A Plan to Simplify and Streamline Superannuation
© Commonwealth of Australia 2006
ISBN 0 642 74298 7
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The Government is seeking comments on a plan to simplify and streamline superannuation.
This paper describes the changes and how the new system would operate. It also explains the current system to provide the context for the changes. This paper complements and expands on the separate booklet ‘A plan to simplify and streamline superannuation’ which provides an overview of the changes being proposed.
The Government’s proposed plan would:
- simplify superannuation arrangements for retirees, making it easier to understand;
- improve incentives to work and save; and
- introduce greater flexibility in how superannuation savings can be drawn down in retirement.
If the proposed changes are implemented, the adequacy of 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.
The Government is seeking submissions and comments from the community on this paper by Wednesday, 9 August 2006. Comments can be forwarded to the following address:
Superannuation, Retirement and Savings Division
PARKES ACT 2600
Email address: email@example.com
Further copies of this paper can be obtained by writing to the address above or from the website, http://simplersuper.treasury.gov.au.
All submissions received will be treated as public unless the author clearly indicates the contrary. Public submissions may be published on the plan’s website.
A request made under the Freedom of Information Act 1982 for access to a submission marked confidential will be determined in accordance with that Act.
This chapter provides the background to the proposal, along with a broad outline of how the proposed superannuation taxation system would operate in different cases. The advantages of the proposed changes are also summarised.
This chapter describes the proposed taxation arrangements for superannuation benefits paid from a taxed superannuation fund (such funds cover about 90 per cent of fund members). The current taxation treatment of benefit payments is also outlined. The arrangements for benefits paid from an untaxed source (mainly covering public servants) are discussed separately in Chapter 8.
In summary, the proposed taxation treatment would be:
- tax free benefits for those over age 60 (that is, no tax when benefits are paid);
- benefits paid before age 60 would be taxed under rules similar to current arrangements (but simplified by reducing the number of components in a benefit); and
- reasonable benefit limits (RBLs) would be abolished.
The proposed treatment of death benefits is also outlined.
This chapter describes how the superannuation payment rules would be relaxed. It also outlines the proposed simplification for the drawdown of superannuation benefits after retirement. The proposed changes are then compared with the existing rules.
In summary, individuals would be given more flexibility over how much of their superannuation they take and when they take it, in particular:
- individuals would not be forced to take their benefits at particular ages (for example, age 75, or from age 65 if they do not meet a work test). Rather, they would be allowed to take their benefits as a regular income stream or lump sum or leave their benefits in the fund and draw on them when they want.
- the complicated set of rules governing the acceptable amounts of pension payments per year and the type of allowable pension products would be simplified. New minimum standards for all pensions would be developed setting simpler basic restrictions such as a minimum amount of payment. If a pension meets the new minimum standards then the earnings on assets supporting that pension would be eligible for an income tax exemption (as is the case currently).
The preservation age (the age at which retired individuals can access their superannuation) will not be changed. The preservation age is already legislated to increase from 55 to 60 between the years 2015 and 2025.
Since 1 July 2005, a person who has reached their preservation age has been able to take their benefits as a non-commutable income stream while they are still working. This measure, which assists individuals’ transition to retirement, will continue.
This chapter describes the proposed taxation arrangements that would apply when taxable contributions are made to a complying superannuation fund.
Under the plan, age-based deduction limits would be abolished. Instead, deductible contributions up to a limit of $50,000 per person per annum would be taxed at the concessional 15 per cent rate (a transitional period would apply for people aged 50 and above). Undeducted contributions would be limited to $150,000 in a year. The Government will consider whether the cap should be averaged over three years to allow people to accommodate larger one-off payments.
Employers would receive a full deduction for all superannuation contributions they make for employees up to age 75.
This chapter describes proposed new contribution incentives for the self-employed. It is proposed that the self-employed (and other eligible persons currently able to claim deductions for contributions made to superannuation) would be able to claim a full deduction for all contributions. It is also proposed that eligible self-employed persons would have access to the Government co-contribution scheme on the basis of an adjusted income test.
This chapter describes the proposed changes to the pension assets test taper rate and the assets test exemption applying to certain ‘complying’ income streams.
