1 Superannuation fact sheets Fact sheet 01: Fact sheet 02: Fact sheet 03: Fact sheet 04: Fact sheet 05: Fact sheet 06: Fact sheet 07: Fact sheet 08: Fact sheet 09: Fact sheet 10: Fact sheet 11: Fact sheet 12: Fact sheet 13: Fact sheet 14: Fact sheet Q&A: A superannuation system that is sustainable, flexible and has integrity Introducing a $1.6 million transfer balance cap Reforming the taxation of concessional contributions A lifetime non concessional cap Changes to defined benefit schemes Supporting Australians to save for their retirement by introducing the Low Income Superannuation Tax Offset Improving access to concessional contributions Allowing catch up concessional contributions More flexibility and choice for older Australians Extending the spouse tax offset Enhancing choice in retirement income products Improve integrity of transition to retirement income streams Improving governance and transparency Women and Super Superannuation Reforms Questions and Answers
2 SUPERANNUATION FACT SHEET 01 A superannuation system that is sustainable, flexible and has integrity A prosperous Australia needs a well-targeted superannuation system that supports and encourages all Australians to save and not be dependent on the Age Pension in retirement. Better targeting superannuation tax concessions will improve the sustainability and integrity of the superannuation system. Overview of Superannuation Reforms The Government will be legislating the objective of superannuation as to provide income in retirement to substitute or supplement the Age Pension. This objective has guided these superannuation changes, and legislating it will enhance stability in the superannuation system. Sustainability The Government is better targeting tax concessions to ensure that the superannuation system is sustainable, affordable and equitable by: introducing a $1.6 million cap on the total amount of superannuation that can be transferred into retirement phase accounts; requiring those with incomes (including superannuation) greater than $250,000 to pay 30 per cent tax on their concessional contributions, up from 15 per cent, consistent with current treatment for people with incomes over $300,000; lowering the concessional contributions caps so that individuals can contribute up to $25,000 per annum pre-tax to superannuation; introducing a $500,000 lifetime cap on non concessional contributions that can be made to superannuation; and introducing a Low Income Superannuation Tax Offset to replace the Low Income Superannuation Contribution when it ends on 30 June 2017, to continue to support the accumulation of superannuation for low income earners. Flexibility Recognising that individuals have different work patterns across their lives, the Government will also improve the flexibility of the superannuation system by: allowing all Australians (under age 75) to claim a tax deduction for personal superannuation contributions made to an eligible fund, irrespective of their employment arrangements; encouraging partners to make contributions to their low income spouses superannuation by extending the eligibility for individuals to claim a tax offset for these contributions; allowing the rollover of unused concessional caps so that those with interrupted work arrangements and low superannuation balances can make catch up superannuation contributions; lifting the current regulations that restrict people aged 65 to 74 from making contributions to their superannuation; and removing barriers to innovation in the creation of retirement income products by extending the tax exemption to other products. Integrity The superannuation changes will improve the integrity of the superannuation system by reducing the extent to which it is used for tax minimisation and estate planning. The introduction of tighter caps are key elements in improving confidence that the system is being used for its core purpose. The Government will further improve the integrity of the superannuation system by: ensuring that the transition to retirement income stream scheme is fit for purpose and participants are less motivated by tax benefits; and removing the out dated anti detriment provision. Budget impact The superannuation changes in the Budget are estimated to have a fiscal increase to revenue of $2.9 billion over the forward estimates.
3 Superannuation Reforms At a Glance BEFORE AFTER TAX LIMIT OTHER TAX LIMIT OTHER CONCESSIONAL (BEFORE-TAX) CONTRIBUTIONS Include: compulsory Super Guarantee contributions; voluntary salary sacrificed contributions; and voluntary personal contributions where a tax deduction is claimed. 15% 30% if income and super >$300K refund tax if income <$37,000 $30,000 p.a ($35,000 for people 50 and over) Only the self-employed whose salary wage is less than 10% of their income can make deductible contributions. People over 65 cannot make voluntary contributions if not working. 15% 30% if income and super >$250K refund tax if income <$37,000 $25,000 p.a for everyone and allowing catch-up contributions of unused caps over 5 years for people with balances $500,000 or less. Everyone is able to claim a tax deduction for super contributions to eligible super accounts up to the cap. People aged between can continue to contribute without meeting the work test. Low Income Super Contribution Low Income Super Tax Offset NON-CONCESSIONAL (AFTER-TAX) CONTRIBUTIONS $1.4 million $1.4 million Include: contributions from take home pay; inheritances; spouse contributions; proceeds from sales of assets; and contributions above the concession limit. After-tax income no tax in fund $180,000 p.a 3 yr bring forward for people under 65. additional CGT cap for eligible small business owners. Tax offset for spouse contributions only where recipient income is less than $10,800 After-tax income no tax in fund $500,000 lifetime cap for everyone. additional CGT cap for eligible small business owners. Tax offset for spouse contributions where spouse income is less than $37,000 EARNINGS TAX IN THE ACCUMULATION ACCOUNTS 15% 15% (10% on capital gains) (10% on capital gains) EARNINGS TAX IN RETIREMENT ACCOUNTS TAX FREE no limit No limit on the size of retirement phase accounts People who have reached preservation age but are under 65 and not retired can access a transitional super income stream (TRIS) with tax free earnings. Only income streams that pay a regular income are eligible for the earnings tax exemption. TAX FREE $1.6m transfer balance limit Excess balances can be held in an accumulation account. People who have reached preservation age but are under 65 and not retired can still access a transitional super income stream (TRIS) but earnings on the amount supporting it will be taxed at 15%. Innovative new retirement income stream products will become eligible for the earnings tax exemption. BENEFITS TAX FREE Minimum draw down requirements for retirement account based pensions. People can elect to treat certain income streams (including TRIS) as lump sum payments to reduce their tax liability. TAX FREE Minimum draw down requirements for retirement account based pensions. People will no longer be able to treat super income streams (including TRIS) as lump sum payments to reduce their tax.
