Explanatory Memorandum(Circulated by authority of the Treasurer, the Hon Peter Costello MP)
Chapter 8 - Regulation impact statement
8.1 The policy objective is to simplify superannuation for retirees making it easier to understand, improve incentives to work and save, and introduce greater flexibility in how superannuation savings can be drawn down in retirement.
8.2 The Government is committed to Australia's three-pillar approach to providing retirement incomes, which has been broadly endorsed by the World Bank. The three pillars comprise:
- a taxpayer funded means-tested age pension for people who are unable to fully support themselves in retirement;
- a minimum level of compulsory employer superannuation contributions made in respect of employees; and
- voluntary private superannuation and other savings.
8.3 This three-tiered approach efficiently and effectively achieves the multiple functions of retirement income policy, which include poverty alleviation and wealth redistribution, increasing private savings, improving retirement incomes and managing risk, while promoting workforce participation. Australia's retirement income system complements Government policies designed to encourage labour force participation, maximise productivity and ensure long-term fiscal sustainability.
8.4 Australia's superannuation system comprises the second and third pillars. Its objective is to assist and encourage people to achieve a higher standard of living in retirement than would be possible from the age pension alone, to ensure Australians have security and dignity in retirement.
8.5 In pursuit of this objective, the Government provides significant superannuation taxation concessions, valued at $15.9 billion in 2005-06. The Government also provides targeted assistance through initiatives such as the superannuation co contribution for low to middle income employees, capital gains tax exemptions for small business owners and the Mature Age Worker Tax Offset for older workers.
8.6 However, there is growing recognition that the efficiency and effectiveness of Australia's superannuation system is being impeded by unnecessarily complex and prescriptive rules.
8.7 In the 2006-07 Budget, the Government announced a plan to simplify and streamline superannuation. A detailed document outlining the Government's proposals, A Plan to Simplify and Streamline Superannuation , was released on Budget night, 9 May 2006.
8.8 Key stakeholders and members of the community were invited to make comments and submissions on the plan during the three-month consultation period. After considering the outcomes of consultation, the Government announced its final policy decision, Simplified Superannuation , on 5 September 2006.
8.9 The package of reforms detailed in Simplified Superannuation will sweep away the current raft of complex tax arrangements and restrictions that apply to people's superannuation benefits. Simplification will increase community understanding and, when combined with more flexibility and greater tax concessions, will encourage individuals to take greater interest in their superannuation. The Government's reforms will also provide individuals with clear incentives to save and to work longer.
8.10 Simplified Superannuation is expected to impact on the following groups:
- individuals (including the self-employed);
- superannuation funds (including approved deposit fund and retirement savings account (RSA) providers, and self-managed superannuation funds); and
- the Government.
8.11 This part of the Chapter will identify the objectives of the Government's reforms. It will explore options to ameliorate existing systemic problems, assessing the costs and benefits of each option for the impact groups identified in paragraph 8.10. The optimal approach for addressing each objective will then be identified.
8.12 The options in this section largely reflect the reforms outlined in Simplified Superannuation . However, where consideration was given to an alternative approach for satisfying a particular objective, the alternative is separately assessed. Linkages between each option are identified and discussed.
8.13 Paragraphs 8.14 to 8.166 contain qualitative assessments of the costs and benefits of the key policy proposals in Simplified Superannuation . Quantitative assessment is in paragraphs 8.167 to 8.171.
Simplification of the taxation arrangements for superannuation by reducing the number of taxing points
8.14 The superannuation system has a myriad of different arrangements for tax on contributions, earnings and benefits.
8.15 In relation to the average person, employer and concessional member superannuation contributions are taxed at the concessional rate of 15 per cent. Personal contributions made from after-tax income for which no deduction has been claimed are not subject to further tax in the superannuation fund.
8.16 The investment income of superannuation funds is taxed at 15 per cent, but can be reduced through the use of imputation credits.
8.17 The tax treatment of superannuation benefits depends on a range of factors, including whether the individual:
- commenced work before 1 July 1983;
- already received some of their superannuation benefits or contributed an employment termination payment;
- chose to withdraw their benefits as a lump sum or as a pension;
- claimed a deduction; and
- the type of pension product purchased, if the recipient elected to receive their benefits as a pension.
8.18 The complexity of the superannuation taxation arrangements impacts on all retirees, irrespective of the amount of money they have accumulated in superannuation. This complexity confuses retirement decisions, clouds the incentive to invest in superannuation and imposes unnecessary costs.
8.19 The transition to retirement is a significant time in a person's life and the superannuation taxation arrangements unnecessarily complicate this transition. People must pay for professional advice or spend hours of time trying to understand the tax treatment of their superannuation.
8.20 Individuals who receive their benefits may not know if they have exceeded their reasonable benefit limit (RBL) (and hence will be required to pay additional tax) until they have lodged their tax return for the period in which the benefits were received.
8.21 The Peter Hendy and Dick Warburton authored report, International Comparison of Australia's Taxes , noted that Australia is one of the only countries in the world to tax superannuation at three points. It suggested that the taxation of both contributions and benefits serves to exacerbate system complexity and imposes high compliance costs.
8.22 The report of the Taskforce on Reducing Regulatory Burdens on Business, Rethinking Regulation , described Australia's superannuation system as highly complex and recommended that high priority be given to comprehensive simplification of the tax rules for superannuation benefits.
Option One : Removal of the tax levied on superannuation benefits paid from a taxed source to individuals aged 60 years and above
8.23 All lump sum and pension payments (including pensions which commenced before 1 July 2007) would be tax free when paid to individuals aged 60 and over from a taxed source (where contributions and earnings tax has been paid). Additional concessions would be introduced for benefits paid from untaxed sources (where contributions and earnings tax has not been paid, primarily affecting public servants and members of the military), to ensure a similar tax treatment between benefits paid from taxed and untaxed sources. RBLs would be abolished for all individuals.
8.24 As the tax treatment of employment termination payments is based on RBLs, the employment termination rules would also be modified.
Individuals (including the self-employed)
8.25 The elimination of benefits tax would have a significant impact on an individual's retirement income. An average income earner whose sole contribution to superannuation comprises superannuation guarantee (SG) payments over a working life of 40 years would have an additional lump sum of around $37,000 in retirement or an additional $136 per week if they took their benefit as a superannuation pension.
