5 May 2016

Address to the Tax Institute, Sydney

On Tuesday, I delivered not just another Budget but a national economic plan. The country doesn’t need just another budget, what the country needs is a national economic plan to support the Australian economy as we shape it and we move it, from the resources investment dominated boom that we had in our economy through to a more broad, more diversified economy that continues to benefit from the increase in production volumes out of the resources sector of course, but also to see our economic base broaden and our economic horizons go beyond, well beyond where they ‘ve been before as a result of the many trade agreements and other initiatives that we’ve been able to pursue as a government.

So we are transitioning to this stronger new economy and Australian’s understand this. I don’t think enough credit is given to Australians out there for understanding the nature of this transition. It is not a “in the bubble” issue, as they like to talk about issues sometimes in Canberra. This is a real issue that Australians understand, and some Australians are more acutely aware of this than others because they’re feeling this transition more acutely than other areas, whether it’s in South Australia, particularly down in Whyalla or in North Queensland, particularly around Townsville and places north of there as well. The transition is felt differently around the country, but the transition is occurring and the need for a national economic plan to support that transition in the economy is incredibly important, and so that’s why I say this is not just another budget. This is a national economic plan. A plan that the Australian people have been asking for and have the opportunity to endorse in just a few months’ time when we go to an election.

That plan I remind everyone has six key points; an innovation and science program for start-up businesses, and I note in particular the measures relating to start-up businesses, angel investing and so on were passed in the parliament yesterday. Secondly a defence plan for local high tech manufacturing and technology. Thirdly, export trade deals to generate new business opportunities. Fourthly, tax cuts and incentives for small businesses and hard working families. Fifthly, a sustainable Budget with crack downs on tax avoidance and loop holes and sixth, guaranteed funding for health, education and roads across the many other responsibilities that the Government has.

So they’re the six points, they are the six things that encompass the national economic plan that we believe is necessary to ensure Australia can make this transition successfully.

Now turning to the tax measures that form part of that plan and two very important parts of that plan. We want Australians to invest, to innovate and to grow our economy and we want them to be able to employ more Australians. To do this businesses also need to reap more of the benefits of their own enterprise so they can reinvest it back into their enterprise, and that requires a tax system that backs them to do so.

At the centre of our plan for jobs and growth is a Ten Year Enterprise Tax Plan which will boost the size of our economy by around $16 billion in the long term, lifting up the GDP on the Treasury estimates by about 1 per cent of GDP. In particular that means supporting growth in real wages, as we know which have been soft in recent years and one of the reasons why revenue estimates have not been as strong as they may have been on previous occasions. A plan that supports enterprises, that boosts our economy and lifts real wages.

So with this Budget, the Government will reduce the tax rate, as I said, for small business — that is those now with a turnover of up to $10 million — to 27.5 per cent. On July 1 this year, nearly 870,000 small businesses employing 3.4 million Australians will have their tax rate cut.

The turnover threshold for a lower company rate will progressively increase until all companies are at 27.5 per cent – and then it will fall to 25 per cent by 2026-27.

In addition I’ve made it clear, since the time of becoming Treasurer, that I think the middle income burden on Australian taxpayers is growing and is unsustainable. In recent times, they’ve received little — if any — income tax relief. And if we are to continue to do nothing about that, if we did nothing on the Budget night about broadening out the middle income tax bracket, around half a million of these Australians would move into the second top marginal tax bracket over the next few years, each year.

Now, I have called this out as unsustainable and I’ve acted in this budget. We will provide some modest personal income tax relief from July 1 this year by extending the middle income tax bracket from $80,000 to $87,000 – to ensure that average wage earners, however you describe them but particularly full time ordinary earnings wage earners, will not be moving into that second highest tax bracket and it means that they will pay, and continue to pay only 32.5 cents as their marginal tax rate.

The Government is not claiming that this is a big cash splash, it’s not, it’s not intended to be. It’s not a sweetener, it’s not about that, what it’s about is recognising that your tax system has to be sustainable and if you’re going to have a middle income tax bracket, well middle income earners have to be in it and you don’t start pushing those middle income earners as they work more, as they earn more and they do more and give them the great prize of their effort – that they pay more marginal tax. And so we think it’s an important structural reform to make sure that the middle income tax bracket encompasses middle income earners in this country.