4 Impact of superannuation reforms on fund members IMPACT OF SUSTAINABILITY MEASURES IN ,000,000 Introduce $1.6 million balance transfer cap Number of fund members Number of fund members 14,000,000 12,000,000 Introduce lifetime non-concessional cap Number of fund members Number of fund members 12,000,000 12,000,000 12,000,000 10,000,000 10,000,000 10,000,000 8,000,000 6,000,000 Less than one per cent of fund members will be affected by the transfer balance cap. 10,000,000 8,000,000 6,000,000 8,000,000 6,000,000 Currently, less than one per cent of superannuation fund members have made contributions above this cap 8,000,000 6,000,000 4,000,000 4,000,000 4,000,000 4,000,000 2,000,000 2,000,000 2,000,000 2,000, $0 $500,000 $1,000,000 $1,500,000 $2m and above Account balance in $0 $1 to $250,000 $250,001 to $500,000 $500,001 to $750,000 $750,001 to above $1M $1,000,000 Non-concessional contributions, Lower concessional contributions caps Reduce high income super tax threshold and introduce LISTO 1,400,000 1,200,000 1,000, , ,000 Number of fund members Number of fund members 3 per cent of fund members will be affected by the lower concessional cap. 1,400,000 1,200,000 1,000, , ,000 3,000,000 2,500,000 2,000,000 1,500,000 Number of contributing fund members 21 per cent of fund members will benefit from the LISTO. Number of contributing fund members 1 per cent of fund members will be affected by the lower threshold. 3,000,000 2,500,000 2,000,000 1,500, , ,000 1,000,000 1,000, , , , , $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 $35,000 above $40,000 Concessional contributions Source: Treasury calculations based on ATO tax return data 0 0 $60,000 $120,000 $180,000 $240,000 $300,000 $360,000 above $400,000 Adjusted taxable income DISTRIBUTION OF LIFETIME TOTAL GOVERNMENT SUPPORT FOR RETIREMENT Current Policy New Policy $900,000 Net present value (2016 dollars) Net present value (2016 dollars) $900,000 $900,000 Net present value (2016 dollars) Net present value (2016 dollars) $900,000 $800,000 $800,000 $800,000 $800,000 $700,000 $700,000 $700,000 $700,000 $600,000 $600,000 $600,000 $600,000 $500,000 $500,000 $500,000 $500,000 $400,000 $400,000 $400,000 $400,000 $300,000 $300,000 $300,000 $300,000 $200,000 $200,000 $200,000 $200,000 $100,000 $100,000 $100,000 $100,000 $0 $ Age pension Contributions tax concessions Earnings tax concessions Income deciles $ $0 Age pension Contributions tax concessions Earnings tax concessions Income deciles Source: Treasury calculations Individuals are assumed to commence work in 2016 at age 30 and work until age 70, with a predicted life expectancy of 92. Accumulated superannuation benefits are invested in an account based pension and individuals are assumed to draw down their assets at the current age based minimum drawdown rates. The level of tax assistance and Age Pension entitlements are discounted by 5 per cent per annum to give a net present value in 2016 dollars. Annual incomes are calculated for each percentile based on the distribution of earners at each single year of age. Assumes no non-concessional contributions.
5 BENEFITS OF SUPERANNUATION REFORMS Introduce the Low Income Superannuation Tax Offset Introducing the Low Income Superannuation Tax Offset will increase the superannuation savings of over 3 million low income Australians, including an estimated 2 million women. The Low Income Superannuation Tax Offset will ensure that individuals with annual income less than $37,000 do not face adverse tax outcomes by making contributions to their superannuation. Improving access to concessional contributions All workers, regardless of their employment circumstances, will now have the flexibility to make concessional contributions up to the cap. This includes those who earn a small amount of their income in salary and wages, such as self-employed contractors or those without access to salary sacrifice. It is expected that this will improve the superannuation balances of 850,000 working Australians. Catch-up concessional contributions Individuals who take time out of the workforce and have lower superannuation balances will be provided with the flexibility to make catch-up superannuation contributions at times when they can afford to do so. It is expected that 230,000 people, including those with interrupted work patterns will utilise this flexibility to make additional superannuation contributions in Harmonisation of contribution rules for older Australians Older Australians, aged 65 to 74, will be provided with more flexibility to make contributions to their own or their spouses superannuation. This is expected to improve the superannuation balances of 40,000 older Australians. The income eligibility threshold to claim a tax offset for contributions made to a spouse will increase to $37,000 per annum. Extending the spouse tax offset An extra 5,000 people with low income partners are expected to receive a tax offset for helping their spouse save for retirement.