8.26 Individuals aged over 60 receiving lump sum or pension payments from a taxed source would not need to include details of these payments in their tax returns, lowering their taxable income and therefore potentially lowering the tax paid on other income. This would increase the incentive for individuals to undertake work while drawing down on superannuation.
8.27 The report of the Taskforce on Reducing Regulatory Burdens on Business, Rethinking Regulation , highlighted that the greatest area of complexity in the current superannuation system is the taxation of end benefits. For example, under the current system, a lump sum may include up to eight different parts taxed in seven different ways.
8.28 Option One would yield significant simplicity benefits for retirees. The thousands of Australians who turn 60 each year and choose to retire would have a much simpler system to face when deciding how to draw on their superannuation. They would no longer need to pay for expensive financial advice on the tax treatment of their superannuation benefits. Independent evidence given to the House Standing Committee on Economics, Finance and Public Administration inquiry into improving the superannuation savings of people under age 40 stated that this advice can currently cost in the order of $3,000 to $10,000 depending on the complexity.
8.29 The reduction in complexity could also be expected to decrease the costs facing superannuation schemes in delivering their services over the longer term, potentially benefiting individuals through a reduction in fees and charges. The impact of the reduction in complexity for superannuation funds is explored in paragraphs 8.32 to 8.34.
8.30 The February 2006 update of the Australian Bureau of Statistics' Retirement and Retirement Intentions Survey indicated that 19 per cent of people in the labour force intend to retire between the ages of 55 and 59. The continued application of benefits tax for individuals aged under 60 who receive payments from both taxed and untaxed sources would provide an incentive for these individuals to remain in the workforce and leave their superannuation benefits in their funds until they turn age 60. If an individual chooses to work and contributes to superannuation in this time, their retirement savings would be further boosted through additional contributions and earnings.
8.31 Employers would benefit from a reduction in the number of forms required to process an employment termination payment entitlement.
Superannuation funds (including approved deposit funds, RSA providers and self-managed superannuation funds)
8.32 The removal of benefits tax would reduce the myriad of rules and red tape that superannuation funds must contend with when paying out a benefit. Funds would no longer need to report benefit payments paid to members and commutations of pensions for RBL purposes. As most superannuation pensions would be tax free, funds would no longer be required to withhold tax instalments from these benefits and provide recipients with a payment summary. The requirement to withhold tax from lump sum payments paid to a person aged 60 or over would be removed, and funds would no longer be required to provide payment summaries to these taxpayers.
8.33 Funds would also benefit through the reduction in the number of benefit components on which records must be maintained (reduced from eight to two).
8.34 The reduction in complexity achieved through the removal of end benefits tax could also be expected to decrease the costs facing superannuation schemes in delivering their services.
8.35 The Australian Taxation Office (ATO) would 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.
8.36 The ATO would also experience an associated reduction in income tax return processing and potentially debt collection cases due to a reduction in the number of clients in the income tax system.
Individuals (including the self-employed)
8.37 The proposed removal of end benefits taxation would require revisions to the existing superannuation contribution rules to ensure appropriate limits on the level of tax concessions provided to individuals. These revisions and their impacts are discussed in paragraphs 8.55 to 8.74.
8.38 Individuals may need to seek clarification and advice on the new arrangements from financial planners and superannuation funds.
8.39 Employers who pay employment termination payments would need to update their systems and processes to reflect the new employment termination arrangements.
Superannuation funds (including approved deposit funds, RSA providers and self-managed superannuation funds)
8.40 Superannuation funds may incur short-term costs associated with the need to review and adapt existing record-keeping systems and processes (both electronic and manual); however, these costs would be recovered from fund members over the longer term.
8.41 In addition, superannuation funds would incur implementation costs associated with training staff, updating product disclosure statements, and communicating the changes to members.
8.42 The ATO may require additional resourcing to update its technical and information products (electronic and printed) to advise its clients of the proposed changes.
Option Two: Removal of the tax on superannuation contributions
8.43 The 15 per cent tax levied on superannuation contributions would be abolished for all individuals.
8.44 Option Two would also necessitate changes to end benefits taxation to reflect that some benefits have been subject to the tax on contributions while others have not.
Individuals (including the self-employed)
8.45 The elimination of the tax on contributions would impact on an individual's retirement income. An average income earner whose sole contribution to superannuation comprises SG payments over a working life of 40 years would have an additional $17 per week if they took their benefit as a superannuation pension.
8.46 Option Two may increase the incentive for individuals to make additional salary sacrifice contributions, further improving retirement incomes. It may also increase the incentive to work, by decreasing the effective tax paid by individuals on their labour income. However, increases in retirement income generated by the removal of the tax on contributions would be clawed back to some degree by the pension assets test.
Superannuation funds (including approved deposit funds, RSA providers and self-managed superannuation funds)
8.47 The abolition of the tax on contributions would benefit superannuation funds by increasing the level of funds available for investment, potentially generating higher earnings. Superannuation funds may also receive some cost savings by no longer having to withhold tax on contributions.
8.48 Employers and the Government would not receive additional benefits.
Individuals (including the self-employed)
8.49 Option Two may further complicate the taxation of benefits. It would require both the apportioning of the amount of benefits on which tax was paid and a new lump sum component to be added for benefits accumulated from the removal of the tax on contributions. This component would then be taxed at an additional 15 per cent to what currently applies.
8.50 In addition, the 15 per cent superannuation pension rebate introduced in 1988 to compensate individuals for the imposition of the tax on contributions would need to be abolished for any part of a pension accumulated after the removal of the tax on contributions.
8.51 Individuals would continue to include superannuation lump sum or pension payments in their assessable income, maintaining the disincentive to work while drawing down on superannuation.
8.52 Employers, superannuation funds and the Government would not incur additional costs.
8.53 It is recommended that Option One be adopted.
8.54 Option One is considered preferable to Option Two, as the benefits expected from Option One are greater than those for Option Two and the associated costs would be less.
- A key objective of the Government's reforms is to reduce the complexity imposed on retirees. The complexities of the current system would remain if the tax on superannuation contributions was reduced or even removed.
- The abolition of end benefits taxation, coupled with the reduction in the age pension assets-test taper rate envisaged in paragraphs 8.94 to 8.104, will result, on average, in higher retirement incomes than the removal of the tax on contributions at a lower cost. Option One will also provide individuals with greater incentives to remain in the workforce until at least age 60.
