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Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016 [and] Superannuation (Excess Transfer Balance Tax) Imposition Bill 2016



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ISSN 1328-8091

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BILLS DIGEST NO. 45, 2016-17 23 NOVEMBER 2016

Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016 [and] Superannuation (Excess Transfer Balance Tax) Imposition Bill 2016 Kai Swoboda Economics Section

Contents

The Bills Digest at a glance ................................................... 4

Purpose and structure of the Bills ........................................ 6

Background ......................................................................... 7

Overview of superannuation tax arrangements ..................... 7

Existing arrangements ........................................................... 7

Recent changes ..................................................................... 7

Policy development ................................................................. 8

2016-17 Budget announcement ........................................... 8

2016 election policy and policy adjustment .......................... 9

Treasury consultation .......................................................... 10

Emergence of concerns ......................................................... 10

Sustainability ......................................................................... 10

Value of superannuation tax concessions ........................... 10

Impact of an ageing population .......................................... 11

Fairness .................................................................................. 11

Rudd/Gillard Governments ................................................. 11

Abbott Government ............................................................ 13

Turnbull Government ........................................................ 14

Key superannuation figures and information ...................... 15

Value of superannuation savings .......................................... 15

The importance of superannuation for household savings ................................................................................... 16

Individual superannuation savings and contributions .......... 16

Committee consideration .................................................. 19

Date introduced: 9 November 2016

House: House of Representatives

Portfolio: Treasury

Commencement: Various dates as set out in the body of this Bills Digest

Links: The links to the Bills, their Explanatory Memoranda and second reading speeches can be found on the home pages for the Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016 and the Superannuation (Excess Transfer Balance Tax) Imposition Bill 2016, or through the Australian Parliament website.

When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the Federal Register of Legislation website.

All hyperlinks in this Bills Digest are correct as at

November 2016.

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Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016 [and] Superannuation (Excess Transfer Balance Tax) Imposition Bill 2016 2

Senate Economics Committee ............................................... 19

Senate Standing Committee for the Scrutiny of Bills ............ 19

Policy position of non-government parties/independents ... 20

Australian Labor Party ........................................................... 20

2015 announcement ........................................................... 20

Subsequent August announcement .................................... 20

Subsequent November announcement .............................. 21

Other parties and independents ........................................... 21

Australian Greens ................................................................ 21

Liberal Democrats ............................................................... 22

One Nation .......................................................................... 22

Nick Xenophon Team .......................................................... 22

Which elements of the package have bipartisan support? ................................................................................ 22

Position of major interest groups ....................................... 23

Superannuation industry groups ........................................... 23

Professional bodies ................................................................ 26

Thinktanks/research groups .................................................. 27

Other groups.......................................................................... 28

Financial implications ........................................................ 29

Statement of Compatibility with Human Rights .................. 30

Key issues and provisions................................................... 30

How many people are affected by the proposed changes? ................................................................................ 30

Schedule 1—Transfer balance cap ........................................ 31

Commencement .................................................................. 31

Key provisions...................................................................... 31

Is a $1.6 million cap too high, too low, or about right? ...... 32

Application to defined benefit fund members .................... 33

Certain factors given special treatment in relation to the $1.6 million cap ............................................................. 33

Schedule 2—Concessional superannuation contributions and income threshold for the imposition of an additional 15 per cent contributions tax ................................................ 34

Commencement .................................................................. 34

Key provisions...................................................................... 34

Concessional contributions cap ........................................... 34

Lower the income threshold for the imposition of an additional 15 per cent contributions tax from $300,000 to $250,000 ......................................................... 36

Table 3: Tax assessments for taxpayers liable for the additional 15 per cent tax on concessional contributions, 2013-14 to 2015-16 .................................... 37

Schedule 3—Non-concessional contributions ....................... 37

Commencement .................................................................. 37

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Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016 [and] Superannuation (Excess Transfer Balance Tax) Imposition Bill 2016 3

Key provisions...................................................................... 37

Schedule 4—Low income superannuation tax offset ............ 38

Commencement .................................................................. 38

Key provisions...................................................................... 38

Schedule 5—Deducting personal contributions .................... 39

Commencement .................................................................. 39

Key provisions...................................................................... 39

Schedule 6—Unused concessional cap carry forward .......... 40

Commencement .................................................................. 40

Key provisions...................................................................... 40

Schedule 7—Tax offsets for spouse contributions ................ 40

Commencement .................................................................. 40

Key provisions...................................................................... 40

Schedule 8—Innovative income streams and integrity ......... 41

Commencement .................................................................. 41

Key provisions...................................................................... 41

Remove the earnings tax exemption in respect to transition to retirement income streams ............................ 41

Extend the earnings tax exemption to new ‘lifetime’ products .............................................................................. 42

Schedule 9—Anti-detriment provisions ................................ 43

Commencement .................................................................. 43

Key provisions...................................................................... 43

Schedule 11—Dictionary ....................................................... 43

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Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016 [and] Superannuation (Excess Transfer Balance Tax) Imposition Bill 2016 4

The Bills Digest at a glance

Suite of legislation

The Government has introduced three Bills as part of a suite of legislation:

 Treasury laws Amendment (Fair and Sustainable Superannuation) Bill 2016.

 Superannuation (Excess Transfer Balance Tax) Imposition Bill 2016.

 Superannuation (Objective) Bill 2016.

This Bills Digest deals with only the first two of those three Bills. The third Bill is the subject of a separate Bills Digest.

Purpose of the Bills

 The Bills include amendments to various tax and superannuation laws to implement most of the elements included in the Government’s 2016-17 Budget ‘Superannuation Reform Package’, as modified by the Government in September 2016.

Measures included in the Bills

 The Bills include the necessary amendments to implement most of the key measures as outlined in September 2016, including providing for an indexed $1.6 million cap on tax-free earnings on superannuation earnings, reducing contributions caps to limit monies paid into superannuation, reimbursing tax paid on superannuation contributions by low income earners and increasing tax rates on superannuation contributions for higher income earners.

Policy rationale

 The Government uses a number of different arguments to support the introduction of the measures. These include improving ‘fairness’, ‘sustainability’, ‘flexibility’ and ‘integrity’.

 The broader backdrop to the package of measures is to provide savings to improve the budget position.

Policy position of non-government parties

 The ALP supports many elements of the package of measures and has proposed amendments to several measures. The ALP opposes two measures relating to removing restrictions to allow all individuals up to the age of 75 to claim an income tax deduction for contributions and allowing catch-up concessional contributions for individuals. That said, the ALP has indicated that it will ‘facilitate’ the passage of the Bills through the Parliament.

 It is unclear what the position of other parties and independents will be on the Bills.

Stakeholder views

 The package of measures has the broad support of superannuation industry groups, although certain elements, such as the lower concessional contributions caps, are opposed by some industry groups.

Key issues

 Issues relating to ‘fairness’ and ‘sustainability’ of superannuation tax concessions have been on the policy agenda for a number of years. The proposed measure to cap tax-free earnings on superannuation at a balance of $1.6 million and to limit other superannuation contributions using this balance provides a basis for reducing the tax concession available to higher income earners.

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Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016 [and] Superannuation (Excess Transfer Balance Tax) Imposition Bill 2016 5

 This Digest includes discussion of schedules of the Bill for which analysis had been completed at the time of publication. An updated Bills Digest that includes those schedules not analysed here, may be provided at a later date.

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Purpose and structure of the Bills The purpose of the suite of Bills is to implement the Government’s 2016-17 ‘Superannuation Reform Package’ of measures, as modified by the Government in September 2016. Most of the amendments apply to the Income Tax Assessment Act 1997 (ITAA 1997).

The Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016 (the main Bill) includes the amendments to implement the following measures:

• impose a $1.6 million transfer balance cap on the amount of superannuation capital, to be indexed in $100,000 increments, that can be transferred to the tax-free earnings retirement phase of superannuation (Schedule 1)

• reduce the annual concessional contributions cap to $25,000, to be indexed in $2,500 increments (Schedule 2)

• lower the income threshold at which an additional 15 per cent tax applies on concessional superannuation contributions to $250,000 (Schedule 2)

• lower the non-concessional contributions cap to four times the concessional cap (initially $100,000) (Schedule 3)

• refund superannuation contributions tax paid by lower income earners through the low income superannuation tax offset (Schedule 4)

• remove the requirement that an individual must earn less than ten per cent of their income from employment-related activities to be able to deduct a personal contribution to superannuation and make it a concessional contribution (Schedule 5)

• allow for catch-up concessional contributions by allowing individuals to carry forward unused concessional contribution amounts from the previous five years if they have a total superannuation balance of $500,000 or less (Schedule 6)

• increase the income threshold for the spouse of a taxpayer from $13,800 to $40,000 at which the taxpayer can claim a tax offset of up to $540 per year for superannuation contributions made on behalf of their spouse (Schedule 7)

• remove the tax exemption for transition to retirement income streams and remove tax barriers to the development of income stream products such as deferred lifetime annuities (Schedule 8)

• remove the so-called ‘anti detriment’ provisions which allow an income tax deduction on some lump sums paid because of the death of a member for the benefit of their spouse, former spouse or child, to compensate them for income tax paid by the fund in respect of contributions made for the member during their lifetime (Schedule 9)

• change a number of administrative processes relating to the payment of amounts to the Commissioner of Taxation by superannuation funds relating to certain superannuation fund members (Schedule 10).

Schedule 11 of the main Bill inserts a number of key definitions into the ITAA 1997 that relate to the measures.

The purpose of the Superannuation (Excess Transfer Balance Tax) Imposition Bill 2016 is to specify the tax rate (15 per cent or 30 per cent) that applies to earnings on amounts that exceed an individual’s transfer balance cap.1

This Bills Digest does not provide any commentary or analysis in relation to the Superannuation (Objective) Bill 2016, which is discussed in the Explanatory Memorandum for the suite of Bills. The Superannuation (Objective) Bill 2016 will be covered in a separate Bills Digest.

1. A separate Bill is required for imposition of tax as section 55 of the Constitution requires that ‘laws imposing taxation shall deal only with the imposition of taxation and any provision therein dealing with any other matter shall be of no effect.’

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Background Overview of superannuation tax arrangements

Existing arrangements The broad approach to the taxation of superannuation in Australia is for a 15 per cent tax to be applied to certain contributions, a 15 per cent tax to be applied to earnings within the fund and for superannuation benefits to be tax-free from the age of 60. This approach to taxation is supported by arrangements that limit contributions by employers, individuals (pre- and post-tax) and the conditions under which superannuation can be accessed, such as the age at which superannuation can be withdrawn (the ‘preservation age’).

The existing tax treatment for accumulation funds—the more common type of arrangement where the final benefit to an individual is related to contributions to the fund and investment earnings of the fund—and the limits on contributions are outlined in Figure 1.

Figure 1: Tax treatment of superannuation savings: accumulation funds

Source: Australian Government, Re:think: tax discussion paper: better tax system, better Australia, The Treasury, Canberra, 30 March 2015, p. 69.

Recent changes The existing arrangements have broadly been in place since July 2007. That said, changes have been made over the past decade, mostly under the Rudd-Gillard-Rudd Governments, to tax arrangements and the framework influencing superannuation contributions, including:

• a reduction in concessional caps (which are also linked to non-concessional caps as these are set at six times the value of concessional caps) from $50,000 for those aged less than 50 and $100,000 for those aged more than 50 for the 2007-08 financial year to a uniform $25,000 for all ages in 2012-13. This amount was then increased and age differentiation re-introduced to be $30,000 for those aged less than 49 and $35,000 for those aged 49 or more in the 2016-17 financial year2

• the introduction of the low income superannuation contribution (LISC) from the 2012-13 financial year to effectively reimburse into a superannuation fund the 15 per cent contributions tax paid by those on an

2. Australian Taxation Office (ATO), ‘Concessional contributions caps’, ATO website, last modified 7 September 2016. Additional information on changes to contributions caps is included in the Bills Digest prepared for the increase in the cap to $35,000 for those aged 50 or more from 1 July 2014. See: K Swoboda, Tax and Superannuation Laws Amendment (Increased Concessional Contributions Cap and Other Measures) Bill 2013 [and] Superannuation (Sustaining the Superannuation Contribution Concession) Imposition Bill 2013, Bills digest, 144, 2012-13, Parliamentary Library, Canberra, 18 June 2013.

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Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016 [and] Superannuation (Excess Transfer Balance Tax) Imposition Bill 2016 8

annual income of $37,000 or less.3 The LISC is legislated to be abolished after the end of the 2016-17 financial year4

• the introduction of an additional 15 per cent contributions tax from the 2012-13 financial year for individuals earning above a $300,000 income threshold5

• the scaling back of the government co-contribution (a government contribution to the superannuation fund of eligible low income earners who make undeducted personal contributions), from a maximum co-contribution of $1,500 and to a lower income threshold of $28,000 in 2004-05 to a maximum of $500 at a lower income threshold of $36,021 for 2016-176

• an increase in the employer contribution rate under the superannuation guarantee scheme from nine per cent in 2012-13 to 9.5 per cent over the period 2014-15 to 2020-21 and then progressively increasing to 12 per cent by 2025-26.7

In general terms, these changes have provided some additional support for lower income earners and reduced, to some extent, the ability of higher income earners to make additional superannuation contributions.

