Changes to superannuation tax concessions and contribution arrangements

Budget Review 2016–17 Index

Kai Swoboda

Superannuation contributions, earnings and benefits are generally concessionally taxed.[1] Arguments to support superannuation tax concessions include compensating people because they are ‘forced’ to save through compulsory superannuation with access limited until retirement age, and to provide incentives for additional savings to reduce reliance on taxpayer support through the age pension.[2]

The 2016–17 Budget makes significant changes to both the rate at which superannuation is taxed and how much money can flow into, or be held in, the concessionally taxed superannuation environment. The main measures and the financial impact of the measures are presented in Table 1. Taken together, these measures are expected to provide additional revenue over the four years to 2019–20 of $3.2 billion.

The key budget measures that relate to superannuation tax concessions can be broadly characterised into three categories: those that limit tax concessions for higher income earners or with high balances; those that support the ‘integrity’ of superannuation tax concessions; and measures that provide for greater flexibility to make additional contributions for those who have been unable to do so.

Table 1    Key superannuation measures included in the 2016–17 Budget and budget impact, by type of measure

 

Budget impact ($m)

 

2016-17

2017-18

2018-19

2019-20

Total

Measures impacting on higher income earners and those with a capacity to make additional contributions

 

Introduce a $1.6 million cap on superannuation balances to limit tax-free investment earnings for those in the pension phase

 

550

700

750

2,000

Introduce a lifetime cap of $500,000 for non-concessional superannuation contributions

50

100

150

250

550

Apply a 30% tax on contributions for those earning $250,000 or more (current threshold $300,000) and reduce concessional contributions cap to $25,000 (currently $35,000 for those aged 49 and over and $30,000 for those aged less than 49)

 

500

800

1,150

2,450

'Integrity' measures

 

 

 

 

 

Remove the anti-detriment provision in respect of death benefits from superannuation. This essentially provided for a refund of contributions tax paid in certain circumstances.

 

 

105

245

350

Remove the tax exemption on earnings of assets supporting Transition to Retirement Income Streams, which allows a tax-free drawdown from superannuation whilst continuing to work.

 

190

220

230

640

Measures supporting low income earners or allowing for limited additional or more flexible contributions arrangements

Introduce the Low Income Superannuation Tax Offset to essentially continue the existing Low Income Superannuation Contribution scheme that compensates low income earners for the 15% contributions tax for those earning less than $37,000.

 

 

–600

–700

–1,300

Allow catch-up concessional contributions for individuals with unused amounts within their annual concessional contributions cap for those with a superannuation balance of less than $500,000

 

 

–100

–250

–350

Remove restrictions for those aged 65 to 74 from making superannuation contributions

 

–40

–40

–50

–130

Raise the threshold for the low income spouse contributions threshold from $10,800 to $37,000

 

 

–5

–5

–10

Remove restrictions to allow all individuals up to the age of 75 to claim an income tax deduction for contributions

 

350

–600

–750

–1,000

Net package total

 

 

 

 

3,200

Source: Australian Government, Budget measures: budget paper no. 2: 2016–17, pp. 25–29.

The Government has given these measures a broader context by setting out the objective of the superannuation system—as recommended by the Financial System Inquiry—‘to provide income in retirement to substitute or supplement the Age Pension’.[3]

While most of these measures are proposed to commence from 1 July 2017, there is an element of retrospectivity in some of them. For example, the lifetime non-concessional cap will apply to contributions made from 1 July 2007, although payments made over the proposed $500,000 cap would attract no penalty and individuals would not be penalised or have to withdraw contributions if they have already exceeded the cap.[4]

The budget measures that reduce tax concessions for higher income earners and those with high superannuation balances and the measure that provides for a continuation of the existing low income superannuation contribution (LISC) arrangements, are broadly consistent with the Australian Labor Party’s April 2015 superannuation policy announcements and its opposition to the repeal of the LISC during the 44th Parliament.[5] The measure to reduce tax concessions for those earning more than $250,000 also goes part way to meeting the Australian Greens’ proposal to introduce a flat 15% contributions tax discount for all taxpayers with taxable incomes above the tax free threshold, based on the taxpayer’s marginal rate[6]

The existing arrangements with regards to contribution limits generally apply to defined benefit funds. These mainly cover some Commonwealth and state government public servants. For defined benefits funds, however, the assessment of contribution limits is based on notional equivalent contributions so that the contribution limit outcomes for defined benefit fund members are broadly equivalent to those of members of accumulation funds. The Government has indicated that the proposed measures will include specific changes for defined benefit funds that replicate the changed taxation arrangements and contribution arrangements.[7]

In broad terms, superannuation interest groups have generally welcomed the continuation of the LISC (now in the form of the ‘low income superannuation tax offset’ (LISTO)) as well as the measures that provide flexibility in making additional contributions, although some groups are critical about the lowering of contributions caps.[8] Reaction to measures that apply to higher income earners has been mixed, with some groups welcoming the equity implications that flow from some of the changes, while other groups considered that tax changes should have been part of a broader review of the tax system.[9]

A number of the measures will be of assistance to some women in ‘catching up’ on their superannuation contributions (due to interrupted work patterns and generally lower lifetime earnings). These measures are likely to benefit women with higher incomes with women on lower incomes assisted by the LISTO.[10] Of the recommendations of a recent Senate Committee inquiry, the continuation of LISC was the most significant of the Committee’s recommendations adopted by the Government in the 2016–17 Budget.[11]



[1].          The general superannuation tax treatment for accumulation fund members is set out in the Re:think tax discussion paper (Australian Government, Re:think tax discussion paper, March 2015, p. 69).

[2].          Australian Government, Re:think tax discussion paper, March 2015, pp. 67–68; Grattan Institute, Super tax targeting, November 2015, pp. 16–17.

[3].          Australian Government, Budget strategy and outlook: budget paper no. 1: 2016–17, pp. 1–13; Financial System Inquiry, Final report, November 2014, p. 95.

[4].          Australian Government, Budget measures: budget paper no. 2: 2016–17, pp. 25–27.

[5].          Australian Labor Party (ALP), Labor's fairer super plan, ALP policy document, April 2015; C Bowen (Shadow Treasurer) and B Ripoll (Shadow Minister for Financial Services and Superannuation), Labor welcomes support for low income superannuation contribution, joint media release, 18 July 2014.

[6].          Australian Greens, Progressive superannuation: a system for everyone, not just the rich, Australian Greens’ policy document, February 2015.

[7].          Australian Government, Budget 2016 superannuation reform: changes to defined benefit schemes, fact sheet, 3 May 2016.

[8].          For example, Association of Superannuation Funds of Australia, Budget package has significant ramifications for super, media release, 3 May 2016; and Financial Services Council, FSC statement on superannuation tax changes, media release, 3 May 2016.

[10].       For example, Australian Institute of Superannuation Trustees, Super measures will improve fairness and sustainability of super: AIST Budget commentary, media release, 3 May 2016.

[11].       Senate Standing Committee on Economics, 'A husband is not a retirement plan': achieving economic security for women in retirement, 29 April 2016, pp. xi–xv.

 

All online articles accessed May 2016. 

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