House of Representatives

Explanatory Memorandum

Circulated By the Authority of the Treasurer, the Hon Wayne Swan MP

Chapter 1 - Government co-contribution for low income earners

Outline of chapter

1.1 Schedule 1 to this Bill amends the Superannuation (Government Co-contribution for Low Income Earners) Act 2003 ( Co-contribution Act 2003) to freeze indexation of the co-contribution income thresholds for the 2010-11 and 2011-12 income years.

1.2 Schedule 1 also amends the Co-contribution Act 2003 to permanently maintain the current matching rate and maximum co-contribution payable for eligible personal superannuation contributions.

Context of amendments

1.3 The co-contribution matches eligible personal superannuation contributions made by low to middle income earners. The maximum co-contribution may be payable to persons with incomes up to the lower income threshold. The maximum amount phases down above this level, until it is phased out completely at the higher income threshold.

1.4 The income thresholds are indexed annually to average weekly ordinary time earnings. The lower and higher income thresholds for the 2009-10 income year are $31,920 and $61,920 respectively.

1.5 In the 2009-10 Budget the Government announced a temporary reduction in the matching rate and maximum Government co-contribution payable for eligible personal superannuation contributions. The matching rate and maximum co-contribution are currently legislated to revert back to the levels of the 2008-09 income year in the 2014-15 income year and for later income years.

1.6 In the 2010-11 Budget the Government announced that it would freeze indexation of the co-contribution lower and higher income thresholds for the 2010-11 and 2011-12 income years.

1.7 In the 2010-11 Budget the Government also announced that it would permanently maintain the current matching rate of 100 per cent and maximum co-contribution payable of $1,000.

Summary of new law

1.8 The Government will freeze indexation of the superannuation co-contribution income thresholds for the 2010-11 and 2011-12 income years.

1.9 The Government will permanently maintain the superannuation co-contribution matching rate at 100 per cent and the maximum co-contribution payable at $1,000.

Comparison of key features of new law and current law

Detailed explanation of new law

1.10 The co-contribution is payable for eligible individuals who make personal contributions into superannuation for which a tax deduction has not been claimed. The maximum co-contribution is payable for individuals whose income is at or below the lower income threshold. The co-contribution phases out for individuals whose income is up to the higher income threshold.

1.11 The lower income threshold is indexed annually to full time adult average weekly ordinary time earnings and the higher income threshold is increased by the indexation increase in the lower income threshold for that year. Indexation for an income year is calculated by multiplying the lower income threshold for the previous year by the indexation factor for that later income year.

1.12 Section 10A of the Co-contribution Act 2003 sets out arrangements for increases in the lower and higher income threshold.

1.13 Section 10A will be amended to freeze indexation arrangements for the 2010-11 and 2011-12 income years. These amendments will operate by setting the indexation factor for the 2010-11 and 2011-12 income years at one, which will lead to the income thresholds not changing for these years.

1.14 Subsection 9(1) of the Co-contribution Act 2003 sets out the basic rule for the matching of eligible personal superannuation contributions by the Government co-contribution.

1.15 Section 10 of the Co-contribution Act 2003 sets out the maximum amount of the Government co-contribution payable for an individual for an income year, and the rate at which this amount reduces where an individual's income is above the lower income threshold.

1.16 Subsection 9(1) and section 10 will be amended to provide for the permanent retention of a matching rate of 100 per cent and a maximum co-contribution payable of $1,000.

1.17 For the 2004-05, 2005-06, 2006-07, 2007-08 and 2008-09 income years, the Government co-contribution will continue to be equal to 150 per cent of the eligible personal superannuation contributions made by an individual during those years.

1.18 The maximum Government co-contribution remains at $1,500 for eligible personal superannuation contributions made in the 2004-05, 2005-06, 2006-07, 2007-08 and 2008-09 income years by individuals with incomes under the lower income threshold. The maximum co-contribution in those years will continue to be reduced by 5 cents for each dollar by which the individual's total income exceeds the lower income threshold in the relevant year.

1.19 For the 2009-10 and later income years, the Government co-contribution matching rate will be equal to 100 per cent of the eligible personal superannuation contributions made by an individual during those years.

1.20 For eligible personal superannuation contributions made in the 2009-10 and later income years the maximum Government co-contribution will be $1,000 for individuals with incomes below the lower income threshold. The maximum co-contribution payable will be reduced by 3.333 cents for each dollar by which the individual's total income exceeds the lower income threshold in the relevant year.

Example 1.1

Jane works for Lemon Pty Ltd. In 2010-11 she makes a personal contribution into superannuation of $1,000 and does not claim a deduction for this contribution. Her assessable income for that year is $30,000 and she has no reportable fringe benefits or reportable employer superannuation contributions. The Commissioner of Taxation determines that Jane is eligible for a Government co-contribution and pays $1,000 into Jane's superannuation account.

Application and transitional provisions

1.21 These amendments will apply to the 2009-10 and later income years.