Policy development

2016-17 Budget announcement The measures included in the suite of Bills were announced by the Government as part of the 2016-17 Budget. The ten separate measures—packaged together under the title ‘Superannuation Reform Package’—can be broadly characterised into three categories: those that limit tax concessions for higher income earners or those individuals with high superannuation balances; those that support the ‘integrity’ of superannuation tax concessions; and measures that support low income earners or provide greater flexibility to make additional contributions for those who have been unable to do so. The measures comprised:

• measures impacting on higher income earners and those with a capacity to make additional contributions

- introduce a $1.6 million cap on superannuation balances to limit tax-free investment earnings for those in the pension phase - introduce a lifetime cap of $500,000 for non-concessional superannuation contributions - apply a 30 per cent tax on contributions for those earning $250,000 or more (current threshold $300,000)

and reduce the concessional contributions cap to $25,000 (currently $35,000 for those aged 49 and over and $30,000 for those aged less than 49) • 'integrity' measures

- remove the anti-detriment provision in respect of death benefits from superannuation. This essentially provided for a refund of contributions tax paid in certain circumstances - remove the tax exemption on earnings of assets supporting Transition to Retirement Income Streams, which allows a tax-free drawdown from superannuation whilst continuing to work • measures supporting low income earners or allowing for limited additional or more flexible contributions

arrangements

3. ATO, ‘Low income superannuation contribution’, ATO website, last modified 1 September 2016. 4. Additional information on the LISC, including its discontinuation after the 2016-17 financial year is included in the Bills Digest relating to the repeal of the minerals resource rent tax. See: K Swoboda, Minerals Resource Rent Tax Repeal and Other Measures Bill 2013, Bills digest, 27, 2013-14, Parliamentary Library, Canberra, 9 December 2013.

5. ATO, ‘Division 293 tax - information for individuals’, ATO website, last modified 14 November 2016. Additional information on the additional 15 per cent contributions tax for those above a $300,000 annual income threshold is included in the Bills Digest prepared for the increase in the cap to $35,000 for those aged 50 or more from 1 July 2014. See: Swoboda, Tax and Superannuation Laws Amendment (Increased Concessional Contributions Cap and Other Measures) Bill 2013 [and] Superannuation (Sustaining the Superannuation Contribution Concession) Imposition Bill 2013, Bills digest, op. cit.

6. ATO, ‘Eligibility for the super co-contribution’, ATO website, last modified 1 September 2016. Additional information on changes to the superannuation co-contribution arrangements is included in the Bills Digest prepared for changes made in 2013 to reduce the maximum co-contribution amount from $1,000 to $500. See: K Swoboda and J Chowns, Tax and Superannuation Laws Amendment (2013 Measures No. 2) Bill 2013, Bills digest, 137, 2012-13, Parliamentary Library, Canberra, 13 June 2013.

7. ATO, ‘Super guarantee percentage’, ATO website, last modified 7 September 2016. Additional information on the progressive increase in the superannuation guarantee rate is included in the Bills Digest prepared for the repeal of the minerals resource rent tax. See: Swoboda, Minerals Resource Rent Tax Repeal and Other Measures Bill 2013, Bills digest, op. cit.

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Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016 [and] Superannuation (Excess Transfer Balance Tax) Imposition Bill 2016 9

- introduce the Low Income Superannuation Tax Offset to essentially continue the existing Low Income Superannuation Contribution scheme that compensates low income earners for the 15 per cent contributions tax for those earning less than $37,000

- allow catch-up concessional contributions for individuals with unused amounts within their annual concessional contributions cap for those with a superannuation balance of less than $500,000 - remove restrictions for those aged 65 to 74 from making superannuation contributions - raise the threshold for the low income spouse contributions threshold from $10,800 to $37,000 - remove restrictions to allow all individuals up to the age of 75 to claim an income tax deduction for

contributions.8 The main policy rationale for the introduction of the package was to better target the existing tax concessions within the context of broader budget ‘repair’. The Treasurer, Scott Morrison, noted in his budget speech:

Together with raising your children and owning your own home, becoming financially independent in retirement, is one of life’s great challenges and achievements.

We need to ensure that our superannuation system is focussed on sustainably supporting those most at risk of being dependent on an Age Pension in their retirement, which is the purpose of these concessions. 9

2016 election policy and policy adjustment During the 2016 election campaign and following the election, the Government was reportedly under pressure from some of its own members to make changes to some elements of the package, particularly the backdated commencement of the $500,000 lifetime cap on non-concessional contributions.10

On 3 June 2016, the Prime Minister was asked whether the measures as announced at the 2016-17 Budget were ‘ironclad’. In response, the Prime Minister noted:

[The superannuation policy as detailed in the May 3 budget] is absolutely ironclad. Yes, the commitment[s] that we have made in the budget are our policy. If we are returned we’ll implement those policies. I believe they are fair. They make the super system, more flexible and more sustainable. The big beneficiaries are people on lower incomes earning up to $37,000 who won’t pay tax on their super, women who are out - this applies to men of course but it mostly applies to women in practise - people who are out of the workforce for up to five years, they can roll over their concessional entitlements, concessional contribution caps if you like, and double up on them for five years to catch up. That’s good for flexibility, particularly good for women. Older people who currently can’t contribute to super on a concessional basis after 65 will be able to now, until they’re 75 because obviously many people in that age bracket continue to work. Independent contractors will be able to contribute in the same way that employees can. So that’s made it a much fairer, and more flexible, and sustainable system.

11

On 15 September 2016, the Treasurer announced ‘improvements’ to the 2016-17 Budget superannuation measures.12 Changes to the package included:

• replacing the $500,000 lifetime non-concessional cap with a reduction in the existing annual non-concessional contributions cap from $180,000 per year to $100,000 per year

• individuals with a superannuation balance of more than $1.6 million will no longer be eligible to make non-concessional (after tax) contributions from 1 July 2017. This limit will be tied and indexed to the transfer balance cap

• not proceeding with the harmonisation of contribution rules for those aged 65 to 74, and

• the commencement date of the proposed catch-up concessional superannuation contributions will be deferred by 12 months to 1 July 2018.13

8. Australian Government, Budget measure: budget paper no. 2: 2016-17, pp. 24-30. 9. S Morrison, ‘Second reading speech: Appropriation Bill (No. 1) 2016-2017’ House of Representatives, Debates, 3 May 2016, p. 4258. 10. G Chan, ‘Coalition backbenchers seek change to super proposal which could cut savings’, The Guardian, 23 August 2016 11. M Turnbull (Prime Minister), Interview with David Penberthy and Will Goodings: 1395 FiveAA, Adelaide, South Australia, transcript,

3 June 2016. 12. S Morrison (Treasurer) and K O’Dwyer (Minister for Revenue and Financial Services), Even fairer, more flexible and sustainable superannuation, joint media release, 15 September 2016.

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Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016 [and] Superannuation (Excess Transfer Balance Tax) Imposition Bill 2016 10

In the press conference announcing these changes, the Treasurer responded to questions about the ‘ironclad’ nature of the 2016-17 package of measures, noting:

What I accept is that when you're in Government, you have to solve problems, you have to work issues and you have to get to conclusions and that's what we've done today. But importantly, what we took to the Australian people was to make superannuation fairer, more flexible, to improve its integrity and to make it more sustainable and make sure it contributes to the budget task. And we've done all of that. What we've done today is not just to take a hard issue and drop it and make taxpayers pay for the difference. No. We have applied a discipline to ourselves in working through this issue fiscally, which I think should be a model to others. If people want to deal with issues, and there are other issues we have to deal with as a government, the same rules will apply. We will make sure what we do washes its face.

14

Treasury consultation The measures that are included in the suite of Bills were part of a consultation process undertaken by the Treasury over the period September to October 2016:

• on 7 September 2016, draft legislation and explanatory material was released relating to the measures for the objective of superannuation, tax deductions for personal superannuation contributions, improving superannuation balances of low income spouses, introduction of the LISTO and harmonising contribution rules for those aged 65-7415

• on 27 September 2016, draft legislation and explanatory material was released relating to the measures for the introduction of the $1.6 million transfer balance cap, lowering the income threshold to $250,000 for additional tax on concessional contributions and reducing the concessional contributions cap to $25,000, allowing catch-up concessional contributions for those with balances less than $500,000, removing regulatory barriers to innovation in the creation of retirement income stream products, improving the integrity of transition to retirement income streams and removing the anti-detriment provision16

• on 10 October 2016, draft legislation and explanatory material was released relating to the measures to lower the annual non-concessional contributions cap to $100,000 and restrict eligibility to make non-concessional contributions to individuals with superannuation balances below $1.6 million.17

Emergence of concerns

Sustainability Debate about the sustainability of superannuation tax concessions has emerged from awareness of the cost of superannuation tax concessions (in terms of revenue foregone) as well as concerns about the impact of population ageing on the budget.

Value of superannuation tax concessions Measured superannuation tax concessions have grown significantly in recent years. According to Treasury’s most recent annual tax expenditures statement, the major superannuation tax expenditures—the concessional taxation of employer contributions and superannuation fund earnings—were measured to ‘cost’ almost $30 billion in 2015-16 on a revenue foregone basis.18

While there is not universal agreement about how these tax concessions are calculated,19 the expected continued growth in these and other superannuation tax concessions into the future has nevertheless promoted

13. Ibid.

14. S Morrison (Treasurer) and K O’Dwyer (Minister for Revenue and Financial Services), Joint press conference, Canberra: superannuation reforms; making superannuation more sustainable; plebiscite on same sex marriage, transcript, 15 September 2016, p. 4. 15. The Treasury, ‘Superannuation reform package’, The Treasury website. 16. The Treasury, ‘Superannuation reform package - tranche two’, The Treasury website. 17. The Treasury, ‘Superannuation reform package - tranche three’, The Treasury website. 18. The Treasury, Tax expenditures statement 2015, The Treasury, Canberra, January 2016, p. 8. 19. See for example, R Clare, Mythbusting superannuation tax concessions, the Association of Superannuation Funds of Australia Limited, Sydney,

October 2015.

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some policy consideration about whether such support for superannuation is desirable, particularly in the context of the Commonwealth’s fiscal position.20

Impact of an ageing population Concerns about the impact of an ageing population in Australia have been expressed in the four intergenerational reports published by Australian Governments since 2002 (2002, 2007, 2010 and 2015). Much of this concern is based on projections for a deterioration in the budget position, due mainly to higher health and aged care expenditure, if policies are left unchanged.21

In terms of retirement incomes policy, one area highlighted in the intergenerational reports has been the continued heavy reliance on the age pension for income support in retirement, albeit with a shift of more recipients to a part-pension as the superannuation system matures.22 This theme of a continued dependence on the age pension remains a concern to some policy makers, with the National Commission of Audit noting in 2014:

Despite the increasing shift towards part-rate pensions the proportion of older Australians eligible for Age Pension is projected to remain constant at 80 per cent. There is no projected increase in the proportion of individuals who are completely self-sufficient despite the significant investment in superannuation over time. This includes the impact of the recent decision to increase the Superannuation Guarantee rate to 12 per cent by 2019-20.

The reasons for this are multi-faceted, but are likely to include people deliberately tailoring their affairs to meet current eligibility criteria such as by consuming assets or transferring equity to the principal residence or other assets that are not means tested. Current means testing arrangements mean that people with significant levels of income or assets can still be eligible for a part-rate pension.

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Fairness Concerns about the ‘fairness’ of superannuation tax concessions—based primarily around the share of concessions going to higher income earners—have been raised over recent years.

Rudd/Gillard Governments In 2010, the Report to the Treasurer: Australia’s Future Tax System: (Henry Tax Review) examined the structure of existing superannuation tax concessions. The review noted:

The structure of the existing tax concessions is inequitable because high-income earners benefit much more from the superannuation tax concessions than low-income earners.

Access to concessions should not depend on an employer’s remuneration policies, such as whether a person can make salary sacrifice contributions. The age limit on who can make superannuation contributions also limits access to concessions.

Taxing superannuation contributions reduces the level of superannuation guarantee contributions invested in the fund. This limits the adequacy of the superannuation guarantee in providing for retirement incomes in a way that is inequitable for low-income earners compared with other saving alternatives. 24

While the Gillard Government did not act on the Henry Tax Review’s recommendations in relation to the taxation of superannuation, it did introduce a number of changes, including the LISC and lower contributions caps, partly to address issues related to the equity of superannuation tax concessions. Introducing the Bill to implement the LISC in late 2011, then Assistant Treasurer, Bill Shorten, noted:

20. See for example, J Daley and D Wood, ‘Future taxpayers will pay the price’, The Australian, 16 May 2016, p. 20. 21. For more information about the intergenerational reports, see: K Swoboda, ‘A comparison of key assumptions and outcomes over four intergenerational reports’, Flagpost, Parliamentary Library blog, 5 March 2015. 22. W Swan, Australia to 2050: future challenges, The Treasury, Canberra, January 2010, p. 146. 23. National Commission of Audit, ‘Appendix to the report of the National Commission of Audit: volume 1’, Towards responsible government,

National Commission of Audit, Canberra, February 2014, p. 162. 24. K Henry, Australia’s future tax system: report to the Treasurer, (Henry Tax Review) ‘Part two: detailed analysis’, vol. 1, The Treasury, Canberra, December 2009, p. 100.

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The Gillard government is acting on the recommendation of the Henry review, which said that superannuation tax concessions should be distributed more equitably.

This will be one of the most significant wealth creation reforms targeted at low-income earners in modern Australian history. Put simply, the government is lowering the tax burden on low-income Australians—people who go to work every day—and directing this forgone tax revenue into their superannuation accounts to help them build for the future.

