Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello MP)Chapter 2 - Regulation impact statement
Policy objective
2.1 The objective of this measure is to broaden the accessibility of superannuation to individuals who are outside the paid workforce. This measure is expected to benefit women in particular. Specifically this measure will:
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- provide low income spouses with their own superannuation assets in their own name and under their own control; and
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- give single income families access to two eligible termination payment (ETP) tax-free thresholds and two reasonable benefit limits.
Implementation options
2.2 Given the Government's election commitment that the administrative burden will not fall on employers, this regulation impact statement does not examine options that involve splitting of superannuation contributions by the employer.
2.3 Four principal ways of implementing the Government's superannuation contributions-splitting proposal have been identified:
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- Prospective split - at the request of a member, the member's superannuation provider would be required to split each future superannuation contribution received on behalf of the member.
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- Annual split - after the end of the financial year and at the request of a member, the member's superannuation provider would be required to split contributions received during the previous year.
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- Joint accounts - couples could open a joint superannuation account or retirement savings account and each spouse would hold a 50 per cent interest in contributions and investment returns credited to the account.
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- Benefits split - members could split benefits accrued after commencement at any time, including following retirement.
Costs and benefits
2.4 The following paragraphs describe each of the four options including their impact on stakeholders. References to superannuation providers include both superannuation funds and retirement savings account providers.
2.5 A prospective split would involve members notifying their superannuation provider of an intention to split each future contribution received by the provider. The superannuation provider would then split each contribution received on behalf of that member.
2.6 Couples gain the tax advantages and other benefits that flow from splitting superannuation contributions, including:
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- providing the low income or non-working spouse with their own superannuation assets under their own control (thereby allowing them to take an interest in their retirement savings by, for example, choosing their own superannuation fund or investment strategy) and their own income in retirement; and
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- access to two ETP low-rate thresholds and two reasonable benefit limits.
2.7 The ability to split superannuation contributions may encourage new or increased contributions, hence potentially increasing funds under management.
2.8 This option does not impose additional requirements on employers in making superannuation contributions.
2.9 This option furthers the Government's superannuation and retirement policy objectives.
2.10 As couples would require at least two superannuation accounts under this option, couples may incur separate account management fees on each account (while these vary significantly, a typical amount might be around $150 per annum, excluding investment management fees. Note however, some funds specify fees as a dollar amount while others specify a percentage of assets, so fees could be higher or lower). However, in many cases, the receiving spouse would already have an existing superannuation account into which the split contributions could be made. The splitting spouse may also be levied with service fees by the provider affecting the split.
2.11 The splitting spouse would need to provide their superannuation provider with details of their spouse's superannuation account.
2.12 This option would impose administration and systems development costs on superannuation providers, especially where the receiving spouse's account is with a different provider or if the member is in receipt of frequent contributions (eg, fortnightly). These costs may be significant, although they have not been able to be quantified. Superannuation providers would not be forced to offer contributions splitting and hence could avoid these costs if they choose not to offer contribution splitting.
2.13 Under a regime of quarterly superannuation guarantee contributions, there would be at least four contributions per annum and therefore at least four times of the year when contributions would be split for participating members.
2.14 Superannuation providers may also need to take steps to establish that the spouse is bona fide and check account details.
2.15 This option does not impose additional requirements on employers in making superannuation contributions.
2.16 This option is of a similar cost to Option 2 over the forward estimates period, though its prospective nature involves a small bring forward of the revenue impact. As such, its actual cost over the forward estimates period is marginally higher than that of Option 2, and broadly in line with the costs of Option 3.
2.17 Following the end of the financial year and at the request of a member, a superannuation provider would split contributions received during the previous year. This option simplifies Option 1 by requiring superannuation providers to effect a split only once per year and by allowing members to notify their provider of their intention to split contributions after the relevant contributions have been made.
2.18 Couples gain the tax advantages and other benefits that flow from splitting superannuation contributions, including:
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- providing the low income or non-working spouse with their own superannuation assets under their own control (thereby allowing them to take an interest in their retirement savings by, for example, choosing their own superannuation fund or investment strategy) and their own income in retirement; and
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- access to two ETP low-rate thresholds and two reasonable benefit limits.
2.19 The ability to split superannuation contributions may encourage new or increased contributions, hence potentially increasing funds under management.
