Explanatory Memorandum(Circulated by authority of the Treasurer, the Hon Peter Costello MP)
General outline and financial impact
The Tax Laws Amendment (Simplified Superannuation) Bill 2006 (this Bill) and supporting Bills:
- implement the Government's Simplified Superannuation reforms; and
- rewrite the superannuation taxation law into the Income Tax Assessment Act 1997 (ITAA 1997) to present a clear picture of the taxation of superannuation.
A simplified and streamlined superannuation system
The Government is sweeping away the current raft of complex tax arrangements and restrictions that apply to superannuation benefits. This will improve retirement incomes and increase incentives to work and save.
Schedule 1 to this Bill contains the key taxation elements of Simplified Superannuation . Broadly, the rules contained in Schedule 1:
- make superannuation benefits paid from a taxed fund either as a lump sum or a pension tax free for people aged 60 and over;
- lower the tax paid on superannuation benefits paid from an untaxed fund for people aged 60 and over;
- abolish reasonable benefit limits (RBLs);
- allow employers to claim a full tax deduction for contributions to superannuation on behalf of employees under the age of 75;
- allow the self-employed to claim a full tax deduction for contributions to superannuation up to age 75;
- limit the level of contributions to superannuation receiving concessional tax treatment to $50,000 per person per financial year; and
- limit personal superannuation contributions from an individual's post-tax income (known as non-concessional contributions) to $150,000 per financial year or $450,000 for a three year period.
Schedule 2 to this Bill limits concessions on large employment termination payments. Currently, both superannuation and employment termination payments are counted together in assessing if a person exceeds their RBL. As the RBL is to be removed for superannuation benefits, it is necessary to apply an upper limit on the amount of employment termination payments that receive concessional tax treatment.
Schedules 4 to 7 contain other key elements of Simplified Superannuation . Broadly, Schedules 4 to 7:
- streamline superannuation fund reporting requirements;
- extend access to the Government co-contribution to include the self-employed; and
- improve the regulation of self-managed superannuation funds through the application of new administrative penalties for late returns and false statements.
Schedules 8 and 9 halve the pension assets-test taper rate so that Age Pension, Service Pension and other pension recipients will only lose $1.50 a fortnight (rather than $3) for every $1,000 of assets above the relevant threshold. The 50 per cent assets-test exemption will be removed for 'complying' income streams purchased from 20 September 2007 as retaining this concession alongside the reduced assets-test taper would create scope for wealthier individuals to access the age pension.
Schedule 10 defines terms and Schedule 3 provides the method for indexing certain limits on contributions and tax thresholds.
The taxes on excess concessional and non-concessional contributions are introduced separately in the Superannuation (Excess Concessional Contributions Tax) Bill 2006 and the Superannuation (Excess non-concessional Contributions Tax) Bill 2006. Similarly, a higher rate of tax on transfers over $1 million from untaxed to taxed schemes is introduced separately in the Superannuation (Excess Untaxed Roll-over Amounts Tax) Bill 2006. Each of these Bills deals with a separate object of taxation.
The Superannuation (Departing Australia Superannuation Payments Tax) Bill 2006 replaces the Income Tax (Superannuation Payments Withholding Tax) Act 2002 to reflect the new components of superannuation benefits while retaining the same rates of taxation.
The Superannuation (Self Managed Superannuation Funds) Supervisory Levy Amendment Bill 2006 repeals the current penalty for the late lodgement of a self-managed superannuation fund's regulatory return.
Improved superannuation law
The provisions dealing with the taxation of superannuation in the Income Tax Assessment Act 1936 (ITAA 1936) are being rewritten and consolidated into the ITAA 1997. This rewrite provides a clearer picture of the taxation treatment of superannuation savings across the life of the superannuation investment: when the money is contributed; during the investment phase; and at the benefit payment phase, and provides a consistent style.
The old legislation had become increasingly difficult to read and understand. When first introduced, the ITAA 1936 was only 126 pages. At that time, it was logically arranged and its sections were numbered in simple sequence. Since then the law has been heavily amended. Adding so much to the law has interfered with the logical arrangement of the sections and the numbering, making the ITAA 1936 difficult to navigate.
The new legislation deals first with the simple, most common case. For example, this means in the vast majority of cases the 90 per cent of Australians in taxed schemes would have their tax treatment specified in the first section about superannuation benefits if accessing their superannuation after age 60.