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Despite these changes, the equity of superannuation tax concessions remained an issue for the Gillard Government. In early 2012, the Treasurer Wayne Swan, and Minister for Financial Services and Superannuation Bill Shorten, announced the establishment of a ‘superannuation roundtable’, comprised of industry representatives, selected academics and others, ‘to consider ideas raised at the Tax Forum for providing Australians with more options in retirement and improving certain superannuation concessions’.26

Work undertaken as part of the round table process provided modelling about the distribution of tax concessions across income groups, which revealed that in 2009-10, the top five per cent of taxpayers by taxable income received one-quarter of the value of tax concessions, with taxpayers with lower incomes receiving a small share of tax concessions (Figure 2).

Figure 2: Estimated distribution of superannuation tax concession 2009-10

Source: The Treasury, Distributional analysis of superannuation taxation concessions: a paper to the superannuation roundtable, The Treasury, Canberra, April 2012.

To address these concerns, the Gillard Government announced changes to superannuation tax arrangements. In the 2012-13 Budget, the Government announced the introduction of an additional 15 per cent contributions tax from the 2012-13 financial year for individuals earning above a $300,000 income threshold.27 This measure was legislated by the Tax and Superannuation Laws Amendment (Increased Concessional Contributions Cap and Other Measures) Act 2013 and remains in place. In April 2013, the Gillard Government announced a proposal to cap at $100,000 the tax exemption for earnings on superannuation assets supporting income streams from

25. B Shorten, ‘Second reading speech: Tax Laws Amendment (Stronger, Fairer, Simpler and Other Measures) Bill 2011’, House of Representatives, Debates, 2 November 2011, p. 12417. 26. W Swan (Treasurer) and B Shorten (Minister for Financial Services and Superannuation), Superannuation roundtable, joint media release, 29 January 2012. 27. ATO, ‘Division 293 tax - information for individuals’, ATO website, last modified 14 November 2016. Additional information on the additional

15 per cent contributions tax for those above a $300,000 annual income threshold is included in the Bills Digest prepared for the increase in the cap to $35,000 for those aged 50 or more from 1 July 2014. See: Swoboda, Tax and Superannuation Laws Amendment (Increased Concessional Contributions Cap and Other Measures) Bill 2013 [and] Superannuation (Sustaining the Superannuation Contribution Concession) Imposition Bill 2013, Bills digest, op. cit.

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1 July 2014, with a concessional tax rate of 15 per cent applying thereafter.28 However, a Bill to put this measure into effect was not introduced into the Parliament.

Abbott Government Following the 2013 election, the Abbott Government announced in November 2013 that the measure to cap at $100,000 the tax exemption for earnings on superannuation assets supporting income streams measure would be dropped.29

Momentum to support further changes in superannuation tax changes was supported in 2014 by the Financial System Inquiry (FSI) (Murray Inquiry). In the Murray Inquiry’s interim report (July 2014), the relatively high share of total superannuation tax concessions for higher income earners was examined and the report noted:

Recent changes to concessional and non-concessional contribution caps and a higher contributions tax rate for very-high-income earners (30 per cent above $300,000) have attempted to achieve more equitable outcomes. Further adjustments to policy settings may be required. 30

The final report of the Murray Review (released 7 December 2014), presented information on the distribution of total superannuation tax concessions across income groups, and noted that the majority of tax concessions accrue to the top 20 per cent of income earners (Figure 3). While the Murray Review considered two options to better target superannuation tax concessions—reducing the non-concessional contributions cap and levying additional earnings tax on superannuation account balances above a certain limit—the Review did not make specific recommendations and instead considered that these should be part of the proposed tax review.31

The Abbott Government tax review released a discussion paper on 30 March 2015.32 In the discussion paper, the Government noted:

While there are policy grounds for superannuation being taxed at a lower rate than labour income, there are issues around the distribution of the impacts and their effectiveness in supporting higher retirement incomes, as well as their complexity. The Financial System Inquiry made observations relating to the differential earnings tax rate across the accumulation and retirement phases, as well as the targeting of superannuation tax concessions. The Government has indicated these will be considered as part of the Tax White Paper process.

33

28. W Swan (Treasurer) and B Shorten (Minister for Financial Services and Superannuation), Reforms to make the superannuation system fairer, joint media release, 5 April 2013. 29. J Hockey (Treasurer) and A Sinodinos (Assistant Treasurer), Restoring integrity in the Australian tax system, joint media release, 6 November 2013. 30. Financial System Inquiry, Financial System Inquiry: interim report, Treasury, Canberra, July 2014, p. 2-122. 31. Financial System Inquiry, Financial System Inquiry: final report, The Treasury, Canberra, November 2014, p. 142. 32. Australian Government, Re:think: tax discussion paper: better tax system, better Australia, The Treasury, Canberra, 30 March 2015. 33. Ibid., p. 69.

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Figure 3: Share of total superannuation tax concessions by income decile, 2011-12

Source: Financial System Inquiry, Financial System Inquiry: final report, The Treasury, Canberra, November 2014, p. 138.

Following the 2015-16 Budget, which did not include any superannuation tax measures, the Treasurer Joe Hockey noted:

As everyone in this room would know, there has also been a lot of talk about superannuation tax concessions. Some believe that the solution to the nation’s ills is to slug those who are taking responsibility for their retirement with higher taxes on superannuation.

This government absolutely rejects that view. As we promised prior to the last election, we will not engage adverse or unexpected changes to superannuation in our first term of government. Nor do we have plans to increase superannuation taxes into the future.

Stability in tax policy is important, and even more important where individuals rely on the long term stability of the rules around retirement savings. What self-funded retirees and part pensioners need now, more than ever, is stability not more tinkering with the system. 34

Turnbull Government In November 2015, the Turnbull Government signalled that it was considering changes to superannuation tax concessions. In a speech to the Association of Superannuation Funds of Australia on 27 November 2015, the Treasurer Scott Morrison noted:

Retirees have saved for their retirement under the existing rules across their working lives. The Government acknowledges these efforts and sacrifices.

And yet we must also balance all that with the goal of shaping the superannuation system so it provides opportunity to all Australians. Because until tax concessions and the superannuation system are perceived to strike the right balance, there’ll continue to be calls for tinkering and more changes. 35

Support for changes to superannuation tax concessions was also continuing to come from other sources, including superannuation industry groups. For example, in its submission for the 2016-17 Budget in February 2016, the Association of Superannuation Funds of Australia included several policy suggestions, such as a

34. J Hockey (Treasurer), Speech to the PwC Tax Forum, Melbourne, speech, 15 July 2015, p. 3. 35. S Morrison (treasurer), Address to the Association of Superannuation Funds of Australia (ASFA) Conference, Brisbane, speech, 27 November 2015, p. 13.

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$2.5 million balance cap, as well as lifetime concessional and non-concessional contributions caps as elements of ‘ensuring equity, adequacy and sustainability in the system’.36

Closer to the 2016-17 Budget, John Daley from the Grattan Institute in March 2016 noted:

The debate about superannuation tax breaks is getting to the pointy end.

Ultimately, where you draw the lines on an “adequate retirement” and super tax breaks are political questions. But on any view, the current superannuation tax breaks are much more than needed for an extremely comfortable retirement. 37

Key superannuation figures and information The superannuation system is an important part of the Australian economy. Accumulated superannuation balances and contributions form an important part of an individual’s retirement income savings.

Value of superannuation savings As at 30 June 2016, the total value of accumulated superannuation savings in Australia was around $2.1 billion.38 There has been significant growth in total superannuation savings both in terms of the value of savings and as a share of GDP since the late 1980s (Figure 4).

Figure 4: Accumulated superannuation savings, June 1988 to June 2016

Source: Parliamentary Library estimates based on Treasury methodology using data from the Australian Prudential Regulation Authority (Quarterly superannuation performance, various issues) and Australian Bureau of Statistics (Australian National Accounts: National Income, Expenditure and Product, various issues).

The value of superannuation savings is likely to continue to increase over the medium to long term, with various estimates putting the value of assets managed by superannuation funds in the order of $6-9 trillion in the mid-2030s.39

36. Association of Superannuation Funds of Australia (ASFA), Submission to the Treasury, Pre-Budget submission for the 2016-2017 Budget, February 2016, p. 4. 37. J Daley, ‘Cut super tax breaks, yet get a good retirement’, The Australian Financial Review, 12 March 2016, p. 16. 38. Australian Prudential Regulation Authority (APRA), Statistics, Quarterly superannuation performance, June 2016, APRA, Sydney,

23 August 2016, p. 7. 39. R Maddock, Superannuation asset allocations and growth projections, Financial Services Council, Monash University and Victoria University, 17 February 2014, p. 6.

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The importance of superannuation for household savings Superannuation assets form an important and growing part of household wealth. The Australian Bureau of Statistics estimates that superannuation savings account for around one-third of average household assets, with property assets (including the value of occupied housing) accounting for more than 55 per cent of household assets.40 That said, analysis by the Grattan Institute shows that superannuation assets held by households are largely held by wealthier households, which also tend to hold significant wealth outside of the home and superannuation (figure 5).

Figure 5: Household mean wealth by asset class, by household income decile, 2013-14 ($’000)

Source: J Daley, B Coates and H Parsonage, How households save for retirement, Background paper, Grattan Institute, Melbourne, October 2016, p. 5.

Individual superannuation savings and contributions Data published by the Australian Taxation Office provides information about the value of contributions to superannuation and the broad characteristics of individuals who had superannuation contributions in 2013-14. In broad terms, these data show:

• the average level of contributions generally increases with age, income and the value of accrued superannuation balances

• women on average have lower contributions than men, for all contributions types, and

• personal contributions form an important part of contributions for those aged more than 50 and those on the highest level of income (Figure 6).

40. Australian Bureau of Statistics (ABS), Household Income and Wealth, Australia, 2013-14, cat. no. 6523.0, ‘Income wealth and debt: table 3.7 Low economic resource households, household assets and liabilities’, ABS, Canberra, 4 September 2015.

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Figure 6: Average superannuation contributions, by taxable income, age, superannuation balance, gender and type of contributions, 2013-14 ($)

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Type of contributions, by gender

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Source: ATO, ‘Individuals’, Taxation statistics 2013-14, ATO website, last modified 18 March 2016, ‘Table 24, Superannuation fund contributions, for the 2013-14 financial year, by superannuation total accounts balance, taxable income and age range’, ‘Table 25, Superannuation fund contributions, 2013-14 financial year, by age range, gender and taxable income’.

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Estimates by the Australian Bureau of Statistics on average superannuation balances suggest that individuals have been able to accumulate higher superannuation balances, and that as they near retirement ages, they will retire with higher balances that a decade ago. That said, average balances for women remain below those for men (Figure 7).

Figure 7: Mean and median male and female superannuation account balances for those aged 55-64 years, by gender, 2003-04 and 2013-14 ($’000)

Source: Australian Bureau of Statistics (ABS), Household Income and Wealth, Australia, 2013-14, cat. no. 6523.0, ‘Superannuation of persons: table 24.3 Superannuation account balances’, ABS, Canberra, 4 September 2015.

Committee consideration Senate Economics Committee The Bills have been referred to the Senate Economics Legislation Committee for inquiry and report by 23 November 2016.41 Details of the inquiry are at the Committee’s homepage.42 The Committee recommended that the Senate pass the Bill.43 Labor members of the Committee issued a dissenting report, outlining alternative positions on two measures and opposing the introduction of catch-up concessional contributions and changes to tax deductibility for personal superannuation contributions, which are regarded as ‘unaffordable given the current fiscal position’.44 While not calling for the Bill to be rejected, Labor stated:

Labor Senators will continue to argue for amendments to the Government’s legislative package, and if unsuccessful on this occasion, will take the position to the next election. 45

Senate Standing Committee for the Scrutiny of Bills At the time of writing this Bills Digest, neither of the Bills had been considered by the Senate Standing Committee for the Scrutiny of Bills.

41. Australia, Senate, Journals, 15, 2016-17, 10 November 2016, p. 21. 42. Senate Standing Committee on Economics Legislation, ‘Superannuation (Excess Transfer Balance Tax) Bill 2016 [Provisions] and Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016 [Provisions]’, Inquiry homepage. 43. Senate Standing Committee on Economics Legislation, Superannuation (Excess Transfer Balance Tax) Bill 2016 [Provisions] and Treasury Laws

Amendment (Fair and Sustainable Superannuation) Bill 2016 [Provisions], The Senate, Canberra, November 2016, p. 23. 44. Ibid., pp. 25-26. 45. Ibid., p. 28.

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Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016 [and] Superannuation (Excess Transfer Balance Tax) Imposition Bill 2016 20

Policy position of non-government parties/independents Australian Labor Party The Australian Labor Party indicated during debate in the House of Representatives on the Bills that while the ALP would move amendments to the Bills, it would ‘facilitate’ the passage of the legislation.46 The Shadow Treasurer noted:

Let me be very clear: This package is better than it was. This package is better than nothing. We are glad the government have finally acknowledged the need for superannuation tax reform. What we will do, in this debate and in the other place, is make sensible suggestions as to how it can be improved.

If the government refuse, at the end of the day, to accept those amendments, we will not give the government an excuse to walk away from this legislation. I will not give this Treasurer an excuse to walk away from what he has been dragged kicking and screaming to do. We will not let the perfect be the enemy of the good, and we will facilitate the passage of the legislation.