6 SUPERANNUATION FACT SHEET 02 Introducing a $1.6 million transfer balance cap The Government will introduce a $1.6 million cap on the total amount of superannuation savings that can be transferred from a concessionally-taxed accumulation account to a tax-free retirement account. This will better target tax concessions to ensure the superannuation system is sustainable, and improve confidence in the system by reducing the extent that superannuation is used for tax minimisation and estate planning. Superannuation tax concessions are intended to encourage people to save for their retirement. They are not intended to provide people with the opportunity for tax minimisation or for estate planning. As the earnings from retirement phase superannuation accounts are tax-free they are a very desirable investment choice for individuals. Limiting the amount that can be transferred into a tax free retirement account will make the superannuation system more fiscally sustainable and increase confidence that the settings are consistent with the objective of superannuation. From 1 July 2017, the Government will introduce a $1.6 million cap on the total amount of superannuation that can be transferred into a tax-free retirement account. The cap will index in $100,000 increments in line with the consumer price index, just as the Age Pension assets threshold does. Superannuation savings accumulated in excess of the cap can remain in an accumulation superannuation account, where the earnings will be taxed at 15 per cent. A proportionate method which measures the percentage of the cap previously utilised will determine how much cap space an individual has available at any single point in time. For example, if an individual has previously used up 75 per cent of their cap they will have access to 25 per cent of the current (indexed) cap Subsequent fluctuations in retirement accounts due to earnings growth or pension payments are not considered when calculating cap space. Those individuals already in retirement as at 1 July 2017 with balances in excess of $1.6 million will need to either: transfer the excess back into an accumulation superannuation account; or withdraw the excess amount from their superannuation. Individuals who breach the cap will be subject to a tax on both the amount in excess of the cap and the earnings on the excess amount. Very few people will be affected by this proposal. The average superannuation balance for a 60-year old Australian nearing retirement is $285,000 and less than one per cent of fund members will be affected by the balance cap. of the broadly commensurate treatment of members of defined benefit schemes are in Superannuation Fact Sheet 5.
7 SUPERANNUATION FACT SHEET 02 Budget impact The measure is estimated to have a fiscal gain to revenue of $2 billion over the forward estimates. Cameo - Jason Jason is 60 and plans to retire during the financial year. Jason expects he will have an accumulated superannuation balance of less than $1.6 million. This measure does not affect Jason. Cameo - Agnes Agnes, 62, retires on 1 November Her accumulated superannuation balance is $2 million. Agnes can transfer $1.6 million into a retirement income account. The remaining $400,000 can remain in an accumulation account where earnings will be taxed at 15 per cent. Alternatively, Agnes may choose to remove this excess amount from superannuation. While Agnes will not have the ability to make additional contributions into her retirement account, her balance will be allowed to fluctuate due to earnings growth or drawdown of pension payments.
8 SUPERANNUATION FACT SHEET 03 Reforming the taxation of concessional contributions The Government will lower the annual cap on concessional (pre-tax) contributions to $25,000 and reduce the income threshold above which high income individuals are required to pay 30 per cent tax on their concessional superannuation contributions commonly referred to as the Division 293 threshold to $250,000 per annum. This will better target tax concessions to ensure that the superannuation system is equitable and sustainable. The superannuation system is designed to encourage Australians to save for their retirement. This is why contributions to, and earnings on, superannuation are generally taxed at a lower rate than income outside of superannuation. However, the existing incentives disproportionately benefit high income earners both because they have more savings and because the relative discount on their marginal tax rate is greater. As high income earners will generally save for their retirement, regardless of tax incentives, these concessions are poorly targeted. From 1 July 2017, the Government will lower the annual concessional contributions cap to $25,000 for all individuals. The cap will index in line with wages growth. Until this time the existing concessional caps ($30,000 for those aged under 50 and $35,000 for those people aged 50 and over) will apply. Most Australians will not be affected by the lower cap. The median Australian worker currently makes annual concessional contributions to their superannuation of around $4,500 per year. In the lower cap will affect about three per cent of superannuation fund members. Those who are affected will have average incomes of around $210,000 and average superannuation balances of around $760,000. Additionally, the Government will reduce the income threshold, above which individuals will be required to pay an additional 15 per cent tax on their concessional contributions, from $300,000 to $250,000 per annum. The additional tax is imposed on the whole amount of the contributions, up to the concessional cap, if your salary and wages are above the threshold. Otherwise, the additional tax is only imposed on the portion of the contribution that takes you over the threshold. To be liable for a total of 30 per cent tax, a person would need to have at least $250,000 in combined income and concessional superannuation contributions. In approximately one per cent of fund members are expected to pay additional contributions tax as a result of this measure. These individuals will have an average taxable income of $266,000 and an average superannuation balance of $535,000. Existing processes for the administration of the concessional contributions caps and the imposition of the additional 15 per cent tax on contributions, including the ability to withdraw the excess from super to pay the additional liability, will be maintained. of the broadly commensurate treatment of members of defined benefit schemes are in Superannuation Fact Sheet 5. Budget impact These measures are estimated to have a fiscal gain to revenue of $2.5 billion over the forward estimates. Cameo Madeline In , Madeline earns $260,000 in salary and wages. In the same year she has concessional superannuation contributions of $30,000. Madeline s fund will pay 15 per cent tax on these contributions. Madeline will pay an additional 15 per cent tax on the $25,000 of concessional contributions resulting in these amounts effectively being taxed at 30 per cent. The $5,000 of contributions in excess of the cap will be included in Madeline s assessable income and taxed at her marginal rate. Madeline pays $1,600 income tax on her excess contribution.
