House of Representatives
Tax Laws Amendment (Simplified Superannuation) Bill 2006
Tax Laws Amendment (Simplified Superannuation) Act 2007
Second Reading Speech
Mr Costello (Treasurer)
That this bill be now read a second time.
When I handed down the 2006-07 budget on 9 May this year, I announced the most significant reforms to the taxation of superannuation in Australia's history.
The reforms were received positively throughout the community, including by some who are not usually complimentary to the government. Former Labor minister Susan Ryan wrote on 12 May 2006 that:
Costello's uncharacteristically bold and effective plan to simplify super and reduce its taxes should be commended ...
She went on to say:
Maybe faced with the Treasurer's bold gazumping of Labor's cherished but slightly shabby super property, the opposition will find the resolve to get another big picture worked out and the wherewithal to let voters know about it.
Garry Weaven, industry fund advocate and former ACTU office-bearer, wrote in June that:
The Government's recent budget initiatives have proved that the Liberal Party is now the official party for superannuation.
The Institute of Actuaries stated in May that it:
... strongly applauds the Government's 'big bang' approach to the Budget reforms. This approach instantly reduces the complexity caused by 'grandfathering' of the previous tax changes ... the tax reductions and simplification measures announced in the Budget present a huge step forward in the evolution of Australia's retirement income regime.
The amendments in this bill implement the government's superannuation plan. The reforms will sweep away the current raft of complex tax arrangements that apply to superannuation, improve incentives to save, increase retirement incomes, and strengthen incentives for older Australians to stay in the workforce.
Australia's superannuation system has become increasingly complicated as a result of changes that have occurred over the last two decades. The complexities in the current tax arrangements for superannuation benefits discourage people from saving for retirement. If people cannot easily understand what they will receive from their superannuation, they will have less confidence in the system. This confuses retirement decisions and clouds the incentive to invest in superannuation.
The simplified superannuation reforms will encourage people to take a greater interest in their superannuation and give people greater confidence to make additional savings. The earlier people contribute, the greater the benefits they will be able to reap from the low-tax and long-term investment environment which is available in the superannuation system.
The amendments in this bill are also an important part of the government's commitment to reduce the complexity of the tax law, regulatory burdens and compliance costs faced by taxpayers. The reforms will cut the number of pages of superannuation law in the income tax assessment acts by over a third.
Under the new rules, in the vast majority of cases, for the 90 per cent of Australians in taxed schemes the tax treatment of their superannuation benefit will be covered in one paragraph of law if they access their superannuation after age 60. That paragraph will be, 'No tax on lump sums and no tax on pensions.'
The centrepiece of this bill is that Australians aged 60 or over will be able to access their superannuation benefits tax free if they are paid from a taxed superannuation fund. Retirees will pay no tax on lump sums and no tax on superannuation pensions. Reasonable benefit limits will be abolished. Cutting taxes will encourage saving and improve retirement incomes. A lower rate of tax and simplified arrangements will also apply to superannuation benefits paid from an untaxed fund to people aged 60 and over.
Retirees will pay lower taxes on their work income once they start drawing on their superannuation, thereby removing the current disincentive for older Australians to remain in the workforce. Improving productivity and sustaining workforce participation are integral to reducing the fiscal pressure of Australia's ageing population.
Further improvements in incentives to save will be achieved by the halving of the pension assets test taper rate from $3 to $1.50 per fortnight for every $1,000 of assets above the relevant threshold. Pensioners currently have to achieve an after-tax return of 7.8 per cent on their additional savings; otherwise they lose more age pension than they generate in income on their savings. The halving of the taper rate will reduce the break-even rate of return to 3.9 per cent. Those who will benefit from the halving of the pension assets test taper rate include not only recipients of the age pension, but also disability pensioners, people receiving the carer payment, Department of Veterans' Affairs service pensioners and recipients of the wife pension, widow B pension and bereavement allowance.
The bill introduces simple and streamlined contribution limits to replace age based limits. Concessional contributions made from pre-tax moneys will be limited to $50,000 per person per year. A transitional limit of $100,000 per person per year will apply for anyone aged 50 or over up to the 2011-12 financial year. Employers will be able to claim a full tax deduction for contributions to superannuation on behalf of employees under age 75.
To ensure superannuation tax concessions are targeted appropriately, a limit of $150,000 per person per year or $450,000 over a three-year period will also apply to contributions from post-tax income. A transitional cap of $1 million on post-tax contributions will apply between 10 May 2006 and 30 June 2007. These arrangements will allow people who were planning larger contributions under the existing rules to continue with their plans. Contributions will still be subject to any applicable work test. Proceeds from the settlement of an injury resulting in permanent disablement will be exempt from the cap on post-tax contributions.