47

2015 announcement The superannuation policy which the ALP took to the 2016 Federal election essentially reflected its announcement on 22 April 2015 that it would limit tax-free earnings on assets supporting income streams to $75,000, after which a 15 per cent rate would apply and reduce the income threshold at which the 30 per cent tax rate on concessional contributions applied from $300,000 to $250,000.48

Announcing the policy, the Leader of the Opposition Bill Shorten and Shadow Treasurer Chris Bowen noted:

A fair and sustainable superannuation system will protect living standards in retirement and take pressure off the age pension. The recent Financial System Inquiry found that 10 per cent of Australians currently receive 38 per cent of all superannuation tax concessions. In particular, the tax-free status of all superannuation earnings, introduced by the Howard Government in 2006, disproportionately benefits high income earners and is unsustainable.

We believe these changes are all that are needed to ensure sustainability at the very top end of our superannuation system. If we are elected these are the final and the only changes Labor will make to the tax treatment of superannuation. 49

Subsequent August announcement On 24 August 2016, the ALP announced its position in relation to the 2016-17 Budget package of measures, noting that that it would amend the proposal to reduce the income level at which the 30 per cent tax on contributions applied to $200,000 rather than $250,000 and that it would:

• oppose allowing catch-up concessional superannuation contributions

• oppose harmonising contribution rules for those aged 65 to 74, and

• oppose allowing tax deductions for personal superannuation contributions.50

The Shadow Treasurer Chris Bowen and Shadow Minister for Small Business and Financial Services Katy Gallagher noted:

46. C Bowen, ‘Second reading: Superannuation (Objective) Bill 2016, Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016, Superannuation (Excess Transfer Balance Tax) Imposition Bill 2016’, House of Representatives, Debates, 22 November 2016, p. 1. 47. Ibid.

48. B Shorten (Leader of the Opposition) and C Bowen (Shadow Treasurer), Labor's plan for fair, sustainable superannuation, joint media release, 22 April 2015. 49. Ibid.

50. C Bowen (Shadow Treasurer) and K Gallagher (Shadow Minister for Small Business and Financial Services), Labor's plan for super reform that is not retrospective, joint media release, 24 August 2016.

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Since Budget night, Labor has expressed our concern about the retrospectivity of the Government’s $500,000 lifetime non-concessional contribution cap. We committed to consult and make changes to it - something Scott Morrison should have done ahead of the Budget.

At the same time, we committed to delivering at least the same quantum of Budget improvements as contained in the Government’s overall superannuation package.

Labor’s measured approach to super reform achieves two important objectives: ensuring that our tax concessions are fit for the task of helping Australians save for a dignified retirement, and improving the Budget bottom line.

Our proposed package is fair, affordable and can be delivered in the Parliament. Malcolm Turnbull simply cannot say the same about his own superannuation plans. 51

Subsequent November announcement On 8 November 2016, the ALP announced that it would propose several changes to the Government’s amended package of measures.52 The changes included restating some elements of its 24 August 2016 announcement which remained as part of the Government’s 15 September 2016 amended package:

• lowering the annual non-concessional contributions cap to $75,000

• lowering the High Income Superannuation Contribution threshold to $200,000, and

• not allowing for catch-up concessional contributions and tax deductibility for personal superannuation contributions.53

In announcing this position, the Shadow Treasurer Chris Bowen noted:

Labor will finalise its position on the Government’s legislation when it is eventually presented to the Parliament. But we urge the Government to accept Labor’s responsible proposals, and work with us to deliver superannuation reforms which are fairer and better. 54

Other parties and independents

Australian Greens The 2016 election superannuation policy of the Australian Greens (the Greens) was to implement a progressive contributions tax arrangement for concessional contributions, so that contributions would be taxed at an individual’s marginal tax rate, less 15 per cent.55 Under the proposal, there would also be a government co-contribution of 15 cents for each dollar of superannuation contributions for those earning an annual income of under $18,200.56 The basis for these proposals is largely related to a view that the existing tax concessions favoured higher income earners, with the Greens noting:

Superannuation tax breaks for the very wealthy are placing an unfair and unsustainable burden on the Budget. It is time to end the unfair tax breaks in our super system, support low income earners and raise the revenue we need to fund schools, hospitals and infrastructure. 57

51. Ibid.

52. C Bowen (Shadow Treasurer) and K Gallagher (Shadow Minister for Small Business and Financial Services), A super system that’s fairer & a budget that’s better off, joint media release, 8 November 2016. 53. Ibid.

54. Ibid.

55. Australian Greens, Progressive superannuation: supporting people to save for retirement, Greens policy document, Election 2016, p. 1. 56. Ibid., p. 2. 57. Ibid., p. 1.

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Liberal Democrats Liberal Democratic Party’s 2016 election policies included a proposal to expand the current superannuation savings account system to encompass health, unemployment and disability as well as retirement—and to also make such accounts tax free with respect to contributions, earnings and permitted withdrawals.58

Following the 27 September 2016 announcement about changes to the package of measures, Senator Leyonhjelm was critical of the measures, stating:

The underlying problem is that, while a superannuation balance of $1.6 million might sound like a lot, it is not enough to retire on without the age pension. With low interest rates and the increased possibility of living for at least 30 years in retirement, $1.6 million might only buy an annuity starting around $50,000, rising with inflation.

Unless interest rates increase substantially or we start dying earlier, a much higher super balance will be needed to ensure permanent ineligibility for the age pension. If there is no benefit in accumulating a super balance in excess of $1.6 million, there will be no incentive to become independent of the age pension.

That means the self-funded retiree will become a distant memory while the working age population will bear a crushing tax burden to pay for pensions. 59

One Nation Pauline Hanson’s One Nation party did not have a specific 2016 election policy relating to superannuation tax arrangements. However, the party did propose to allow Australians up to the age of 38 to access their accumulated superannuation funds to use as a deposit to buy their first home.60

Nick Xenophon Team The 2016 election superannuation policy of the Nick Xenophon Team (NXT) included proposals to bring forward the increase in the superannuation guarantee to 12 per cent, improve transparency and end fee ‘gouging’ and a requirement for funds to hold annual general meetings.61 In relation to tax arrangements, the NXT proposal was that ‘[t]ax-breaks for superannuation must be re-calibrated so the greatest benefit is directed to those with the least savings, and a reduced benefit is enjoyed by those with very high superannuation savings’.62

Which elements of the package have bipartisan support? Based on the statements made by the ALP on elements of the package of measures included in the Bill, only two of the measures are opposed by the ALP. Of the remaining measures, the ALP supports five measures, has proposed amendments to three measures and has not expressed a view on one of the measures (Figure 8). That said, as noted earlier, the ALP has indicated that they will ‘facilitate’ the passage of the Bills through the Parliament.63

58. Liberal Democratic Party, Welfare, Liberal Democratic Party policy document, Election 2016, p. 1. 59. D Leyonhjelm, ‘Government's great super con job’, The Australian Financial Review, 30 September 2016, p. 38. 60. Pauline Hanson’s One Nation, Home ownership for young Australians, Pauline Hanson’s One Nation policy document, Election 2016, p. 1. 61. Nick Xenophon Team, Policy principles, Nick Xenophon Team policy document, Election 2016, p. 14. 62. Ibid.

63. C Bowen, ‘Second reading: Superannuation (Objective) Bill 2016, Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016, Superannuation (Excess Transfer Balance Tax) Imposition Bill 2016’, House of Representatives, Debates, 22 November 2016, p. 1.

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Figure 7: Comparison of Government and ALP positions on measures included in the Bill

Notes: Green indicates the measure has bipartisan support. Orange indicates the ALP has proposed amendments to the measure. Red indicates the ALP opposes the measure. No colour indicates that the ALP has not expressed a specific view. Source: Parliamentary Library analysis of Government and ALP policy statements.

Position of major interest groups Superannuation industry groups The Association of Superannuation Funds of Australia (ASFA) had mixed views on the measures announced in the 2016-17 Budget, supporting the introduction of the LISTO but opposing the reduction in concessional caps to $25,000.64 ASFA also noted:

ASFA has long advocated for support for low income earners contributing to superannuation. The LISTO scheme provides this and makes the superannuation system stronger.

While ASFA has previously supported a $2.5 million cap on balances that can be transferred to the tax free retirement phase, the Budget proposal for a cap of $1.6 million goes much further. A $2.5 million cap will have an impact on over 50,000 people, and involve additional revenue of under $500 million a year—while a $1.6 million

64. Association of Superannuation Funds of Australia (ASFA), Budget package has significant ramifications for superannuation, media release, 3 May 2016.

Schedule 1 $1.6 million cap on superannuation balances

Schedule 2 Reduce concessional contributions cap to $25,000

Schedule 2

30 per cent tax on concessional contributions for those earning $250,000 or more (Schedule 2)

Schedule 3

Reduction in the existing annual non-concessional contributions cap from $180,000 per year to $100,000 per year

Schedule 3

No additional non-concessional contributions to be made if accrued superannuation balance is $1.6 million or more

Schedule 4 Introduce the Low Income Superannuation Tax Offset

Schedule 5

Remove restrictions to allow all individuals up to the age of 75 to claim an income tax deduction for contributions

Schedule 6 Allow catch-up concessional contributions for individuals

Schedule 7

Raise the threshold for the low income spouse contributions threshold from $13,800 to $40,000

Schedule 8

Remove the tax exemption on earnings of assets supporting Transition to Retirement Income Streams

Schedule 9 Remove the anti-detriment provision in respect of death benefits

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cap will affect more than 100,000 people and result in additional revenue for the government of $1.15 billion by 2019/20. ASFA will need to do work to understand the impact on retirement incomes.

The changes to the flexibility caps will allow women, in particular, who currently retire with less than half the superannuation of men, to catch up. However, the restriction of a five year period for the calculation of previously unused cap amounts restricts the effectiveness of this. 65

Following the Government’s 15 September 2016 announcement of changes to some of the measures, ASFA was supportive of the changes and ‘urges the Parliament to pass the changes as soon as practical, in order to provide certainty for people saving for their retirement’.66 The interim CEO of ASFA noted:

ASFA has long advocated for both a lifetime cap on non-concessional contributions and a limit on the total amount tax free in retirement. The revised superannuation proposals address both issues.

The primary role of superannuation is to provide income in retirement and it should not be used as an estate planning tool.

The ceiling of $1.6 million, once it is legislated, balances the need to ensure enough income for a comfortable retirement with ensuring the level of tax concessions is sustainable in the future.

This is the responsible thing to do for the superannuation system and for Australia’s long term, fiscal sustainability. 67

After the introduction of the Bills on 9 November 2016, ASFA noted that it had ‘broadly supported the thrust of the government’s tax package from its announcement because it makes the superannuation system more sustainable and fair’.68 AFSA considered that the Bills ‘should be passed without any undue delay, to provide certainty and confidence in the system’.69

The Financial Services Council (FSC) considered the 2016-17 Budget announcements had both ‘positive’ and ‘restrictive’ elements.70 The CEO of the FSC noted:

The test for this budget is whether Australia will have more pensioners or more self funded retirees.

The new caps and thresholds limit the capacity for Australians to save for their own retirement and will restrict retirees to an income of around $80 000 per annum from their superannuation. An $80 000 limit will fail to cover the costs of retirement for many Australians, when you include healthcare, aged care and a comfortable standard of living.

71

Following the Government’s 15 September 2016 announcement of changes to some of the measures, the FSC welcomed the changes to the non-concessional contribution caps.72 The FSC noted:

For those Australians who can afford it, they will now be able to place $125,000 into super each year until they reach the $1.6 million cap. This is made up of $25,000 of concessional contributions and $100,000 of after tax contributions.

65. Ibid.

66. ASFA, Superannuation package should be passed, media release, 15 September 2016. 67. Ibid.

68. ASFA, Pass super tax changes to provide certainty and confidence, media release, 9 November 2016. 69. Ibid.

70. Financial Services Council (FSC), FSC statement on superannuation tax changes, media release, 3 May 2016. 71. Ibid.

72. FSC, Changes to non-concessional super caps, media release, 15 September 2016.

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The FSC has consistently argued that the proposed backdating measures would have been difficult to implement and they also conflicted with the long-term nature of superannuation policy, undermining opportunities for consumers to prospectively plan for their retirement.

The removal of the $500,000 cap gives Australians who can afford to save more, increased flexibility to do so and avoids administration that would have increased costs for superannuation savers. 73

After the introduction of the Bills on 8 November 2016, the FSC indicated that it was broadly supportive of the measures announced in the 2016-17 Budget and had ‘welcomed the Government’s consultation with industry to work through implementation issues to minimise costs to funds and consumers’.74 The CEO of the FSC noted:

Australians want certainty and confidence in superannuation. They want to be free to choose their own super fund and they want employers to be able to offer them a choice of funds. More than anything they want political parties to draw a line in the sand under changes to the tax treatment of super so they can plan confidently for their financial futures.

75

The SMSF Association was supportive of the introduction of the LISTO following the 2016-17 Budget announcement but noted several measures of ‘concern’ including the lower $25,000 concessional contribution cap, the $500,000 lifetime non concessional cap, limiting tax-free earnings to a balance of $1.6 million and lowering the income threshold to $250,000 for the higher tax on concessional contributions.76 The SMSF Association noted:

The Federal Government’s decision to reduce the concessional contribution cap down to $25,000 is a backward step that will severely reduce the ability of people to save adequately for retirement.

… this decision, when coupled with other flawed measures in the Budget, will send shock waves through an SMSF [Self Managed Super Fund] sector that was hoping the broad parameters of the system had been settled.

… We strongly believe that adequate concessional contribution caps are vital to allow people to save for a secure and dignified retirement. 77

Following the introduction of the suite of Bills on 8 November 2016, the SMSF Association considered that SMSF trustees and their advisers could have greater certainty in beginning to adjust their superannuation strategies in advance of the proposed 1 July 2017 start date for most of the proposed changes.78 The CEO of the SMSF Association noted:

The changes allowing the carry forward of unused concessional contribution cap space and allowing all taxpayers to make deductible contributions to their superannuation are undoubtedly positives for the system. These changes greatly increase the flexibility for people[‘s] contribution to super, especially for women who may have had broken work patterns, allowing greater opportunities to save for retirement.

