House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Treasurer, the Hon Scott Morrison MP and Minister for Revenue and Financial Services, the Hon Kelly O'Dwyer MP)

General outline and financial impact

Superannuation Reform package

The Government's Superannuation Reform Package was announced in the 2016-17 Budget on 3 May 2016 with some later changes announced by the Treasurer and Minister for Revenue and Financial Services on 15 September 2016. The package:

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makes the superannuation system fairer and fiscally sustainable by ensuring that the superannuation tax concessions are well targeted and affordable;

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enables more choice and flexibility to encourage and provide more opportunities for people to save for their retirement; and

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improves the integrity of the superannuation system to ensure that it is used for the purpose of providing income in retirement to substitute or supplement the age pension and not for tax minimisation and estate planning purposes.

Financial impact

The Superannuation Reform Package is estimated to increase the underlying cash balance by $2,793.6 million over the forward estimates period comprising:

.. represents an estimate that is not zero, but has been rounded to zero.

*the impact of the administration and consequential changes has been assessed as unquantifiable but small.

The financial implications reflect changes to the package announced by the Treasurer and the Minister for Revenue and Financial Services on 15 September 2016. This has implications for a number of the 2016-17 Budget measures due to interactions between policies, and results in an increase in the underlying cash balance of $180 million over the forward estimates. The financial implications also include variations arising from detailed changes to the implementation of the package informed by the consultation. Overall, these variations reduce the underlying cash balance by $320 million over the forward estimates period.

The objective of the superannuation system

The Superannuation (Objective) Bill 2016 (the Objective Bill) establishes a legislative framework to guide the development of future superannuation policy. It does this by enshrining the primary objective of the superannuation system in legislation and the subsidiary objectives of the superannuation system in regulation. It requires new bills and regulations relating to superannuation to be accompanied by a statement of compatibility with the objective of the superannuation system. The subsisidary objectives of the superannuation system will be prescribed by regulation.

Part 5 of Schedule 10 to the Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016 (the TLA Bill) makes a consequential amendment to the Legislation Act 2003 to require a statement of compatibility with the objective of the superannuation system to be included in an explanatory statement for a regulation relating to superannuation.

Date of effect: The Objective Bill applies from commencement, which is the start of the first day of the first quarter following Royal Assent of the Objective Bill.

The amendments made by Part 5 of Schedule 10 to the TLA Bill apply from commencement, which is the start of the first day of the first quarter following Royal Assent of the TLA Bill.

Proposal announced : This measure was announced by the Treasurer as part of the 2016-17 Budget on 3 May 2016.

Financial impact: This measure does not have a financial impact.

Human rights implications : See Statements of Compatability with Human Rights - Chapter 2, paragraphs 2.42 to 2.47.

Cost of Compliance impact: There is no compliance cost impact from this measure.

Transfer balance cap

Schedule 1 to the Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016 (the TLA Bill) imposes a $1.6 million cap (the transfer balance cap) on the amount of capital that can be transferred to the tax-free earnings retirement phase of superannuation.

Schedule 1 to the TLA Bill also introduces additional income tax rules on recipients of certain defined benefit income streams in excess of $100,000 per annum to achieve a broadly commensurate taxation outcome.

Date of effect: The amendments made by this Schedule take effect from 1 July 2017.

Proposal announced: This measure was announced by the Treasurer as part of the 2016-17 Budget on 3 May 2016.

Financial impact: The transfer balance cap measure is estimated to increase the underlying cash balance by $1,845.6 million over the forward estimates period comprising:

Human rights implications: See Statements of Compatability with Human Rights - Chapter 3, paragraphs 3.365 to 3.379.

Compliance cost impact: The introduction of a transfer balance cap is expected to result in a medium increase in compliance costs.

Concessional superannuation contributions

Schedule 2 to the TLA Bill reduces:

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the annual concessional contributions cap to $25,000 (from $30,000 for those aged under 49 at the end of the previous financial year and $35,000 otherwise); and

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the threshold at which high-income earners pay Division 293 tax on their concessionally taxed contributions to superannuation, to $250,000 (from $300,000).

Schedule 2 to the TLA Bill also amends how concessional contributions are determined to ensure that amounts included in concessional contributions in respect of constitutionally protected funds and unfunded defined benefit superannuation schemes count towards an individual's concessional contributions cap.

Date of effect: The amendments made by this Schedule apply with effect from 1 July 2017, Part 1 applies to the 2017-18 financial year and later financial years and Part 2 applies to the 2017-18 income year and later income years.

Proposal announced: This measure was announced by the Treasurer as part of the 2016-17 Budget on 3 May 2016.

Financial impact: The concessional superannuation contributions measure is estimated to increase the underlying cash balance by $2,343 million over the forward estimates period comprising:

Human rights implications: See Statement of Compatability with Human Rights - Chapter 4, paragraphs 4.60 to 4.72.

Compliance cost impact: The changes to the concessional contributions cap and Division 293 are expected to result in a low increase in compliance costs.