To make the assets test fairer, it is proposed to reduce the pension assets test taper rate to $1.50 per fortnight for every $1,000 of assets above the free area from 20 September 2007. The current 50 per cent assets test exemption for complying income streams would be removed from 20 September 2007 to coincide with the reduction in the assets test taper rate. Retaining the assets test exemption under the new arrangements would create scope for wealthier individuals to access the age pension and the associated concessions.
Some changes are also proposed in related areas. This chapter sets out the Government’s proposed approach in these areas.
In particular, certain payments made by employers to individuals in consequence of the termination of employment are currently taxed concessionally as eligible termination payments (ETPs) up to the RBL. Currently, employer ETPs and superannuation benefits are counted together in determining if payments exceed the RBLs. With the proposal that superannuation benefits no longer be subject to RBLs, some changes may be necessary to ensure there would be an appropriate cap on the concessional taxation treatment of large employer ETPs. A proposed approach is outlined in this chapter. It is also proposed that employer ETPs not be able to be rolled over into superannuation.
This chapter sets out the rules that would apply to superannuation benefit payments from an untaxed source (mainly affecting public servants). As no tax has been paid on either contributions or earnings, superannuation benefits from these funds have traditionally had a higher tax rate on withdrawal (for example, pensions are taxed at marginal tax rates with no 15 per cent rebate).
For those over age 60, lump sums would be taxed at 15 per cent up to a total amount of $700,000. Amounts above this threshold would be taxed at the top marginal tax rate. Pensions paid from untaxed schemes would be taxed at the individual’s marginal rate less a 10 per cent offset.
This chapter describes proposals which would make it easier for people to find lost superannuation and transfer benefits to a fund of their choice.
It is proposed that the ATO would take on a more active role in reuniting members with their superannuation and consolidating accounts. To further streamline processes it is proposed to reduce the maximum 90 days for funds to process a transfer request to 30 days. In addition, all funds will be required to use a standard form (including standardised proof of identity checks) for individuals to complete if they wish to directly arrange a transfer request through their fund.
This chapter summarises the benefits of the proposed changes.
Removing superannuation benefits tax for those aged 60 or over builds on the introduction of the Government co-contribution as a means of encouraging additional superannuation savings. Simplifying the superannuation rules would also help individuals better understand and become more engaged with superannuation. This would allow better planning for their retirement.
Under a fully mature Superannuation Guarantee (SG) system, a person on $1,000 per week (about average income) is projected to have accumulated superannuation benefits of approximately $466,000 (over a working life of 40 years) through the SG arrangements alone. Under the proposed plan, tax of around $37,000 payable when the benefit is paid would be abolished. This average worker would thus gain around $37,000 in retirement, an increase of approximately 9 per cent if they take a lump sum. If the person chooses to take their benefits as a superannuation pension, they are estimated to have an average of around $136 per week in additional retirement income.
The proposed reforms would also boost incentives to work and save. By making superannuation payments tax free to those aged 60 or over, a person’s assessable income would be lower, reducing the tax paid on their other income. Disincentives caused by the pension assets test would also be reduced as a result of the changes to the assets test taper rate. The reduction in taxes proposed in this paper also boosts incentives to save.
The benefits end of superannuation would become simpler for superannuation funds to administer under the proposed changes. Not only are the payment and tax rules complex for individuals, but they also impose significant costs on superannuation funds. These obligations impose costs not only on people aged over 60 but on all fund members.
Appendix A — Examples of how the proposed changes would increase retirement incomes
This appendix provides examples of how individuals stand to gain from the proposed changes. The appendix shows, for various individuals, how the proposed arrangements would increase retirement incomes.
Appendix B — Examples of how the proposed changes would make superannuation simpler and more streamlined for individuals
This appendix provides examples of how the proposed reforms would make dealing with superannuation simpler and more streamlined for individuals.
The glossary contains explanations of a number of terms used in this paper.
In particular, for simplicity this paper refers only to superannuation funds. It is intended that the proposals outlined in this paper apply equally to other types of superannuation entities such as approved deposit funds and retirement savings account providers. In addition, for simplicity this paper refers only to superannuation pensions. It is intended that the proposals outlined in this paper apply equally to superannuation annuities.