THE HON WAYNE SWAN MP DEPUTY PRIME MINISTER TREASURER THE HON BILL SHORTEN MP MINISTER FOR EMPLOYMENT AND WORKPLACE RELATIONS

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1 THE HON WAYNE SWAN MP DEPUTY PRIME MINISTER TREASURER THE HON BILL SHORTEN MP MINISTER FOR EMPLOYMENT AND WORKPLACE RELATIONS MINISTER FOR FINANCIAL SERVICES AND SUPERANNUATION *** JOINT MEDIA RELEASE *** REFORMS TO MAKE THE SUPERANNUATION SYSTEM FAIRER The Gillard Government today announced reforms to improve the fairness, sustainability and efficiency of the superannuation system. Labor is the party of superannuation we established it, we have nurtured it and grown it, and we will protect it. Because of past and present Labor Governments, superannuation is a unique national advantage for Australia we have a system that is the envy of the world. Australians are living longer and in this context the superannuation system needs to be fair and it needs to be sustainable. The Government has already taken the historic decision to gradually increase the Superannuation Guarantee rate from 9 per cent to 12 per cent, which will provide a better standard of living in retirement for 8.4 million Australians. It means a person aged 30 today on average full-time earnings will retire with an extra $118,000 in superannuation savings. The Government has also increased the fairness of the concessions provided for superannuation.

2 The Low Income Superannuation Contribution benefits 3.6 million Australians on low and modest incomes, including 2.1 million women. It will benefit around 30 per cent of workers, who in only received around 1.2 per cent of superannuation concessions. The Superannuation Concession Reduction reduces the tax concession that people with income above $300,000 receive on their contributions from 30 per cent to 15 per cent. It will only affect around 128,000 Australians in , or 1.2 per cent of people contributing to superannuation. In , the top 1 per cent of income earners received around 9 per cent of superannuation concessions. The reforms we announce today will further improve the fairness of superannuation tax concessions. The changes we are making today will help restore the principles of the superannuation system that Labor created 20 years ago. The reforms will: Cap the tax exemption for earnings on superannuation assets supporting income streams at $100,000, with a concessional tax rate of 15 per cent applying thereafter, and apply the same treatment to defined benefit funds; Simplify the design and administration of the higher concessional contributions cap; Reform the treatment of concessional contributions in excess of the annual cap; Extend the normal deeming rules to superannuation account-based income streams; Extend concessional tax treatment to deferred lifetime annuities; and Further reform the arrangements for lost superannuation. These reforms will save around $900 million over the forward estimates period. Reforming the tax exemption for earnings on superannuation assets supporting income streams The Government will better target the tax exemption for earnings on superannuation assets supporting income streams, by capping it to the first $100,000 of future earnings for each individual. Under current arrangements, all new earnings (such as dividends and interest) on assets supporting income streams (superannuation pensions and annuities) are taxfree. This is in contrast to earnings in the accumulation phase of superannuation, which are taxed at 15 per cent. From 1 July 2014, earnings on assets supporting income streams will be tax free up to $100,000 a year for each individual. Earnings above $100,000 will be taxed at the same concessional rate of 15 per cent that applies to earnings in the accumulation phase.

3 An individual with $100,000 of tax-exempt earnings typically receives more government assistance than someone on the maximum rate of the Single Age Pension. This reform will help make the superannuation system fairer and more sustainable, and will help restore a number of the original intentions of the system. For superannuation assets earning a rate of return of 5 per cent, this reform will only affect individuals with more than $2 million in assets supporting an income stream. Treasury estimates that around 16,000 individuals will be affected by this measure in , which represents around 0.4 per cent of Australia s projected 4.1 million retirees in that year. This reform will save around $350 million over the forward estimates period. The changes build on the superannuation reforms announced in last year s Budget. The Government s Superannuation Concession Reduction for contributions by very high income earners announced in the Budget, together with this reform of earnings on assets supporting income streams, will improve the fairness and long-term sustainability of the superannuation system. These two measures combined will save over $10 billion over the next decade. Applying the same treatment to defined benefit funds The Government will ensure that members of defined benefit funds, including federal politicians, are impacted by this new reform in the same way as members of defined contribution funds (i.e. that there will be a corresponding decrease in concessions in the retirement phase). This will be achieved by calculating the notional earnings each year for defined benefit members in receipt of a concessionally-taxed superannuation pension. These calculations will be based on actuarial calculations, and will depend both on the size of the person s superannuation pension and their age. The amount of notional earnings each year will fall as a person grows older, in the same way that yearly earnings for people in defined contribution schemes fall over time as they draw down their capital. Where a person s notional yearly earnings exceed the $100,000 threshold, the amount in excess of $100,000 will be subject to tax at a rate of 15 per cent. This reform will save $6 million over the forward estimates period. Simplifying the design and administration of the higher concessional contributions cap The Government will simplify the design and administration of the proposed higher concessional contributions cap, by providing an unindexed $35,000 concessional cap to anyone who meets certain age requirements. The Government believes that it is important to allow people who have not had the benefit of the Superannuation Guarantee for their entire working lives to have the ability to contribute more to their superannuation as their retirement age approaches. Accordingly, the Government will bring forward the start date for the new higher cap