- The ongoing compliance savings for both individuals and superannuation funds from the abolition of end benefits tax and RBLs are substantially larger than the initial implementation costs.
- Removing the tax on contributions:
- would not have the same benefits on participation as the removal of end benefits tax as the draw down of superannuation would be included in the assessable income of the taxpayer, potentially increasing the tax on their work income; and
- would result in a significantly higher cost to revenue.
Simplification of contribution rules
8.55 Currently, individuals must contend with complex and prescriptive rules when deciding to contribute to superannuation. Employers are able to claim a full deduction for contributions made on behalf of an employee up to the employee's age-based limit; in 2006-07 the aged-based limits are:
- $15,260 for individuals aged under 35 years;
- $42,385 for individuals aged 35 to 49; and
- $105,113 for individuals aged 49 to 69.
Employers are denied a deduction for contributions above the relevant limit. The age-based limits are a source of complexity in the superannuation system.
8.56 The proposed abolition of RBLs and end benefits taxation would create an incentive for high-wealth individuals to transfer large amounts of assets currently held outside of superannuation to the concessionally taxed superannuation system. The existing contribution rules would therefore need to be streamlined and tightened to ensure appropriate limits are applied on the level of tax concessions provided to individuals.
Streamlined rules for concessional contributions
8.57 Age-based limits would be removed and a uniform limit on concessional contributions of $50,000 per person per annum would apply. These contributions would be taxed at 15 per cent. The proposed limit has been set with reference to the current median age-based limit.
8.58 Where the ATO identifies that a person's concessional contributions have exceeded $50,000 in a financial year, the amount in excess of $50,000 would be taxed at the top marginal rate (plus the Medicare levy). Excess concessional contributions would be included in the cap on non-concessional contributions (see paragraphs 8.61 to 8.63).
8.59 In cases where a tax file number (TFN) has not been quoted, the top marginal rate (plus the Medicare levy) would be withheld from concessional contributions over $1,000. The $1,000 threshold would not apply to new accounts.
8.60 Employers would be able to claim a full deduction for all contributions to superannuation funds made on behalf of their employees under age 75.
New rules for post-tax (non-concessional) contributions
8.61 A cap of $150,000 per year on the amount of non-concessional superannuation contributions a person can make would apply. Eligible individuals under age 65 would be able to bring forward two years of contributions to accommodate larger one-off payments.
8.62 Where the ATO identifies that a person has breached the cap, excess contributions would be taxed at the top marginal rate plus the Medicare levy.
8.63 Superannuation funds would only be able to accept non-concessional contributions for or on behalf of a member if the member's TFN has been quoted to the trustee.
Individuals (including the self-employed)
8.64 The proposed removal of age-based limits would provide scope for employees under age 35 to make larger contributions to superannuation through salary sacrifice arrangements, as their employers would be able to claim a full tax deduction for all contributions. The current age-based limit for individuals less than age 35 is $15,260 per annum, compared to the proposed limit of $50,000 per annum.
8.65 Employers would benefit from their ability to claim a full deduction for superannuation contributions made on behalf of employees up to age 75. They would no longer be required to monitor the level of superannuation contributions against age-based limits to determine if they can claim a deduction.
8.66 Superannuation funds and the Government would not receive additional benefits.
Individuals (including the self-employed)
8.67 The proposed cap on non-concessional contributions may impact unfavourably on a small number of individuals who wish to transfer amounts greater than $450,000 (allowing for the two year bring forward arrangements) into superannuation.
8.68 The cap on non-concessional contributions is expected to impact on relatively few individuals.
8.69 It is estimated that currently less than one per cent of people aged 65 and below who make non-concessional contributions to superannuation would contribute more than $450,000 in a year. The impact of the cap on these individuals would be mitigated through a number of exemptions and transitional arrangements.
8.70 While additional tax payable for excess concessional contributions would be levied on individual members, superannuation funds may be required to arrange for the payment of the additional tax if requested by a member.
8.71 In addition, superannuation funds would be required to withhold tax on concessional contributions where a member's TFN has not been reported, and refund tax withheld if the TFN is subsequently reported.
8.72 The ATO would require additional resourcing to manage the increased administrative workflow resulting from the need to monitor the level of individuals' concessional and non-concessional contributions and assess tax on excess contributions.
8.73 Employers would not incur additional costs.
8.74 It is recommended that the proposed streamlined rules for concessional contributions and non-concessional contributions be adopted. The new rules will allow individuals to contribute more concessionally taxed money into superannuation from a younger age and will be significantly easier to understand. While the new rules may impact unfavourably on a very small number of individuals and will involve implementation and ongoing costs for superannuation funds, they will be mitigated through a number of exemptions and transitional arrangements and will play a key role in the fiscal sustainability of the Government's reform package.
Simplification of payment rules
8.75 The Government recognises that for the superannuation system to be efficient, superannuation rules and regulations must be understandable, send clear signals and provide appropriate incentives. Impediments, complexity and rigidity should be minimised.
8.76 The existing rules regulating matters such as how benefits are to be taken, coupled with the forced payment of benefits once an individual reaches age 65 and no longer satisfies the work test (ie, has not worked at least 40 hours during a consecutive 30 day period in a financial year), are complex and limit individual choice.
8.77 These rules discourage market innovation, and result in decisions being driven by product tax / social security treatment. In addition, they impose unnecessary costs on superannuation funds which have to administer a work test for all members aged 65 to 74 who have not yet taken their benefits, to determine whether the benefits of these members must be paid.
Abolition of compulsory withdrawal
8.78 The requirement for compulsory payment of benefits to members over age 65 who do not meet the current work test would be removed - that is, there would be no forced payment of superannuation benefits after age 65. The requirement that benefits must be paid out regardless of a person's work status from age 75 would also be removed.
Streamlined pension rules
8.79 All pensions that meet simplified minimum standards would be taxed the same on payment.
8.80 The new minimum standards for pensions commencing on or after 1 July 2007 would require:
- payments of a minimum amount to be made at least annually, allowing pensioners to take out as much as they wish above the minimum (including cashing out the whole amount);
- no provision to be made for an amount to be left over when the pension ceases; and
- that the pension could be transferred only on the death of the pensioner to one of their dependants or cashed as a lump sum to the pensioner's estate.
8.81 The payment rules would specify minimum limits only. No maximum would apply, with the exception of pensions which are commenced under the transition to retirement condition of release.