We also announced a suite of measures designed to drive greater investment in our economy and to simplify the tax system:

• new forms of collective investment vehicles to boost our financial services exports;

• fixing the mess created by Labor’s changes to consolidation rules from 3 years ago; and

• introducing changes to Division 7A to reduce red tape on private family companies with strengthening integrity.

At the same time, we must ensure that multinationals pay the right amount of tax, that is they should pay the tax on what they earn as income in this country. When Australians see companies avoiding tax, they know it means the burden falls more on them as individuals and so not only do the measures have to be there, which we have put in this budget, but the backing into the ATO and the follow through in political commitment must be there so Australians know that we are enforcing these rules.

As Liberals and Nationals we have some clear principles around tax. We think that the tax burden wherever we can make it less, we should. We think a tax burden on the Australian economy retards the Australian economy. That’s why in this Budget we haven’t added to the tax burden over and above the projections that were contained in last year’s budget on the tax burden. We have reinvested the savings, I should say the revenue, that we have gained from other tax measures in this Budget and we have reinvested in lowering the tax burden in other areas. So that’s our principle, a dollar in the hand of someone who earns it is better than a dollar in the hands of government, in our view.

But where the tax rules are there, then all Australians must pay their tax. So yes we’re strong on ensuring a lighter tax burden for Australians wherever we can, but we’ll always be as strong and as tough as we need to be, and we must be, to ensure that all Australians pay the tax that is required of them under the tax laws.

So we are introducing measures to further build on our Multinational Anti-Avoidance Laws that we got through the parliament last year, despite the opposition from the Labor Party once again who say they support increased measures to deal with multinational tax avoidance, but in government did nothing about it and now they’re in the parliament and asked to vote to support such measures, they voted against it.

These measures included, what I announced this week:

• The introduction of a diverted profits tax from 1 July 2017;

• A new Tax Avoidance Taskforce with more than 1,000 experts to ensure greater compliance with our tax laws; and

• Updating our transfer pricing laws to implement OECD best practice.

There is much more I could say about the Enterprise Tax Plan and the rest of the Budget more broadly. But what I want to do is move beyond the many headlines we’ve seen over the last couple of days, and break down some of the detail for you on the superannuation changes.

Let me say upfront that these, I believe are very necessary steps. As Australia’s economy transitions, we need to make sure our tax and super systems are up to the job and the job of driving economic growth and jobs. That means having a sustainable superannuation system which is better targeted and which is fit for purpose. We want a superannuation system that works for Australians — one that offers opportunity, stability and certainty and of course flexibility as well, to deal with the changing work-life patterns that so many Australians have in a modern economy.

We believe it’s critical that we get this right as the Australian population ages and the fiscal pressures increase. In last year’s Budget as Social Services Minister I was responsible for bringing forward the changes that we saw in the eligibility to the pension. This was the first phase of what I’d called the retirement income systems changes that was introduced in last year’s Budget.

What we’ve done in this year’s Budget is carried that through. We dealt with the pension issues last year and there are no changes to pensions in this year’s Budget, nor would there be. In this year’s Budget we focused on the superannuation side of the retirement incomes system. And that’s what we’ve sought to do with the package of super measures in the Budget. We’ve sought to get these settings right to encourage savings and make sure the system is sustainable, and we’ve done that in four ways.

Firstly, we’ve been setting out to clarify the objective of superannuation. The purpose of the super system is to “provide income in retirement to substitute or supplement the Age Pension”. That’s what was recommended in the Murray Inquiry, and that remains our very strong view.

And now, for the first time, as we move through the final stages of the process we’re engaged in this will be enshrined in legislation, should we have that opportunity to do so after the next election.

It is important that we do this because a clear objective will boost stability in the superannuation system, and create a clearer framework for policy in this area. It will also mean we can all assess whether or not the system is meeting its objective.

So that’s the ‘anchor’ for the package, if you like. And with that objective clear, we worked from that principal. Simply put, it was clear to us that against that principal, that principal, that objective, that purpose to provide income in retirement to substitute or supplement the Age Pension, in that context, generous tax concessions to the top 4 per cent of superannuation members was not a sustainable proposition, nor was it related to the purpose of superannuation tax incentives as we understood them.

