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 13 - Statement of Compatibility with Objective of Superannuation
Prepared in accordance with section 6 of the Superannuation (Objective) Bill 2016
Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016
13.1 The Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016 (TLA Bill) is compatible with the primary objective of the superannuation system as set out in subsection 5(1) of the Superannuation (Objective) Bill 2016 and with the subsidiary objectives of the superannuation system.
Overview of the Bill
13.2 The TLA Bill contains a package of superannuation reforms that will improve the sustainability, flexibility and integrity of the superannuation system.
13.3 The TLA Bill is compatible with the primary objective of the superannuation system, which is to provide income in retirement to substitute or supplement the age pension. The TLA Bill is also compatible with the subsidiary objectives of the superannuation system, which are to:
- facilitate consumption smoothing over the course of an individual's life;
- manage risks in retirement;
- be invested in the best interests of superannuation fund members;
- alleviate fiscal pressures on Government from the retirement income system; and
- be simple, efficient and provide safeguards.
13.4 The superannuation reforms increase the ability of many Australians to improve their superannuation savings, which will increase their income in retirement. While some measures place limits on the amount of contributions that can be made to superannuation or that will receive tax-free status, these measures target superannuation tax concessions to ensure they are fiscally sustainable, consistent with the subsidiary objective of alleviating fiscal pressure on Government from the retirement income system.
13.5 In 2017-18, 96 per cent of superannuation account holders will not be adversely affected by these measures. The majority of the four per cent of individuals that are adversely affected by these changes are unlikely to rely on the age pension in retirement. Around a quarter of fund members (including many low income earners) will benefit from the Government's superannuation package.
13.6 The TLA Bill's sustainability measures improve the targeting of the superannuation tax concessions to those who need incentives to save. In particular the measures:
- introduce a $1.6 million superannuation transfer balance cap that will limit the amount of superannuation that can be transferred into the tax-free retirement phase;
- lower the annual concessional contributions cap to $25,000;
- lower the annual non-concessional cap to $100,000 for those with a total superannuation balance below $1.6 million;
- reduce the threshold at which high-income earners pay additional tax (Division 293 tax) on their concessionally taxed contributions to superannuation from $300,000 to $250,000; and
- introduce the Low Income Superannuation Tax Offset (LISTO).
13.7 The sustainability measures in the TLA Bill target superannuation tax concessions to those who need them most and where they will be most effective at increasing self-sufficiency in retirement. They will ensure that the tax concessions continue to encourage saving for retirement, thereby increasing income in retirement and reducing the reliance on the age pension. The measures limit the ability for wealthy individuals to use the tax concessions for tax minimisation and estate planning purposes.
13.8 These changes continue to facilitate consumption smoothing over an individual's lifetime, by allowing individuals to save over their working lives to provide income in retirement. The LISTO will help to increase the superannuation savings of many low income earners by effectively refunding the tax paid on their concessional contributions. While the transfer balance cap places a limit on the amount of superannuation that will benefit from tax-free earnings, the $1.6 million cap can support an income stream of around four times the level of the single age pension. Superannuation savings of this magnitude also allow individuals to manage risks in retirement, including reducing the chance of outliving their savings.
13.9 Targeting the tax concessions for superannuation will improve the sustainability of the concessions, and therefore reduce fiscal pressure on the Government from the retirement income system.
13.10 While the measures do involve some complexity, this is necessary to target tax concessions. This includes the transfer balance cap and the eligibility tests for the catch-up concessional contributions and non-concessional contributions measures. The transfer balance cap approach to limiting access to the retirement phase earnings tax exemption is less complex than alternative options to achieve similar policy outcomes. The ATO will provide appropriate interpretive guidance, fact sheets and information to help members and funds manage their obligations.
13.11 The flexibility measures in the TLA Bill will improve the superannuation system settings to reflect modern work patterns which vary across people's lives and provide greater choice for retirees in retirement.
13.12 In particular, the measures:
- allow more people to claim a tax deduction for superannuation contributions up to the concessional cap irrespective of their employment arrangements;
- allow unused concessional cap amounts to be carried forward so that those with interrupted work arrangements, variable incomes, and low superannuation balances can make 'catch up' superannuation contributions;
- extend access to the low income spouse superannuation tax offset; and
- encourage product innovation by extending the tax exemption on earnings in the retirement phase to deferred products such as deferred lifetime annuities and group self-annuities.