8.82 Pensions which commenced prior to 1 July 2007, which complied with relevant rules for the transition to retirement measure at the time, would be deemed to satisfy the proposed requirements.
Individuals (including the self-employed)
8.83 Individuals would benefit from greater flexibility, as they would no longer be forced to draw down on their superannuation benefits after age 65. Subject to fund rules, superannuation could be paid out whenever and however an individual wished. Individuals could withdraw as much or as little as they wanted from superannuation and it would generally not need to be included in their tax return. Moreover, individuals would have the freedom to change their arrangements as their circumstances change.
8.84 Lower drawdowns in the earlier years of a pension would result in greater capital accumulation and longer pension terms. The changes to the pension drawdown rules would also improve the likelihood that pensions will easily adapt to improvements in life expectancy. This would provide increased certainty that individuals would not outlive their retirement savings.
8.85 Individuals may also benefit from greater product choice and lower fees and charges brought on by the deregulation of the pension product market.
8.86 Superannuation funds would no longer have to administer work tests to determine whether the benefits of members aged between 65 and 74 must be paid out.
8.87 The deregulation of the pension product market would benefit superannuation funds by providing them with greater scope for innovation.
8.88 Employers and the Government would not receive additional benefits.
8.89 Members may need to seek clarification and advice on the new streamlined rules from their superannuation funds.
8.90 Superannuation funds may need to seek advice about changing their investment strategies due to possibly changed cash flow requirements applicable to the new products they would be able to market in accordance with the new pension rules. They may also need to seek advice as to whether their trust deeds should be updated to reflect the new streamlined rules.
8.91 In addition, superannuation funds may also need to manage enquiries from their members who are seeking clarification and advice concerning the new streamlined rules.
8.92 Employers and the Government would not incur additional costs.
8.93 It is recommended that the abolition of compulsory withdrawal and the introduction of streamlined pension rules be adopted. The abolition of compulsory withdrawal will provide individuals with greater freedom and flexibility. The new pension rules will benefit individuals through greater product choice and lower fees and charges. While individuals will face initial implementation costs, they will receive substantial ongoing compliance savings through these amendments. Similarly, while superannuation funds may incur initial implementation costs from the need to change investment strategies, update trust deeds and advise members of the proposed changes, these costs will be offset by substantial ongoing compliance savings.
Reduction in the pension assets-test taper rate
8.94 The existing pension assets-test taper rate is very punitive as retirees must achieve a return of at least 7.8 per cent on their additional savings to overcome the effect of a reduction in their age pension amount.
8.95 The current assets test also prevents existing retirees with relatively modest assets but with low incomes from being able to access the age pension. Under the current system, a single homeowner would lose part of their pension once their assets exceed $161,500.
8.96 The introduction of more generous pension assets-test rules would greatly increase incentives to save.
Halving the pension assets-test taper rate
8.97 The pension assets-test taper rate would be halved from 20 September 2007 so that recipients only lose $1.50 per fortnight (rather than $3) for every $1,000 of assets above the relevant threshold.
Abolishment of the assets-test exemption for complying income streams
8.98 The 50 per cent assets-test exemption for complying income streams would also be abolished from 20 September 2007, with all new pensions receiving uniform age pension treatment. Retaining the assets-test exemption would enable high wealth individuals to access the age pension.
Individuals (including the self-employed)
8.99 The proposal to halve the assets-test taper rate would mean that retirees would need to achieve a return of 3.9 per cent on their additional savings before they are better off in net income terms - that is, after taking into account the withdrawal of the age pension. Based on the current age pension, the proposal would enable a single retiree homeowner to have around an additional $172,000 of assets before losing the age pension, while a couple could have approximately $287,000 of additional assets. The proposal would therefore generate significant incentives for individuals to work and save.
8.100 Employers, superannuation funds and the Government would not receive additional benefits.
Individuals (including the self-employed)
8.101 From 20 September 2007, an assets-test exemption would no longer apply for certain income streams. However, the effects of the removal of the exemption are expected to be offset for most individuals through the reduction in the assets-test taper rate.
8.102 The abolition of the assets-test exemption is required to limit the scope for wealthier individuals to access the age pension. If the assets-test exemption was maintained, the age pension could potentially be extended to high wealth individuals, undermining the spirit of the age pension arrangements.
8.103 Employers, superannuation funds and the Government would not incur additional costs.
8.104 It is recommended that the reduction in the assets-test taper rate be adopted. The reduction will encourage and reward individuals to work and make additional savings, supporting the Government's objective of encouraging self-provision in retirement.
Improved incentives for superannuation contributions by the self-employed
8.105 Under the current system, the self-employed may have less incentive to contribute to superannuation than employees.
8.106 Under the current system, employers are able to claim a full deduction for contributions made on behalf of employees up to the relevant age-based limit. In addition, low and middle income employees are eligible for the Government's co-contribution scheme (which matches $1.50 for every $1 of post-tax superannuation contributions made by low and middle income employees, up to a maximum of $1,500 for employees earning below $28,000 and phasing out completely for employees earning over $58,000).
8.107 In contrast, self-employed persons are only entitled to claim a full deduction for the first $5,000 contributed to a complying superannuation fund in a financial year. Contributions above this amount are 75 per cent tax deductible, up to a maximum deduction equal to the relevant age-based limit. Moreover, self-employed persons are not eligible for the Government's co-contribution scheme.
8.108 The current contribution arrangements for the self-employed may discourage the self-employed from making larger contributions to superannuation.
Removal of the 75 per cent limit on deductions for superannuation contributions over $5,000 made by the self-employed
8.109 The deductibility of superannuation contributions by the self-employed (and other persons who are currently eligible for a deduction) would be treated in the same way as contributions made for the benefit of employees. That is, the self-employed would be able to claim a full deduction for all contributions made to accumulation schemes on their own behalf up to age 75.
Extension of the Government's co-contribution scheme to the self-employed, effective from 1 July 2007
Individuals (including the self-employed)
8.110 The increased deductibility of superannuation contributions and the Government co-contribution, coupled with the abolition of end benefits taxation and the reduced age pension assets-test taper rate would bring significant benefits to the self-employed.
8.111 A self-employed individual earning $28,000 and contributing $2,500 per annum to superannuation over a working life of 40 years would be expected to have an increase in their benefit at retirement of over $88,000 or $113 per week if they took their benefit as a superannuation pension.