79

Immediately following the 2016-17 Budget announcement, Industry Super Australia (ISA) generally supported the package of measures, which they considered had ‘rightly wound back’ the ‘overly generous’ superannuation tax concessions.80 The ISA in particular welcomed the decision to introduce the LISTO, noting:

This top up payment, which was due to be abolished in 2017, is critical in ensuring lower paid workers don’t end up paying more tax on their super than they do on their take home pay.

73. Ibid.

74. FSC, Government super tax changes a step forward - but competition reform is the priority, media release, 8 November 2016. 75. Ibid.

76. SMSF Association, Super changes cause for concern for SMSFs, media release, 3 May 2016. 77. Ibid.

78. SMSF Association, Introduction of super legislation provides important certainty, media release, 10 November 2016. 79. Ibid.

80. Industry Super Australia, Budget 2016 - rebalancing of super tax concessions a sensible step in the right direction for 3 million lower income earners, media release, 3 May 2016.

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Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016 [and] Superannuation (Excess Transfer Balance Tax) Imposition Bill 2016 26

… This is a sensible step in the right direction for which Industry SuperFunds have strenuously advocated. However, with a whopping 45% gap in super savings between men and women, more will need to be done to actively boost the super savings of this lower paid group to help them reach a comfortable retirement standard. 81

Following the Government’s 15 September 2016 announcement of changes to some of the measures, the ISA expressed its support for the changes, noting:

We would hope all MPs will now give careful consideration to these changes so the reforms can start to make their way through the Parliament. These are evolutionary, not revolutionary changes. 82

The Australian Institute of Superannuation Trustees (AIST) responded positively to the 2016-17 Budget announcements, seeing the measures as a ‘necessary step toward a fairer and more sustainable super system.83 Responding to the changes announced by the Government on 15 September 2016, the AIST remained supportive of the overall package, noting:

While AIST is disappointed to see the reversal of rules affecting older workers aged 65 to 74, on balance these changes are in keeping with the need to improve the fairness and sustainability of the system … Furthermore these changes are considerably easier for funds to implement and do not add to the complexity of the system. 84

On the introduction of the suite of Bills into the Parliament, the AIST ‘urged all Federal Parliamentarians to support tax changes to superannuation that improve retirement outcomes for low income earners, including women’.85

Professional bodies Following the 2016-17 Budget announcements, the Actuaries Institute welcomed the proposed changes, which in its view would ‘inject more equity and fairness into the retirement incomes system’.86 The Institute noted:

Overall the Budget changes improve the system, making it fairer while also increasing revenue to assist the economy in these financially constrained times.

The Institute believes these changes will help to meet the Government’s objective of superannuation, which was adopted from the Financial System Inquiry - to provide income in retirement to substitute or supplement the Age Pension. 87

The Actuaries Institute welcomed the Government’s 15 September 2016 changes, noting:

The proposed changes meet the overall targets for the superannuation and retirement incomes system of adequacy, equity and sustainability. Today’s announcement represents a reasonable compromise in order to allow the package of much needed superannuation tax reforms to proceed. 88

The Tax Institute was supportive of the changes announced in the 2016-17 Budget.89 The President of the Institute noted:

81. Ibid.

82. Industry Super Australia, Industry super Australia welcomes workable compromise on super tax breaks, media release, 15 September, 2016. 83. Australian Institute of Superannuation Trustees, Super measures will improve fairness and sustainability of super: AIST Budget commentary, media release, 3 May 2016. 84. Australian Institute of Superannuation Trustees, Super budget changes still improve fairness and sustainability of system, media release,

15 September 2016. 85. Australian Institute of Superannuation Trustees, Super changes that improve retirement outcomes for low income earners must be supported, media release, 10 November 2016. 86. Actuaries Institute, Actuaries Institute says Budget injects fairness into retirement incomes system, media release, 3 May 2016 87. Ibid.

88. Actuaries Institute, Actuaries Institute Chief Executive David Bell welcomed the changes to the superannuation tax reform package announced today by Treasurer Scott Morrison, media release, 15 September 2016. 89. The Tax Institute, A Budget for now and the future, media release, 3 May 2016.

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The Budget delivered today is a good step in the evolution of our tax system.

The superannuation measures better target tax concessions in the superannuation system to make the system more equitable without compromising stability. 90

Following the 2016-17 Budget announcement, the Chartered Accountants Australia New Zealand (CAANZ) expressed concerns that the ‘confidence in the super system has been severely shaken by some of the changes announced in the Turnbull Government’s budget’.91 The CAANZ was supportive of the proposal for a lifetime non-concessional contributions cap but believed that $500,000 was too low, and that a higher lifetime limit should apply for those aged at least 50 years of age.92 The CAANZ also considered that the proposed annual concessional cap of $25,000 was too low.93

Thinktanks/research groups In a September 2016 paper entitled A Better Super System: Assessing the 2016 Tax Reforms, the Grattan Institute considered the different policies presented by the Government in the 2016-17 Budget and those proposed by the ALP.94 The Grattan Institute concluded that the policies were not that different, noting:

The major parties disagree about relatively little in this reform debate. The ALP would not count post-tax contributions between 2007 and the present. On the other hand it would adopt a number of other policies that would contribute even more to budget repair. Any combination of the packages on offer would improve the current system overall.

The proposed changes to super tax are built on principle, supported by the electorate, and largely supported by all three main political parties. If common ground cannot be found in this situation, then our system of government is irredeemably flawed.

Even after the reforms, super tax breaks will still mostly flow to high income earners who do not need them. The budgetary costs of super tax breaks will remain unsustainable in the long term. Further changes to super tax breaks will be needed in future. 95

The Institute of Public Affairs (IPA) did not support the 2016-17 Budget changes, making reference to the Coalition’s 2013 election superannuation policy and a ‘disdain for anyone who has worked hard, made sacrifices, and become successful’.96 The IPA noted:

The language the government uses to justify its changes basically implies that anyone with more than $1.6 million in superannuation is somehow engaged in a rort or a tax dodge. But what the Coalition doesn't acknowledge is that up until a fortnight ago it was deliberately encouraging to do exactly what people are now being blamed for. In any case, anyone with $1.6 million in superannuation has most likely spent the majority of their working life paying nearly half of their income to the government in taxes.

Some of those most worried by what the government has done are not affected by these changes to superannuation. Those not immediately targeted by the government in this budget don't know what's going to happen next. Now that the Coalition has opened the door to blatant and retrospective changes to superannuation,

90. Ibid.

91. Chartered Accountants Australia New Zealand, The Government's budget super changes need urgent clarification and adjustment, media release, 12 May 2016. 92. Ibid.

93. Ibid.

94. J Daley, B Coates and W Young, A better super system: assessing the 2016 tax reforms, Working paper, 1, 2016, Grattan Institute, Carlton, September 2016. 95. Ibid., p. 3. 96. J Roskam, ‘Our new “soak the rich” Liberals’, The Australian Financial Review, 20 May 2016, p. 34.

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there's the potential for a future Labor/Greens government to do what the Coalition is attempting - but only worse. 97

The Centre for Independent Studies (CIS) was critical of some aspects of the 2016-17 Budget announcements, considering that the changes ‘do not address the core problem of pension dependence’.98 Robert Carling from the CIS, in a September 2016 article entitled How should super be taxed?, was critical of efforts to improve the ‘fairness’ of tax concessions, noting:

Fairness is a subjective concept, but what can be said objectively is that the overall tax/transfer system is highly redistributive without any further reshaping of superannuation taxes to mirror the progressive personal income tax. Moreover, there are significant simplification benefits in flat superannuation taxes. The recent and proposed changes are introducing new complexities to the system.

Balancing the budget is an important objective but in itself does not override the principle of concessionality for superannuation. Revenue constraints will always require limits on access to concessionality, but the tightening of access proposed by the government is draconian and little justification has been provided for the details. The government needs to go back to the drawing board, review its proposals, and produce a green paper for consultation, including the actuarial basis for revised proposals.

99

Other groups National Seniors Australia (NSA) was supportive of the 2016-17 Budget changes, but did express some ‘reservations’ about the reduction in the concessional contribution cap from $35,000 to $25,000.100 The CEO of the NSA noted:

The Turnbull Government has taken a measured but fairly comprehensive approach to superannuation reform … The mix, in terms of fairness and sustainability, appears pretty good.

Currently, women are retiring with half the super balances of men. Initiatives such as allowing the rollover of concessional caps and widening access to partner contributions may help address this. 101

Following the 2016-17 Budget announcements, the Council on the Ageing Australia (COTA) welcomed the changes, which it considered were ‘the most significant structural reforms since superannuation was introduced’.102 The CEO of COTA noted:

COTA is pleased to see the government move in a direction that ensures superannuation is used for the purpose it was originally intended - as a way for people to save for their retirement rather than a wealth accumulation scheme for Australia's highest earners.

The changes, many of which COTA has called for over the last few years, will make superannuation much more sustainable and fit for purpose for the long term.

Overall this is a significant and integrated set of reforms that better utilises taxpayer funded concessions for genuine retirement income support. 103

97. Ibid.

98. S Cowan, M Potter, P Carvalho, J Buckingham, T Jha, S Hudson (The Centre for Independent Studies), Budget 2016: timid Turnbull tinkers at top and bottom, media release, 3 May 2016. 99. R Carling, ‘How should super be taxed?’, Policy, 32(3), September 2016. 100. M O’Neill (CEO National Seniors Australia), Seniors budget verdict: super reforms broadly fair but pension problem persists, media release,

4 May 2016. 101. Ibid. 102. Council of the Ageing Australia, Budget 2016: superannuation reform package welcomed, media release, 3 May 2016.

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The Australian Council of Social Services (ACOSS) welcomed the 2016-17 Budget superannuation measures, considering they would ‘take us in the right direction, tackling unfair concessions for people on higher incomes, and providing assistance to people who struggle to secure adequate retirement savings’ but also that ‘the tax treatment of super remains biased towards higher income earners, and the door for future reform must remain open’.104

Responding to the Government’s 15 September 2016 announced changes to the package of measures, ACOSS welcomed the reduction in the non-concessional cap to $100,000, but criticised the continuation of the three-year bring forward rule and the retention of the carry-forward measure of unused concessional contributions.105

Financial implications The Explanatory Memorandum notes that the measures to be implemented by the Bills are estimated to increase the underlying cash balance by $2.8 billion over the four years to 2019-20 (Table 1).106

Table 1: Financial impact of measures included in the Bills, underlying cash basis, 2016-17 to 2019-20 ($ million) Measure 2016-17 2017-18 2018-19 2019-20 Total

$1.6 million transfer balance cap -4.4 500.0 650.0 700.0 1,845.6

Concessional superannuation contributions and lowering threshold for high income earners additional contributions tax -2.8 499.1 797.8 1,048.9 2,343.0

Annual non-concessional contributions .. .. 50.0 150.0 200.0

Low income superannuation tax offset - -2.8 -651.1 -801.1 -1,455.0

Deducting personal contributions - 350.0 -500.0 -700.0 -850.0

Unused concessional cap carry forward - - - -100.0 -100.0

Tax offsets for spouse contributions - - -5.0 -5.0 -10.0

Innovative income streams and integrity .. 130.0 160.0 180.0 470.0

Anti-detriment provisions - - 105.0 245.0 350.0

Administration and consequential amendments

- * * * *

Total -7.2 1,476.3 606.7 717.8 2,793.6

*These changes are assessed as having an unquantifiable but small impact.

Source: Explanatory Memorandum, Superannuation (Objective) Bill 2016 [and] Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016 [and] Superannuation (Excess Transfer Balance Tax) Imposition Bill 2016, pp. 9-10.

As noted previously, the package of measures included in the Bills is different in several ways to that announced in the 2016-17 Budget:

• the measure allowing for the carry forward of unused concessional contributions cap amounts commences one year later, from July 2019, rather than from July 2018

103. Ibid. 104. C Goldie (CEO Australian Council of Social Services (ACOSS)), Some positive directions, but budget locks in harsh cuts - with more likely to come, media release, 3 May 2016. 105. C Goldie (CEO ACOSS), ACOSS statement: superannuation changes announced, media release, 16 September2016. 106. Explanatory Memorandum, Superannuation (Objective) Bill 2016 [and] Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill

2016 [and] Superannuation (Excess Transfer Balance Tax) Imposition Bill 2016, pp. 9-10. There is no financial impact associated with the Superannuation (Objective) Bill 2016.

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• a measure to provide for a lifetime non-concessional contributions cap of $500,000, backdated to 1 July 2017, is no longer part of the overall package—this has been replaced with the measure for lower annual non-concessional cap of $100,000, for those with a superannuation balance of $1.6 million or less

• a measure to harmonise contribution rules for those aged 65 to 74 has been dropped.

With the financial impact of the 2016-17 Budget measures presented in the budget papers on an accrual basis, and those in the Explanatory Memorandum presented on a cash basis, it is difficult to directly compare the financial impact between the 2016-17 Budget package of measures and those included in the Bills.

Statement of Compatibility with Human Rights As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bills’ compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act. The Government considers that the Bills are compatible.107

Parliamentary Joint Committee on Human Rights

In its report on 22 November 2016, the Parliamentary Joint Committee on Human Rights noted that the Bills did not raise human rights concerns.108

Key issues and provisions This section provides an overview of each Schedule to the main Bill and highlights some issues that may be of interest in debate about the Bills.