Non-concessional contributions cap

Schedule 3 to the TLA Bill amends the annual non-concessional contributions cap from $180,000 to $100,000, introduces criteria for an individual to be eligible for the non-concessional contributions cap and makes other minor amendments in respect of the non-concessional contributions rules.

Date of effect: The amendments made by this Schedule take effect from 1 July 2017, applying to the 2017-18 and later financial years.

Proposal announced: This measure was announced by the Treasurer and Minister for Revenue and Financial Services on 15 September 2016.

Financial impact: The annual non-concessional contributions cap measure is estimated to result in a gain to revenue over the forward estimates period of $200 million on an underlying cash balance basis comprisin g:

.. represents an estimate that is not zero, but has been rounded to zero.

Human rights implications: See Statement of Compatability with Human Rights - Chapter 5, paragraphs 5.82 to 5.93.

Compliance cost impact: The changes to non-concessional contributions are expected to result in a low increase in compliance costs.

Low income superannuation tax offset

Schedule 4 to the TLA Bill amends the Superannuation (Government Co-contribution for Low Income Earners) Act 2003 to enable eligible low income earners to receive the low income superannuation tax offset.

Date of effect: The amendments made by this Schedule apply to the 2017-18 income year and later income years.

Proposal announced: This measure was announced by the Treasurer as part of the 2016-17 Budget on 3 May 2016.

Financial impact: The low income superannuation tax offset measure is estimated to reduce the underlying cash balance by $1,445 million over the forward estimates period comprising:

Human rights implications: See Statement of Compatability with Human Rights - Chapter 6, paragraphs 6.33 to 6.38.

Compliance cost impact: Introducing the low income superannuation tax offset is expected to result in a low increase in compliance costs.

Deducting personal contributions

Schedule 5 to the TLA Bill removes the requirement in the income tax law that an individual must earn less than 10 per cent of their income from their employment related activities to be able to deduct a personal contribution to superannuation and make it a concessional contribution.

Date of effect: The amendments made by this Schedule apply to the 2017-18 income year and later income years.

Proposal announced: This measure was announced by the Treasurer as part of the 2016-17 Budget on 3 May 2016.

Financial impact: The deducting personal contributions measure is estimated to result in a cost to revenue over the forward estimates period of $850 million on an underlying cash balance basis comprising:

Human rights implications: See Statement of Compatability with Human Rights - Chapter 7, paragraphs 7.42 to 7.50.

Compliance cost impact: Improving the access to concessional contributions is expected to result in a medium increase in compliance costs.

Unused concessional cap carry forward

Schedule 6 to the TLA Bill introduces provisions to allow catch-up concessional contributions. This will allow individuals to make additional concessional superannuation contributions in a financial year by utilising unused concessional contribution cap amounts from up to five previous financial years, providing that the individual's total superannuation balance just before the start of the financial year is less than $500,000.

Date of effect : The amendments made by this Schedule apply in relation to working out an individual's concessional contributions cap in the 2019-20 financial year and later financial years.

Proposal announced: This measure was announced by the Treasurer as part of the 2016-17 Budget on 3 May 2016 with amendments announced on 15 September 2016.

Financial impact: The unused concessional cap carry forward measure is estimated to result in a cost to revenue over the forward estimates period of $100 million on an underlying cash balance basis comprising:

Human rights implications : See Statement of Compatability with Human Rights - Chapter 8, paragraphs 8.22 to 8.26.

Compliance cost impact: Providing individuals with the ability to make catch-up contributions is expected to result in a low increase in compliance costs.

Tax offsets for spouse contributions

Schedule 7 to the TLA Bill amends the tax law to encourage individuals to make superannuation contributions for their low income spouses. This is achieved by increasing the amount of income an individual's spouse can earn before the individual ceases to be entitled to a tax offset for making superannuation contributions on behalf of their spouse.

Date of effect: The amendments made by this Schedule apply to the 2017-18 income year and later income years.

Proposal announced: This measure was announced by the Treasurer as part of the 2016-17 Budget on 3 May 2016.

Financial impact: The tax offset for spouse contributions measure is estimated to result in a cost to revenue over the forward estimates period of $10 million on an underlying cash balance basis comprising:

Human rights implications: See Statement of Compatability with Human Rights - Chapter 9, paragraphs 9.19 to 9.23.

Compliance cost impact: Extending the ability of individuals to benefit from the spouse tax offset is expected to result in a low increase in compliance costs.

Innovative income streams and integrity

Schedule 8 to the TLA Bill amends the earnings tax exemptions in the Income Tax Assessment Act 1997 to:

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extend the earnings tax exemption to new lifetime products such as deferred products and group self-annuities;

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remove the earnings tax exemption in respect of transition to retirement income streams; and

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introduce an integrity measure that will apply to self-managed superannuation funds and small Australian Prudential Regulation Authority funds to support the operation of the transfer balance cap measure.

Date of effect : The amendments made by this Schedule apply to the 2017-18 income year and later income years.

Proposal announced: This measure was announced by the Treasurer as part of the 2016-17 Budget on 3 May 2016.

Financial impact: The innovative income streams and integrity measure is estimated to result in a gain to revenue over the forward estimates period of $470 million on an underlying cash balance basis comprising:

.. represents an estimate that is not zero, but has been rounded to zero.

