Superannuation

Budget Review 2010-11 Index

Budget 2010–11: Superannuation

Leslie Nielson

The government has proposed significant changes to Australia’s superannuation regime in this year’s budget. The following covers the major proposed changes in this area.

Changes to the superannuation guarantee regime

The superannuation guarantee (SG) is one of the three ‘pillars’ of the Australian retirement income system (the other two pillars are the Age Pension and voluntary superannuation contributions). Briefly, employers are required to make SG contributions to superannuation funds on behalf of their employees. In 2009, total employer contributions to superannuation funds (the overwhelming majority of which were SG contributions) were $71 billion, an increase from $67.9 billion in 2008.[1]

Increasing the Superannuation Guarantee contribution rate

The required SG contribution rate is proposed to rise from 9 to 12 per cent of ordinary time earnings in 2019–20. The proposed rise is gradual and will not commence until 2013–14, as shown in the following table:

Increases in the required SG contribution rate

Source: Budget paper no. 2[2]

The proposed increase in the SG rate was not supported by the Henry Review.[3]

Funding the increased contributions

Based on government statements and media commentary it would be easy to assume that the proposed rise in the SG contribution rate is to be directly funded by the proposed Resource Super Profits Tax (RSPT).[4] However, this is not the case.

Generally, SG contributions are made by employers, on behalf of their employees. Further, all SG contributions made within the allowable time limits are tax deductible for the employer. As such, an increase in SG contributions reduces the employer’s taxable income. This means a reduction in company tax paid to the government. The company tax rate is currently 30 per cent (the government has proposed in this Budget to reduce the rate to 29 per cent from 2013–14 and 28 per cent from 2014–15).[5]The receipts from the proposed RSPT make up for (amongst other things) the short-fall in company tax arising from the proposed increase in SG contributions, not the increased SG contributions themselves. The payment of the SG contributions remains the responsibility of employers.

This loss of tax revenue is not compensated for by any increase in the Superannuation Fund Income Tax (SFIT), arising from the proposed increase in SG contributions. The SFIT is set at a rate of 15 per cent on tax deductible contributions (such as SG contributions) and 15 per cent on the investment earnings of superannuation funds.

Raising the SG age limit from 70 to 75

Currently, employers are not obliged to make SG payments in respect of employees who are age 70 and over.[6] However, employers can make voluntary tax deductible superannuation contributions on behalf of employees aged between 70 and 75, and the self-employed may make such contributions up until age 75.[7]

From 1 July 2013, the government proposes to raise the SG age limit from 70 to 75. This means that employers would be required to make SG contributions on behalf of workers in this age group.

Changes to the government superannuation co-contributions regime

The government has proposed changes to the superannuation co-contributions regime to limit its costs and to provide enhanced benefits for lower income earners via a contributions tax rebate targeted at this group (see below). In  2007–08 and 2008–09  the government made about $1.2 billion in superannuation co-contribution payments.[8]

Freezing the income thresholds

In 2009–10, taxpayers with an adjusted annual income less than $31 920 are eligible for a matching dollar for dollar contribution from the government to their superannuation fund for the first $1000 of eligible personal superannuation contributions they make. Those with an annual income above $31 920 but less than $61 920 are entitled to a co-contribution, but at a lesser rate.[9] These income thresholds are usually increased each year in line with increases in the Average Weekly Ordinary Time Earnings (AWOTE) as calculated by the Australian Bureau of Statistics. This process by which these thresholds are increased is known as indexation.

Proposed change

The government has proposed that these income thresholds will not increase for the 2010–11 and 2011–12 tax years only. Under the proposed change, these thresholds would next increase in the 2012–13 tax year.[10]

This proposed change will affect those receiving annual incomes close to the $37 000 per annum threshold. Normally, incomes increase with successive wage settlements. The indexation of the co-contribution income thresholds compensates for increased wages. It may be the case that some who would have continued to be eligible for the maximum rate of government co-contribution support due to the indexation of these thresholds would be disadvantaged by the proposed change.