8.112 A self-employed individual with less time remaining in the workforce would still stand to gain considerably under the proposed incentives. A self-employed individual earning $90,000 and contributing $12,000 to superannuation per annum over a working life of 20 years would be expected to have an increase in their benefit at retirement of over $83,000 or $160 per week if they took their benefit as a superannuation pension.
8.113 Consultation with industry suggests that self-employed people who currently seek professional advice on superannuation are likely to seek less advice as a result of the proposed changes, saving an average of around $50 each per year.
8.114 Employers, superannuation funds and the Government would not receive additional benefits.
8.115 Individuals, employers, superannuation funds and the Government would not incur additional costs.
8.116 It is recommended that the self-employed be allowed full deductibility for their contributions to superannuation and given access to the Government's co-contribution scheme. These amendments will address the inequities of the existing arrangements for the self-employed, improve retirement incomes and provide cost savings for the self-employed.
Improvement and simplification of the arrangements to find, transfer and consolidate lost superannuation
8.117 Since 1 July 2004, members of most superannuation funds have been able to move their superannuation benefits into a fund of their choice (portability), subject to some limited exceptions.
8.118 Portability is further complemented by the Lost Members Register maintained by the ATO. The Lost Members Register contains details of accounts that individuals may have lost track of (the actual money remains with the relevant funds). Individuals who may have lost track of their superannuation can search the Lost Members Register (for free) to identify their accounts, and then, using portability, organise for those accounts to be consolidated if desired. At 30 June 2005, the Lost Members Register held records of approximately 5 million accounts with a total value of around $8 billion.
8.119 The Government's initiatives on choice and portability have significantly improved the ability of individuals to manage and take control of their superannuation.
8.120 However, the Government considers there is scope to make transferring and consolidating accounts simpler and easier by further improving the operation of the portability and Lost Members Register arrangements.
- The absence of standardised portability documentation imposes unnecessary administrative costs on superannuation funds as they are often required to seek additional information from members when processing a transfer application.
- The 2005 Australian National Audit Office audit report on the ATO's administration of the Lost Members Register found that while the ATO has implemented strategies and mechanisms to promote awareness of, and enable access to, the Lost Members Register, an evaluation of the effectiveness of its strategies and tools to reunite people with their lost superannuation would be timely.
- Improvement and simplification of the arrangements to find, transfer and consolidate lost superannuation may ultimately reduce the number of accounts on the Lost Members Register by encouraging individuals to increase their engagement with their superannuation.
A staged approach to address the number of lost accounts would be adopted
8.121 The process would commence in 2006 07 with a rationalisation and improvement of existing processes for lost member identification and the introduction of a standardised portability form. The maximum time period in which a transfer must occur would be reduced from 90 days to 30 days.
ATO to contact lost members
8.122 In 2007-08, the ATO would move to a more proactive role by contacting lost members by phone and mail. This would include targeting members with small balances to facilitate direct repayment or consolidation with an active account utilising the standardised portability form.
8.123 By 2009-10, members would be able to electronically request consolidation of their accounts via a facility on the ATO's website.
Individuals (including the self-employed)
8.124 The development of a standardised portability form would facilitate account consolidation, and would reduce the need for individuals' direct involvement.
8.125 Requests for account transfers would be processed more quickly, increasing the likelihood that individuals' superannuation assets would be held in accounts that reflect their immediate preferences (eg, fees and charges and level of insurance coverage).
8.126 Streamlining the portability arrangements would encourage individuals to claim and consolidate their accounts, eliminating multiple fees and charges and allowing individuals to claim the full entitlement of their accumulated superannuation benefits in retirement.
8.127 The use of a standardised portability form and proof of identity requirements would potentially reduce the need for funds to seek additional information from members, thereby decreasing the costs of processing a transfer application.
8.128 Over time, the ATO would have lower administration costs through a reduction in the number of accounts listed on the Lost Members Register.
8.129 Employers would not receive additional benefits.
8.130 Some funds may be required to update their existing administrative systems (both electronic and manual) to meet the 30-day rule.
8.131 The ATO would require additional resourcing to manage the increased administrative workflow resulting from greater efforts to reunite lost members with their superannuation.
8.132 Individuals and employers would not incur additional costs.
8.133 It is recommended that the proposed staged approach to improving the portability and Lost Members Register arrangements be adopted. The amendments will provide individuals with substantial ongoing compliance savings which will significantly outweigh the initial implementation and ongoing compliance costs of superannuation funds and the costs stemming from the ATO's increased administrative workflow.
Improvement of self-managed superannuation fund compliance
8.134 The Government is concerned at the level of compliance with superannuation law by self-managed superannuation funds and the level of trustee education and their understanding of their responsibilities.
8.135 Approved auditors operate as a key integrity element in the regulation of self-managed superannuation funds by providing independent assurance that a self-managed superannuation fund is complying with its regulatory obligations. However, there are concerns with the oversight being provided by approved auditors.
8.136 A survey by CPA Australia found that 30 per cent of self-managed superannuation fund members do not realise they are also a trustee of their fund. A lack of awareness results in higher levels of non-compliance, risks the fund being declared non complying and puts members' retirement incomes at risk.
8.137 The current penalty regime for self-managed superannuation funds does not provide sufficient flexibility for the ATO in administering the law.
8.138 Currently if an in specie contribution (eg, business real property or shares) is made to a fund by an employer for the benefit of an employee, the employer may incur a fringe benefit tax (FBT) liability. A contribution made by a payment of money that meets certain conditions is specifically excluded from FBT.
8.139 The Financial System Inquiry recommended that '... as far as practicable, the regulatory agencies should charge each financial entity for direct services provided, and levy sectors of industry to meet the general costs of their regulation'. The current $45 self-managed superannuation fund levy has not changed since 1999 and no longer adequately covers the cost of the ATO's regulation of self-managed superannuation funds. The current supervisory level for small (less than five members) Australian Prudential Regulation Authority regulated funds is $500.
Option One: Improvement of regulatory processes within existing frameworks
8.140 This approach would include:
- simplifying self-managed superannuation fund reporting requirements by replacing the current requirement for multiple reports with a single annual report;
- making the Auditor Contravention Report an approved form;
- improving the level of education and assistance provided by the ATO to self-managed superannuation funds trustees;
- introducing additional legislative changes to assist in the prevention and management of compliance problems in self-managed superannuation funds; and
- removing the application of FBT to in specie transfers of assets to superannuation funds.