9 SUPERANNUATION FACT SHEET 04 A lifetime non concessional cap From Budget night, the Government will introduce a $500,000 lifetime cap on non-concessional (post-tax) contributions. This will better target tax concessions to ensure the superannuation system is sustainable. It will also improve flexibility and strengthen confidence by reducing the extent that superannuation can be used for tax minimisation and estate planning. Non-concessional contributions are generally voluntary contributions into superannuation made out of an individual s post-tax income. Earnings on these contributions are taxed at a flat-rate of 15 per cent in accumulation accounts and then become tax free when transferred into a retirement account. Individuals can currently make non-concessional contributions of $180,000 per year (or $540,000 every three years for individuals under 65). These generous annual caps are currently used for estate planning because they provide wealthy individuals with the opportunity to contribute large sums to the concessionally taxed superannuation environment every year. From 7:30 pm (AEST) on 3 May 2016, the Government will introduce a $500,000 lifetime cap on non-concessional contributions taking into account all non-concessional contributions made since 1 July This is the date from which the Australian Taxation Office has reliable contribution records. The cap will apply to individuals aged up to 75, and will be indexed in $50,000 increments in line with wages. If an individual has exceeded the cap prior to commencement, they will be taken to have used up their lifetime cap but will not be required to take the excess out of the superannuation system. If after commencement, an individual makes contributions that cause them to exceed their cap they will be notified by the Australian Tax Office to withdraw the excess from their superannuation account. Individuals who choose not to withdraw will be subject to the current penalty arrangements. The new lifetime cap will be in addition to the special lifetime CGT exemption cap that is currently available to eligible small business owners preparing for retirement. This change is only expected to affect a small number of individuals as very few Australians make non concessional contributions of more than $500,000. In fact less than one per cent of fund members have made non-concessional contributions over $500,000 since 1 July The lifetime cap will give increased flexibility to those aged 65 to 74 who are currently limited to $180,000 per year. Non-concessional contributions made into defined benefit accounts will be included in an individual s lifetime non-concessional cap. of the broadly commensurate treatment of members of defined benefit schemes are in Superannuation Fact Sheet 5. Budget impact The measure is estimated to have a fiscal gain to revenue of $550 million over the forward estimates. Cameo Anne Anne, aged 61, is planning for her retirement. Five years ago Anne received an inheritance of $200,000 which she put into her superannuation. Anne now intends to sell her home and buy a smaller property. She is hoping to put the proceeds into her superannuation. Anne can contribute up to $300,000 more into her superannuation before she reaches her non-concessional cap. Anne s non-concessional contributions are in addition to the compulsory superannuation payments her employer makes and the additional salary sacrificed contributions she elects to make from her salary.
10 SUPERANNUATION FACT SHEET 05 Changes to defined benefit schemes The Government will make changes so that the superannuation tax reforms apply broadly commensurately to members of defined benefit schemes and constitutionally protected funds Defined benefit schemes, as compared with accumulation schemes, pay benefits based on length of service and final salary. Funded defined benefit schemes are taxed on contributions and earnings but pay tax-free benefits. Unfunded defined benefit schemes pay pensions that are taxed at the individual s marginal tax rate less a 10 per cent tax offset. Many of the superannuation tax reforms are intended to make the system more equitable and sustainable. These goals would be undermined if the tax treatment of defined benefit schemes and constitutionally protected funds were not similarly adjusted. Similar treatment for defined benefit schemes and constitutionally protected funds raises a range of different administrative issues in comparison with accumulation schemes, and most defined benefit schemes have been closed to new members for some time. From 1 July 2017, members of defined benefit schemes and constitutionally protected funds will be subject to the $250,000 threshold for the high income contributions tax (subject to current constitutional exemptions). To broadly replicate the effect of the proposed $1.6 million transfer balance cap, pension payments over $100,000 per annum paid to members of unfunded defined benefit schemes and constitutionally protected funds providing defined pensions, will continue to be taxed at full marginal rates, however the 10 per cent tax offset will be capped at $10,000 from 1 July For members of funded defined benefit schemes, 50 per cent of pension amounts over $100,000 per annum will now be taxed at the individual s marginal tax rate. Less than one per cent of defined benefit fund members in retirement phase will be affected by this change. Cameo Deepika In Deepika, a 62 year-old former public servant, receives a pension of $120,000 from her untaxed state government constitutionally protected fund. As she is aged over 60, Deepika s pension is taxed at marginal tax rates, however she is entitled to a capped offset of $10,000 against her tax liability. Prior to the changes, she would have been entitled to an offset of $12,000. Cameo Paul In Paul, a 65 year-old former academic, receives a pension of $180,000 from his funded defined benefit fund. As he is aged over 60, 50 per cent of the amount by which his pension exceeds $100,000 (that is, $40,000), will be included in his taxable income and taxed at his marginal tax rate.
