Thank you to the Alliance for a Fairer Retirement System for inviting me here today. I am honoured to join you for your inaugural summit.
A fair retirement is a pursuit worthy of us all. The simple fact is that Australians are expected to live ten years longer than they were 50 years ago.1 This is a great news story and our Government recognises the importance of providing more choice for older Australians to live healthier, more independent and safer lives.
I welcome the summit's focus on fairer retirement and I am pleased to outline the Government's approach to increasing the choices of older Australians to give them more financial flexibility.
Scope
This morning I'd like to outline the Government's priorities in:
- Franking Credits
- More Choice and simplifying Super, especially SMSF
- Pensioner Work Test
- Make a number of announcements around simplifying super
1. Franking credits
If I was to sum up the Government's view of fairness, it would be as you've heard the Prime Minister say – if you have a go in this country, you'll get a go - that's what fairness means.
Our Government believe in reward for effort, of keeping more of what you earn, of backing in those who have a go.
There are many voices on this issue, yet it is a significant sign that some of Australia's leading industry associations are taking a united stand.
The heart of the matter is fairness - a principle worth fighting for.
A bit of history and an example will help.
In 2001 changes were made to ensure Franking Credits (credits for corporate tax paid) that were received by an individual that were in excess of their tax liability could be received in cash. This was never a bonus or a windfall. It recognised that a shareholder, a part or full owner of a business has a right to pay their personal marginal tax rate on the dividend on that ownership.
Imputation ensures that income from franked dividends is taxed at the difference between a shareholder's marginal personal tax rate and the company tax rate. The outcome is therefore as if the shareholder had derived their share of the company's profit themselves.
Let me give an example.
Under the Government's plan of no change, Sally earns $17,000 a year (paying no tax) and receives $20,000 in franked dividends. Sally received a $14,000 in cash dividend and $6000 in franking credits (30% corporate tax rate) Sally still has a taxable income of $37,000 and is liable for $3,572 in tax, but there is a $6000 franking credit. Sally receives the difference between the tax already paid of $6000 and the tax liability of $3,572 and she gets a tax refund of $2,428.
Under Labor's plan, Sally receives that $20,000 in dividends fully franked ($14,000 with a 30% franking credit), so she would have her wage of $17,000 plus $14,000 dividend plus $6000 in franking credits. Sally still has a taxable income of $37,000 and is liable for $3,572 in tax, and she has a $6000 franking credit. The difference is that Sally does not receive the difference between the tax already paid of $6000 and the tax due of $3,572 as a tax refund and therefore is $2,428 worse off.
How is that fair on the lowest paid, those with low fixed incomes, those who are retired? How is this fair on Sally?
Labor thinks it is going after the top end of SMSF. Those on higher incomes can absorb franking credits against their tax liabilities. Sally can't.
It is not fair.
You know that and I know that - the 900,000 Australians who face losing their refunded franking credits know that.
The critical point is that more than 45 per cent of the 900,000 people are 65 years or older. Any changes will overwhelmingly hit low and middle-income earners, with 84 per cent of the individuals impacted on taxable incomes of less than $37,000, and 96 per cent of the individuals impacted on taxable incomes below $87,000.
That is why on 19 September, the Treasurer asked the House of Representatives Standing Committee on Economics to inquire into the implications of removing refundable franking credits.2 The Committee invites submissions by Friday, 2 November 2018.
When Labor originally announced its retiree tax, the Shadow Treasurer assured us "this is a well-targeted measure" and "that Labor's reforms are carefully designed. Labor's reforms are properly designed, and Labor's reforms are sensible".
What a terrible indictment of the Opposition's economic credentials that their 'sensible, well-targeted' policy lasted less than a fortnight – and still has holes right through it! This is up there with the carbon tax as far as Labor's greatest hits go.
Despite their backflip, Labor are still reaching into the pockets of around 900,000 Australians, including low-income earners and self-funded retirees, who will miss out on refunds of their own tax.
Labor's 'pensioner guarantee' does nothing to protect pensioners who benefit from franking credit refunds to their SMSFs who first receive the Age Pension after 27 March 2018. APRA regulated super funds will well be able to wash these changes through their large superannuant bases, but individuals and SMSFs will not.
96% of the individuals impacted by Labor's retiree tax have taxable income of less than $87,000.
Labor's retiree tax favours millionaires, as they are allowed to retain access to the full benefit of their franking credits. It's those with lower incomes who miss out.
2. More choice and simpler super for retirement
More choice - not less - is our broad objective.
Increased consumer choice underpins the Coalition Government's plan for a stronger economy in ensuring all Australians get a fair go, especially in retirement.
For example, we are increasing the maximum number of members allowed in self-managed superannuation funds from four to six.
This change is widely supported. It provides greater flexibility for joint management of retirement savings, in particular for larger families.
SMSFs not only play a valuable role in allowing individuals the choice to exert more control of their own retirement, they also provide a competitive dynamic in the superannuation sector.
We know the number of SMSFs and the value of SMSF assets are consistently increasing.