Australia’s super tax arrangements must be fiscally sustainable, and that’s why we’ve had to announce better targeted incentives — ones aimed at those Australians who need that incentive to save, and that support to save over their working life so as to not to become dependent on a pension or part pension in their retirement.

To do this, we’re introducing a $1.6 million transfer balance cap on the total amount of super a person can transfer into a retirement phase account. This will, in practice, affect less than 1 per cent of superannuation retirees, and I should point out that a balance of $1.6 million can support, based on various modelling that has been done, an income stream in retirement that is up to four times the single Age Pension.

Furthermore, we’re retaining the tax-free status of retirement accounts and we’re not limiting the savings that can be accumulated outside these accounts or outside superannuation. This is an important point, we have not changed the taxation status of retirement accounts. They will continue to have a tax-free status on their earnings in retirement accounts. This is an important principal as far as we’re concerned. So that has not changed. No change to the tax status of retirement income accounts.

What we’ve done is we’ve put a ceiling height on what can go into those accounts and there is a very real difference. Our opponents have decided to tax retirement income accounts. They’re taxing them, and you know you start taxing those and where are they going to stop? They say it’s at 75 now, but where’s it going to stop? Our view is, you do not tax retirement income account savings. Now we’ve said there should be a ceiling on what should go into that. A means test if you like as to how much capital that you’ve accumulated, over the course of your working life, can be put into such an account. That’s a separate question. But when you start taxing those retirement income accounts, that is a very different proposition, and as you would know practically and administratively, it is a very cumbersome and difficult thing for funds to actually manage anyway. So it fails the practical test as well as I think it fails the policy test and that is why we have not gone down that path. I do not think that the Opposition, the Labor Party have thought through what they’re doing in superannuation, they just see super as a big bag of cash to tax. What we see it as, is an important system in our retirement incomes policies to ensure that Australians can be sustainable in their retirement and where those who need it, they get that support, and for those who’ve been able to make their own way, well that’s fantastic and we commend them for that and we wish them to have as much flexibility to put their money wherever they would like.

So we are retaining the tax-free status.

If you’re part of the one per cent that have more than $1.6 million in their superannuation account, you can transfer the excess into an accumulation account where your earnings will still be concessionally taxed. Or you can go and invest in a start-up business, freeing up the capital of retirees in Australia. Unlocking that capital. No disrespect to super funds but away from some of the index hugging type investment practices funds, and I know that they have their requirements and they have their conditions that they have to meet, but the investor doesn’t have to be limited by that, and if they wish to transfer their funds, their hard earned funds, the funds that they worked for, and go and invest that in a start-up business utilising the concessions that we have introduced to drive growth and innovative businesses that passed the parliament yesterday, well good. If they wish to pay down debt. If they want to go and do something else, travel, that’s up to them. It’s their money, they earned it. They can spend it how they like.

Many of the 1 per cent of superannuants affected by this change benefited from the generous transitional arrangements in 2006-07 that enabled $1 million to be placed into super in a single year. But it’s a cold hard fact that younger Australians were much less able to benefit from these transitional arrangements and are very unlikely to accumulate the multi-million dollar balances that some have today, in the future. We need to ensure that the concessions in our superannuation system are not skewed in favour of one generation of Australians over another. The balance cap is an important measure to promote confidence in the system amongst young generations as well. It says to them that we are backing them in as just as much as we are backing in others.

Another change will be to require those with combined incomes and super contributions greater than $250,000 to pay a 30 per cent tax on their concessional contributions — up from 15 per cent. Again, this will only affect 1 per cent of superannuation fund members, and is consistent with the current tax treatment for people with incomes of more than $300,000. We’ll also lower the concessional contributions cap to $25,000 per annum this level still enables individuals to make enough contributions over their working life to be self-sufficient in retirement and also makes it feasible to allow them more flexibility in the system which I’ll talk about in a few moments. And we’ll introduce a lifetime cap of $500,000 on non-concessional contributions which is now active as of 7.30pm on Budget night.