11 SUPERANNUATION FACT SHEET 05 Members of defined benefit schemes will be permitted to make concessional contributions to accumulation schemes. However, the $25,000 cap will be reduced by the amount of their notional contributions. From Budget night, non-concessional contributions to defined benefit schemes made since 1 July 2007 will be included in the $500,000 lifetime cap, but will not be required to be withdrawn. If a member with a defined benefit account exceeds their lifetime non concessional contributions cap, ongoing contributions to the defined benefit account can continue but they will be required to remove an equivalent amount from any accumulation account on an annual basis if they have one. The amount that could be removed from any accumulation account will be limited to the amount of non concessional contributions made into those accounts after 1 July The Government is mindful that there may be some individuals for whom no amount of post 1 July 2007 non-concessional contributions could be available to be removed. The Government will consult on options to achieve broadly commensurate treatment for these individuals in an equitable manner. Cameo Reginald Between 1 July 2007 and 30 June 2015 Reginald made $400,000 in non-concessional contributions to an accumulation account and $100,000 in non-concessional contributions to a defined benefit account. He has reached his lifetime cap at Budget night. In Reginald makes $10,000 in non concessional contributions to his defined benefit account. Reginald has exceeded his lifetime cap by $10,000. This amount does not need to be withdrawn from his defined benefit account, but must be withdrawn from his accumulation account to avoid penalty. More broadly, the Government will consult on implementation of the superannuation tax reform measures to defined benefit schemes to avoid unintended consequences and, in particular: on the method to value defined benefit pensions and annuities for the purpose of aggregating multiple defined benefit and accumulation interests for the transfer balance cap proposal; and to determine the appropriate treatment of arrangements that have both funded and unfunded components for the transfer balance cap proposal.
12 SUPERANNUATION FACT SHEET 06 Supporting Australians to save for their retirement by introducing the Low Income Superannuation Tax Offset The Government will introduce a Low Income Superannuation Tax Offset to replace the Low Income Superannuation Contribution. This will provide continued support for the accumulation of superannuation for low income earners and ensure they do not pay more tax on their superannuation contributions than on their take-home pay. The superannuation system is designed to encourage Australians to save for their retirement. This is why superannuation is taxed at a lower rate than income outside of superannuation. However, for low income earners, the 15 per cent tax on superannuation contributions means they pay more tax on their superannuation contributions than on their other income. From 1 July 2017, the Government will introduce the Low Income Superannuation Tax Offset. This non-refundable tax offset will mean that those with an adjusted taxable income up to $37,000 will receive a refund into their superannuation account of the tax paid on their concessional superannuation contributions, up to a cap of $500. In effect, this means that most low income earners will pay no tax on their superannuation contributions. Low income earners, who are disproportionately women, will benefit from the Low Income Superannuation Tax Offset. This is important because women, on average, have lower superannuation balances than men, despite having higher life expectancies. It is expected that in around 3.3 million people (almost two-thirds of whom are women) will benefit from the Low Income Superannuation Tax Offset. The Low Income Superannuation Tax Offset will effectively avoid the situation in which low income earners would pay more tax on savings placed into superannuation than on income earned outside of superannuation. Implementation The Australian Taxation Office will determine a person s eligibility for the Low Income Superannuation Tax Offset and advise their superannuation fund annually. The fund will contribute the Low Income Superannuation Tax Offset to the member s account. The Government will consult on the implementation of the Low Income Superannuation Tax Offset. Budget impact The measure is expected to have a fiscal cost of $1.6 billion over the forward estimates. Cameo Katherine In the financial year Katherine worked part time as a nurse and earnt $35,000. Her employer made superannuation contributions of $3,325 on her behalf. Katherine is eligible for the Low Income Superannuation Tax Offset. She receives $ of Low Income Superannuation Tax Offset in her account. Katherine would have received the same amount of Low Income Superannuation Contribution.
