Taxation Laws Amendment (Superannuation) Bill 1992

Second Reading Speech

by the Minister for Industry, Technology and Commerce the Hon. John Button, MP

I move that the Bill be now read a second time.

Mr President, this Bill will amend the taxation laws in a number of respects.

The Bill will introduce many of the measures outlined in the Treasurer's 'Security in Retirement - Planning for Tomorrow Today' statement of 30 June 1992.

In that statement the Treasurer outlined how the Government's retirement incomes framework now combines three central tiers. The age pension and social security system interacts with both compulsory and voluntary superannuation arrangements, with the compulsory tier of the Superannuation Guarantee Charge operating largely through the existing tax assisted arrangements.

The statement also reaffirmed the Government's commitment, on grounds of equity and social justice, to assist lower income workers to live better in retirement through a combination of the age pension supplemented with tax assisted superannuation.

Several major initiatives were announced in the statement affecting both the voluntary and compulsory tiers of the superannuation arrangements. These measures will be introduced in this Bill. They will reinforce the existing fundamental features of the Government's retirement incomes policy.

Rebate and deduction arrangements for personal superannuation contributions

The Bill will replace the existing deduction and rebate arrangements for employees who have employer superannuation support with a new rebate.

The new rebate will be simpler and directed to low and middle income employees with employer superannuation support. The rebate will be 10% of personal superannuation contributions of up to $1,000 made to a complying superannuation fund. The maximum rebate begins to be phased out when the contributor's assessable income exceeds $27,000, and is unavailable to people whose assessable income is $31,000 or more.

The new rebate is not only simpler but also fairer than the previous arrangements. Eligibility for tax concessions is no longer dependant upon the level or type of employer superannuation support received. All taxpayers in equivalent circumstances are treated equally.

The Government recognises that the level of rebate is modest and that some employees will face reduced tax concessions on their member contributions. However, employees will benefit significantly from the other tax concessions provided for superannuation.

Firstly, rebatable contributions will not be taxed in the superannuation fund. This measure combined with the maintenance of the concessional 15% tax rate on the earnings of superannuation funds will contribute very substantially to the magnitude of end benefits received by employees in retirement. Rebatable contributions will also form part of the contributor's undeducted contributions even though the contributor has received a tax concession for them.

Secondly, the introduction of the SGC has extended access to the superannuation tax concessions to a wide range of employees. The value of these tax concessions will grow in line with increases in the prescribed minimum rate of the SGC. In this context, the cost to the Commonwealth in terms of revenue foregone in 1993-94 as a result of the introduction of the SGC is around $400 million, in contrast with savings of $230 million arising from the changes to the taxation treatment of member contributions.

The existing deduction arrangements will continue for employees without employer superannuation support and self-employed people.

The proposed amendment will apply to payments made on or after 1 July 1992.

Limits On Deductions For Superannuation Contributions

The Bill will implement proposals to limit the amount of deductions available to an employer or self employed person for contributions to a superannuation fund.

The purpose of these amendments is to restrict the amount of superannuation benefits which can be funded in a superannuation fund. These amendments will replace the existing arrangements which restrict funding through the two fund rule and the complex minimum funding standards applying to superannuation funds.

From the 1994-95 year, the total amount of deductions available to an employer for contributions to a superannuation fund for the benefit of an employee will be restricted to certain age-based limits. For the 1994-95 year, the limits will be $9,000 for an employee under 35 years of age; $25,000 for an employee between the ages of 35 to 49; and $62,000 for employees aged 50 and over.

However, if an employer has ten or more employees at all times during the year of income, the employer may elect to use a standard contribution limit. In such cases, the employer's total deductible superannuation contributions will be limited to the amount calculated by multiplying $25,000 by the least number of employees employed at all times during the year of income.

From the 1994-95 year, the maximum deduction a self-employed person can make will be the lesser of $3000 plus 75% of the amount over $3000, and the person's age-based limit.

The age-based limits and the standard contribution limit will be indexed annually.

These measures will also apply from 1 July 1994. Combined with the measure relating to Reasonable Benefit Limits they are expected to increase revenue by $20 million in 1995-96.

Reasonable Benefit Limits

The Bill introduces amendments to transfer responsibility for the administration of the reasonable benefit limits (RBL) from the Insurance and Superannuation Commissioner to the Commissioner of Taxation from 1 July 1994.

The Bill also contains measures to simplify the operation of the RBLs. From 1 July 1994 a person's RBL will be a set dollar amount. For the 1994-95 year the set dollar amounts will be $400,000 for the lump sum RBL and $800,000 for the pension RBL. These set dollar amounts will replace the existing complex calculations based on a person's highest average salary. The amounts will be indexed each year.

Transitional measures will ensure that taxpayers who already have accrued benefits that are within the existing RBL but are in excess of the proposed limits will be able to retain their entitlement (indexed to AWOTE). These transitional measures will be set out in regulations.

The Bill contains a number of other minor RBL simplification measures including the removal of the need to commute the amount of a pension or annuity which exceeds a person's RBL.

These measures apply from 1 July 1994. Combined with the measures limiting deductions for superannuation contributions they are expected to increase revenue by $20 million in 1995-96.

Taxation treatment of redundancy, early retirement and invalidity payments

Under the present law, 5% of bona fide redundancy payments, approved early retirement scheme payments and invalidity payments are taxable. There is no limit on the amount of these payments eligible for concessional tax treatment.

The Bill will provide a limit on the concessionally taxed amount of bona fide redundancy payments and approved early retirement scheme payments to avoid scope for abuse by people able to manufacture the necessary circumstances. The limits will be $4000, plus $2000 per year of completed service with the employer concerned. These amounts will be indexed in later years.