We should stress on that one in particular, that if there is additional funds that people already had in and contributed in non-concessional contributions and they are already above $500,000 they will not be required to take that excess out, they will not be required to do that. They can stay in there, because it’s obviously moderated down the track by the $1.6 million transfer balance cap at the end of the day. So we’re not asking people to change any arrangements if they are already over the cap as of 7.30pm last night. But the proportion of those Australians will be minimal, to put it mildly.

Finally, these changes being put in place, enable the Government to introduce the Low Income Superannuation Tax Offset. This will support low income earners by allowing those with adjusted taxable income of up to $37,000 to effectively receive a refund of the tax paid on their concessional contributions, capped at $500. There will be around 3.3 million low income Australians that will benefit from this measure. Around two-thirds of those will be women.

Fundamentally, this reduces tax on the retirement savings of low income earners. It exposes the Labor lie that there was nothing for low income earners in this Budget. What this does is support those low income earners who are working and saving and investing, as we always said we would do.

By introducing the Low Income Superannuation Tax Offset, we will make a real difference for low income Australians looking to build their superannuation savings.

As it stands, the system offers little in the way of flexibility for Australians who, for various reasons, have to take time out of work or work part time. We know that women in particular are affected by this lack of flexibility which contributes to women having lower average super balances than men. The Government wants to change this and where women are in a position, or anyone is in the position, say carers for example as another common example where people have had to break their work-life pattern, by making the system more flexible and accessible for all, we’ll be able to meet the objective and this is achieved by allowing the rollover of concessional caps.

From July 1, unused concessional contributions caps will be able to be carried forward for five years for those with superannuation balances below half a million dollars. This flexibility will make it easier for people with varying capacity to save and for those with interrupted work patterns, to save for their retirement and benefit from the tax concessions to the same extent as those with a regular income.

This will help an estimated 230,000 Australians. It will help mums. It will help carers. It’ll help those who take extended leave from the workplace due to illness. And it will also assist those who temporarily leave the workforce, or work part time, to undertake further education. This will ensure that our superannuation system accommodates the reality of modern work-life.

Additionally, we’ll extend the current spouse tax offset. This will help even more families build their super, with the income threshold for a receiving spouse lifted to from $10,800 to $37,000. So a higher income spouse with a low income partner will be able to make contributions into their partner’s account – and get an 18 per cent tax offset worth up to $540. An extra 5,000 families Australia wide are expected to make use of this opportunity, and this is a good thing for families who are together working, savings and investing for their future.

The Government is also fixing problems in our superannuation system that prevents some Australians from accessing superannuation tax concessions because of their employment situation. This has been a running sore. This has been a real bug-bear, particularly for self-employed people. Imagine the following; a young accountant – possibly even a member of this Institute – decides to go part-time and work only 3 days a week to give them time to develop a start-up business – let’s say they’re creating a new app. If his salary as an accountant is more than 10 per cent of his total income, he can’t claim a tax deduction for any super contributions from the income, from his start-up.

But not for much longer. Under our changes, this young entrepreneur, along with 850,000 other Australians, which includes tradies and others, will have the same ability to access superannuation tax concessions as the rest of the country. These outdated rules are not part of a superannuation system we need in our modern, 21st century economy. The stronger new economy that we are transitioning to.

The Turnbull Government’s Budget also includes measures to assist older Australians save for their retirement. We’ll lift the restrictions, such as the minimum work requirements for non-concessional contributions, from 1 July 2017 — meaning there will no longer be a set of rules for people aged 65 to 74, none of which apply to younger people.

This is great news for older Australians who want to downsize. Let’s say a retired couple in their late 60’s sell their family home and downsize to a townhouse and free up say, let’s say $300,000, $100,000 worth of capital perhaps. Under current rules they would not be able to contribute this money into their superannuation. And I don’t think that’s right.

So what we are doing is giving older Australians a greater incentive to ‘downsize’ or ‘rightsize’ their home after they have retired, by allowing them to place any of those proceeds into their superannuation fund. Of course they are still subject to the same $1.6 million transfer balance cap and the $500,000 lifetime non-concessional contributions cap, to ensure that superannuation is not used for tax minimisation or estate planning purposes. But the overwhelming majority, 99 per cent or thereabouts in fact, would be in this situation and seeking to take advantage of this, would be able to do something now that they were unable to do before. This is another change in our drive to make super more accessible for older Australians.

