Tax and super
Making our tax system more sustainable so we can cover the Government’s responsibilities for the next generation
Please note: some Budget measures may be subject to the passage of legislation.
Australia’s population is changing, our way of doing business is changing, and the opportunities and challenges we face are changing.
As we go through this economic transition, it is vital that our tax and superannuation systems are modernised to ensure that they are doing their job to drive economic growth and national prosperity.
A prosperous Australia needs a well-targeted superannuation system that supports and encourages all Australians to save and not be dependent on the Age Pension in retirement. We have a world-class superannuation system and we want to keep it that way. Better targeting superannuation tax concessions will improve the sustainability and integrity of the superannuation system.
Australia also needs a sustainable tax system that can continue to fund public services like schools, hospitals, defence and welfare spending while creating the right settings for enterprise, innovation and investment.
This means having a tax system with integrity. That is why the Government will crack down more heavily on multinational tax avoidance and introduce a responsible tax package that supports jobs and growth.
These are the settings we need to get right to encourage jobs and growth for today and the next generation, so that we can afford to provide the services and infrastructure that will be needed now and into the future.
The Budget takes important steps to modernise Australia’s tax and superannuation systems. This is a tax and superannuation plan for Australia’s future.
Australia needs a superannuation system that has a clear objective and is fit for purpose
Superannuation is one of the three pillars of Australia’s retirement income system. Together with the Age Pension and savings outside of superannuation, it supports Australians in their retirement years.
As the population ages and fiscal pressures increase, it is important to ensure that the tax concessions for superannuation are affordable and well-targeted.
It is important that all Australians are encouraged to save for their own retirement. A superannuation system that is structured around targeted incentives to save will ensure that an increasing number of Australians become more self-sufficient in retirement.
Targeted tax concessions, combined with the changes the Government made to rebalance the Age Pension asset test in the last Budget, promote a more sustainable retirement income system.
The superannuation system also needs to be flexible, by providing more choice and access to superannuation to help Australians enjoy retirement.
Australians need to have confidence in the superannuation system, assured that it is being used for its core purpose of providing income in retirement and not for tax minimisation and estate planning purposes.
It is important to get the superannuation settings right to encourage savings while ensuring that the system is fiscally sustainable.
A clear objective for superannuation
The objective of superannuation, which for the first time will be enshrined in legislation, is ‘to provide income in retirement to substitute or supplement the Age Pension’.
Having this clear objective will enhance stability in the superannuation system by creating a clear framework for superannuation policy – and a way to assess whether the system is meeting its objective. The objective for superannuation has been an important anchor for the development of the superannuation changes.
96 per cent of individuals with superannuation will not be adversely affected by these changes
To ensure the superannuation tax arrangements support the objective of superannuation and are fiscally sustainable, the Government will better target tax concessions to those who need incentives to save by:
This puts a limit on taxpayer support for tax-free retirement phase accounts, but does not limit the savings that can be accumulated outside these accounts or outside superannuation. A balance of $1.6 million could support an income stream in retirement of around four times the level of the single Age Pension.
The transfer balance cap will affect less than one per cent of superannuation fund members and will be applied to both current retirees and to individuals yet to enter their retirement phase.
- requiring those with combined incomes and superannuation contributions greater than $250,000 to pay 30 per cent tax on their concessional contributions, up from 15 per cent. This extends the current treatment of people with combined incomes and superannuation contributions over $300,000. These individuals will still have significant incentives to save for their retirement. This change will only affect around one per cent of superannuation fund members.
- lowering the superannuation concessional contributions1 cap to $25,000 per annum. This level still enables individuals to make enough contributions over their working life to be self sufficient in retirement. Lower caps on concessional contributions also make it feasible to allow more flexibility across the system to accommodate modern working arrangements. Reducing the caps on concessional contributions will only affect around three per cent of superannuation fund members.
- introducing a $500,000 lifetime cap for non-concessional contributions. The lifetime cap will limit the extent to which the superannuation system can be used for tax minimisation and estate planning. Currently, less than one per cent of superannuation fund members have made contributions above this cap since 2007.
Broadly commensurate treatment will apply to defined benefit arrangements.
In addition to better targeted tax concessions, the Government will introduce the Low Income Superannuation Tax Offset to replace the Low Income Superannuation Contribution when it expires on 30 June 2017. This will continue to support the accumulation of superannuation for low income earners.
