John Watson (Tasmania, Liberal Party) Share this | Hansard source

The Treasurer, Peter Costello, took the superannuation industry and financial markets by surprise in the May 2006 budget with his policy of simplifying and streamlining superannuation. People moving into retirement have been actually handed the biggest tax break on superannuation since the time of the five per cent tax on lump sums. Unlike most other countries, Australia has taxed super three times: on entry into a fund, 15 per cent; on earnings from the fund, 15 per cent less dividend withholding tax; and on exit from the fund, anywhere from zero to 47 per cent. In the future, as a result of these monumental changes by the Treasurer, there will be only two levels of taxation, with exit taxation being abolished in the case of a taxed fund, where most of the members reside. So the effect of this simplifying of superannuation by the Treasurer is that gone are the eight very complex stages of computation of tax on what is known as an eligible termination payment, often referred to as an ETP. This means that the financial planners of this world will now focus on investment earnings rather than on planning around the age based and reasonable benefit limits to minimise tax. Too much time in the past was spent on minimising tax rather than on maximising returns.

Commenting on his superannuation budget initiatives, Treasurer Costello said that the measures had effectively made superannuation one of the best possible investment options for Australia and that they would encourage Australians to remain in the workforce. It is interesting to note that, following that announcement, many senior people in the union movement commented that it was the Liberal coalition government that was now the party for superannuation.

Earlier, Senator Sherry waxed lyrical on what the government of his day did in the early nineties, but times have moved on and the initiative has now been taken by the Liberal Party, which is handing out the biggest benefit in known memory. Approximately 85 to 90 per cent of superannuants in Australia are in what is known as a tax fund. When they are aged over 60, they will receive a lump sum with very few strings attached that will essentially be tax free. What is even more important and attractive is that, when this sum is invested in a pension, the income stream following that pension will be tax free. There is another group which comprises the 10 or 15 per cent of superannuants who are in a Commonwealth fund or are state employees, but their super is not taxed to begin with and they will be subject to a separate concessional taxation regime.

For many years now people have been saying that the nine per cent superannuation contribution from employers was not enough to derive a reasonable retirement income. But, as a result of these measures, the capital accumulation which will now be required to produce an effective income stream will, because of the impact of no tax on the stream, be so much lower than it was previously. This will minimise the adequacy issue. This is a great simplification of the accumulation and the draw-down.

Because the tax on superannuation has been reduced for people receiving benefits from tax sources, taxes will also be reduced on benefits paid from untaxed sources for people who are aged 60 and above. Under the plan, it is proposed that the 30 per cent tax on lump sums will be reduced to 15 per cent for amounts up to $700,000, with any excess taxed at the top marginal rate. Pensions received from an untaxed source will be taxed at the marginal rate but will receive a 10 per cent offset. Again, this is a very generous arrangement.

I will give an example of how the system will work. Say a person receives a pension of $56,000 per annum with a deductible amount of $6,000; that $6,000 would represent contributions made from that pensioner’s after-tax income. As a result of that, there would be a taxable pension of $56,000 less the $6,000 that he put in himself—$50,000. The deductible amount of $6,000 would naturally be paid tax free. The tax offset would be 10 per cent of the $50,000, which is $5,000. So the amount of tax payable by the person would be reduced by up to $5,000 depending on the person’s circumstances. In the case that I have outlined, it would be reduced by $5,000. That is a very generous and helpful contribution courtesy of the Liberal coalition.

Some of the other budget changes include the abolition of the reasonable benefit limits, often known as RBLs. These will be replaced with a flat pre-tax maximum of $50,000 in a salary sacrifice type of arrangement and an after-tax contribution of $150,000 per annum with a facility for deductibility up to $450,000 in any one year but still within that three-year arrangement. Members aged over 50 will be able to contribute $100,000 pre tax in one year for five years and this new $150,000 per annum limit on the undeducted contribution applies with effect from 9 May 2006. The Treasurer also confirmed that the tax will exclude the capital gains tax component from the sale of a small business. This will allow each small business owner to contribute up to $500,000 of capital gains into a superannuation fund in addition to contributions allowed under the cap. It is a very generous arrangement and it will be very helpful to small businesses.