Freezing the government contribution

As noted above, currently for every $1 in personal contributions made by a person with an adjusted taxable income up to $31 920 per annum the government will contribute $1 up to a maximum contribution of $1000. The maximum rate of government contribution was previously $1.50 for every $1 contributed by the individual. However, legislative amendments in Schedule 2 of Tax Laws Amendment (2009 Budget Measures Act No.1) 2009 (Cth) changed this contribution rate to $1 for every $1 made in eligible personal contributions for the 2009–2010, 2010–2011 and 2011–2012 years only.

After the 2011–12 financial year, government superannuation co-contribution rates are currently legislated to be:

• $1.25 for every $1 of eligible personal contribution in the 2012–13 and 2013–14 financial years. That is, the maximum government superannuation co-contribution for these years will be $1250, and
• $1.50 for every $1 of eligible personal contribution in 2014–15 and later financial years.  That is, the maximum annual government superannuation co-contribution will be $1500.[11]

The above increases in co-contribution rates will not occur under the proposed change.

Proposed change

The government proposes to make the current contribution rate of $1 for every $1 contributed by the individual (up to $1000 in personal contributions) a permanent feature of the co-contributions regime. The legislated changes in the superannuation co-contribution rate noted above will have to be repealed for this to occur.

Low income earners superannuation contributions rebate

Low income earners currently receive little, if any, tax benefit from superannuation. As noted in the Personal Income Tax Brief in this Budget Review, in 2010–11 those with incomes of less than $37 000 per annum are subject to a 15 per cent marginal tax rate, while those on incomes of less than $16 000 per annum do not pay any income tax. As noted above, the Superannuation Fund Income Tax (applying to both tax deductible contributions and investment earnings) is also set at 15 per cent. In these circumstances there is no tax benefit to be gained by a low income earner having tax deductible contributions (known as concessional contributions) made on their behalf (such as SG contributions), or by making personal contributions.

Proposed change

From 1 July 2012, the government proposes to introduce a tax rebate of up to $500 per annum, in respect of concessional contributions made by individuals whose adjusted taxable incomes are less than $37 000 per annum. This threshold will not be indexed and the rebate will be paid directly into the individual’s superannuation account.[12]

This proposed measure will affect all those with SG payments made on their behalf whose annual income is less than $37 000 per annum.

Increased concessional contributions limits

A ‘concessional’ superannuation contribution is generally a tax deductible contribution. Annual limits apply to concessional contributions made by an employer on behalf of an employee and by a self-employed individual claiming these contributions as a tax deduction against their taxable income. These annual limits are:

• $25 000 for the 2010–11 financial year (indexed),[13] or
• $50 000 for those aged 50 and over under special transitional arrangements, which are scheduled to end on 30 June 2012[14]

A tax of 31.5 per cent is imposed on the amount of a person’s tax deductible contributions in excess of the above annual limits.[15] This tax is in addition to the 15 per cent contributions tax that may have already been paid on these excess contributions by the superannuation fund, bringing the total tax paid on excess contributions to 46.5 per cent (which is the top personal marginal tax rate plus the Medicare levy).[16]

These limits were introduced to restrict the amount of tax advantaged superannuation benefits an individual could accumulate and also as a measure to limit the revenue loss occasioned by unlimited tax deductible contributions to superannuation funds. These limits have been of particular concern to older workers nearing retirement as they are perceived as preventing them from making significant contributions late in their working life.

Proposed change

From 1 July 2012, individuals with less than $500 000 in total superannuation benefits may make $50 000 in annual concessional contributions, without being subject to excess contributions tax.

The major differences from the current rules outlined above are:

• as noted above, the current $50 000 limit on concessional contributions for those aged 50 and over ends on 30 June 2012. The proposed change removes this time limit, and
• the proposed change limits the ability of a taxpayer aged over 50 years to make more than $25 000 in annual concessional contributions, if they already have more than $500 000 in superannuation benefits.