8.141 Option One would also involve the provision of additional funding for the ATO to regulate self-managed superannuation funds by raising the supervisory levy to $150 (see cost recovery impact statement in paragraphs 8.185 to 8.208).
8.142 Employers would benefit from not having to pay FBT on in specie contributions made on behalf of their employees.
8.143 Simplified reporting requirements would make it easier for self-managed superannuation fund trustees to meet their compliance obligations, potentially reducing the costs of compliance.
8.144 The increase in direct costs resulting from the rise in the supervisory levy would be partially offset by a decrease in compliance costs through streamlined and more efficient collection processes. The supervisory levy would be collected at the same time as the fund's income tax liability.
8.145 Using the Business Cost Calculator, the simplified arrangements are estimated to produce an average compliance saving of $80 per annum for each self-managed superannuation fund.
8.146 The appropriate level of regulation would enhance self-managed superannuation fund compliance while maintaining freedom and flexibility - key priorities of Australia's retirement income policy. A standard Auditor Contravention Report would improve communication between auditors and the ATO, allowing auditors to quickly and easily alert the ATO to incidences of non compliance.
8.147 Option One would provide the ATO with additional tools to enforce self-managed superannuation fund compliance (eg, the application of administrative penalties where self-managed superannuation funds fail to lodge returns or make false or misleading statements).
8.148 The rise in the supervisory levy would allow the ATO to broaden its self-managed superannuation fund compliance activities, ensuring the integrity of the proposed limits on contributions. The broadening of the ATO's education activities would assist the ATO in ensuring that self-managed superannuation fund trustees understand their obligations and responsibilities.
8.149 The ATO's estimated costs of regulating self-managed superannuation funds are based on total costs over the forward estimates period. The estimated costs would be broadly offset by the collection of the supervisory levy, and an improved rate of collection, over the same period.
8.150 The revenue impact of the increase in the supervisory levy is estimated to be $55 million over the forward estimates period.
8.151 Individuals would not receive additional benefits.
8.152 The increase in the supervisory levy would increase a self-managed superannuation fund's direct costs by $105 per annum. However, ATO data suggests that the annual cost of running a self-managed superannuation fund ranges from around $1,500 to $12,000 for larger funds. In this context, an increase in the levy of $105 per annum would not add significantly to the running costs of a self-managed superannuation fund.
8.153 Administrative penalties for the late or non-payment of the levy would also increase direct costs.
8.154 The ATO may need additional resourcing to implement the more direct supervisory activities envisaged in Option One.
8.155 The Government may experience a very minor decline in revenue as a result of the proposal to exempt in specie contributions from FBT, although this cannot be quantified.
8.156 Individuals and employers would not incur additional costs.
Option Two: Introduction of new rules
8.157 This approach would include:
- requiring self-managed superannuation funds to have a third party independent trustee who would be required to sign off on all decisions and transactions of the fund;
- setting a minimum balance before individuals can establish a self-managed superannuation fund; and
- tightening self-managed superannuation fund investment rules, including limiting the classes of assets in which self-managed superannuation funds are allowed to invest.
8.158 Self-managed superannuation fund trustees may find it easier to comply with well-defined and tightly regulated rules. Option Two would provide trustees with a degree of protection, as the requirement for an independent trustee may reduce the possibility of the self-managed superannuation fund inadvertently breaking the law.
8.159 The introduction of more prescriptive rules would facilitate the ATO's administration of self-managed superannuation funds.
8.160 Individuals and employers would not receive additional benefits.
8.161 The degree of flexibility currently afforded to self-managed superannuation fund trustees would be significantly reduced.
8.162 Compliance costs (in terms of both time and money) would be expected to increase through the requirement to employ an independent trustee.
8.163 The ATO would require additional resourcing to update its self-managed superannuation fund administration systems.
8.164 Individuals and employers would not incur additional costs.
8.165 It is recommended that Option One be adopted.
8.166 The range of proposals identified in Option One are preferable to those identified in Option Two, as the benefits expected from Option One are greater than those for Option Two and the associated costs would be less.
- Option One will provide the Government with more certainty over the regulation of self-managed superannuation funds and their compliance with superannuation law, without compromising freedom and choice.
- Increased funding for the ATO's self-managed superannuation fund supervisory activities will enable the ATO to more efficiently and effectively regulate self-managed superannuation funds and target problem funds.
- The education initiatives proposed in Option One will improve community awareness and understanding of the laws relating to self-managed superannuation funds, reducing the likelihood of unintentional non-compliance and reinforcing the integrity of retirement income policy.
Estimates of compliance costs and compliance savings
8.167 Table 8.1 details the ATO's estimates of net potential compliance costs and compliance savings from Simplified Superannuation .
8.168 The implementation and on-going compliance costs and compliance savings identified in the table relate to the key policy proposals discussed above, along with minor policy proposals, transitional and administrative arrangements which are not separately identified in this regulation impact statement.
|Implementation savings/(costs) $ million||Ongoing savings/(costs) $ million per year|
|Funds (including self-managed superannuation funds)***||(180.6)||32.2|
8.169 The Government will provide additional funding of $500 million over the next four years to the ATO, Department of Families, Community Services and Indigenous Affairs, Centrelink and Department of Veterans' Affairs to administer the Simplified Superannuation reforms.
8.170 Estimates of potential compliance costs and compliance savings are based on assumptions about the time taken and level of expertise required to perform compliance tasks under both the current system and the proposed arrangements. The estimates are therefore sensitive to changes in these assumptions.
8.171 Taken together, Simplified Superannuation is expected to result in an aggregate fiscal cost of $7.2 billion over the forward estimates (including administration costs). As noted in paragraph 8.54, the abolition of the tax on contributions would result in a significantly higher cost to revenue.
8.172 The Government has undertaken extensive consultation with a range of employer, consumer, industry and professional groups since the announcement of A Plan to Simplify Superannuation on Budget night, 9 May 2006. In addition to delivering numerous presentations and attending meetings across Australia, Treasury officials participated in forums with independent groups.