13 SUPERANNUATION FACT SHEET 07 Improving access to concessional contributions The Government will improve the flexibility of the superannuation system so that more Australians can utilise their concessional contributions cap, by allowing anyone under 75 to claim an income tax deduction for personal superannuation contributions to an eligible fund, up to the $25,000 concessional contribution cap. Currently, an income tax deduction for personal superannuation contributions is only available to people who earn less than 10 per cent of their income from salary or wages. This means those who earn a small amount, but more than 10 per cent, of their income in salary and wages are restricted from receiving tax concessions on their retirement savings. It similarly means that some employees are prevented from fully accessing the tax concessions simply because their employer does not allow them to make pre-tax contributions through salary sacrifice. This change will allow all individuals, regardless of their employment circumstances, to make concessional superannuation contributions up to the concessional cap. Individuals who are partially self-employed and partially wage and salary earners for example contractors and individuals whose employers do not offer salary sacrifice arrangements, will benefit from these changes. From 1 July 2017, the Government will allow all Australians under 75 to claim an income tax deduction for any personal superannuation contribution into an eligible superannuation fund. These amounts will count towards the individual s concessional contributions cap, and be subject to 15 per cent contributions tax. To access the tax deduction, individuals will lodge a notice of their intention to claim the deduction with their superannuation fund or retirement savings provider. Generally, this notice will need to be lodged before they lodge their income tax return. Individuals can choose how much of their contributions to deduct. Certain untaxed and defined benefit superannuation funds will be prescribed, meaning members will not be eligible to claim a deduction for contributions to these funds. Instead, if a member wishes to claim a deduction, they may choose to make their contribution to another eligible superannuation fund. This more flexible arrangement will benefit all Australians by allowing them to utilise more of their concessional cap if they have the capacity and choose to do so. Budget impact This measure is estimated to have a fiscal cost to revenue of $1 billion over the forward estimates. Cameo Chris Chris is 31 and decides to start his own online cricket merchandise business. While he gets his business up and running he continues working part-time in an accounting firm where he earns $10,000. In his first year his business earns him $80,000. Of his $90,000 income he would like to contribute $15,000 to his superannuation account. Under current arrangements, Chris would not be eligible to claim a tax deduction for any personal contributions. While his employer allows him to salary sacrifice into superannuation, he is limited to the $10,000 he earns in salary and wages. Under the new arrangement, Chris will qualify for a tax deduction for any personal contributions that he makes (up to his concessional cap). Chris makes a $15,000 personal contribution and notifies his superannuation fund that he intends to claim a deduction. He includes the tax deduction as part of his tax return.
14 SUPERANNUATION FACT SHEET 08 Allowing catch up concessional contributions The Government will allow individuals with account balances of $500,000 or less to make catch-up superannuation contributions. This will support working Australians to build independent wealth for their retirement, and improve the flexibility of the superannuation system by enabling those with interrupted work arrangements to make catch up superannuation contributions. The annual concessional (before-tax) superannuation caps currently offer little flexibility for those who take time out of work, work part-time, or have lumpy income and therefore have periods in which they make no or limited contributions to superannuation. Women often have interrupted work patterns or work part-time, which contributes to lower, on average, superannuation account balances than men. Additionally, individuals may take time out of the workforce to undertake caring responsibilities, further studies, or due to physical or mental illness. Similarly, there is limited flexibility for those who find that they have greater disposable income later in life when some ongoing costs, such as mortgage repayments and school fees diminish. Allowing people to carry forward unused concessional cap amounts provides them with the opportunity to catch-up if they have the capacity and choose to do so. People with superannuation balances of $500,000 or less will be able to accrue additional concessional cap amounts from 1 July Individuals will be able to access their unused concessional contributions cap space on a rolling basis for a period of five years. Amounts carried forward that have not been used after five years will expire. This increased flexibility will make it easier for people with varying capacity to save and for those with interrupted work patterns, to save for retirement and benefit from the tax concessions to the same extent as those with regular income. Budget impact Allowing catch-up concessional contributions is expected to have a fiscal cost to revenue of $350 million over the forward estimates. Cameo Cassandra Cassandra is a 46-year-old earning $100,000 per year. She has a superannuation balance of $400,000. In , Cassandra has total concessional superannuation contributions of $10,000. In , Cassandra has the ability to contribute $40,000 into superannuation of which $25,000 is the amount allowed under the annual concessional cap and $15,000 is her unused amount from which has been carried forward. The full $40,000 will be taxed at 15 per cent in the superannuation fund. Prior to the changes, her amounts in excess of the annual cap would have been subject to tax at her marginal rate, resulting in a $3,600 tax liability.
15 SUPERANNUATION FACT SHEET 09 More flexibility and choice for older Australians The Government will improve the flexibility of the superannuation system by making it easier for people aged 65 to 74 to contribute to their superannuation savings by removing the aged based contribution rules. Currently, people who are aged 65 to 74 are only able to make voluntary or non-concessional superannuation contributions if they meet a work test. Additionally, people are only permitted to make contributions for a spouse aged 65 to 69 if that spouse meets a work test. If their spouse is aged 70 or over no spouse contributions can be made. These rules limit the ability of older Australians to save for their retirement and create unnecessary complexity. From 1 July 2017, the rules that limit the ability of working Australians aged under 75 to make contributions to their own or their spouse s superannuation will change. Specifically, the Government will: remove the requirement that an individual aged 65 to 74 must meet a work test before making voluntary or non-concessional contributions to superannuation; and allow individuals to make contributions to a spouse aged under 75 without the need for the spouse to meet a work test. In addition, individuals aged 65 to 74 will benefit from other changes that improve the flexibility of the superannuation system. This includes: the carry forward of any unused concessional contributions cap, on a rolling basis for up to five years, where their superannuation balance is less than $500,000; allowing non-concessional contributions, subject to a $500,000 lifetime cap; and expanding the eligibility for the 18 per cent spouse tax offset up to $540 that an individual can claim if they make a superannuation contribution for a spouse who earns less than $37,000 per annum. To ensure that superannuation is not used for tax minimisation or estate planning, older Australians will still be subject to other integrity measures such as the $1.6 million transfer balance cap and the lowered concessional contributions cap. Budget impact This measure is estimated to have a fiscal cost of $130 million over the forward estimates. Cameo Bronte Bronte is 71 and retired two years ago. She has $200,000 in her superannuation account including $80,000 in non-concessional contributions that she contributed after receiving an inheritance in As part of her retirement plan she sells her home and purchases a small townhouse, and now has $200,000 to invest. Bronte would like to use this to top up her superannuation. Under the current rules as Bronte does not meet the work test, she is prevented from using the $200,000 to top up her superannuation savings. After 1 July 2017, since Bronte has not exceeded the new $500,000 lifetime non-concessional cap, she will be able to top up her superannuation with the $200,000 she has from downsizing her home. Cameo Julia and Sam Julia is 65 and has left work to care for her father. Julia and her partner Sam decide Sam will make spouse contributions to Julia s superannuation. As there is no work restriction, Sam can make spouse contributions. If Julia s income is less than $37,000, Sam can claim an 18 per cent tax offset (up to $540 per year) on the contribution.