13.13 These measures will increase flexibility and choice for individuals, which will allow them to increase their superannuation savings and assist them to manage their risks in retirement.
13.14 Extending the tax exemption on earnings in the retirement phase of deferred products aims to remove barriers to innovative new retirement products, including deferred lifetime annuities and group self-annuities. These products will help people manage their consumption and risks in retirement, in particular longevity risk, so they do not outlive their savings and potentially increase the standard of living they can enjoy in retirement.
13.15 Extending the tax deduction for personal contributions and allowing catch-up concessional contributions will improve access to concessional contributions for many Australians, increasing the fairness of the superannuation tax concessions and increasing the ability to smooth consumption over the course of the person's life through increasing their superannuation savings.
13.16 The flexibility measures do have a fiscal cost for Government. However, the measures provide individuals with more opportunities to save through superannuation, increasing their self-sufficiency and reducing reliance on the age pension thereby alleviating fiscal pressure on the Government in the future. In addition, the package as a whole reduces the cost of the tax concessions provided to the superannuation system.
13.17 Extending the tax deduction for personal contributions and tax exemption for deferred products reduce complexity. While allowing carry forward of unused concessional contributions cap amounts does involve some complexity, this reflects elements that ensure that the measure is appropriately targeted. The ATO will provide appropriate interpretive guidance, fact sheet and information to help members and funds manage their obligations.
13.18 The integrity measures in the TLA Bill reduce the extent to which the superannuation system is used for tax minimisation and estate planning. The measures build on the sustainability measures to improve confidence that the superannuation system is being used for the primary purpose of providing income in retirement to substitute or supplement the age pension.
13.19 In particular, the measures:
- encourage individuals to use transition to retirement income streams for their intended purpose, rather than tax minimisation;
- remove the inconsistently applied and outdated anti-detriment provision;
- streamline some of the ATO's administrative processes (single notices, release authorities and end benefit cap calculations); and
- ensure that the objection rights that apply to discretionary decisions made by the Commissioner in respect of non-concessional contributions align with the objection rights that apply to discretionary decisions in respect of concessional contributions, as a matter of procedural fairness.
13.20 The measures will alleviate fiscal pressure on the Government by ensuring the tax concessions provided by the superannuation system are used for their intended purpose without impeding individuals' ability to save for their retirement or draw down their savings in retirement.
13.21 Individuals will still be able to access transition to retirement income streams as a means of supplementing their income as they move towards retirement and reduce their working hours. However, earnings in relation to these income streams will receive the same tax treatment as applied to earnings on accumulation accounts for individuals who are still working, improving the integrity of the superannuation system.
13.22 The removal of the anti-detriment provision simplifies the law by removing a transitional provision that is no longer warranted and is inconsistently applied.
13.23 The measures that streamline the ATO's administrative processes reduce the compliance burden on taxpayers and superannuation providers and improve efficiency in the superannuation system.
13.24 The measures in the TLA Bill improve the sustainability, flexibility and integrity of the superannuation system. The measures better target superannuation tax concessions to those who need them most, enhance flexibility and choice in saving for retirement and managing income in retirement, and improve the integrity of the superannuation system (see diagram below). This is consistent with the primary objective of the superannuation system, which is to provide income in retirement to substitute or supplement the age pension.
13.25 The measures are also compatible with the subsidiary objectives of the superannuation system. The measures increase the ability of many people to facilitate consumption smoothing over their lifetime and improve their superannuation savings. The measures as a whole also alleviate fiscal pressures on government from the retirement income system by better targeting the tax concessions and increasing superannuation savings which ultimately reduce reliance on the age pension, though a number of the flexibility measures do have a fiscal cost. Removing barriers to innovative new products will also increase the ability of members to manage risks in retirement. While a number of the measures do involve complexity, this arises from the need to target assistance and tax concessions, to manage fiscal costs. The measures also do not raise concerns in relation to being inconsistent with the best interest of members.
Diagram 13.1 : Bill's superannuation reform and the objective of superannuation