The bill also strengthens contribution incentives for the self-employed by bringing them into line with those for employees. The self-employed will be allowed to claim a 100 per cent deduction for all contributions to superannuation, compared to the 75 per cent deduction they currently receive for contributions above $5,000, with a maximum deduction equal to their age based limit. Individuals will be able to contribute up to $1 million over their lifetime from the sale of eligible small business assets, over and above the cap on post-tax contributions. In addition, the government's highly successful co-contribution scheme will be extended to low- and middle-income self-employed people.
Under the reforms concessions on large employment termination payments will be limited. Currently, both superannuation and employment termination payments are counted together in assessing whether a person exceeds their reasonable benefit limits. As the reasonable benefit limits are being removed for superannuation benefits, it is necessary to apply an upper limit on the amount of employment termination payments that receive concessional tax treatment.
In order to ensure the integrity of the generous taxation concessions given to superannuation, it is necessary to ensure that tax file numbers are quoted for as many superannuation accounts as possible. Increased TFN quotation will also, over time, lead to better matching of people with their lost superannuation benefits. Where a tax file number is not quoted, a higher rate of tax will be imposed on concessional contributions, in a similar way to the higher rate of tax imposed on bank account interest, wages and dividend income where a tax file number is not quoted. People will generally have until 30 June 2008 to quote their tax file number if they have not already done so, before the higher rate need apply. The additional tax will be refunded where people subsequently quote their TFN within four years.
When an individual reaches age 65 and cannot be contacted by their fund, their superannuation benefits become unclaimed money and are paid to the government of the state or territory in which the superannuation fund is based. These moneys are held in trust by the relevant government until claimed by the rightful owner or their estate. This results in a fragmented system for individuals searching for unclaimed superannuation, particularly if they have worked in numerous states or their fund was based in a different state to that in which they were employed. These arrangements are not optimal for older Australians trying to find their superannuation.
The Australian government is significantly enhancing the policy and administrative framework to ensure that individuals receive the full benefit from their superannuation savings. The government has provided a significant increase in resources for the ATO to reduce the amount of money held in lost accounts. This includes rationalising existing processes to identify actual lost members; more comprehensive reporting from funds; an extensive letter campaign to lost members in 2007-08 and 2008-09; establishing a web based tool for locating lost accounts; and, by 2009-10, enabling members to electronically request consolidation of their accounts through the ATO website.
The Australian government will now take full responsibility for the management of unclaimed superannuation, which means that, in future, unclaimed superannuation money will not be paid to the states or territories. This is consistent with the arrangements for lost superannuation and provides a single access point for individuals searching for lost or unclaimed superannuation and a simpler nationalised claims process going forward. As a result, individuals will be able to seek advice directly from the ATO on any superannuation related issue, without having to contact numerous government agencies.
These changes will not affect state and territory government superannuation schemes.
The Australian government is investing significant resources in these changes to assist more individuals to access all of their superannuation at retirement.
In addition to implementing the government's reforms, the bill also rewrites the superannuation tax law into the Income Tax Assessment Act 1997 to present a clearer picture of the taxation of superannuation savings across the life of the superannuation investment. Currently, provisions are located in different parts of the old legislation and not in a logical sequence.
Significant improvements have been made to the law which will make it easier to use by taxpayers and practitioners. These include the use of plain English contemporary drafting, guides to sets of rules and the grouping of rules on a case-by-case basis. These improvements will aid in reducing compliance costs and the regulatory burden faced by business and other taxpayers. They also demonstrate the government's commitment to responding to the report of the Taskforce on Reducing Regulatory Burdens on Business, Rethinking regulation, which recommended that high priority be given to comprehensive simplification of the tax rules for superannuation.
Over 10 million individuals, 1.3 million employers and more than 310,000 superannuation funds are potentially affected by these extensive reforms. This bill represents a substantial investment by the government in the standard of living of Australians in retirement and demonstrates its commitment to addressing the challenges of Australia's ageing population. The streamlined superannuation system established by this bill is another major step along the path of ensuring Australia maintains a prosperous and stable economy for future generations.
I thank all of the people who have worked so hard on these reforms-the Assistant Treasurer, Mr Dutton, who is here, and his staff, my staff, the Treasury officials who are also here and who have done a wonderful job on this landmark reform. Full details of the measures in this bill are contained in the explanatory memorandum. I commend the bill to the House.
Debate (on motion by Mr Edwards) adjourned.