16 SUPERANNUATION FACT SHEET 10 Extending the spouse tax offset The Government will extend the current spouse tax offset to assist more couples to support each other in saving for retirement. This will better target superannuation tax concessions to low income earners and people with interrupted work patterns. The superannuation system offers little flexibility for those who take time out of work, work part time, or have lumpy income and therefore have periods in which they make no or limited contributions to superannuation. Many working Australians, especially women, take time out of the workforce to raise children or care for a relative. Many return to work part-time. This contributes to women having lower superannuation balances. The median superannuation balance for a woman is around 65 per cent of the median superannuation balance for a man. Although women are more likely to have interrupted work patterns, they also have a longer life expectancy than men and need higher superannuation balances to support a longer retirement. From 1 July 2017, the Government will extend the eligibility rules for claiming the tax offset for superannuation contributions partners make to their low income spouses. The current 18 per cent tax offset of up to $540 will be available for any individual, whether married or de facto, contributing to a recipient spouse whose income is up to $37,000. This is an increase from the current $10,800. As is currently the case, the offset is gradually reduced for income above this level and completely phases out at income above $40,000. In addition, the Government is making other changes to support older Australians to save for retirement, including removing aged based contribution rules. This includes allowing individuals to make contributions on behalf of their spouse who is under age 75. Budget impact This measure is estimated to have a fiscal cost of $10 million over the forward estimates. Cameo Anne and Terry Anne earns $37,500 per year. Her husband Terry wishes to make a superannuation contribution on Anne s behalf. Under the current arrangements, Terry would not be eligible for a tax offset as Anne s income is too high. There is no incentive for Terry to make a contribution on behalf of Anne. Under the new arrangements, Terry would be eligible to receive a tax offset. As Anne earns more than $37,000 per year, Terry will not receive the maximum tax offset of $540. Instead, the offset is calculated as 18 per cent of the lesser of: $3,000 reduced by every dollar over $37,000 that Anne earns, or the value of spouse contributions. For example, Terry makes $3,000 of contributions and Anne earns $500 over the $37,000 threshold. Terry receives a tax offset of $450: 18 per cent of $2,500, as this is less than the value of the spouse contributions ($3,000). If Anne were to earn more than $40,000 there would be no tax offset.
17 SUPERANNUATION FACT SHEET 11 Enhancing choice in retirement income products The Government will remove barriers to innovation in retirement income stream products by extending the tax exemption on earnings in the retirement phase to products such as deferred lifetime annuities and group self annuitisation products. This will enhance choice and flexibility for Australian retirees looking to better manage the risk of outliving their retirement savings. Current rules restrict the ability of retirement income providers to develop and bring to market new retirement income stream products. Most Australians receive income in retirement by drawing down regular amounts of superannuation from an account based pension. In doing so they ensure that earnings on these savings are not subject to tax. Other more tailored products could be made available to help individuals manage their income throughout their retirement years. These products do not currently receive the same tax treatment as account based pensions. This limits the ability of providers to competitively offer this wider range of products. This issue was highlighted in both the Financial System Inquiry and Retirement Income Streams Review which recommended that barriers to new product development be removed. From 1 July 2017, the Government will extend the tax exemption on earnings in the retirement phase to products such as deferred lifetime annuities and group self-annuitisation products. These products seek to provide individuals with income throughout their retirement regardless of how long they live. This will allow providers to offer a wider range of retirement income products which will provide more flexibility and choice for Australian retirees, and help them to better manage consumption and risk in retirement, particularly longevity risk, wherein people outlive their savings. In addition, the Government will consult on how these new products are treated under the Age Pension means test. Budget impact This measure has no impact on the Budget. Cameo Emma is a 65 year old retiree who currently draws down her account-based superannuation pension at the minimum rates to ensure her superannuation savings do not run out. Emma is energetic and healthy and would like to have the confidence that her superannuation savings will last throughout her retirement. However, as deferred and pooled income stream products do not qualify for the retirement phase earnings tax exemption these products are not widely offered in the market. Extending the retirement phase tax exemption on earnings to a wider range of products will provide Emma with more choice and flexibility. This will allow her to maintain a higher standard of living in retirement and give her peace of mind knowing she will always have a guaranteed income stream.