Current allocated pensions require a draw-down within both minimum and maximum parameters. What will happen as a result of these significant changes is that a new type of pension will be introduced which requires only a statutory minimum—no maximum—payment to be made. People will be able to take a pension and also work at the same time. That is very valuable in circumstances where we are encouraging people to work after reaching normal retirement age. So there will be a facility for people to be able to have an income which has a taxable component and a tax-free component.

Another very important facility that is given to individuals is that they will have far greater flexibility as to how and when they draw down their superannuation in retirement, and there will be no forced payment of superannuation benefits. In effect, a person could maintain their superannuation account with their industry fund, or wherever it might be, and it will act almost as a bank account does, because they could draw out the money—draw down their funds—as and when they require.

As a result of these changes, the self-employed will be able to claim a full deduction for their superannuation contributions as well as be eligible for the government co-contribution on their personal post-tax contributions. The ability to make deductible superannuation contributions will be extended to the age of 75. Let me give you an example of just how significant these changes can be. For somebody who is earning $1,000 per week, the lump sum saving over 40 years will be $37,000, or an extra $136 per week in pension. I will repeat that to show the impact that simplifying and streamlining superannuation will have on an individual: if an individual is on $1,000 per week, lump sum savings over 40 years will be $37,000, or an extra $136 per week in pension.

To further increase the incentives to save for retirement, from 20 September 2007 the pension asset test taper will be halved to $1.50 per fortnight per $1,000 dollars of assets above the threshold. The effect of this is that it will allow a single retiree homeowner to have around $165,000 in additional assets before they lose the age pension, while a couple can have around $275,000 in additional assets before losing the age pension. This will have a very significant impact on providing security for older people in our society because the benefits and the side benefits of the age pension, in terms of access to the Pharmaceutical Benefits Scheme, are very significant.

But not everything has changed. The 15 per cent contribution tax will remain, although any taxable contributions over the new $50,000 limit will be taxed at the top rate. Our friends on the other side of politics believe that the way to tackle this is to reduce the contributions tax by some amount—by how much was never stated—but, while that could provide some benefits, the problem with that approach is that it would not reduce much of the red tape. In fact, according to the Labor Party proposal, instead of having eight stages of computation for an eligible termination payment, you would have nine—further complicating the arrangements that we have sought to eliminate.

The government provided an opportunity for submissions to be made, which were passed to Treasury. This was a massive undertaking. It is a big change and has a big impact on the budget: $2 billion every year for the next three years at least. The matters that the coalition looked at favourably included exiting the existing pension arrangements and so on. In summary, the aspects of the reform are as follows: it will significantly lower the tax impact on superannuation in terms of a tax fund; the replacement of the age based limits with streamlined contribution rules will certainly simplify matters; it will improve the co-contribution incentives for the self-employed; it will halve the asset test taper; and it will rewrite superannuation law to present a much clearer picture. The removal of taxes from three levels—on entry, on earnings and on exit—to only two levels will certainly bring us to the forefront of the lower taxation regime that applies throughout the world.

It is not surprising that around the world people are looking to Australia for taxation reform. I know from experience in Asia that it is Australia they are looking to for reform and for guidance as to how they should shape their retirement incomes. There is a situation where, particularly in Asia, the family unit is breaking down, there is a lot more mobility and, in China’s case, there is a one-child policy. They are undergoing some fundamental rethinking of retirement. The Asians are particularly good savers. At the present time, most of this money just goes into bank accounts. They are looking to get larger returns. They are looking to find an environment and a regime that will provide the security that is absolutely necessary for saving over a 30- to 40-year period. It is to Australia that they are looking.

Australians are at the forefront in providing the IT facilities and the expertise that the Asians are looking for. To the credit of Australia, Australian companies, executives and experts are providing that information and assistance and are contributing to the stability of pension regimes right across the world. I thank them for that, and I thank the Treasurer for his foresight in introducing such a marvellous incentive and initiative.