For example, in the 2016-17 financial year, total funds under management for SMSFs amounted to $750 billion, or 28 per cent of total superannuation assets. That is more than 595,000 self‑managed funds, and more than 1.1 million members in SMSFs.
SMSFs benefit our economy with the majority of SMSF assets being Australian listed shares, cash and term deposits.
SuperStream
In light of that, we are planning to extend the SuperStream system to SMSF rollovers requested on or after 30 November 2019.
SuperStream is the way businesses must pay employee superannuation guarantee contributions to superannuation funds.
With SuperStream, money and data are sent electronically in a standard and consistent format between employers, funds, service providers and the ATO.
This means that employers can make all their contributions in a single transaction, even if they are going to multiple superannuation funds.
It also means that contributions and rollovers can be processed faster, more efficiently and with fewer errors.
The ATO is continuing to work with the industry, including SMFSs, ahead of the commencement date to help ensure a seamless rollover process.
Protecting Your Super
The ATO is also set to play a key role in implementing our Protecting Your Super measures.
Announced as part of the 2018-19 Budget, this package of reforms are a significant step in delivering millions of Australians higher superannuation savings at retirement.
The Government is improving the superannuation regulatory system to protect Australians from the excessive fees, inappropriate insurance premiums and the inefficiencies which result from inadvertently holding multiple accounts.
There are 28.6 million superannuation accounts in Australia.3 According to the ATO, at June this year 15.6 million people had accounts, meaning that around 39 per cent of people have more than one account. And around 14 per cent of people had three or more accounts.
The Government has introduced legislation that will:
- empower the ATO to proactively reunite people's unclaimed, or low and inactive accounts with their active superannuation accounts where possible
- cap certain fees for low balance accounts
- ban exit fees on all accounts, and
- require insurance be provided on an opt-in basis only for members with low balances or inactive accounts (without a contribution for 13 months or longer) and for new members who are under 25.
Let me give you a practical example; take someone like Max. He starts out his working life with a part-time job and ends up working four jobs over his career accruing four superannuation accounts.
He pays fees and insurance premiums on each, eroding his inactive accounts, ending up with a balance at retirement of $397,000.4
With the Protecting Your Super measures in place it is a different story. With lower fees, fewer insurance premiums and auto-consolidation through the ATO, Max would have a retirement balance of $454,000 - a difference of $57,000.
And there's a lot of Maxs and Maxines out there - the benefits of the Government's reforms add up quickly.
Based on the most recent data, our reforms are estimated to:
- save around 7 million people more than half a billion dollars in fees
- provide around 5 million individuals with the opportunity to save an estimated $3 billion in insurance premiums by choosing to opt-in to this cover, rather than paying for it by default, and
- reunite approximately $6 billion of unclaimed or inactive, low-balance superannuation with the active accounts of around 3 million individuals, in the first year of the package.
3. Pension Work Bonus and Work Test
It was not the only measure announced in this year's Federal Budget geared towards improving choices in retirement.
We are supporting older Australians who choose to work more and improve their incomes by increasing the Pension Work Bonus to $300 a fortnight and extending eligibility to the self-employed.
As many of you know, the Pension Work Bonus is an income test concession for age pensioners and equivalent Veterans' Affairs pensioners.
As it currently stands, the first $250 of employment income a fortnight is not counted in the Age Pension income test.
This amount has not been increased since 2011, and does not apply to income earned from self-employment.
That is changing. Say Jessica is a single age pensioner working one day a week and earning $450 a fortnight.5
She has no other income and her assets are below the asset test free area.
Her pension is currently reduced because of her earnings.
Under our changes, the first $300 of Jessica's earnings will not be assessed and only $150 will count for the pension income test.
As this is less than the pension income test free area, her pension will increase by $16 per fortnight to the maximum rate.
Work test exemption
In the Federal Budget, we also announced a one-year exemption from the work test for superannuation contributions to allow recent retirees to boost their balances.
Currently, individuals aged 65 to 74 must work a minimum of 40 hours during a 30 day period in the financial year in order to keep making voluntary contributions to superannuation.
Our exemption provides older Australians additional flexibility to contribute more into superannuation as they move into retirement.
It means from 1 July 2019, Australians aged 65 to 74 with a total superannuation balance below $300,000 will be able to make voluntary contributions for 12 months from the end of the financial year in which they last met the work test.
Treasury has released exposure draft legislation to give effect to this measure. And while we have only just completed the public consultation, I look forward to introducing the legislation into Parliament.
Retirement income framework
It's no secret that the retirement phase of superannuation is under‑developed and often takes a back seat to the wealth accumulation phase.
There is limited availability and take-up of products that manage the risks people face in retirement, in particular the risk of outliving their savings.
As a result, most people invest their superannuation savings in an account based pension and withdraw only legislated minimum amounts, without being aware of all the choices.
In response, the Government is working with the industry to develop a retirement income framework that increases flexibility and choice for members.
Surprisingly, there are no obligations on superannuation fund trustees to consider the retirement income needs of their members.
