A plan to simplify and streamline superannuation
The Government is proposing a plan aimed at dramatically simplifying superannuation and improving the retirement incomes of the more than 10 million Australians with superannuation accounts.
The Government's proposed plan would:
- simplify and streamline superannuation arrangements;
- improve incentives to work and save; and
- introduce greater flexibility in how superannuation savings can be drawn down in retirement.
The Government has provided $6.2 billion over three years in the budget for the plan.
The Government has already introduced a number of major reforms to superannuation, including choice of fund, portability and the Government co-contribution. With over $800 billion in assets the superannuation industry is a major part of the financial system and of crucial importance to the retirement aspirations of all Australians.
But Australia's superannuation system is complex. Complexity confuses retirement decisions, clouds the incentive to invest in superannuation and imposes unnecessary costs. The report of the Taskforce on Reducing Regulatory Burdens on Business recommended that the Government give high priority to comprehensive simplification of the tax rules for superannuation. The Government's plan would sweep away the current raft of complex tax arrangements that apply to Australians' superannuation benefits.
Simpler, easier to understand, taxation arrangements
Under the plan, from 1 July 2007:
- Superannuation benefits paid from a taxed fund (over 90 per cent of fund members) either as a lump sum or a pension would be tax-free for people aged 60 and over.
- A person aged less than 60 would, as now, be taxed on their benefits but under streamlined arrangements.
- Benefits paid from an untaxed fund (mainly to public servants) would still be taxed although where the retiree was aged 60 and over the rate would be lower than now.
- Reasonable benefit limits (RBLs) would be abolished.
- The concessional tax arrangements for superannuation contributions and earnings would remain. Age‑based restrictions limiting tax deductible superannuation contributions would be replaced with the introduction of a streamlined set of rules.
- The superannuation preservation age would not change. The preservation age is already legislated to increase from 55 to 60 between 2015 and 2025.
Currently, Australia applies tax on contributions, earnings and benefit payments. In 1988, the then Government brought forward part of the tax which was previously applied to end benefits. This dramatically exacerbated the complex tax treatment of superannuation in Australia. The recent report on the International Comparison of Australia's Taxes noted that Australia's superannuation system is concessionally taxed, though it is unusual in having three tax points. The Government's proposal is to remove the tax on end benefits because it is the most complicated. The complex rules applying to the taxation of end benefits make it extremely difficult for anyone to understand how their benefits will be taxed, creating unnecessary confusion and costs and adversely affecting the efficiency and effectiveness of the retirement income system.
The removal of benefits tax would greatly assist people in planning for their retirement by introducing a simpler and more streamlined system for both those retiring and those considering further contributions. It would also reduce significant associated 'red tape' for the superannuation industry.
Improving incentives to work and save
Improving rewards for working and saving is an important component of the Government's pro-growth policies and strategy for addressing the demographic challenges facing Australia over the coming decades.
Incentives to work, save or retire are affected by various factors, including the rules concerning when people can access their superannuation and the impact of savings on their age pension entitlement. It is important that the retirement income system does not encourage people to leave the workforce early.
The removal of benefits tax would increase retirement incomes and encourage pre-retirement savings (see Table 1). Other aspects of the plan would further boost retirement incomes and encourage savings:
- 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 post-tax personal contributions.
- The ability to make deductible superannuation contributions would be extended to age 75.
- The pension assets test taper rate would be halved to $1.50 per fortnight from 20 September 2007 — the current rate provides a significant disincentive to save because of the impact of higher savings on reducing age pension entitlements.
Table 1: Potential impact of the plan on a person's retirement income
- These are the benefits a person would achieve if they received employer contributions of nine per cent of earnings for 40 years and retire at 65.
- Includes the increase in age pension and superannuation pension when the person takes the minimum amount from an allocated pension.
The plan also removes disincentives for older Australians to remain in the workforce. With superannuation benefits tax-free from age 60, there would be an incentive to remain in the workforce longer. In addition, as superannuation benefits would no longer be included in a person's assessable income for tax purposes this may reduce the tax paid on their work income, providing further incentive to work.
Greater flexibility in drawing down benefits
Under the plan, individuals would have greater flexibility as to how and when to draw down their superannuation in retirement. There would be no forced payment of superannuation benefits. This builds on earlier Government initiatives to make superannuation more flexible and adaptable to the needs of individuals.
With the ageing of the population it is also important that changes to taxation arrangements are sustainable. The plan provides simplicity benefits for retirees, participation effects and improvements to retirement incomes that are superior to other options, such as removing the tax on contributions. The cost of removing the tax on contributions along with the proposed reforms to the pension assets test would be considerably greater than the cost of the proposed package. Removing the tax on contributions does not have the same benefits on participation as the removal of benefits tax. This will be an increasing priority as the workforce ages. Such alternatives also fail to bring the considerable simplicity and other benefits of the Government's plan.
The plan impacts positively on all three pillars of Australia's retirement income system. These three pillars comprise:
- a taxpayer funded means-tested age pension;
- a minimum level of compulsory employer superannuation contributions; and
- voluntary private superannuation and other savings.
Reducing taxation increases the benefits flowing from compulsory superannuation guarantee contributions and the plan also provides new incentives to make voluntary contributions. In addition, the reduction of the assets test taper rate improves the operation of the age pension pillar of Australia's retirement income system.
Making it easier to find and transfer superannuation benefits
The Government has already significantly improved the ability of people to manage and control their superannuation through the introduction of choice of fund (allowing employees to choose the fund for employer contributions) and portability (allowing people to move existing benefits from one fund to another). But practical difficulties can make transferring and consolidating accounts difficult and members can lose contact with their superannuation fund.
To make finding, transferring and consolidating accounts simpler, the Australian Taxation Office (ATO) would take on a more active role. The ATO would contact people with lost accounts and provide them with a simple standard form to complete if they wish to consolidate their accounts. The ATO would then organise the consolidation, avoiding the need for the individual to deal with multiple funds with different procedures.
To streamline the transfer of benefits it is also proposed to reduce the maximum 90 days for funds to process a transfer request to 30 days and introduce a standard form (including standardised proof of identity checks) for individuals to complete should they wish to make their own arrangements through their fund to transfer benefits.