8.173 Industry bodies consulted by Treasury during the three-month consultation period include: AMP; Association of Independent Retirees; Association of Superannuation Funds of Australia; Association of Tax and Management Accountants; Australian Bankers Association; Australian Chamber of Commerce and Industry; Australian Institute of Superannuation Trustees; Business Council of Australia; Chartered Professional Accountants Australia; Corporate Superannuation Association; Council of Small Business Organisations of Australia; CPA Australia; EquipSuper; Financial Planners Association; Industry Funds Forum; Institute of Actuaries of Australia; Institute of Chartered Accountants of Australia; Investment and Financial Services Association; Law Council of Australia Superannuation Committee; Mercer Human Resources Consulting; National Institute of Accountants; Small Independent Superannuation Funds of Australia; Self-Managed Superannuation Fund Professionals Association of Australia; Taxation Institute of Australia; and Taxpayers Association of Australia.
8.174 Key stakeholders expressed strong support for the key elements of A Plan to Simplify and Streamline Superannuation on the basis that they will simplify the administration of superannuation, provide retirees with greater flexibility, improve incentives to work and save, decrease costs and enhance the operation of the superannuation system. The bulk of the feedback received by the Government centred on administrative, operational and transitional issues.
8.175 Community members were also given the opportunity to make comments and submissions on A Plan to Simplify and Streamline Superannuation through the 'Simpler Super' email service and the Superannuation Hotline. At the conclusion of the consultation period on 9 August 2006, the Simpler Super service had received 1,127 emails while the Superannuation Hotline received 3,645 telephone enquiries.
8.176 The views expressed by stakeholders and members of the community during the three month consultation period were examined and considered by the Government. Overall, the Government received over 1,500 submissions and comments on the plan. The main issues raised in submissions related to the contribution rules and their associated administration, the parity of the proposed treatment of benefits paid from taxed and untaxed sources and the taxation of death benefits for non dependants. Issues outside A Plan to Simplify and Streamline Superannuation were also raised, including the work test in relation to contributions made by persons aged 65 or over, full deductibility for all contributions and commutation of complying income streams.
8.177 The feedback received by stakeholders and members of the community resulted in a number of changes to the reforms proposed in A Plan to Simplify and Streamline Superannuation , which have been reflected in the Government's final policy decision, Simplified Superannuation . For example:
- The plan did not propose indexation of the limit on concessional contributions and the cap on non-concessional contributions. Industry argued strongly that the limit and cap should be indexed over time.
- Simplified Superannuation would permit indexation of the limit and cap in $5,000 increments.
- A number of concerns were raised regarding the level of the cap on non-concessional contributions. Key stakeholders and members of the community sought the introduction of averaging provisions and requested consideration of certain exemptions.
- Simplified Superannuation would allow individuals under age 65 to make larger non-concessional contributions of up to $450,000 by bringing forward two years of future entitlements. Moreover, the proceeds from the disposal of small business active assets up to $1 million and permanent incapacity payments would be excluded from the cap.
- As a transitional measure, Simplified Superannuation would allow individuals who meet the work test to contribute up to $1 million in post-tax contributions between 10 May 2006 and 30 June 2007 irrespective of future work status.
- The plan proposed to remove the existing portability retriggering provisions so that in all cases benefits would be transferred within 30 days of a transfer request (the retriggering provisions allow the current 90-day rule to start again if a fund is required to seek additional information from a member). Industry expressed a preference for the 30-day rule to commence upon receipt of all information required to process a transfer request.
- Under Simplified Superannuation , the 30-day rule would commence upon receipt of a valid and complete transfer form, consistent with industry's preferred approach.
- The plan did not propose to alter the treatment of invalidity benefits paid to the self-employed. However, during the consultation period, industry expressed concern that employees invalided out of the workforce receive part of their lump sum tax free, whereas the self-employed are unable to access this concession due to the requirement for the termination of employment under current law.
- Under Simplified Superannuation , lump sum invalidity benefits paid to the self-employed would receive the same concessional tax treatment afforded to employees.
8.178 Simplified Superannuation encompasses all of the recommended options in this statement. Taken together, these options will enhance the fairness, integrity and equity of the superannuation system, and create more opportunities for individuals to work and save.
8.179 The reforms will simplify and streamline the existing superannuation system, generating substantial improvements and savings for individuals, employers, superannuation funds and the Government at the lowest cost.
Implementation and review
8.180 Simplified Superannuation will commence on 1 July 2007, with the exception of:
- abolition of compulsory withdrawal (10 May 2006);
- reduction in the pension assets-test taper rate and related changes (20 September 2007); and
- transitional cap and exemptions for non-concessional contributions (10 May 2006).
8.181 Press Release No. 093 of 5 September 2006, issued jointly by the Treasurer and the Minister for Revenue and Assistant Treasurer, announced Simplified Superannuation .
8.182 Following consultation with industry, the implementation arrangements for the treatment of excess concessional contributions were modified (see paragraphs 8.57 to 8.60). Under A Plan to Simplify and Streamline Superannuation , contributions in excess of the concessional cap would be taxed at the top marginal rate and the ATO would raise a tax assessment on the fund. However, industry expressed concern that this approach would impose significant administrative costs on funds. Under Simplified Superannuation , the additional tax payable on concessional contributions in excess of $50,000 will be levied on the individual who can then direct their fund to pay the tax. This approach will minimise compliance costs for superannuation funds.
8.183 The Government will continue to consult with peak representative bodies such as Association of Superannuation Funds of Australia and Investment and Financial Services Association regarding the implementation of Simplified Superannuation .
8.184 Simplified Superannuation will be subject to ongoing review by the administering agencies.
Improvement of self-managed superannuation fund compliance.
8.185 Since 1991 all superannuation funds, including self-managed superannuation funds, have been subject to a supervisory levy designed to fund the regulatory costs of ensuring funds comply with superannuation legislation.
8.186 This approach was confirmed as appropriate by the 1997 Financial System Inquiry which recommended that '... as far as practicable, the regulatory agencies should charge each financial entity for direct services provided, and levy sectors of industry to meet the general costs of their regulation,'
8.187 Cost recovery of general regulatory oversight continues to be considered appropriate for the entire superannuation industry. Since 1999 regulatory responsibility for superannuation funds has been split between the ATO (responsible for self-managed superannuation fund regulation) and the Australian Prudential Regulation Authority (APRA) with separate levy arrangements applying to self-managed superannuation fund and APRA regulated funds.