2.20 This option does not impose additional requirements on employers in making superannuation contributions.
2.21 This option furthers the Government's superannuation and retirement policy objectives.
2.22 As couples would require at least two superannuation accounts under this option, couples may incur separate account management fees on each account (while these vary significantly, a typical amount might be around $150 per annum, excluding investment management fees. Note however, some funds specify fees as a dollar amount while other's specify a percentage of assets, so fees could be higher or lower). However, in many cases, the receiving spouse would already have an existing superannuation account into which the split contributions could be made. The splitting spouse may also be levied with service fees by the provider affecting the split. The cost may be lower if the receiving spouse's account were in the same fund.
2.23 However, the ongoing administration costs incurred by superannuation providers are expected to be lower under this option than under Option 1, and hence the fees paid by splitting members are also expected to be lower.
2.24 This option would impose administration and system development costs on superannuation providers. These costs have not been able to be quantified. However, because providers would affect a split only once per year, costs are expected to be lower under this option than under Option 1. Superannuation providers would not be forced to offer contributions splitting and hence could avoid these costs if they choose not to offer contribution splitting.
2.25 Superannuation providers may also need to take steps to establish that the spouse is bona fide and check account details.
2.26 This option does not impose additional requirements on employers in making superannuation contributions.
2.27 This option has an estimated cost to taxation revenue of $9.9 million from commencement to 30 June 2009.
2.28 A member who wished to split superannuation contributions would open a new account, with their existing superannuation provider, to be held jointly in their own and their spouse's names. At the request of the splitting spouse, the superannuation provider would deposit all (or part) of the splitting spouse's contributions into this account.
2.29 Each spouse would hold a 50 per cent interest over contributions and investment returns credited to the account. Each spouse could transfer their accumulated share of the benefit from the joint account to an account in their name. Alternatively, payment of a superannuation benefit could be made directly to the relevant spouse, providing that spouse had satisfied a condition of release.
2.30 Couples gain the tax advantages and other benefits that flow from splitting superannuation contributions, including:
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- providing the low income or non-working spouse with their own superannuation assets and their own income in retirement; and
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- access to two ETP low-rate thresholds and two reasonable benefit limits.
2.31 The ability to split superannuation contributions may encourage new or increased contributions, hence potentially increasing funds under management.
2.32 This option does not impose additional requirements on employers in making superannuation contributions.
2.33 This option furthers the Government's superannuation and retirement policy objectives.
2.34 Couples would be required to open a new account under this option. If each spouse already had their own superannuation account then couples may maintain three accounts between them - one in the name of each spouse, and the joint account.
2.35 Maintaining an additional superannuation account and paying an extra set of account-keeping fees is expected to reduce the retirement income benefits of splitting, particularly for low income couples.
2.36 Furthermore, owing to joint control of the accounts, the low income or non-working spouse may have reduced control over their superannuation assets relative to Options 1 and 2.
2.37 This option would impose significant system development costs on providers. The systems development costs are expected be significantly higher than the other options, as the superannuation system is currently built on the basis of the individual being the unit, rather than a couple. The costs to providers associated with this option have not been able to be quantified. Superannuation providers would not be forced to offer contributions splitting and hence could avoid these costs if they choose not to offer contribution splitting.
2.38 However, because providers would not be required to split regular contributions, ongoing costs for those providers who offer splitting may be lower than under Options 1 and 2.
2.39 Superannuation providers may levy a fee at the time of the split to recoup administration costs incurred by the provider.
2.40 Superannuation providers may also need to take steps to establish that the spouse is bona fide.
2.41 This option does not impose additional requirements on employers in making superannuation contributions.
2.42 This option would result in complex changes to the tax and superannuation legislation and regulations.
2.43 This option is of a similar cost to Option 2 over the forward estimates period, though its prospective nature involves a small bring forward of the revenue impact. As such, its actual cost over the forward estimates period is marginally higher than that of Option 2, and broadly in line with the costs of Option 1.
2.44 Under this option members would be able to split benefits accrued after commencement of the measure at any time, including at retirement. To reduce the administrative burden on providers (and eliminate the need for providers to track contributions and earnings accrued after commencement of the measure), a simplified calculation of benefits eligible for splitting could be used. In principle, eligible splitting benefits could be the total benefit multiplied by the proportion of time spent in employment after commencement of the measure, relative to total time in employment (a member's eligible service period could be used for this purpose).
2.45 If the receiving spouse was aged less than 65 and had not satisfied a condition of release at the time of retirement of the splitting spouse, the receiving spouse's benefit would be rolled into their own account and preserved until they retire.
