannuation contributions—commonly referred to as the division 293 threshold—to $250,000 per annum.
To be liable for a total of 30 per cent tax, a person would need to have more than $250,000 in combined income and concessional superannuation contributions in a financial year.
Only around one per cent of fund members will be affected by the lower division 293 threshold.
Over the forward estimates, we estimate that the lower concessional cap combined with the lower high-income contributions threshold improves the underlying cash balance by $2.3 billion.
These savings are being used, in part, to improve the flexibility and fairness of the system, in particular to make it easier for all Australians to take full advantage of the concessional caps that are available.
Deductions for personal superannuation contributions
We are introducing a number of important flexibility measures. First, we are abolishing the so-called '10 per cent rule'. This rule prevented anyone earning more than 10 per cent of their income from salary and wages from claiming a deduction for personal superannuation contributions.
As a result of abolishing this rule, more people will be able to claim a tax deduction for personal contributions to superannuation. Now all workers will have the flexibility to make concessional contributions up to their annual cap.
This reform will benefit up to 800,000 Australians, particularly self-employed contractors, individuals employed by small businesses and freelancers. It offers flexibility to people who are partially self-employed, partially wage and salary earners and in instances where employers do not offer salary sacrifice arrangements.
Take the example of a firefighter who works part time, or indeed full time. They might also be a contract tradesman. Under the current rules, they cannot access the superannuation concessions available to most of the population because more than 10 per cent of their income comes from their firefighting wage. They would not be able to make concessional superannuation contributions from their contract work as a tradesman.
It will also help small businesses compete on a level playing field for talent. Currently, many small businesses just do not have the capability to offer salary sacrificing to their employees. This limits their ability to attract talented staff—particularly those who are moving closer to retirement age. Under this change, those employees will be able to access the superannuation concessions to the same extent as the rest of the community without imposing red tape on the small business that they work for.
This change has been widely welcomed by key organisations like the Tax Institute, the Australian Small Business and Family Enterprise Ombudsman, the Institute of Public Accountants and the Financial Services Council, who noted that 'positive measures … help women save for their retirement and extend the scope of superannuation to all Australians, including contractors'.
Catch-up concessional contributions
The second important flexibility measure we are introducing is giving Australians the flexibility to make catch-up concessional contributions when they can afford it.
There are many Australians who take time out of the workforce, voluntarily and involuntarily, have irregular income, or whose ability to save varies year to year. Most of these Australians are women, who have lower superannuation balances than those with a more regular income pattern.
Annual concessional contribution caps can limit the ability for people with interrupted work patterns or variable incomes to make savings through superannuation.
This goes to the very issue of fairness within the superannuation system.
This bill introduces changes to allow unused concessional cap space to be carried forward.
From 1 July 2018, people with superannuation balances less than $500,000 will be able to access any unused component of their concessional contributions cap on a rolling basis for a period of five years. This is a crucial step in providing assistance to those—particularly women—who have interrupted work patterns, whether it be to raise children, look after elderly parents, or seek to boost their retirement savings just before retirement.
Over 90 per cent of Australians who have balances below $500,000 will be able to make catch-up contributions if they have unutilised cap space to carry forward. We estimate that around 230,000 people will utilise this flexibility to make additional superannuation contributions in 2019-20.
This measure is available for people with less than $500,000 in superannuation savings, effectively targeting this measure towards those who most need to build up their superannuation balances. Extending the spouse superannuation tax offset
Thirdly, we are expanding the current spouse superannuation tax offset to help more couples who make contributions to their spouses' superannuation savings. We are extending it by making the offset available to those whose spouses earn up to $40,000. This is up from the current threshold of just $13,800.
It is estimated it will encourage an additional 5,000 people to make contributions to the superannuation accounts of their low-income partners, who are disproportionately women.
Taken together, the removal of the 10 per cent rule, the introduction of the catch-up contributions measure and the extension of the spouse tax offset provide more opportunities for couples to jointly decide how to balance their superannuation savings between each other.
Low- income superannuation tax offset (LISTO)
To step back, the superannuation system is designed to encourage Australians to save for their retirement.
That is why superannuation is taxed at a lower rate than income outside of superannuation.
But, for low-income earners, the 15 per cent tax on superannuation contributions means they pay more tax on their superannuation contributions than on their take-home pay.
So, we are improving the fairness of the superannuation system by also introducing the low-income superannuation tax offset—or LISTO.
The LISTO will ensure most individuals with taxable incomes of $37,000 or less do not pay more tax on their concessional superannuation contributions than on their take-home pay.