This will allow individuals with an adjusted taxable income of $37,000 or less to receive an effective refund of the tax paid on their concessional contributions, up to a cap of $500.
The Low Income Superannuation Tax Offset will, in particular, assist women to build their superannuation savings.
Taken together, these changes will better target the concessional taxation of superannuation and help to ensure that the superannuation system remains sustainable for the benefit and retirement security of all Australians.
Low income earner
Bronwyn is a part-time worker who earns $20,000 in the 2017-18 income year. Her employer makes compulsory Superannuation Guarantee payments of 9.5 per cent ($1,900 per year) into Bronwyn’s superannuation account. Once in the superannuation account Bronwyn’s contributions are taxed at 15 per cent ($285 per year). At the end of the year Bronwyn will be eligible for a Low Income Superannuation Tax Offset of $285. Bronwyn now effectively pays zero tax on her superannuation contributions.
Middle income earner
In 2017-18, Jamie earns an average full-time wage of $80,000 per year. His employer makes compulsory Superannuation Guarantee payments of 9.5 per cent of his salary ($7,600 per year) into his superannuation account. Jamie makes no additional contributions to superannuation and is not affected by the changes. Jamie can still make additional concessional superannuation contributions of $17,400 either through salary sacrifice or by making a deductible personal contribution. If Jamie inherited some money, he could also put this in his superannuation (subject to the new $500,000 lifetime cap for non-concessional contributions).
Individuals will not be adversely affected by the changes unless they:
Boosting retirement savings options for Australians in a modern economy
The superannuation system currently offers little flexibility for those who take time out of work, work part time, or have ‘lumpy’ income and therefore have periods in which they make no or limited contributions to superannuation. Women often experience breaks in work, or work part-time, which contributes to lower, on average, superannuation account balances than men.
The Government will ensure that the superannuation system is flexible and equally accessible for all Australians to better meet the objective of superannuation.
Improving access to concessional contributions
From 1 July 2017, the Government will lift current restrictions and allow individuals under the age of 75 to claim tax deductions for personal superannuation contributions to eligible superannuation funds.
This effectively allows all individuals, regardless of their employment circumstances, to make concessional super contributions up to the concessional cap. Individuals who are partially self-employed and partially wage and salary earners and individuals whose employers do not offer salary sacrifice arrangements will benefit from these changed arrangements.
In addition, the Government will improve the superannuation balances of low income spouses by extending the current spouse tax offset to assist more families to support each other in accumulating superannuation. The current income threshold for the receiving spouse (whether married or de facto) will be lifted from $10,800 to $37,000.
A contributing spouse will be eligible for an 18 per cent offset worth up to $540 for contributions made to an eligible spouse’s superannuation account.
The Government will also introduce catch-up concessional superannuation contributions by allowing unused concessional contribution caps to be carried forward on a rolling basis for up to five years for those with account balances of $500,000 or less. This will allow those with lower contributions, interrupted work patterns or irregular capacity to make contributions to make ‘catch-up’ payments to boost their superannuation savings.
Harmonising contributions rules for older Australians
To assist older Australians prepare for their retirement by boosting their superannuation account balances, the Government is lifting restrictions on their ability to contribute.
Currently, there are minimum work requirements for Australians aged 65 to 74 who want to make voluntary superannuation contributions. Restrictions also apply to the bring-forward of non-concessional contributions. In addition, spouses aged over 70 cannot receive contributions. None of these restrictions apply to individuals aged under 65.
The Government will remove these restrictions and instead apply the same contribution acceptance rules for all individuals aged up to 75, from 1 July 2017.
These changes will provide better incentives and more flexibility to all Australians to make superannuation contributions appropriate to their circumstances.
Changes to retirement income products
Rules and regulations currently restrict the development of new retirement income products. These products could provide more flexibility and choice for Australian retirees, and help them to better manage consumption and risk in retirement. They can be of particular benefit for those who are concerned that they might outlive their superannuation fund savings.
As a result, the Government will remove barriers to innovation in the creation of retirement income products. From 1 July 2017, the tax exemption on earnings in the retirement phase will be extended to products such as deferred lifetime annuities and group self-annuitisation products.
This will enhance choice and flexibility for Australian retirees looking to make the most of their superannuation savings and enhance their standard of living throughout their retirement.
The Government will consult on how these products will be treated under the Age Pension means test.