2.46 Couples gain the tax advantages and other benefits that flow from splitting superannuation contributions, including:
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- providing the low income or non-working spouse with their own income in retirement; and
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- access to two ETP low-rate thresholds and two reasonable benefit limits.
2.47 The ability to split eligible superannuation contributions at any time would encourage spouses to split after retirement when the splitting spouse could calculate the precise amount of superannuation to transfer to the receiving spouse to minimise the couple's combined tax liability.
2.48 By splitting after retirement, couples could avoid the need to open a superannuation account in the name of the receiving spouse.
2.49 The implementation costs of this option are smaller than Options 1, 2 and 3.
2.50 This option does not impose additional requirements on employers in making superannuation contributions.
2.51 This option does not meet all of the Government's superannuation and retirement policy objectives associated with this measure.
2.52 This option provides reduced economic independence to the receiving spouse. The receiving spouse would not have superannuation assets under their direct control during the accumulation phase potentially missing out on cost-effective death and disability insurance. Furthermore, the receiving spouse may not have access to their benefit until after their spouse retired.
2.53 The splitting spouse may be levied with service fees by their provider at the time of the split.
2.54 This option would impose systems development and administration costs on superannuation providers. As providers would be splitting benefits rather than contributions, the systems development costs would likely be the lowest of all the options, although they have not been able to be quantified. Providers already have the operational means to split superannuation benefits reflecting recent amendments to the Family Law Act 1975 . Superannuation providers would not be forced to offer splitting and hence could avoid these costs if they choose not to offer splitting.
2.55 It is expected that providers would only split balances once, probably following the retirement of the splitting spouse.
2.56 Providers may levy a fee at the time of the split to recoup administration costs incurred by the fund.
2.57 Superannuation providers may also need to take steps to establish that the spouse is bona fide.
2.58 This option does not impose additional requirements on employers in making superannuation contributions.
2.59 This option does not meet the Government's objective of providing non-working spouses with superannuation assets under their control.
2.60 This option broadens the scope of the Government's policy announcement and focuses more narrowly on facilitating the ability of fund members to minimise their combined tax liability. Accordingly, the cost to revenue of this option would be significantly higher than for Options 1, 2 and 3.
2.61 In the long-term, the cost to revenue reflects the ETP tax benefits of splitting as well as lower income taxation in retirement. The increasing proportion of benefits that can be split over time is an important factor increasing long-term costs well in excess of those incurred under the other options.
Consultation
2.62 The Government has conducted a range of consultation activities in relation to this policy. In July 2002 the Government issued a consultation paper for public comment, which outlined the policy proposal in detail, including the first three options included in this paper. The Government subsequently consulted on a draft Bill and on two sets of draft regulations.
2.63 Many key industry stakeholders participated in the consultation process, including the Association of Superannuation Funds of Australia, the Investment and Financial Services Association, CPA Australia, the Financial Planning Association, the Institute of Chartered Accountants in Australia and the Institute of Actuaries of Australia. Submissions were also received from numerous other entities and individuals.
2.64 The inclusion of Option 4 in the preceding regulation impact statement reflects the desire of some parts of industry to pursue benefits splitting rather than contributions splitting.
2.65 Mixed views were presented by those who responded to the Government's consultation paper on which of Options 1 or 2 would impose the smaller costs on funds, although Option 2 was more likely to be favoured than Option 1. Of these two options, superannuation providers in favour of Option 1 were possibly the more highly automated providers while providers that preferred batch processing were more likely to favour Option 2. There was very little support for Option 3 (joint accounts) and a general view that it raised some complex legal issues.
Recommendation and reasons
2.66 Options 1 and 2 best meet the Government's policy objectives. However, these options do impose costs on funds. Option 2 is expected to impose smaller costs on superannuation providers who choose to offer contributions splitting than Option 1, and therefore is the preferred option.
2.67 Option 3 is the least preferred option (of those that meet the Government's objectives). Option 3 would require fundamental change to the superannuation system, imposing costs on superannuation providers and the Government, and provide the lowest benefit to couples, because couples may be required to maintain three accounts.
2.68 Option 4 does not fully meet the Government's objectives and comes at a higher cost to Government revenue. While Option 4 maximises the tax benefit for couples, it does not provide the receiving spouse with their own superannuation during the accumulation phase and the broader benefits that can bring.