These individuals will not face adverse tax outcomes by making contributions to their superannuation.
It is estimated that the LISTO will increase the superannuation savings of around 3.1 million low-income Australians, or one in every five fund members. Almost two-thirds of these beneficiaries are women.
Replacing the low-income superannuation contribution with the low-income superannuation tax offset better reflects the true nature of this scheme—it is an tax offset, effectively, not a handout or a welfare payment.
Encouraging the development of innovative retirement income products
We are also improving choice and flexibility for Australian retirees looking to better manage the risk associated with outliving their retirement savings.
Currently, innovative income stream products that could help people to better manage the risk of outliving their retirement savings are not available because they do not qualify for tax-free earnings status. This has restricted the ability of retirement income providers to develop and bring new retirement products onto the market.
This was highlighted as an issue in the Financial System Inquiry, as well as the Retirement Income Streams Review, each of which recommended the removal of barriers to new product development.
Indeed, the Financial System Inquiry concluded that the retirement phase of Australia's superannuation system was underdeveloped and that superannuation assets were not being efficiently converted into retirement incomes.
Extending the tax exemption on earnings in the retirement phase to products like deferred lifetime annuities will also play its part in providing more flexibility and choice for Australian retirees, as well as helping them better manage consumption and risk in retirement.
And we are improving integrity by making a taxation change for people who have reached preservation age but are under 65 and not retired.
Those people will still be able to access a transitional superannuation income stream ahead of their retirement but earnings on the amount supporting it will be taxed in the fund at 15 per cent.
This change will substantially reduce the incentive for people to establish transition-to-retirement accounts as a tax minimisation measure. But at the same time it will retain access to superannuation for those people who are genuinely transitioning to retirement.
Taxing earnings on these accounts at 15 per cent will provide the same tax treatment as that which applies to all other individuals who are not yet retired.
The integrity of the system will also be enhanced by the removal of the inconsistently applied and outdated antidetriment provision.
As part of this package of reforms, the government is also streamlining some of the ATO's administrative processes.
Notably, these reforms will replace the existing release authority requirements with standardised time frames and processes. Schedule 10 to this bill will also introduce a default process for individuals who do not make an election within 60 days when dealing with all release amounts from superannuation, ensuring that the majority of individuals will be better off if they do nothing.
Commensurate treatment for defined benefit schemes
Finally, unlike some previous changes to superannuation taxation, the government has carefully analysed the impact of this package of reforms and is making changes to ensure commensurate tax impacts on members of defined benefit schemes.
Many of our superannuation tax reforms will make the system fairer and more sustainable.
These vital and important goals would be undermined if the tax treatment of defined benefit schemes and constitutionally protected funds was not similarly adjusted.
In the past, governments have baulked at the challenge of tackling defined benefit schemes when making changes.
But this government can not only identify tough issues—we can deal with them in a way that is fair and workable.
Developing this legislation has also benefited from the input of many stakeholders.
Over 300 submissions were received on superannuation in response to the taxation white paper discussion paper Re:think. Several of them suggested that the fairness of superannuation concessions could be improved.
In fact, superannuation was the most commonly raised issue in submissions to the tax white paper process.
After our 2016-17 budget announcement, we sought views from a wide range of interested parties such as retirees, consumer advocates, tax experts, industry associations, superannuation funds, administrators, academics and legal experts.
Over 150 written submissions were received on the draft legislation and over 50 organisations attended round tables and bilateral meetings to discuss the draft legislation.
Let me take this opportunity to thank the many people who have been involved in the various consultation processes on these important reforms. Let me also thank the hardworking team at the Department of the Treasury who have been steering this process for some time.
In closing, let me cite two key comments that underscore just how imperative the passage of this legislation really is.
The first comes from ASFA, the Association of Superannuation Funds of Australia, who note that they support our revised superannuation package and urge the parliament to:
… pass the changes as soon as practical, in order to provide certainty for people saving for their retirement.
Significantly, they point out that this is:
… the responsible thing to do for the superannuation system and for Australia's long term, fiscal sustainability.
Industry Super Australia has also urged:
… all Parliamentarians to reach consensus on a super tax package that better targets tax concessions and improves the fiscal sustainability of the system.
This package of measures achieves that goal.
It is clear that it is incumbent upon the 45th Parliament to now act to pass this crucial package of reforms.
I urge those present to pass this legislation, not only to provide certainty—as critical as that is—but also to play their part in giving Australia a superannuation system that is fair, sustainable and flexible and achieves its legislative objective.
Full details about this bill are contained in the explanatory memorandum.