Helping individuals with interrupted work patterns
Emma is a mother on maternity leave who is about to return to work part time. Emma, who earns $30,000 will be eligible for the Low Income Superannuation Tax Offset when she returns to work. Under the new changes to spouse contributions, her partner, Frank will be eligible to claim a tax offset up to $540 for contributions he has made to Emma’s superannuation account.
Once Emma returns to full time work, she will be able to boost her retirement income by making additional concessional contributions. Enabling her to ‘catch up’ by rolling over the amounts left remaining under the concessional contributions cap, Emma can contribute more over her working life. Although Emma has changed jobs she will also benefit from the Government’s changes to member protection measures making it easier for her to reunite and consolidate her multiple accounts, including any in an Eligible Rollover Fund.
Saving for retirement
Gus is a 65 year old retiree who currently draws down his account-based superannuation pension at the minimum rates as he is concerned that his superannuation will run out.
As deferred income stream products do not qualify for the retirement phase earnings tax exemption, these products are not generally offered in the market.
Under this initiative, Gus will have the option to buy a deferred lifetime annuity that will give him a guaranteed income stream for the rest of his life commencing from age 80. This will give Gus the confidence to have a higher standard of living in the intervening period and peace of mind knowing that no matter how long he lives he will receive a guaranteed income stream.
Strengthening confidence in the superannuation system
The superannuation package will build public confidence in the system by improving alignment with its objective and reducing the extent to which superannuation is used for tax minimisation and estate planning purposes.
The introduction of the $1.6 million limit on the amount that can be transferred into the retirement phase and the introduction of the $500,000 lifetime non-concessional cap are key elements to improve confidence that the system is being used for its core purpose.
The Government will further improve the integrity of the superannuation system by ensuring that the transition to retirement income stream (TRIS) scheme is fit–for–purpose and participants are not primarily motivated by tax benefits; and by removing the out dated anti-detriment provision.
Strengthening the integrity of income streams
TRIS were designed to assist Australians to access limited superannuation savings to gradually move to retirement. As the schemes encourage workforce participation, the Government will make adjustments to ensure they operate effectively.
The Government will remove the tax exempt status of earnings supporting the TRIS. More broadly, individuals will no longer be allowed to treat certain superannuation income stream payments as lump sums for tax purposes.
These changes ensure that TRIS remain fit for purpose, are not accessed primarily for their tax advantage, and still meet the objective of supporting people who want to remain in the workforce.
The Government will also remove the outdated anti-detriment provision. The anti-detriment provision can effectively result in a refund of a member’s lifetime superannuation contributions tax payments into an estate, where the beneficiary is the dependant of the member (spouse, former spouse or child). Currently this provision is inconsistently applied by superannuation funds.
From 1 July 2017 the Government will no longer allow funds to claim this as a deduction. This will ensure consistent treatment of lump sum death benefits across all superannuation which aligns with the treatment of bequests outside of superannuation.
Changes are underway to create a sustainable, fair, flexible and efficient superannuation system for the 21st century
This package of superannuation reforms complements the wide range of improvements the Government is pursuing to strengthen governance and transparency. This will enhance efficiency and competition in the superannuation system.
- Product dashboard: consumers will know fees paid, investment returns and be able to compare products
- Portfolio holdings disclosure: consumers will know where superannuation savings are invested to make more informed choices
- Retirement income projections: provide tools to help people predict retirement incomes and plan ahead for retirement
- myGov: people can find and consolidate superannuation accounts easily, reducing fee duplication
- SuperMatch2: automate and streamline existing processes for account consolidation, reducing multiple fees
- Pre-filled TFN and choice forms: will allow people to easily retain the same superannuation account when starting a new job
- Proactive Eligible Rollover Fund (ERF) account consolidation: reduce fee duplication by proactively reuniting amounts held by ERFs with active accounts
- Extending choice of fund: increased ability to reduce multiple accounts
- Plans to improve quality and integrity of MySuper products: better defaults for those who don’t choose
- Plans for better presentation of superannuation data: make it easier to select a suitable superannuation fund
- Productivity Commission review: address system efficiency and competitiveness to benefit members
1. Concessional (before-tax) contributions include compulsory Superannuation Guarantee contributions and other employer or salary-sacrificed contributions, or contributions where a tax deduction is claimed. Non-concessional (after-tax) contributions can include contributions made from individuals’ take home pay, inheritances and proceeds from asset sales. Once in the fund, both concessional and non-concessional contributions benefit from the concessional 15 per cent tax rate on earnings.