Amounts within the limit will be fully exempt from tax. They will be excluded from the definition of eligible termination payment and will not be able to be rolled over. Amounts in excess of the limit will be treated as ordinary ETPs from employers.

The Bill will also exempt the whole of an invalidity payment from taxation. However, invalidity payments will continue to form part an ETP and will be able to be rolled over.

The Bill also requires the disability of the recipient of an invalidity payment to be verified by two legally qualified medical practitioners. This measure will prevent the treatment of redundancy and early retirement scheme payments from being abused, while accommodating the vast majority of genuine arrangements.

The proposed amendments apply to payments made on or after 1 July 1994.

The proposed limit on bona fide redundancy payments and approved early retirement scheme payments will generate an indeterminate but not significant revenue gain. The exemption from tax of amounts within the limit and invalidity payments will cost $20 million in 1995-96.

Rolling over eligible termination payments

Under the present law taxpayers can elect the amount of each component of their eligible termination payment they want to roll-over. This allows taxpayers who have pre-July 83 service the ability to avoid much of the tax on the post-June 83 components of their eligible termination payment.

The Bill will remove this tax avoidance loophole. Under the new arrangements taxpayers can continue to elect the amount of their undeducted contributions and concessional components they want to roll-over. However a number of steps will need to be followed to identify the extent to which the amounts rolled-over consist of the other components.

Because of its anti avoidance nature and the ease with which this loophole can be used this measure will apply from 1 July 1992. This measure is expected to result in a small increase to tax revenue.

The Bill will also amend the income tax law to remove the current 90 day roll-over period so that benefits must be rolled-over directly from the source to the destination fund. The new arrangements will substantially reduce the administrative complexities associated with roll overs. They will also help eliminate the scope for abuse that currently exists. Direct roll-overs of benefits will also help to ensure greater amounts remain in the superannuation system by removing the temptation to 'fritter' moneys away during the roll-over period.

This measure will apply from 1 July 1994. It is expected to have an insignificant effect on the revenue.

Rebate on Superannuation Pensions and Roll-over Annuities

Annuities and well designed pensions provide a simple, certain retirement benefit. To improve the attractiveness of pensions and annuities the Bill will amend the income tax law to replace the existing complex rebate arrangements with a 15% rebate on superannuation pensions paid from taxed superannuation funds and on annuities purchased wholly with rolled-over eligible termination payments. The flat 15% rebate will mean that no tax will be payable on rebatable superannuation pensions and annuities under approximately $17300 in today's dollars.

The rebate will apply to the whole amount of the pension or annuity included in assessable income up to the maximum amount allowed under the reasonable benefit limits.

The new rebate will apply from 1 July 1994. It is expected to have an indeterminate but not significant cost in the short-term. Longer term costs could be greater if the measure is successful in encouraging greater use of pensions and annuities, with this cost offset by lower age pension outlays.

Undeducted Purchase Price

The Bill will also limit the undeducted purchase price of rebatable superannuation pensions and roll-over annuities to the recipient's post-June 1983 undeducted contributions. This will ensure consistent treatment between superannuation pensions and annuities.

The Bill amends the definition of eligible termination payment so that the unused undeducted purchase price of a commuted pension or roll-over annuity can be rolled-over direct to a roll-over fund or to another pension or annuity benefit.

These changes will apply from 1 July 1994 and are expected to have an indeterminate effect on the revenue.

Pensions and Annuities

The Bill will also introduce a definition of pension and annuity into the income tax law to ensure that allocated pensions and allocated annuities receive appropriate tax treatment. This change has no revenue implications.

Amendments to the Occupational Superannuation Standards Act

The Bill also proposes several amendments to the Occupational Superannuation Standards Act 1987. The terms "pension" and "annuity" will be defined in terms of conditions that income payments must meet to be regarded as tax concessional pensions or annuities. Furthermore, complying funds within the meaning of that Act will be restricted to providing benefits meeting those conditions.

Retired people will be given greater freedom of choice in benefit provider by an amendment to allow them to transfer benefits into superannuation funds from other superannuation funds, approved deposit funds, life assurance companies or registered organisations.

From 1 July 1994, those people considering rolling over superannuation benefits will be able to require their fund to delay payment of their benefits for up to 90 days. This amendment will complement related tax amendments which will require rollovers to be made directly from the source to the destination fund.

With the transfer of the reasonable benefit limit function to the Tax Office, the RBL provisions will be removed from the Act with effect from 1 July 1994. However transitional arrangements will permit benefits paid up to 30 June 1994 to be processed after that date in accordance with the existing rules.

Amendments to the superannuation guarantee legislation

The Bill will also make several amendments to the Superannuation Guarantee (Administration) Act 1992. The amendments will ensure that if an employer's superannuation contribution under an industrial award in place prior to 21 August 1991 is based on the earnings of a standard employee, then the earnings of the standard employee can be used to calculate the employer's requisite contribution for SGC purposes. This measure will also apply if an employer's superannuation contributions are made under a law in place prior to 21 August 1991.

The Bill also includes an amendment to exclude payments of salary or wages from the SGC where those payments are prescribed in the regulations. A complementary regulation will be made to prescribe certain categories of payments which are alternatives to Social Security payments.

These amendments will apply from 1 July 1992 and are not expected to have a significant impact on the revenue.

In addition some minor technical amendments will be made to clarify issues that have arisen since the commencement of the SGC. These amendments will generally apply from the date of introduction of the amendments.

Other Proposals

The Treasurer's 'Security in Retirement - Planning for Tomorrow Today' statement foreshadowed other amendments to the taxation laws, including amendments relating to death benefits and overseas superannuation funds. Those amendments are expected to be included in a Bill to be introduced later in these Sittings.

I present the Explanatory Memorandum which contains more detailed explanations of the provisions of the Bill.

Mr President, I commend the Bill to the Senate.