How many people are affected by the proposed changes? When the measures were announced at the 2016-17 Budget the Government emphasised that a relatively small number of people that would be negatively affected by some of the proposals. In his Budget speech, the Treasurer noted that the implementation of the transfer balance cap, lifetime non-concessional cap and the 30 per cent contributions tax for those on high incomes will each affect less than one per cent of superannuation fund members and the reduction in the concessional contributions cap to $25,000 would affect three per cent of fund members.109 Information prepared at the time of the Budget and later to the Senate Economics Legislation Committee also gave estimates of how many people would be impacted by the 2016-17 Budget proposals.110

In addition to information provided by the Government, the Association of Superannuation Funds of Australia and the Grattan Institute have also provided estimates for the number of people affected by some measures. In some cases, the Government provided two estimates for the same measure (Table 2).

107. The Statement of Compatibility with Human Rights can be found at pages 129-131, 148-149, 172-174, 191-192, 200, 207, 222-224, 230-231 and 260-261 of the Explanatory Memorandum to the suite of Bills. 108. Parliamentary Joint Committee on Human Rights, Report 9 of 2016, 22 November 2016, p. 39. 109. S Morrison, ‘Second reading: Appropriation Bill (No. 1) 2016-2017’, House of Representatives, Debates, 3 May 2016, p. 4255. 110. The Treasury, Making a fairer and more sustainable superannuation system, Budget 2016: superannuation fact sheets, The Treasury,

Canberra, May 2016; Senate Economics Legislation Committee, Official committee Hansard, (proof), 19 October 2016, p. 101.

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Table 2: Estimates of the number of people affected by the 2016-17 Budget superannuation measures as amended in September 2016 Measure Government Association of

Superannuation Funds of Australia

Grattan Institute

$1.6 million transfer balance cap Less than 160,000 (a) 110,000 60,000

$25,000 concessional contributions cap and lowering threshold to $250,000 for high income earners additional 15% contributions tax

Around 560,000 (a)

Less than 1 per cent fund members (additional contributions tax)

Up to 500,000 (many of these affected by both)

550,000

$100,000 cap on non-concessional contributions Less than 160,000 (a)

Low income superannuation tax offset 3.3 million (2/3 of whom are women) and

3.1 million

3,200,000

Deducting personal contributions 800,000 and 850,000 850,000

Unused concessional cap carry forward 220,000 and 230,000 230,000

Tax offsets for spouse contributions 5,000 5,000

Remove tax exempt status of income from assets supporting transition to retirement [TTR] income streams

110,000 550,000 plus (b) 115,000

Anti-detriment provisions 20,000 (annual) 20,000

Notes: (a) Estimated by the Parliamentary Library based on numbers cited by the Government and a total number of superannuation account holders of 16 million (b) ASFA noted some individuals may have more than one TTR account, and some TTR account holders might be able to satisfy a condition of release for a normal superannuation account based income stream.

Source: S Morrison, ‘Second reading: Appropriation Bill (No. 1) 2016-2017’, House of Representatives, Debates, 3 May 2016, p. 4255; The Treasury, Making a fairer and more sustainable superannuation system, Budget 2016: superannuation fact sheets, The Treasury, Canberra, May 2016; Senate Economics Legislation Committee, Official committee Hansard, (proof), 19 October 2016, p. 101; The Treasury, ‘Superannuation reforms’, The Treasury website; Association of Superannuation Funds of Australia, Individuals affected by superannuation budget measures, media release, 2 June 2016; J Daley, B Coates and W Young, A better super system: assessing the 2016 tax reforms, Working paper, 1, 2016, Grattan Institute, Carlton, September 2016.

Schedule 1—Transfer balance cap

Commencement The amendments in Schedule 1 to the main Bill commence on the first 1 January, 1 April, 1 July or 1 October to occur after Royal Assent.

Key provisions Schedule 1 of the main Bill amends various tax and superannuation laws to implement a system to limit the amount of capital individuals can transfer to the retirement phase to support superannuation income streams. This in turn, limits the amount of superannuation fund earnings that are exempt from taxation.111 Under this system tax-free investment earnings on superannuation will be limited to earnings in a ‘transfer balance account’ which is capped at $1.6 million. The measure is to take effect from 1 July 2017.

111. Explanatory Memorandum, Superannuation (Objective) Bill 2016 [and] Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016 [and] Superannuation (Excess Transfer Balance Tax) Imposition Bill 2016, p. 37.

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Is a $1.6 million cap too high, too low, or about right? Item 4 of the Schedule 1 to the main Bill inserts proposed Division 294 —Transfer balance cap into the ITAA 1997. It operates to:

• place a cap on the total amount a person can transfer into the retirement phase of their superannuation

• where the balance of the account exceeds the cap, an individual will be required to remove the excess from the retirement phase and to pay excess transfer balance tax.112

Within the new Division, proposed section 294-35 specifies that the transfer balance cap for 2017-18 is $1.6 million. The $1.6 million transfer balance cap will be subject to indexation arrangements in proposed section 960-285,113 which indexes the $1.6 million amount for 2017-18 (in $100,000 increments) to changes in the all groups consumer price index from the quarter ending 31 December 2016, as measured by the Australian Bureau of Statistics.114

In his second reading speech, the Treasurer, Scott Morrison noted that an amount of $1.6 million was ‘around twice the level at which access to the Age Pension ceases on account of an individual’s assets’.115

For an individual retiring at age 65, an amount of $1.6 million would provide an annual indexed income, under certain assumptions including an annual return of five per cent, of around $90,000 until age 87.116

Those groups supporting a higher cap include the Association of Superannuation Funds of Australia Association. In its submission to the tax white paper in June 2015, ASFA supported a higher limit of $2.5 million and based this amount on several criteria including that this would support an income stream of around $120,000 per year for a person into their 90’s and was close to twice the ‘comfortable’ retirement standard as measured by ASFA.117 Arguments for a cap higher than $1.6 million also noted that should returns be lower, such a balance would support a lower income stream and the potential impact of any financial crisis event that could significantly reduce the balance in such an account.118

Those supporting a lower cap include the Grattan Institute. While acknowledging that the proposed $1.6 million cap was a ‘positive step’, the Grattan Institute considered that all earnings in the retirement phase should be taxed at 15 per cent, noting:

Allowing retirees to amass four times the amount needed for a comfortable retirement and not pay a cent of tax is unacceptable. Even people affected by the cap will pay very little extra tax compared to their total income. Imposing a 15 per cent tax on all superannuation earnings in retirement would have little impact on retirement incomes … A 15 per cent tax on all super earnings would improve budget balances by $2.7 billion a year today, and much more in future.

119

The level of the transfer balance cap is important as several other elements of the changes proposed in the Bill make reference to this amount (Box 1).

112. ITAA 1997, proposed section 294-1. The term ‘retirement phase’ is defined in proposed section 307-80 and generally covers situations where a superannuation income stream is payable and the person has met a condition to release funds from superannuation, including retirement or having a terminal medical condition.

113. Inserted by item 6 of Schedule 11 to the Bill. 114. The indexation arrangements are amended by proposed section 960-285 in Schedule 11, which amend the broader indexation arrangements that apply in the ITAA 1997 to a range of other thresholds. 115. S Morrison, ‘Second reading speech: Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016’, House of Representatives,

Debates, 9 November 2016, p. 78. 116. T Power, ‘Crunching the numbers: a $1.6 million retirement’, Superguide website, 23 May 2016. 117. Association of Superannuation Funds of Australia, Submission to the Treasury, Inquiry into tax discussion paper, May 2015, pp. 17-18. 118. See for example, T McCrann, ‘Brutal but clever’, Herald Sun, 4 May 2016, p. 23. 119. Daley, Coates and Young, A better super system, op. cit., p. 29.

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Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016 [and] Superannuation (Excess Transfer Balance Tax) Imposition Bill 2016 33

Box 1: Use of the $1.6 million transfer balance cap in regulating other arrangements included in the Bill

The ‘general transfer balance cap’ established in Schedule 1 of the main Bill is used in several other areas of the Bill to limit or modify other arrangements including:

• no non-concessional contributions able to be made once this level of superannuation balance is reached120

• no government co-contribution available once this level of superannuation balance is reached121

• no entitlement to the spouse tax offset.122

Application to defined benefit fund members Under existing arrangements, members of certain defined benefit funds do not generally receive their superannuation pension benefits tax-free after age 60, instead paying tax at marginal rates, less a 10 per cent tax offset.123

As part of the 2016 Budget measure for the $1.6 million cap, the Government announced that ‘commensurate treatment for members of defined benefit schemes will be achieved through changes in the tax arrangements for pension amounts over $100,000 from 1 July 2017’.124

Item 32 of Schedule 1 to the main Bill inserts proposed Division 303 into the ITAA 1997 to provide arrangements that apply additional taxation to certain defined benefit income streams. Under these arrangements:

• a ‘defined benefit income cap’ of 1/16th the value of the general transfer balance cap is specified125 (this is therefore $100,000 for 2017-18 based on a transfer balance cap of $1.6 million)

• 50 per cent of any amount above this defined benefit income cap would be included in an individual’s assessable income and would not be eligible for the 10 per cent tax offset.126

The Explanatory Memorandum notes that the choice of a $100,000 threshold to apply this tax rate is based on providing ‘broadly commensurate’ tax outcomes compared to accumulation arrangements, whereby:

The net present value of the additional lifetime tax paid by high balance accumulation members is estimated to be comparable to the net present value of the additional lifetime tax paid on unfunded defined benefit income over $100,000 per annum. 127

Certain factors given special treatment in relation to the $1.6 million cap The proposed $1.6 million transfer balance cap includes several specific modifications to take account of certain types of events that may lead to exceptions being made to monies paid into or out of a transfer balance account. These include:

• structured settlement contributions such as from a personal injury payment or lump sum workers compensation payment that are moved into the superannuation environment are excluded from the $1.6 million cap,128 and

• certain events that result in reduced superannuation (namely losses due to fraud and void transactions under the Bankruptcy Act 1966) and family law payment splits whereby superannuation interests are split following a divorce or relationship breakdown do not count towards the $1.6 million cap.129

120. Item 2 of Schedule 3 to the main Bill inserts proposed subsections 292-85(2) to (4) into the ITAA 1997. 121. Item 7 of Schedule 3 to the main Bill inserts proposed paragraphs 6(1)(da) and (db) into the Superannuation (Government Co-contribution for Low Income Earners) Act 2003. 122. Item 2 of Schedule 7 to the main Bill inserts proposed subsection 290-230(4A) into the ITAA 1997. 123. ATO, ‘Super related tax offsets’, ATO website, last modified 24 May 2016. 124. Australian Government, Budget measure: budget paper no. 2: 2016-17, p. 26. 125. ITAA 1997, proposed section 303-4. 126. ITAA 1997, proposed section 303-2. 127. Explanatory Memorandum, Superannuation (Objective) Bill 2016 [and] Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill

2016 [and] Superannuation (Excess Transfer Balance Tax) Imposition Bill 2016, op. cit., p. 96. 128. Item 4 of Schedule 11 of the main Bill inserts proposed subsection 307-230(2) into the ITAA 1997. 129. ITAA 1997, proposed section 294-80 at item 4 of Schedule 1 to the Bill.

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Schedule 2—Concessional superannuation contributions and income threshold for the imposition of an additional 15 per cent contributions tax

Commencement The amendments in Schedule 2 to the main Bill commence on the first 1 January, 1 April, 1 July or 1 October to occur after Royal Assent.

Key provisions Schedule 2 amends the ITAA 1997, Income Tax (Transitional Provisions) Act 1997, and the Taxation Administration Act 1953 (TAA) to:

• specify the concessional contributions cap to be $25,000 for the 2017-18 financial year and provide for indexation arrangements to increase the cap in $5,000 increments130

• lower the income threshold for the imposition of an additional 15 per cent contributions tax from $300,000 to $250,000131

• specify an amount for the maximum contribution base under the superannuation guarantee—effectively the maximum wages and salary that the quarterly employer contribution is based on—so that mandatory employer contributions cannot by themselves result in employees having excess concessional contributions.132

The Government intends for these measures to take effect from 1 July 2017.

Concessional contributions cap The level of the concessional contributions cap has been subject to a number of changes over recent years, including changes to the age at which a person may have had access to a higher age-based cap. The proposed reduction to $25,000 irrespective of age would see a return to the level that applied in most years over the past decade (Figure 9).

130. Item 1 of Schedule 2 to the main Bill inserts proposed subsection 291-20(2) into the ITAA 1997. 131. Items 15, 17 and 18 of Schedule 2 to the main Bill amend various sections of the ITAA 1997. 132. Item 21 of Schedule 2 to the main Bill inserts proposed subsections 15(5) and (6) into the Superannuation Guarantee (Administration) Act 1992.

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Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016 [and] Superannuation (Excess Transfer Balance Tax) Imposition Bill 2016 35

Figure 8: Concessional contributions cap, 2007-18 to 2017-18

Source: ATO, ‘Key superannuation rates and thresholds: Concessional contributions cap’, ATO website, last modified 7 September 2016.

In broad terms, the argument in favour of a higher cap, or a higher cap for older persons is largely based on the view that higher caps for people as they approach retirement provide an opportunity to contribute more to superannuation, at a time when they more likely to have the available resources to do so.133

Those arguing for a higher general cap, or a higher cap for older persons include the Australian Institute of Superannuation Trustees and the SMSF Association.134 The SMSF Association noted after the 2016-17 Budget announcement:

The Federal Government’s decision to reduce the concessional contribution cap down to $25,000 is a backward step that will severely reduce the ability of people to save adequately for retirement.