4 to 1 July 2013 for people aged 60 and over. Individuals aged 50 and over will be able to access the higher cap from the current planned start date of 1 July The general concessional cap is expected to reach $35,000 from 1 July The Government has decided not to limit the new higher cap to individuals with superannuation balances below $500,000 in light of feedback from the superannuation sector that this requirement would be difficult to administer. This reform will save $365 million over the forward estimates period. Reforming the treatment of concessional contributions in excess of the annual cap The Government will reform the system of excess contributions tax (ECT) that was introduced by the former government in 2007, to make it fairer and give individuals greater choice. Under the current arrangements, concessional contributions that are in excess of the annual cap are effectively taxed at the top marginal tax rate (46.5 per cent) rather than the normal rate of 15 per cent. This outcome is achieved through the imposition of ECT. This is a severe penalty for individuals with income below the top marginal tax rate. The Government will allow all individuals to withdraw any excess concessional contributions made from 1 July 2013 from their superannuation fund. In addition, the Government will tax excess concessional contributions at the individual s marginal tax rate, plus an interest charge to recognise that the tax on excess contributions is collected later than normal income tax. These rules will ensure that individuals are taxed on excess concessional contributions in the same way as if they had received that money as salary or wages and had chosen to make a non-concessional contribution. Treasury estimates that this reform will reduce the tax liability of around 41,000 people in , by around $1,300 on average. Around 59,000 people on the top marginal tax rate will have a slightly larger tax liability due to the interest charge. This reform will cost $55 million over the forward estimates period. Extending the normal deeming rules to superannuation account-based income streams The Government will extend the normal deeming rules to superannuation accountbased income streams for the purposes of the pension income test to ensure all financial investments are assessed fairly and under the same rules. Under the change announced today, standard pension deeming arrangements will apply to new superannuation account-based income streams assessed under the pension income test rules after 1 January All products held by pensioners before 1 January 2015 will be grandfathered indefinitely and continue to be assessed under the existing rules for the life of the

5 product so no current pensioner will be affected, unless they choose to change products. Superannuation account-based income streams are a form of investment that provide the holder with a tax-free retirement income stream and flexible access to their capital. Income from this type of investment currently receives highly concessional treatment under pension income testing arrangements compared with income from similar assets, such as dividends from shares or interest from term deposits which is subject to deeming. This inequity in the income testing rules means that pensioners with similar levels of financial assets receive different amounts of pension. This reform is a recommendation of the Pension Review and the Australia s Future Tax System Review. It is a simple and common sense extension of the normal deeming rules that will ensure a fairer and more sustainable age pension. This reform will save $158 million over the forward estimates period. Extending concessional tax treatment to deferred lifetime annuities The Government will encourage the take-up of deferred lifetime annuities (DLAs), by providing these products with the same concessional tax treatment that superannuation assets supporting income streams receive. This reform will apply from 1 July The superannuation industry has called for this reform, including at the Government s Tax Forum in October 2011 and during meetings of the Government s Superannuation Roundtable. This reform will have no financial impact over the forward estimates period. Further reforming the arrangements for lost superannuation The Government has put in place a number of initiatives through the Australian Taxation Office (ATO) to help reunite members with lost super accounts. These initiatives have proven highly successful, with the value of lost super held by funds falling by 10 per cent (from $20.2 billion to $18.1 billion) and the number of lost accounts falling by 30 per cent (from 5.0 million to 3.5 million) over the 18 months to 31 December In the Mid-Year Economic and Fiscal Outlook, the Government announced that for the first time, interest will be paid from 1 July 2013 on all lost superannuation accounts reclaimed from the ATO (at a rate equivalent to Consumer Price Index inflation). It also announced that the account balance threshold below which inactive accounts, and accounts of uncontactable members, are required to be transferred to the ATO will be increased to $2,000, to ensure they are properly protected from being eroded by fees and charges.

6 The Government will further increase the account balance threshold to $2,500 from 31 December 2015, and to $3,000 from 31 December Treasury analysis shows that: A 20-year-old with $3,000 in an inactive superannuation account will be able to claim around $3,394 from the ATO after five years, a boost to their superannuation savings of around $671 compared with what the balance would be if their account remained with their fund. A 30-year-old with $3,000 in an inactive superannuation account will be able to claim around $3,394 from the ATO after five years, a boost to their superannuation savings of around $898 compared with what the balance would be if their account remained with their fund. This measure is estimated to improve the budget position by $123 million over the forward estimates period. Council of Superannuation Custodians The Government will establish a Council of Superannuation Custodians to ensure that any future changes are consistent with an agreed Charter of Superannuation Adequacy and Sustainability. The Charter will be developed against the principles of certainty, adequacy, fairness and sustainability. The Charter will clearly outline the core objects, values and principles of the Australian superannuation system. The Council will be charged with assessing future policy against the Charter and providing a report to be tabled in Parliament. Individuals who would like more information on these reforms should call the ATO Hotline on