NO.042

A PLAN TO SIMPLIFY AND STREAMLINE SUPERANNUATION

The Treasurer released tonight a plan to simplify and streamline superannuation. It includes a suite of proposals to:

• sweep away the current tax complexities faced by retirees;
• improve retirement incomes;
• give greater flexibility over how superannuation savings can be drawn down; and
• improve incentives to work and save.

The proposals represent the most significant reform of Australia’s superannuation system in decades.

Australia’s superannuation system is complex. The complexity associated with taxing superannuation benefits confuses retirement decisions, clouds the incentive to invest in superannuation and imposes unnecessary costs. The Regulation Taskforce in its report ‘Rethinking Regulation’ recommended that the Government give a high priority to comprehensive simplification of the tax rules for superannuation.

As a result of decisions made by the then Government in 1988, the current superannuation system has different arrangements for tax on contributions, earnings and superannuation benefits. Superannuation benefits tax is by far the most complicated, as highlighted by the Regulation Taskforce. For example, a lump sum superannuation benefit may include up to eight different parts which can be taxed in seven different ways. If people can not understand what they will receive from their superannuation in retirement, they will not have confidence in the system.

Under the Government’s plan, Australians aged 60 and over who have already paid tax on their superannuation contributions and earnings would not pay tax on their superannuation benefits from 1 July 2007. The removal of benefits tax would sweep away the complexities retirees face when taking their benefits. As superannuation benefits would no longer be assessable income, there would be an incentive to continue to work while drawing down on superannuation as people would pay less tax on their work income.

The plan would also abolish reasonable benefit limits (RBLs), introduce new streamlined rules for contributions and give individuals greater flexibility as to how and when they wish to draw on their superannuation in retirement. The ability to make deductible superannuation contributions would also be extended to age 75. The self-employed would be able to claim a full deduction for their superannuation contributions as well as being eligible for the Government co-contribution for their personal post-tax contributions.

As part of the superannuation reform there would also be reform of the pension assets test which would benefit age pensioners affected by the assets test. The assets test taper rate would be reduced from $3.00 to $1.50 per fortnight with effect from 20September2007. A pensioner’s home would remain outside the assets test.

This would allow a single retiree homeowner to have around an additional $165,000 of assets before losing the age pension, while a couple could have around $275,000 of additional assets before losing the age pension.

The current taper rate of $3.00 means that a retiree loses more age pension than they earn on their additional savings if they do not achieve a return of at least 7.8per cent a year. This is currently a large disincentive to save for retirement.

I encourage the public to comment on this plan.

More detail on the plan can be obtained by calling 1800012238 between 9.00am to 5.00pmAEST. Copies of the plan are available on the website http://simplersuper.treasury.gov.au.

Submissions can be made until Wednesday 9August 2006 to:

General Manager

PARKES ACT 2600

CANBERRA

9 May 2006

Contact: David Alexander

(02) 6277 7340

Supporting Information

Why is this important?

• The then Government in 1988 introduced different arrangements for the tax on superannuation contributions, earnings in the fund and superannuation benefits paid to retirees. The taxation of superannuation benefits is extremely complex. At present it is very difficult for anyone to understand how their superannuation benefits are taxed. A lump sum may include up to eight different parts which can be taxed in seven different ways. The transition to retirement is a significant time in a person’s life and the taxation of superannuation benefits unnecessarily complicates this transition. Abolishing superannuation benefits taxation removes red tape and significantly adds to retirement incomes.
• Currently, a person loses $3 of age pension per fortnight for every $1,000 of assets above the assets test free area. This means retirees must achieve a return of at least 7.8 per cent on these assets in order to overcome the effect of a reduction in their age pension amount. This acts as a large disincentive to save for retirement.
• Easing the assets test means existing retirees with relatively modest assets but with low incomes will be able to access the age pension.

Who will benefit?

• Under the plan, retirement incomes would be improved and over 10 million Australians with superannuation accounts plus future account holders, and their families, would benefit through greater simplicity. Over 100,000 people aged 60 and over are expected to retire next year and this figure will gradually grow over time.
• Pensioners who currently have their pension reduced due to the assets test would benefit. Based on the current age pension, a single retiree homeowner could have around an additional $165,000 of assets before losing the age pension, while a couple could have around $275,000 of additional assets.

What funding is the Government committing to the initiative?

• The Government has provided over $6billion in this Budget over the next four years to implement the proposals, subject to consultation on A plan to simplify and streamline superannuation.

What have we done in the past?

• The Government has increased the attractiveness of saving for retirement by introducing the superannuation co-contribution from the 2003-04 year of income which matched dollar for dollar personal contributions made by eligible low to middle income earners. From 2004-05 the matching rate was increased to $1.50 for every dollar contributed. An employee with an income of less than $28,000 can achieve a maximum contribution of $1,500 by investing $1,000 in a superannuation fund.
• The Government has also abolished the surcharge payable on an individual’s surchargeable contributions and termination payments made on or after 1 July 2005.

When will the initiative conclude?

• The proposal would commence from 1 July 2007 and be ongoing. The assets test change would apply from 20 September 2007.