We strongly believe that adequate concessional contribution caps are vital to allow people to save for a secure and dignified retirement. It is especially important that people approaching retirement have adequate contribution caps to maximise contributions to superannuation when they are most likely to have the financial resources to do so. 135

Advocates for a lower annual concessional cap include the Grattan Institute, which argues for an $11,000 cap on concessional contributions.136 In making the case for this lower cap, the Grattan Institute notes:

The tax breaks on contributions disproportionately benefit high income earners: they save more tax per dollar contributed, and they contribute more dollars. Voluntary pre-tax contributions over $10,000 in a year are mostly

133. See for example, B Shorten, ‘Second reading speech: Tax and Superannuation Laws Amendment (Increased Concessional Contributions Cap and Other Measures) Bill 2013’, House of Representatives, Debates, 15 May 2013, p. 3202. 134. Australian Institute of Superannuation Trustees, Super budget changes still improve fairness and sustainability of system, media release, 15 September 2016. 135. SMSF Association, Super changes cause for concern for SMSFs, media release, 3 May 2016. 136. J Daley, B Coates and D Wood, Super tax targeting, Grattan Institute, Carlton, November 2015, p. 2.

$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18

(proposed)

Annual concessional contributions cap ($)

Higher older age cap General cap

age +50 age +50

age +50 age +50 age +50

age 59+ age 49+ age 49+ age 49+

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Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016 [and] Superannuation (Excess Transfer Balance Tax) Imposition Bill 2016 36

about tax planning rather than adding to net savings. Those contributing more than $10,000 a year are predominantly high-income men aged over 50.

As a result, the tax breaks for contributions of more than $10,000 a year primarily benefit those who would have self-funded their retirement anyway. Indeed, around 24 per cent of voluntary pretax contributions are made by those aged over 60, entitled to withdraw their contributions immediately.

The best way to reform these tax breaks would be to limit concessional contributions to a maximum of $11,000 per year. This change would target superannuation tax breaks to those who need them to reduce and replace their Age Pension. It would be relatively easy to implement, and would improve the budget bottom line by around $3.5 billion a year.

137

Lower the income threshold for the imposition of an additional 15 per cent contributions tax from $300,000 to $250,000 The additional 15 per cent tax on concessional contributions for those above a $300,000 income threshold was announced by the Rudd Government in the 2012-13 Budget.138 The introduction of the measure was largely based on equity grounds, with the measure aimed at making ‘the superannuation system fairer by reducing the tax concession which very high income earners receive on their concessional contributions, so it is more in line with the concession received by average income earners’.139

At the time the originating Bill to introduce the measure was being considered, the Coalition did not oppose it, but based this approach on the budget position at the time, with then Shadow Parliamentary Secretary for Tax Reform, Tony Smith noting:

These Bills contain a tax increase on superannuation that the Coalition would not wish to see in place, but due to years of mismanagement we have been left with little choice.

This tax provides a gain to the budget of $1.747 billion over the forward estimates. Whilst the Coalition would in normal circumstances be opposed to yet another tax increase by Labor, as the Leader of the Opposition outlined in his budget reply speech, given the state of the budget the coalition will not oppose this schedule. 140

The income threshold for the measure, currently $300,000, uses an income definition based on that used for Medicare levy surcharge purposes, less reportable superannuation contributions.141 This is a broader income definition than taxable income, including amounts such as reportable fringe benefits amounts and total net investment losses.142 Having been in place since 1 July 2012, the number of tax assessments issued in relation to the additional 15 per cent tax has increased each year, with the value of tax assessments issued in 2015-16 exceeding $500 million at an average value of around $3,600 (Table 3).

137. Ibid., p. 39. 138. Australian Government, Budget measures: budget paper no. 2: 2012-13, p. 41. 139. Ibid. 140. T Smith, ‘Second reading: Tax and Superannuation Laws Amendment (Increased Concessional Contributions Cap and Other Measures) Bill

2013, Superannuation (Sustaining the Superannuation Contribution Concession) Imposition Bill 2013’, House of Representatives, Debates, 29 May 2013, p. 4262. 141. Schedule 3, Tax and Superannuation Laws Amendment (Increased Concessional Contributions Cap and Other Measures) Act 2013. 142. ATO, ‘Income tests’, ATO website, last modified 10 August 2016.

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Table 3: Tax assessments for taxpayers liable for the additional 15 per cent tax on concessional contributions, 2013-14 to 2015-16 2013-14 2014-15 2015-16

No. of tax assessments issued 96,900 118,500 137,673

Value of tax assessment issued ($ million) $294 $378.9 $504.1

Average value of assessments $3,034 $3,197 $3,662

Source: Commissioner of Taxation, Annual report 2015-16, vol. 1., ATO, Canberra, p. 133.

As noted previously, the ALP has proposed to lower the threshold further to $200,000, which it states would apply to less than four per cent of taxpayers and provide additional revenue of $688 million in the four years to 2019-20.143

Schedule 3—Non-concessional contributions

Commencement The amendments in Schedule 3 to the main Bill commence on the first 1 January, 1 April, 1 July or 1 October to occur after Royal Assent.

Key provisions Schedule 3 to the main Bill amends the ITAA 1997 to provide:

• the annual non-concessional contributions cap will be four times the annual concessional contributions cap from the 2017-18 financial year144

• if a person has a superannuation balance that exceeds the general transfer balance cap (proposed to be $1.6 million for 2017-18) then the non-concessional cap is taken to be nil

• indexation arrangements will allow the cap to be increased in $2,500 increments with changes in average weekly ordinary times earnings as measured by the Australian Bureau of Statistics

• arrangements relating to the existing three-year carry forward rule for individuals aged under 65 at any time during that financial year are changed so that the carry forward period and amounts depend on the difference between the value of their total superannuation balance and the general transfer balance cap and the value of the annual non-concessional cap

• eligibility for the government co-contribution is limited so that individuals are not eligible for the co-contribution if their non-concessional contributions exceed their non-concessional contributions cap or if at 30 June of the previous year their total superannuation balance exceeded the general transfer balance cap, and

• transitional arrangements for those whose three year carry forward period includes the 2017-18 financial year and the change from the existing arrangements which have a higher non-concessional cap.

The Government intends these measures to take effect from 1 July 2017.

Under existing arrangements the non-concessional contributions cap is set at six times the value of the general concessional contributions cap, with the cap therefore being $180,000 in 2016-17.145 When implemented in 2007-08, the non-concessional contributions cap was $150,000, and remained at this level up until 2014-15, when it increased to the present level of $180,000.146 People aged under 65 years may be able to make non-concessional contributions of up to three times their non-concessional contributions cap for the year, over a

143. C Bowen (Shadow Treasurer) and K Gallagher (Shadow Minister for Small Business and Financial Services), A super system that’s fairer & a budget that’s better off, media release, 8 November 2016. 144. Item 2 of Schedule 3 to the main Bill inserts proposed subsections 292-85(2) to (4) into the ITAA 1997. 145. ATO, ‘Non-concessional contributions cap’, ATO website, last modified 7 September 2016; subsection 292-85(2), ITAA 1997. 146. ATO, ‘Non-concessional contributions cap’, op. cit.

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three-year period.147 This is known as the ‘bring-forward’ option and would allow, for example, an eligible person to bring forward contributions of 3 x $180,000 = $540,000 for 2016-17.

The proposal for a $100,000 annual non-concessional contributions cap was part of the Government’s 15 September 2016 amended package of measures, effectively replacing the measure for a $500,000 lifetime cap on non-concessional contributions, which would have applied from 1 July 2007.148

As previously noted, the ALP has proposed lowering the annual non-concessional contributions cap further, to $75,000.149

Schedule 4—Low income superannuation tax offset

Commencement The provisions of Schedule 4 to the main Bill commence on 2 July 2017.

Key provisions Schedule 4 to the main Bill amends the Superannuation (Government Co-contribution for Low Income Earners) Act 2003 to provide for the payment of the low income superannuation tax offset (LISTO) to a person’s superannuation fund if their adjusted taxable income is $37,000 or less, from the 2017-18 income year. The payment is to be calculated at 15 per cent of the total eligible concessional contributions up to a maximum of $500.

The LISTO effectively replaces the low income superannuation contribution (LISC), which made a payment of up to $500 to a person’s superannuation fund based on the same maximum income threshold. The policy rationale for both the LISTO and LISC was that the reimbursed amount returns the 15 per cent tax paid on concessional contributions so that an eligible person does not pay any more tax on these contributions than they would have paid had they received the money as salary or wages and paid tax in their own hands.

The provisions in Schedule 4 largely replicate the existing arrangements for the LISC in the Superannuation (Government Co-contribution for Low Income Earners) Act 2003, which will be repealed from the Act from 1 July 2017 by Schedule 7 of the Minerals Resource Rent Tax Repeal and Other Measures Act 2014. The key difference is the replacement of the term ‘contribution’ with the term ‘tax offset’. In legislating for the repeal of the LISC in 2013 and 2014, the Coalition did not oppose the purpose of the LISC, but rather focussed on the lack of revenue raised by the minerals resource rent tax (MRRT)—which it argued was introduced to partly pay for this measure.150 Introducing the first Bill to repeal the MRRT in 2013 (which would also have repealed the LISC from 1 July 2013), the Treasurer Joe Hockey noted:

When we are responsibly able to and once the budget has been returned to a strong surplus the Coalition will revisit the concessional contribution caps and incentives for lower income earners. The removal of [the LISC], which is going to be funded by borrowed money and is unsustainable in its form, will save the budget $2.7 billion over the forward estimates.

151

In the financial year 2015-16, the Australian Taxation Office identified more than 3.14 million beneficiaries for the LISC, with payments totalling almost $800 million (average payment of $254).152

The introduction of the LISTO has broad support across the superannuation industry. For example, the AIST noted when the Bills were introduced into the Parliament:

[O]f the super tax changes in the legislation introduced into Parliament yesterday, the Low Income Super Tax Offset (LISTO) is the most critical, impacting on more than 3 million Australians, or about 20% of fund members.

147. Subsections 292-85(3) and (4), ITAA 1997. 148. S Morrison (Treasurer) and K O’Dwyer (Minister for Revenue and Financial Services), Even fairer, more flexible and sustainable superannuation, joint media release, 15 September 2016. 149. Bowen and Gallagher, A super system that’s fairer & a budget that’s better off, op. cit. 150. Explanatory Memorandum, Minerals Resource Rent Tax Repeal and Other Measures Bill 2013, p. 37. 151. J Hockey, ‘Second reading speech: Minerals Resource Rent Tax Repeal and Other Measures Bill 2013’, House of Representatives, Debates,

13 November 2013, p. 86. 152. ATO, ‘Annual reports - low income superannuation contributions’, ATO website, last modified 17 October 2016.

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Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016 [and] Superannuation (Excess Transfer Balance Tax) Imposition Bill 2016 39

Without support for this measure, more than three million low income Australians, of which nearly two thirds are women, will be paying more tax on their super than their take home pay from next July … The LISTO is an equity measure that is fundamental to the integrity of the super system and it is therefore essential that this measure is legislated and not caught up in the political crossfire.

While important and welcome, the other tax measures are less significant in terms of their impact on individual Australians than the LISTO, which will boost the super of low income earners by up to $500 a year … Based on Treasury estimates, the impact of the LISTO on fund members is nearly 20 times that of nearly all the other tax measures.

153

Schedule 5—Deducting personal contributions

Commencement The amendments in Schedule 5 to the main Bill commence on the first 1 January, 1 April, 1 July or 1 October to occur after Royal Assent.

Key provisions Schedule 5 of Bill amends the ITAA 1997 to remove an existing arrangement in subsection 280-10(1) of that Act that does not allow individuals to deduct personal superannuation contributions if 10 per cent or more of their income is attributable to employment or similar activities. The Government intends the measure to take effect from 1 July 2017.

This so-called ‘10% rule’ was first introduced in 1992 by the Taxation Laws Amendment (No. 2) Act 1992. However, the Explanatory Memorandum that accompanied the legislation did not provide an explanation about why a 10 per cent figure was chosen, nor was it referred to by the Minister in his second reading speech for the Bill.154

The abolition of the 10 per cent rule has been advocated by a number of interest groups over recent years. For example, in their 2015-16 pre-budget submission, Chartered Accountants Australia New Zealand recommended removing the rule, noting:

The current "10% rule" means that only taxpayers who earn less than 10% of their assessable income from an employer source can claim a tax deduction for personal superannuation contributions. Access to this deduction is actually only available to relatively few people, generally those who are fully self­employed as sole traders.

Many employers currently allow their employees to salary sacrifice additional superannuation contributions, effectively overcoming the inability of their employees to claim their own deduction. By forgoing salary and wages to contribute (or have contributed for them) tax effective superannuation contributions up to the concessional contribution cap, they have overcome any need for directly claiming a deduction for otherwise personal contributions.

Effectively this means employees whose employers do not allow them to salary sacrifice are disadvantaged. Australians trying to save for their retirement should not be deprived of superannuation concessions by working for an employer who does not allow them to salary sacrifice into superannuation. In our view, it would be more equitable and efficient to permit employees to make personal concessional contributions in order to "top up" their employer contributions.

