A Plan to Simplify and Streamline Superannuation
This chapter outlines proposals to allow the self-employed full deductibility for their contributions, and access to the Government co-contribution scheme.
5.1.1 Current arrangements
Contributions to a superannuation fund by the self-employed (and other eligible persons) are an allowable personal income tax deduction subject to certain restrictions. In any year, only the first $5,000 contributed to a complying superannuation fund is fully deductible. Additional contributions above this amount are 75 per cent tax deductible, up to a maximum deduction equal to the relevant age-based limit. The age-based deduction limits for the 2005-06 income year are $14,603 for those aged less than 35, $40,560 for those aged 35 to 49, and $100,587 for those aged 50 to 69.
5.1.2 Proposed arrangements
It is proposed that the deductibility of contributions by the self-employed (and other persons who are currently eligible for a deduction) be treated in the same way as contributions made for the benefit of employees. That is, the self-employed would be eligible to claim a full deduction for all contributions made to accumulation schemes on their own behalf up to age 75.
5.2.1 Current arrangements
The co-contribution replaced the taxation offset for personal superannuation contributions made by low-income employees. The offset still applies for eligible personal contributions made prior to 1 July 2003.
To be a qualifying low-income employee for the co-contribution, a person must earn 10 per cent or more of their income from eligible employment. A person must also be less than 71 years of age on 30 June of the year in which the personal contributions are made and not be a temporary resident.
Self-employed persons currently do not have access to the co-contribution if they do not have 10 per cent or more of their income attributable to eligible employment (that is, income earned as an employee).
5.2.2 Proposed arrangements
It is proposed to extend the Government co-contribution scheme to the self-employed, effective from 1 July 2007.
Persons (including the self-employed) would be eligible for a Government co-contribution if they meet certain criteria. First, they must earn 10 per cent or more of their income from carrying on a business, eligible employment or a combination of both. Second, their income must be under the Government co-contribution upper threshold. They must also not be a temporary resident at any time during the income year in which they make the personal undeducted contribution, and be less than 71 years of age at the end of that income year.
Superannuation contributions made by a self-employed person would be matched at $1.50 for every dollar contributed, subject to the maximum co-contribution of $1,500. The maximum co-contribution would be available for those persons on incomes up to the lower threshold, currently $28,000. As is presently the case with employees, the co-contribution would only be payable on undeducted contributions.
The maximum co-contribution is reduced at a rate of 5 cents for every dollar of total income over the lower threshold, and currently phases out at the upper threshold of $58,000.
From 1 July 2007, the co-contribution lower income threshold would be indexed in line with the growth in full-time adult average weekly ordinary time earnings. The upper income threshold would also be increased to maintain the same income range over which the maximum is reduced.
To provide for the self-employed, income would be determined by adding the assessable income of an individual (including any reportable fringe benefits, if applicable) and then reducing that amount by their expenses incurred in carrying on a business.
Eligible self-employed persons seeking a co-contribution would need to consider the component of their contribution for which they intend to claim a deduction and the component they wish to remain undeducted for co-contribution purposes. For a comparison of the retirement income outcomes for the self-employed under current arrangements and the proposed arrangements see Table A5 of Appendix A.