Other changes

The government has proposed a number of other changes to the superannuation system, including:

• additional administration funds to the Australian Taxation Office to ensure that participants in the superannuation co-contribution scheme satisfy eligibility requirements
• additional funding for the Superannuation Complaints Tribunal
• permitting complying superannuation funds and retirement savings account providers to deduct a wider range of terminal medical benefits from their fund’s taxable income. That is, a wider range of terminal medical conditions may be recognised as being of sufficient seriousness to warrant the early release of superannuation benefits
• extending the existing merger tax relief for superannuation funds past the 2010–11 tax year
• increasing the time-limit for deductible employer contributions (mostly SG contributions) to be made. Generally, employers have up to 28 days at the end of the relevant quarter to make the required SG payment. This time period may be extended in the case of SG payments due to a former employee, and
• providing new arrangements for public sector defined benefit superannuation schemes which fund benefits through last minute contributions to those schemes.[17]

[1].    Australian Prudential Regulation Authority, Statistics: Annual superannuation bulletin, June 2009, Commonwealth of Australia, 10 February 2010, p. 28, viewed 13 May 2010, http://www.apra.gov.au/Statistics/upload/June-2009-Annual-Superannuation-Bulletin-PDF.pdf

[2].    Australian Government, Budget measures: budget paper no. 2: 2010–11, Commonwealth of Australia, Canberra, 2010, p. 42, viewed 12 May 2010, http://www.aph.gov.au/Budget/2010-11/content/bp2/download/bp2.pdf

[3].    K Henry (Chair), J Harmer, J Piggott, H Ridout, G Smith, The retirement income system: report on strategic issues, Australia’s Future Tax System Review Panel (Henry review), Commonwealth of Australia, Canberra, 4 May 2009, p. 2, viewed 13 May 2010, http://www.taxreview.treasury.gov.au/content/downloads/retirement_income_report_stategic_issues/retirement_income_report_20090515.pdf

[4].    K Rudd (Prime Minister), Building stronger, fairer and simpler superannuation for Australians, speech given at the Investment and Financial Services Association breakfast, Sydney, 4 May 2010, viewed 17 May 2010, http://www.pm.gov.au/node/6735; D Uren and M Franklin, ‘Swan mines boom to boost super’, Australian, 3 May 2010, p. 1, viewed 17 May 2010, http://parlinfo/parlInfo/download/media/pressclp/IBKW6/upload_binary/ibkw60.pdf

[5].    Australian Government, Budget measures: budget paper no. 2, op. cit., p. 43.

[6].    Section 27(1), Superannuation Guarantee (Administration) Act 1992 (Cth).

[7].    Australian Government, Budget measures: budget paper no. 2, op. cit., p. 44.

[8].    M D’Ascenzo (Commissioner for Taxation), Super co-contributions annual report 1 July 2007 to 30 June 2008, ATO, Canberra, 2 September 2008 and M D’Ascenzo, Super co-contributions annual report 1 July 2008 to 30 June 2009, ATO, Canberra, 9 February 2010, viewed 13 May 2010, http://www.ato.gov.au/superfunds/pathway.asp?pc=001/149/022/002

[9].    The rate of the superannuation co-contribution is reduced by 3.33 cents for every dollar the taxpayer earns over the lower threshold.

[10]. Australian Government, Budget measures: budget paper no. 2, op. cit., p. 299.

[11]. Changes made by Schedule 2 of Tax Laws Amendment (2009 Budget Measures Act No.1) 2009 (Cth).

[12]. Australian Government, Budget measures: budget paper no. 2, op. cit., p. 40.

[13]. Australian Taxation Office (ATO), Key superannuation rates and thresholds, media release, Canberra, 4 May 2010, .viewed 12 May 2010, http://ato.gov.au/superfunds/content.asp?doc=/content/60489.htm This threshold is the same as for the previous financial year, the increase in the Annual Weekly Ordinary Time Earnings (AWOTE) by which this threshold increases was not large enough to justify its increase for the 2010–2011 financial year.

[14]. The current transitional concessional contributions cap applies until 30 June 2012 for people aged 50 years old or over. The current cap is not indexed.

[15]. Sections 4 and 5 of the Superannuation (Excess Concessional Contributions Tax) Act 2007 (Cth) and section 292–15 of the Income Tax Assessment Act 1997.

[16]. Australian Government, ‘Super contributions – too much super can mean extra tax’, ATO website, 11 March 2010, viewed 12 May 2010, http://ato.gov.au/individuals/content.asp?doc=/content/00106372.htm&pc=001/002/064/002/003&mnu=42869&mfp=001/002&st=&cy=1&alias=supercaps

[17]. Australian Government, Budget measures: budget paper no. 2, op. cit., pp. 48–50 and 298–299.