155

It is also noteworthy that in its 2010 election policy, the ALP also supported the removal of the 10 per cent rule, noting in August 2010:

153. Australian Institute of Superannuation Trustees, Super changes that improve retirement outcomes for low income earners must be supported, media release, 2016. 154. Explanatory Memorandum, Taxation Laws Amendment Bill (No. 2) 1992, pp. 92-95; P Baldwin, ‘Second reading speech: Taxation Laws Amendment Bill (No. 2) 1992’, House of Representatives, Debates, 2 April 1992, p. 1767. 155. Chartered Accountants Australia New Zealand, Submission to the Treasury, 2015-16 Pre-budget submission, 6 February 2015, pp. 13-15.

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The self-employed require appropriate incentives and opportunity to adequately save for their retirement. The arbitrary ’10 per cent’ rule for the tax deductibility of superannuation contributions must be removed to ensure the opportunity is available and all workers have equal access to the superannuation concessions available.

Deductibility for personal contributions to superannuation primarily assists individuals who are substantially or wholly self-employed or who are not gainfully employed. The deduction is allowed in recognition of the fact that these groups do not benefit, or benefit only to a limited extent, from the Superannuation Guarantee. 156

Schedule 6—Unused concessional cap carry forward

Commencement The amendments in Schedule 6 to the main Bill commence on the first 1 January, 1 April, 1 July or 1 October to occur after Royal Assent.

Key provisions Schedule 6 of the Bill amends the ITAA 1997 to implement arrangements whereby amounts that are unused from the concessional contributions cap from the previous five financial years can be carried forward, subject to the person’s total superannuation balance being $500,000 or less.157 These arrangements are to commence from the 2019-20 financial year, thereby incorporating any unused concessional contributions from the 2018-19 financial year onwards.

The concessional contributions carry forward arrangements have been promoted by the Government as ‘giving Australians the flexibility to make catch-up concessional contributions when they can afford it’.158

Prior to the 2016-17 Budget announcement, the SMSF Association supported a carry forward approach for concessional contributions:

The current system delivers a poor result for people with volatile incomes - those with broken work patterns, especially women, small business owners or farmers whose income can fluctuate widely. These people may be able to make significant contributions to superannuation in some years but not others.

In addition, younger people who are unable to make contributions above compulsory superannuation contributions earlier in life due to financial commitments, such as mortgages and raising families, will have an opportunity to increase their contributions later in life.

Contrary to what many believe, a carry-forward approach is a more equitable and sustainable approach for the superannuation system in preference to a lifetime contribution cap approach. 159

As noted previously, the ALP opposes this measure.160

Schedule 7—Tax offsets for spouse contributions

Commencement The amendments in Schedule 7 to the main Bill commence on the first 1 January, 1 April, 1 July or 1 October to occur after Royal Assent.

Key provisions Schedule 7 of the Bill amends the ITAA 1997 so that the income threshold for an existing tax offset—which allows an individual to claim a tax offset of up to $540 per year for superannuation contributions made on behalf of their spouse if the spouse’s income is less than $13,800— will be increased to $40,000 from the 2017-18

156. Australian Labor Party (ALP), CPA Australia: governance and accountability in government: if re-elected, will the Labor Government commit to improving accountability and associated governance. ALP policy document, Election 2010, p. 12, 157. Item 4 of Schedule 6 to the main Bill inserts proposed subsections 291-20(3) to (7) into the ITAA 1997. 158. S Morrison, ‘Second reading speech: Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016’, House of Representatives,

Debates, 9 November 2016, p. 78. 159. SMSF Association, SMSF urges flexible approach to concessional caps, media release, 29 March 2016. 160. Bowen and Gallagher, A super system that’s fairer & a budget that’s better off, op. cit.

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Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016 [and] Superannuation (Excess Transfer Balance Tax) Imposition Bill 2016 41

financial year.161 A further amendment will remove the ability to claim a tax offset if the spouse’s total superannuation balance before the start of the relevant year exceeds the general transfer balance cap ($1.6 million in 2017-18) or if the spouse’s non-concessional contributions for the year exceed their non-concessional contributions cap for the year.

Eligibility to claim the tax offset for a spouse superannuation contribution is set out in section 290-230 of the ITAA 1997. The income threshold of $13,800 incorporates a definition of income that comprises assessable income plus reportable fringe benefits total and reportable employer superannuation contributions. The value of the offset is limited by section 290-235 of the ITAA 1997, which specifies a maximum rebate of $540 with the calculated amounts below this to be a rebate of 18 per cent of the lesser amount of:

• $3,000 less the amount by which the total spouse income (which for eligibility is $13,800) exceeds $10,800 or

• the sum of the spouse contributions made by the individual.

A tax offset for spouse contributions was introduced from the 1998-99 financial year by Schedule 10 of the Taxation Laws Amendment Bill (No. 3) 1997, which incorporated an income threshold of $13,800 and a maximum rebate of $540. According to the revised Explanatory Memorandum for the relevant Bill, the introduction of the measure was announced in the 1996-97 Budget.162 The introduction of the measure reflected a Coalition 1996 election commitment relating to improving superannuation for women.163

Tax statistics collected by the ATO show that in 2013-14, around 12,000 taxpayers claimed the tax offset, with the average offset claimed being $414.164 The number of taxpayers claiming the offset has declined from a highpoint of around 35,000 in the mid-2000s. The Treasurer noted in his second reading speech for the main Bill that the change ‘will encourage an additional 5,000 people to make contributions to the superannuation accounts of their low income partners, who are disproportionately women’.165

Schedule 8—Innovative income streams and integrity

Commencement The amendments in Schedule 8 to the main Bill commence on the first 1 January, 1 April, 1 July or 1 October to occur after Royal Assent.

Key provisions Schedule 8 amends the ITAA 1997 to:

• remove the earnings tax exemption in respect to transition to retirement income streams (TRISs—also sometimes referred to as TRIPs)

• extend the earnings tax exemption to new ‘lifetime’ products such as deferred products and group self-annuities, and

• provide for the use of the so-called ‘proportioning method’ by SMSFs and small APRA funds rather than the ‘segregated method’ to determine their earnings tax exemption for an income year if a person has a total superannuation balance that exceeds $1.6 million.

Remove the earnings tax exemption in respect to transition to retirement income streams Under the transition to retirement scheme, if a person has reached their superannuation preservation age, they may be able to continue to work and draw a superannuation income stream, subject to certain conditions.166 In terms of taxation arrangements, a key feature of TRIS arrangements is that earnings on assets supporting the income stream are exempt from tax.

161. Item 1 of Schedule 7 to the main Bill amends existing paragraph 290-230(2)(c) of the ITAA 1997. 162. Explanatory Memorandum, Taxation Laws Amendment Bill (No. 3) 1997. 163. Liberal Party of Australia and the Nationals, Super for all: security and flexibility in retirement: the federal Coalition's superannuation and retirement incomes policy, Coalition policy document, Election 1996, p. 9.

164. ATO, ‘Table 1: Selected items for income years 1978-79 to 2013-14’, ‘Taxation statistics 2013-14: individuals’, ATO website, last modified 18 March 2016. 165. S Morrison, ‘Second reading speech: Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016’, House of Representatives, Debates, 9 November 2016, p. 78. 166. ATO, ‘SMSF - transition to retirement income streams’, ATO website, last modified 19 September 2014.

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Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016 [and] Superannuation (Excess Transfer Balance Tax) Imposition Bill 2016 42

The transition to retirement arrangements were first announced in February 2004 as part of the Howard Government’s broader agenda to respond to demographic ageing.167 In announcing the arrangements, the Government noted at the time:

As the population ages, the need for people to retain a connection with the workforce will become increasingly important. The skills and experience of older Australians will make them valuable employees with much to contribute. In recognition of this, people who have not retired will be able to access their superannuation as a non-commutable income stream once they reach their superannuation preservation age.

This measure will provide people with more flexibility in developing strategies in their transition to retirement. For example, a person might choose to continue to work with their employer on a part-time basis, and use part of their superannuation to supplement their income instead of leaving the workforce altogether. 168

The TRIS arrangements commenced from 1 July 2005, with the policy changes implemented by amendments to the Superannuation Industry (Supervision) Regulations.169 These changes provided for the new limited condition of release for benefits held in a superannuation fund to accommodate the TRIS arrangements and provided for a maximum 10 per cent of the account balance to be drawn down, depending on the pension product and member’s age.

On the tax side of TRIS arrangements, it is important to note that TRIS arrangements came into effect prior to the ‘simplified super’ taxation changes implemented by Treasurer Costello from 1 July 2007 which provided for tax-free super (benefits and earnings) from age 60.

‘Integrity’ concerns about the TRIS arrangements are based on a view that the arrangements are not genuinely being used to reduce working hours and transition into retirement, instead allowing individuals to salary-sacrifice contributions at the concessional rate of 15 per cent while employers still pay the compulsory superannuation guarantee.170 In a July 2015 paper, the Productivity Commission noted some of these concerns:

However, [TRIS] arrangements can also be used by individuals to remain working full-time, receive the income from the pension (at a concessional rate, especially after the age of 60) and make salary sacrifice from their wage income to maintain their superannuation balances. Put more simply, wage income, which may be taxed at a higher rate, is salary sacrificed at a concessional rate in exchange for income from the superannuation balance which is taxed at a lower rate than wages. This can be used by some to reduce their tax liabilities while maintaining the same level of income.

171

Extend the earnings tax exemption to new ‘lifetime’ products Schedule 8 of the main Bill also includes amendments to provide for a broader suite of retirement income products to qualify for the earnings tax exemption, including those that provide a deferred income stream.

In making these changes, the Government has implemented concerns raised in a number of reviews and reports, including the Henry Tax Review (2009-2010), the Financial System Inquiry and the Productivity Commission, about the ‘longevity risks’ associated with an ageing population.172 In brief, the longevity risk—the risk of outliving savings in retirement—may be mitigated by allowing for a broader set of financial products, such as deferred lifetime annuities.

In April 2013, the Gillard Government announced a policy that would encourage the take-up of deferred lifetime annuities, by providing these products with the same concessional tax treatment that superannuation assets

167. Australian Government, A more flexible and adaptable retirement income system, Australian Government, Canberra, February 2004. 168. Ibid., p. 10. 169. Superannuation Industry (Supervision) Amendment Regulations 2005 (No. 2). 170. See for example, P Coorey, ‘Super transition tax “loopholes” in play’, The Australian Financial Review, 29 October 2015, p. 1. 171. Productivity Commission (PC), Superannuation policy for post-retirement, Research paper, ‘vol. 2: supplementary papers’, PC, Canberra,

July 2015, p. 144. 172. Ibid., p. 21; Henry, Australia’s future tax system, ‘Part two: detailed analysis’, vol. 1, op. cit., p. 121; Financial System Inquiry, Financial System Inquiry: final report, op. cit., pp. 120-130.

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Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016 [and] Superannuation (Excess Transfer Balance Tax) Imposition Bill 2016 43

supporting income streams receive.173 However, this measure was not implemented prior to the September 2013 election.

Following the election, the Abbott Government announced that it would not implement the measures, instead considering the proposal as part of the review of the regulatory arrangements for retirement income streams.174 A discussion paper for this review was released in July 2014.175 A Government response was released on 3 May 2016, coinciding with the 2016-17 Budget.176

Schedule 9—Anti-detriment provisions

Commencement The amendments in Schedule 9 to the main Bill commence on the first 1 January, 1 April, 1 July or 1 October to occur after Royal Assent.

Key provisions Schedule 9 of the main Bill amends the ITAA 1997 and the Income Tax (Transitional Provisions) Act 1997 to repeal the relevant references to detriment payments.

Under section 295-485 of the ITAA 1997, complying superannuation funds and approved deposit funds are able to claim an income tax deduction when they provide a lump sum benefit because of the death of a member for the benefit of their spouse, former spouse or children. This tax saving amount—referred to as an anti-detriment payment—is an additional amount that may be paid to an eligible dependent and represents a refund of the 15 per cent contributions tax that has been paid by the deceased member over their lifetime.177

While the relevant provisions were inserted into the ITAA 1997 in 2007 by the Tax Laws Amendment (Simplified Superannuation) Act 2007, an equivalent provision existed prior to this in former section 279D of the Income Tax Assessment Act 1936. This provision dates back to 1989, when contributions and earnings tax on superannuation were introduced by the Hawke Government by the Taxation Laws Amendment (Superannuation) Act 1989. Introducing the relevant Bill in 1989 the then Assistant Treasurer Peter Morris noted in relation to this provision:

A special deduction will enable tax exempt death benefits paid by superannuation funds to be paid at the same levels as before the changes taking effect from 1 July 1988. This deduction acknowledges that the contributions tax cannot be compensated for in such cases by the 15 per cent reduction in tax rates applicable to taxable [eligible termination payments].

178

Schedule 11—Dictionary Schedule 11 includes amendments to the ITAA 1997 to define key terms associated with amendments in other parts of the main Bill including the term ‘total superannuation balance’.

173. W Swan (Treasurer) and B Shorten (Minister for Financial Services and Superannuation), Reforms to make the superannuation system fairer, joint media release, 5 April 2013. 174. J Hockey (Treasurer) and A Sinodinos (Assistant Treasurer), Restoring integrity in the Australian tax system, joint media release, 6 November 2013. 175. The Treasury, Review of retirement income stream regulation, Discussion paper, The Treasury, Canberra, July 2014. 176. The Treasury, Retirement income streams review, The Treasury, Canberra, May 2016. 177. ATO, ‘Paying superannuation death benefits’, ATO website, last modified 8 September 2015. 178. P Morris, ‘Second reading: Taxation Laws Amendment (Superannuation) Bill 1989’, House of Representatives, Debates, 4 May 1989, p. 2008.

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