So the Government is moving to introduce a retirement income covenant in the Superannuation Industry (Supervision) Act 1993.
Among other things, this will require trustees to consider the retirement income needs of their members, by developing a retirement income strategy.
We believe this will focus the industry on providing a higher standard of living for retirees.
The covenant will require trustees of APRA-regulated funds to offer Comprehensive Income Products for Retirement or CIPRs - products that reduce the risk of individuals running out of money, no matter how long they live.
We have already heard from the SMSF sector that the development of CIPRs will benefit SMSFs over time, by providing more choice in the retirement income product market.
Under the covenant, SMSFs will be required to develop a retirement income strategy. This will require SMSFs to think about how they are going to balance their needs and preferences, such as having access to capital for unexpected costs, having income for life and not just until life expectancy, and whether the members will be eligible for the Age Pension. But to be clear, SMSFs won't have to develop or offer CIPRs to members.
In addition to these considerations, the retirement income strategy is an opportunity for SMSF trustees to consider possible exit strategies. This allows SMSF trustees to plan for the possibility of cognitive decline or loss of capacity in older age, and for the possibility that one member might outlive another.
We'll have more to say on this in the coming weeks.
Super Announcements
In the 2016-17 Budget, the Government passed a range of reforms to improve the fairness, sustainability, flexibility and integrity of the superannuation system.
Now that these reforms have been rolled out, Australians need stability and certainty in the superannuation rules. This is why the Government has committed to making no further major changes to superannuation taxation and the focus on any future change will be to simplify Super where ever possible or lessen any burden.
The Government is committed to the smooth, ongoing implementation of the superannuation taxation package, to ensure that it remains fair and effective. That is why I am announcing this morning three new measures to address some minor but important issues that affect retirees.
Firstly, we are fixing an error in the way that market-linked pensions are valued under the transfer balance cap when they are commuted or rolled over, resulting in a nil debit.
This nil debit is an issue because it doesn't accurately reflect the individual's transfer balance cap position, and may lead to an individual breaching their cap. The ATO has issued guidance to SMSFs on their approach to compliance on this issue, but the
Government is committed to finding a more permanent legislative solution to ensure that the value of a commuted market-linked pension is correct.
Secondly, we are amending the law to maintain the treatment of market‑linked pensions under the transfer balance cap where they have been rolled over as a result of a successor fund transfer.
To give you a bit more background on this, market-linked pensions rolled over or commenced after 1 July 2017 are not treated as capped defined benefit income streams under the transfer balance cap.
Because of this, market-linked pensions that are rolled over as a result of a successor fund transfer could lead to individuals inadvertently breaching their transfer balance cap. The measure I am announcing today will ensure the new market-linked pensions that commence as the result of a successor fund transfer will continue to be treated as a capped defined benefit under the transfer balance cap.
And thirdly, we will be changing the law to make sure that death benefits that include life insurance proceeds are not subject to tax when they are rolled over to a new superannuation fund.
The Government recognises this is anomalous with the tax treatment of death benefits taken out of superannuation and out of line with the policy that death benefits are tax free for dependants. This measure c. ensures that death benefit lump sums remain tax-free for dependants, even if rolled over within the superannuation system.
These changes will ensure that the superannuation tax system operates smoothly and fairly.
Closing remarks
I thank the Alliance for hosting today's event. While the Alliance is only new, I believe your united voice is an important one.
I want to reiterate that Labor's tax will punish aspirational, self-reliant Australians who have worked hard to support themselves, instead all but directing them to move on to the pension.
Labor's tax will distort investment decisions, discouraging investment in Australian companies in favour of other investments.
Citi Research has indicated the policy would diminish demand for Australian shares relative to other investments and the major banks' valuation could be impacted by as much as five to ten per cent by the change.
Labor's retiree tax is a cruel strike against self-managed super funds to benefit the union aligned industry fund sector.
The Shadow Treasurer claims Labor's policy costing takes account of the Government's transfer balance cap and other behavioural changes – the rest of us are very sceptical. He could of course prove it by releasing his costings.
Bill Shorten has now announced more than $200 billion worth of higher taxes of which this is but one.
The Government is prepared to take a stand and I am pleased to outline our broader approach to put in place the settings for a fairer retirement.
We are committed to providing older Australians with more choice so they can enjoy healthier, more independent lives.
1 - https://www.budget.gov.au/2018-19/content/essentials.html
2 - https://www.aph.gov.au/Parliamentary_Business/Committees/House/Economics/FrankingCredits
3 - APRA Annual Superannuation Bulletin June 2017 (issued 28 March 2018)
4 - This assumes Max works part-time with a starting salary of $24,000 in 2019-20. A new account is opened with every new job, with default insurance cover. Assumes 7.5% returns, 0.85% investment fees, $66 annual fixed fees and $190 annual insurance premiums. Under the package, Max will have fewer default insurance policies and as a result an insurance payout may be lower if an insured event were to occur. Balances at retirement are in 2019-20 dollars.
5 - https://www.budget.gov.au/2018-19/content/factsheets/3-financially-prepared.html