18 SUPERANNUATION FACT SHEET 12 Improve integrity of transition to retirement income streams The Government will remove the tax exempt status of income from assets supporting transition to retirement income streams. Individuals will also no longer be allowed to treat certain superannuation income stream payments as lump sums for tax minimisation purposes. This will improve the sustainability and integrity of the superannuation system by ensuring that transition to retirement income streams are fit-for-purpose. Transition to retirement income streams were introduced in 2005 to provide limited access to superannuation for people wanting to move towards retirement by reducing their working hours and using their superannuation to supplement their income. People can commence a transition to retirement income stream between preservation age (currently 56) 1 and age 65. Individuals in receipt of transition to retirement income streams enjoy tax-free earnings on their superannuation assets. Recipients are also able to reduce their tax liability by salary sacrificing their income (that would otherwise be taxed at their marginal tax rate) into superannuation and instead taking a superannuation income stream at a concessional tax rate. The Productivity Commission has recently found that transition to retirement income streams have increasingly been used by people for tax minimisation purposes without any reduction in work hours To ensure access to transition to retirement income streams is primarily for the purpose of substituting work income rather than tax minimisation, the tax exempt status of income from assets supporting transition to retirement income streams will be removed from 1 July Earnings from assets supporting transition to retirement income streams will now be taxed concessionally at 15 per cent. This change will apply irrespective of when the transition to retirement income stream commenced. Reducing the tax concessional nature of transition to retirement income streams will ensure they are fit for purpose and not primarily accessed for tax minimisation purposes. Further, individuals will no longer be able to treat certain superannuation income stream payments as lump sums for tax purposes, which currently makes them tax-free up to the low rate cap ($195,000). 1 An individual s preservation age depends upon their date of birth. Date of birth Preservation age (years) Before 1 July July June July June July June July June After 30 June Budget impact This measure is estimated to have a fiscal increase to revenue of $640 million over the forward estimates Cameo Sebastian Sebastian is 57 years old, earns $80,000 and has $500,000 in his superannuation account. He pays income tax on his salary and his fund pays $4,500 tax on his $30,000 earnings. Sebastian decides to reduce his work hours to spend more time with his grandchildren. He reduces his working hours by 25 per cent and has a corresponding reduction in his earnings to $60,000. He commences a transition to retirement income stream worth $20,000 per year so that he can maintain his lifestyle while working reduced hours. Currently, Sebastian pays income tax but his fund pays nothing on the earnings from his pool of superannuation savings. Under the Government s changes, while the earnings on Sebastian s superannuation assets will no longer be tax free they will still be taxed concessionally (at 15 per cent). He will still have more disposable income than without a transition to retirement income stream. This ensures he has sufficient money to maintain his lifestyle, even with reduced work hours.
19 SUPERANNUATION FACT SHEET 13 Improving governance and transparency The Government is strengthening the governance, transparency, competition and efficiency of the superannuation system through a wide range of existing initiatives. These reforms will improve performance and confidence in the system, encouraging increased saving for retirement. The Financial System Inquiry (FSI) noted that there is a lack of consumer driven competition in superannuation. It is estimated that around two-thirds of employees play no active role in selecting their superannuation fund. For many, choice of fund is limited by law. Nearly half of superannuation fund members have more than one account and nearly 20 per cent have three or more accounts. This can result in duplication of fees for fund members, reducing retirement incomes. Many superannuation fund members don t know the fees they pay and don t know the return their fund makes. The Government has begun to introduce a broad set of initiatives to improve efficiency, enhance transparency and increase competition in superannuation. These initiatives will help empower consumers, improve after-fee returns, grow superannuation balances and improve retirement incomes. Initiatives to enhance transparency include: providing a new choice product dashboard to allow consumers to compare superannuation products more easily; requiring superannuation funds to disclose where funds are being invested; and allowing superannuation funds to provide retirement income projections on member statements where the superannuation fund determines this to be practical and cost effective. We are also improving efficiency in various ways. Australians can use mygov to find and consolidate their superannuation accounts easily. In , around 200,000 people consolidated approximately 440,000 superannuation accounts holding just under $2 billion. SuperMatch2 is automating and streamlining existing processes between funds and the Australian Taxation Office (ATO) to facilitate reunification and consolidation of accounts. Pre-filled superannuation choice forms on mygov will enable Australians to retain the same superannuation account easily when they change jobs. The Government is removing impediments to Eligible Rollover Funds proactively reuniting amounts they hold with active superannuation accounts. Legislation requiring a minimum of one-third independent directors, including an independent chair, on superannuation trustee boards is expected to lead to more efficient decision making for the benefit of members. Government initiatives are helping to boost competition. Legislation has been introduced to extend choice of fund. Once this is passed, up to 800,000 more employees will be able to choose where their employer s superannuation guarantee contributions are paid, which will increase competition and reduce the need for multiple accounts. The Productivity Commission review of competition and efficiency of the superannuation system will explore concerns about the lack of consumer-driven competition in superannuation. The Government recognises that more can be done for those who do not choose their superannuation fund. The Government plans to improve the quality and integrity of MySuper products, helping to provide better default products.