Human rights implications: See Statement of Compatability with Human Rights - Chapter 10, paragraphs 10.66 to 10.79.

Compliance cost impact: Extending the tax exemption on earnings in retirement phase to deferred products such as deferred lifetime annuities and group self-annuity products is expected to result in a medium increase in compliance costs. The changes to transition to retirement income streams are expected to result in a low increase in compliance costs.

Anti-detriment provisions

Schedule 9 to the TLA Bill removes the income tax deduction available to a complying superannuation fund, life insurer, or complying approved deposit fund that pays an increased lump sum, because of the death of a member for the benefit of their spouse, former spouse or child, can effectively result in a refund of income tax paid by the fund in respect of contributions made for the member during their lifetime.

Date of effect : The amendments made by this Schedule take effect on and from 1 July 2017.

Proposal announced: This measure was announced by the Treasurer as part of the 2016-17 Budget on 3 May 2016.

Financial impact: The anti-detriment measure is estimated to result in a gain to revenue over the forward estimates period of $350 million on an underlying cash balance basis.

Human rights implications : See Statement of Compatability with Human Rights - Chapter 11, paragraphs 11.17 to 11.22.

Compliance cost impact: Removing the anti-determent provision is expected to result in a low reduction in compliance costs.

Administration and consequential amendments

Part 1 of Schedule 10 to the TLA Bill 2016 amends the tax law to simplify and consolidate the range of existing processes for the release of amounts from individuals' superannuation using a release authority.

The amendments will replace existing release authorities (except those relating to deferred debt account discharge liabilities for Division 293 tax) with a new simplified release authority regime. This will ensure that the release of all such superannuation amounts is subject to common processes and timeframes.

Part 2 of Schedule 10 to the TLA Bill 2016 simplifies the taxation law to assist in streamlining the administration of the Division 293 tax regime. The amendments reduce compliance costs for superannuation providers and individuals where superannuation benefits become payable from defined benefit interests by removing the requirements in the taxation law relating to superannuation interests for which a Division 293 tax debt account is being kept for:

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superannuation providers to notify the Commissioner of Taxation (Commissioner) of the amount of end benefit caps for their members in some circumstances; and

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individuals to notify the Commissioner in any circumstance when their superannuation benefits from such interests first become payable.

Part 3 of Schedule 10 to the TLA Bill 2016 clarifies that the Commissioner can provide a single notice that includes two or more separate notices that are required to be provided.

Part 4 of Schedule 10 to the TLA Bill makes consequential amendments to the Superannuation Act 1976 that sets out the rules that govern the Commonwealth Superannuation Scheme (CSS) in relation to release authorities issued by the Commissioner. The amendments take account of changes made by other parts of the Superannuation Reform Package.

Date of effect : The amendments made by this Schedule apply as follows:

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Part 1 - financial years commencing on or after 1 July 2018;

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Part 2 - end benefit notifications for which the obligation to provide the notification arises on or after 1 July 2017;

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Part 3 - on and from 1 July 2017;

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Part 4 - financial years commencing on or after 1 July 2018

Proposals announced : These measures are consquential to the measures announced by the Treasurer as part of the 2016-17 Budget on 3 May 2016 and the amendments announced on 15 September 2016.

Financial impact : The impact of the administration and consequential changes are estimated to have an unquantifiable but small financial impact.

Human rights implications : See Statements of Compatability with Human Rights - Chapter 12, paragraphs 12.127 to 12.136.

Compliance cost impact: Streamlining administration is expected to result in a low reduction in compliance costs for both individuals and superannuation providers.

Summary of regulation impact statement

Impact: The Regulation Impact Statement (RIS) - Chapter 14 of this Explanatory Memorandum finds that the recommended package of measures would improve the sustainability, flexibility and integrity of the superannuation system.

In establishing the recommended package of measures consideration was given to overarching costs (including compliance costs), benefits, and the fiscal impact of the measures both individually and as a package. Compliance costs will include those arising from the need for stakeholders to familiarise themselves with the changes and the need for superannuation providers to update systems. After considering the costs and benefits, the RIS concludes that the recommended package of measures would provide the highest net benefit while taking into account the Government's broader fiscal strategy.

Main points:

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Better targeting of tax concessions will improve the fairness and sustainability of the superannuation system. These measures will require all stakeholders to familiarise themselves with the changes. Superannuation providers would also need to update systems to give effect to the required changes.

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The flexibility measures will enable more individuals to save for their retirement. Providing individuals, especially those individuals with low incomes or with broken work patterns, with more ways to save for their retirement will enable them to be more likely to have higher retirement incomes. While individuals will benefit from these measures, they will also incur costs in familiarising themselves with the changes and considering their current superannuation tax affairs.

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The integrity measures will ensure that superannuation is not primarily used for tax minimisation purposes, increase alignment with the objective of superannuation and streamline processes across the superannuation system. These measures will require all stakeholders to familiarise themselves with the changes. Superannuation providers would also need to update systems to give effect to the required changes.