Explanatory Memorandum
(Circulated by the authority of the Treasurer, the Hon Scott Morrison MP and Minister for Revenue and Financial Services, the Hon Kelly O'Dwyer MP)Chapter 1 - Superannuation reform package overview
Outline of chapter
1.1 The Superannuation (Objective) Bill 2016 (the Objective Bill), the Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016 (the TLA Bill) and the Superannuation (Excess Transfer Balance Tax) Imposition Bill 2016:
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- legislate the primary objective and subsidiary objectives of the superannuation system; and
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- make a number of changes to the taxation and regulation of superannuation to make the system fairer and more sustainable, and to provide more flexibility and choice.
Context of amendments
1.2 These Bills implement the Government's reforms to superannuation announced in the 2016-17 Budget and the subsequent changes announced following consultation with a wide variety of interested persons and organisations.
1.3 As Australia's population ages and fiscal pressures increase it is important that our superannuation system is used for its core purpose of providing income in retirement to substitute or supplement the age pension and not for tax minimisation and estate planning purposes.
1.4 The Government's changes will make the superannuation system fairer and more sustainable by ensuring superannuation tax concessions are well-targeted and affordable. The measures in the TLA Bill reduce access to tax concessions for the wealthiest individuals and better target tax concessions to encourage all Australians to be more self-sufficient in retirement.
1.5 These reforms also increase flexibility and choice in superannuation to support how people work and save for retirement in Australia's modern economy.
Objective of the superannuation system
1.6 Together with the age pension and private savings, savings from compulsory and voluntary contributions to superannuation are important elements of the three-pillars that underpin Australia's retirement income system. Superannuation is the second largest savings vehicle of the Australian financial sector.
1.7 Given its importance, it is essential that future superannuation policy is guided by clear objectives. To achieve this, the Government will legislate the objective of the superannuation system in the Objective Bill. Subsidiary objectives will be prescribed by regulation.
1.8 All future changes to superannuation policy will be assessed for compatibility with the primary objective and subsidiary objectives of the superannuation system.
Fairer and more sustainable superannuation
1.9 Currently, superannuation tax concessions are poorly targeted -a significant proportion go to people who will save for their retirement regardless of the concessions and who will never depend on the age pension.
1.10 To ensure the superannuation system is fairer and fiscally sustainable the Government's changes will better target tax concessions to those who most need them to save for their retirement.
1.11 The introduction of a $1.6 million transfer balance cap will limit the amount of superannuation that an individual can transfer into a tax free retirement phase interest.
1.12 Lowering both the concessional contributions cap to $25,000 and the threshold at which high income earners pay Division 293 tax on their concessionally taxed contributions to $250,000 also better targets the tax concessions.
1.13 Lowering the annual non-concessional contributions cap from $180,000 to $100,000 and restricting the ability of individuals to make non-concessional contributions to those with total superannuation savings of less than $1.6 million ensures the ability to make after-tax contributions is focused on those individuals aspiring to acquire superannuation savings up to the limit of the transfer balance cap.
1.14 The Government's changes also provide for broadly commensurate taxation treatment for members of defined benefit schemes and constitutionally protected funds.
1.15 In addition to better targeted tax concessions the Government will introduce the low income superannuation tax offset. This will ensure that most people earning $37,000 or less are not paying more tax on their superannuation than they are on their take-home income.
More choice and flexibility
1.16 The Government recognises that in Australia's modern economy the superannuation system needs to be flexible and encourage all individuals to save for their retirement, regardless of their employment circumstances. Many Australians have interrupted work patterns or irregular income as a result of the work-life choices they make.
1.17 The Government's changes will allow more individuals to claim a deduction for personal contributions they make to superannuation. This will ensure that most workers, regardless of their employment circumstances can choose to make concessional contributions up to their cap.
1.18 The introduction of catch-up arrangements will allow individuals with a total superannuation balance of less than $500,000 just before the beginning of a financial year to carry forward unused concessional contribution cap space from the five previous financial years. This will provide more flexibility for those with interrupted work patterns or irregular income to make concessional contributions to their superannuation when they have the capacity to do so.
1.19 The changes also extend the current spouse tax offset arrangements to assist more couples to support each other in accumulating superannuation.
1.20 Extending the earnings tax exemption to assets supporting deferred products will encourage the development of new retirement income products. This will ensure individuals have more choices about how to manage their consumption, and manage the risks associated with outliving their retirement savings.
Improved integrity
1.21 Australians should have confidence that the superannuation system is being used for its core purpose of providing income in retirement. A number of the changes in the TLA Bill will build this confidence.
1.22 Removing the earnings tax exemption from assets supporting transition to retirement income streams (TRIS) will encourage the use of TRIS for their intended purpose of supplementing income for workers who have reduced their hours or responsibilities as they near retirement, rather than for tax minimisation.
1.23 The integrity of the system will also be enhanced by the removal of the inconsistently applied and out-dated anti-detriment provision which serves no justifiable policy purpose.