Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)Chapter 1 - Extension of the Government's superannuation co-contribution
Outline of chapter
1.1 Schedule 1 to this bill will amend the Superannuation (Government Co-contribution for Low Income Earners) Act 2003 (Co-contribution Act) to:
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- increase the level of Government matching of personal superannuation contributions;
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- increase the maximum amount of co-contribution available;
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- increase the income level up to which the maximum co-contribution applies; and
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- reduce the rate by which the maximum co-contribution phases out.
Context of amendments
1.2 The Government announced in the 2004-2005 Budget that it will enhance the superannuation co-contribution scheme by increasing both the level of matching and the maximum co-contribution, and by raising the income thresholds so that more employees will qualify under the scheme. This will increase the incentives for low to middle income employees to save for their retirement through the superannuation system.
Summary of new law
1.3 The level of matching of personal superannuation contributions under the co-contribution arrangements will be increased to $1.50 for every dollar contributed. The maximum Government contribution under the arrangements will also be increased to $1,500.
1.4 The income level up to which the maximum co-contribution applies will be increased to $28,000, while for incomes above that amount the maximum co-contribution will reduce at a lower rate of 5 cents for each dollar of income, to phase out completely at an income of $58,000.
Comparison of key features of new law and current law
| New law | Current law |
|---|---|
| The Government will increase the level of matching to $1.50 for each dollar of personal superannuation contributions made by qualifying employees, up to a maximum Government contribution of $1,500. | The Government matches personal superannuation contributions made by qualifying employees on a dollar for dollar basis up to a maximum Government contribution of $1,000. |
| The maximum Government contribution of $1,500 will be available for qualifying employees on incomes (for co-contribution purposes) up to $28,000. | The maximum Government contribution of $1,000 is available for qualifying employees on incomes (for co-contribution purposes) up to $27,500. |
| The maximum Government contribution will phase out at a rate of 5 cents for every dollar of income above $28,000. It will phase out completely at $58,000. | The maximum Government contribution phases out at a rate of 8 cents for every dollar of income above $27,500. It phases out completely at $40,000. |
Detailed explanation of new law
1.5 Subsection 9(1) of the Co-contribution Act sets out the basic rule governing the Government's matching of personal superannuation contributions. This subsection will be amended to provide that for the 2004-2005 or later income years, the Government co-contribution will be equal to 150% of the eligible personal superannuation contributions made by a person during that year. [Schedule 1, item 1]
1.6 Section 10 of the Co-contribution Act sets out the maximum amount of Government contribution payable for a person for any one income year, and the rate at which this amount reduces for incomes above the lower income threshold.
1.7 As a result of the Government's announcement, a new subsection 10(1A) will be inserted to provide, for the 2004-2005 and later income years, for a maximum Government contribution of $1,500, and a reduced phase out rate of 5 cents for each dollar of income above the lower income threshold. For example, a qualifying person whose total income is $40,000 will have a maximum available Government co-contribution of $900. [Schedule 1, items 2 to 4]
1.8 Section 10A of the Co-contribution Act provides for the indexation of the lower income threshold, and for related increases in the higher income threshold. The increase in the higher income threshold is equal to the dollar growth in the lower income threshold to maintain the taper range in dollar terms.
1.9 As a result of the increase in the lower income threshold, subsection 10A(2) will be amended to provide for the new lower threshold amount of $28,000. Subsection 10A(3) will also be amended to reflect this new lower threshold and the reduced phase out rate of 5 cents in the dollar. The amendments will increase the taper range to $30,000, and provide for a higher income threshold of $58,000 (for the 2004-2005, 2005-2006 and 2006-2007 income years). [Schedule 1, item 5]
Application and transitional provisions
1.10 The amendments made in respect of the Co-contribution Act are to apply to the 2004-2005 and later income years. [Schedule 1, item 6]