8.188 This statement proposes a material amendment to the cost recovery arrangements for self-managed superannuation funds to ensure that amounts collected are broadly sufficient to fund the expected ongoing costs of effective ATO regulation. Specifically, it is proposed that the existing self-managed superannuation fund supervisory levy be raised from $45 to $150.
8.189 The proposed amendment would be implemented as part of a package of reforms envisaged under Simplified Superannuation , announced by the Government on 5 September 2006. This statement is intended to be read in conjunction with the rest of the regulation impact statement for the reforms.
8.190 The ATO assumed primary responsibility for the supervision of self-managed superannuation funds in October 1999. Its regulatory role is currently exercised through the Superannuation Industry (Supervision) Act 1993 and the Superannuation Industry (Supervision) Regulations 1994 . The ATO is tasked with ensuring that self-managed superannuation fund trustees comply with their legislative obligations under this legislation. Obligations under this legislation include requirements to lodge returns, comply with rules on superannuation contributions and benefit payments, and comply with rules on superannuation investments.
8.191 Prior to 1999, the supervisory levy paid by self-managed superannuation funds was set at $200 per annum. The levy was reduced when the ATO assumed responsibility for self-managed superannuation funds, as it was considered that the $200 levy would exceed the costs of the ATO's regulation.
8.192 The current supervisory levy imposed on self-managed superannuation funds is $45 per annum. This amount has not been changed since 1999 and no longer covers the cost of the ATO's regulation of self-managed superannuation funds nor the expected costs of future regulation. The shortfall between the amount levied and the ATO's regulatory costs has, to date, been subsidised from general tax revenue.
Australian Government cost recovery policy
8.193 In December 2002, the Australian Government adopted a formal cost recovery policy to improve the consistency, transparency and accountability of its cost recovery arrangements and promote the efficient allocation of resources. Cost recovery policy is administered by the Department of Finance and Administration and outlined in the Australian Government Cost Recovery Guidelines and the Review Schedule is outlined in Finance Circular 2005/09 . Cost recovery broadly encompasses fees and charges related to the provision of Government goods and services (including regulation) to the private and other non-government sectors of the economy.
8.194 The policy applies to all Financial Management and Accountability Act 1997 agencies and to relevant Commonwealth Authorities and Companies Act 1997 bodies that have been notified, under section 28 or 43 of the Commonwealth Authorities and Companies Act 1997 , to apply the cost recovery policy. These entities are collectively referred to as 'agencies' for the purposes of the guidelines. In line with the policy, individual portfolio ministers are ultimately responsible for ensuring agencies' implementation and compliance with the cost recovery guidelines.
Policy review - analysis of activities
Description of activity
8.195 It is proposed that the current supervisory levy be increased from $45 per annum to $150 per annum to reflect the expected costs of ATO regulation. While the increased levy would take effect from the 2007-08 financial year, revenue will not be received until the 2008-09 financial year.
8.196 The process for collection of the levy would also be streamlined, by incorporating the levy into self-managed superannuation fund income tax assessments. Currently, the levy is collected by a separate process whereby the ATO issues an invoice to each self-managed superannuation fund for payment.
Analysis of costs and benefits
Self-managed superannuation funds
8.197 The increase in the supervisory levy would increase a self-managed superannuation fund's direct costs by $105 per annum. However, ATO data suggests that the annual cost of running a self-managed superannuation fund ranges from around $1,500 up to almost $12,000 for larger funds. In this context, an increase in the levy of $105 per annum would not add significantly to the running costs of a self-managed superannuation fund.
8.198 In addition to improving the effectiveness of ATO compliance activities, the increased funding will also enable the ATO to broaden its education activities which will assist self-managed superannuation fund trustees to understand their obligations and responsibilities.
8.199 The provision of additional funding would allow the ATO to broaden its self-managed superannuation fund compliance activities and more effectively ensure self-managed superannuation funds are complying with their legislative obligations. This is especially important in the context of the growing number and size of such funds.
8.200 The revenue impact of the increase in the supervisory levy is estimated to be $55 million over the forward estimates period.
|2006-07 ($m)||2007-08 ($m)||2008-09 ($m)||2009-10 ($m)||Total($m)|
|Increase in supervisory levy||-||-||+24.0||+31.0||+55.0|
8.201 It is recommended that the current supervisory levy be increased from $45 per annum to $150 per annum, to better reflect the cost of the ATO's self-managed superannuation fund supervisory activities.
Design and implementation
Basis of charging - fee or levy
8.202 Cost recovery of the ATO's self-managed superannuation fund supervisory activities through the imposition of a levy has been in place for a number of years. The levy remains the most efficient and effective mechanism for cost recovery.
Legal requirements for the imposition of charges
8.203 Supervisory levies are currently imposed on all superannuation funds, including self-managed superannuation funds. The legislative authority for imposing a levy on self-managed superannuation funds is provided by the Superannuation (Self Managed Superannuation Funds) Supervisory Levy Imposition Act 1991 .
Outline of charging structure
8.204 For simplicity, the levy will be applied at a flat rate of $150 per self-managed superannuation fund (consistent with current arrangements). The ATO will manage under-over-recoveries over the medium term. Sustained under-recoveries will be managed through an amendment to the levy to reflect the higher costs of supervision; while sustained over recoveries will be returned to the industry via reduced charges.
8.205 Detailed analysis of the ATO's costs of self-managed superannuation fund regulation was taken into consideration in identifying the appropriate levy.
8.206 The ATO would implement an ongoing monitoring process to assess the efficiency and effectiveness of levy collections. This process would reflect the Government's cost recovery guidelines and would ensure the ongoing appropriateness of the levy charged, by periodically assessing the size of the levy with the costs incurred by the ATO in discharging its self-managed superannuation fund supervisory responsibilities. This process would provide an opportunity for continual improvement of the levy collection arrangements.
8.207 This statement proposes an increase in the quantum of the existing levy to reflect necessary costs incurred to ensure effective regulation, rather than wholesale changes to the arrangements for cost recovery. As a result, consultation was not considered necessary.
8.208 The ATO will also review the levy collection arrangements and the adequacy of monitoring processes no later than 30 June 2011 to ensure the levy continues to provide appropriate cost recovery of the ATO's functions. The review will be undertaken in accordance with Australian Government cost recovery policy and a cost recovery impact statement will be prepared. The purpose of the review will be to ensure that the supervisory levy collected from self-managed superannuation funds accurately reflects the ATO's regulatory costs over the medium term.