Preserving existing entitlements for those retiring between preservation age and age 60 and for the 10 per cent of Australians with benefits in untaxed schemes, means that some of the complexity and length of the old legislation has been retained. The user-friendliness of the legislation has however been greatly improved for these groups by the use of improved legislative design principles, such as plain English drafting and guides to groups of rules to aid reader navigation. In addition, sections are grouped on a case-by-case basis so a person can choose a path through the legislation.
Date of effect : Simplified Superannuation commences on 1 July 2007, although limits on non-concessional contributions apply from 10 May 2006. The revised age pension arrangements will commence on 20 September 2007.
Proposal announced : The proposals were released for community consultation on 9 May 2006 in A Plan to Simplify and Streamline Superannuation . The Government's final decisions were announced on 5 September 2006 in Press Release No. 93 issued jointly by the Treasurer and the Minister for Revenue and Assistant Treasurer.
Financial impact : The amendments in this Bill will have a budgetary cost of $7.2 billion over four years (including administration costs).
Impact on fiscal balance ($ billion )
Compliance cost impact : Initial implementation costs for individuals, employers and superannuation funds are expected to be offset by ongoing compliance savings from the new simplified and streamlined arrangements.
Summary of regulation impact statement
Impact : Simplified Superannuation will sweep away the raft of complex tax arrangements and restrictions that apply to superannuation benefits. These amendments will improve retirement incomes and increase incentives to work and to save.
The reforms will generate substantial improvements and savings for individuals, employers, superannuation funds and the Government, at the lowest cost.
- As a result of the Government's reforms, an average income earner whose sole contribution to superannuation comprises Superannuation Guarantee (SG) payments of 9 per cent over a working life of 40 years will have an additional lump sum of around $37,000 in retirement or an additional $136 per week if they take their benefit as a superannuation pension.
- Australians who turn 60 and choose to retire will have a much simpler system to face when deciding how to draw on their superannuation.
- The reduction in the assets-test taper rate will allow individuals to keep more of their pension when they exceed the relevant threshold.
- Individuals who make non-concessional contributions in excess of $150,000 per annum or $450,000 over a three year period will be affected by the limit on non-concessional contributions. However, the impact on these individuals will be mitigated through a number of exemptions and transitional arrangements.
- Individuals will have greater flexibility in how and when they take their superannuation benefits.
- The self-employed will benefit from improved incentives to contribute to superannuation, such as access to the superannuation co-contribution.
- Streamlined arrangements for individuals to find and transfer superannuation will encourage individuals to consolidate their accounts, thereby assisting in eliminating multiple fees and charges.
- Employers will benefit from their ability to claim a full deduction for superannuation contributions made on behalf of employees up to age 75.
- Employers who pay termination payments will benefit from a reduction in the number of forms required to process an employment termination payment entitlement. However, they will be required to update their existing systems to reflect the new employment termination payment tax arrangements.
- Superannuation funds will benefit from a reduction in the myriad of rules and red tape with which they must currently contend (eg, funds will no longer need to report benefits paid to members and commutations of pensions for RBL purposes). However, superannuation funds will incur implementation costs associated with adapting existing record-keeping systems and processes, training staff, updating product disclosure statements and communicating the changes to members.
- Simplified and streamlined pension rules will provide superannuation funds with greater scope to innovate. However, superannuation funds will also incur costs associated with communicating the streamlined rules to their members.
- Self-managed superannuation funds will benefit from simplified and streamlined reporting requirements and a suite of amendments designed to improve the level of education and assistance provided to self-managed superannuation fund trustees, and assist in the prevention and management of compliance problems. However, self-managed superannuation funds will face higher direct costs through an increase in the supervisory levy from $45 per annum to $150 per annum.
- The Australian Taxation Office (ATO) will experience a reduction in the number of taxpayers who are required to lodge tax returns each year (around 152,000 taxpayers per annum based on 2004-05 tax return data) as a result of the abolition of end benefits tax.
- The ATO will require additional resourcing to develop new information technology systems, update its technical and information products (electronic and printed), and manage the increased administrative workflow resulting from the new contribution rules and arrangements to assist individuals in locating their 'lost' superannuation accounts.