Now I want to turn to changes we are making to enhance product offerings in the retirement income sector. This is something in particular that Ian Yates from COTA has been talking to us about for some time and we’ve been working with him, the Institute and others on these issues.

On Budget night the Assistant Treasurer and I responded to the Treasury’s review of retirement income products. As part of this response, the Government will remove the barriers that are restricting innovation and the development of new products.

For example, a retiree may be concerned by the prospect of outliving their superannuation and private savings. Yet there are virtually no products, such as a deferred lifetime annuity that help them manage this risk. By removing the tax on earnings in the retirement phase for these products, treating them as retirement income accounts effectively, we expect these products to become more prevalent and individuals will be able to purchase a guaranteed income stream for the rest of their life.

I note this was welcomed by Challenger on Budget night who said:

“Deferred lifetime annuities will give Australians a simple and effective way to insure against the risk of outliving their savings”

It’s about more choice. It’s about more flexibility. It’s about allowing the sector, the sector you’re part of and the sector you serve and support to become more innovative and to become more focused on the needs of your clients and your customers. They’re looking for more and more options, they’re looking for more and more choices. These types of changes will facilitate those choices.

Finally, the last setting we’ve looked at to get superannuation right is to strengthen confidence. We believe that with a clear objective in place, and reducing the extent to which super is used for tax minimisation and estate planning, Australians will have confidence our super system is working as it should. And it will be a system with integrity at its core. I’ve already mentioned some of our better targeted incentives, all of which will go a long way in this regard.

But we’ll also make sure the ‘transition to retirement income stream’, or TRIS, is fit for purpose and not driven primarily by tax benefits. We think the objective of transition to retirement pensions is a good one. The principal is good. The purpose is good. To allow workers to transition to retirement by perhaps working less instead of not working at all, and allowing them to draw an income stream from their superannuation to supplement their wage income. But to ensure that they are not accessed primarily as a tax planning exercise, we are going to remove the tax exempt status of earnings from assets supporting TRIS, and not allowing people to treat certain super income stream payments as lump sums for tax purposes. Furthermore, we’ll get rid of the outdated anti-detriment payments. Why this hasn’t gone earlier is a mystery to me, but it effectively results in a refund of a fund member’s contributions tax paid over a lifetime. It’s a bit like saying, well all the income tax you paid over your lifetime, we’re going to give it back to you when you pass on as some sort of inheritance for your children. Not a good idea. That’s over.

Let me now turn to defined benefit arrangements in my concluding remarks. When Governments change the rules on superannuation, Australians rightly expect that these rule changes apply equally to everyone.

In his 2009 Budget, Wayne Swan heavily reduced the concessional caps. You’ll all remember that. Yet he failed to apply these new rules to the unfunded defined benefit arrangements which apply to politicians, many still serving, or public servants. And there are other examples where defined benefit schemes have been exempted from changes to the superannuation system. Now, that wasn’t a good decision. If you’re going to change the system, well it’s got to have commensurate changes that impact everyone equally, and that’s what we’ve done on Budget night.

The decisions we’ve taken sent a clear message to say that we will seek to apply the changes that we bring down as broadly and as fairly and as evenly as we possibly can. So there are a few changes to defined benefit arrangements.

• To broadly ensure commensurate treatment with the $1.6 million transfer balance cap, defined benefit pensions over $100,000 will be more heavily taxed.

• We will apply the concessional caps to those on defined benefit arrangements. This means current politicians and past politicians and public servants can’t be building a large defined benefit pension and be salary sacrificing up to the value of the entire concessional cap.

• The lifetime non-concessional cap will apply and require those who breach the cap to take an equivalent amount from their accumulation account.

• And the reduction in the threshold at which the contributions tax rate becomes 30 per cent will also apply to all defined benefit arrangements, except those which are exempt for constitutional reasons.

Now when Labor changed these arrangements, they exempted the politicians and the public servants. We’re not doing that. One size is going to fit all on this occasion and it should be commensurate across the population as far as that is practically possible and that’s what we have done.

This package of superannuation reforms complements the wide range of improvements that the government is pursuing to strengthen governance and transparency. The Government is committed to improving governance standards, including requiring a minimum one-third independent directors with an independent chair on superannuation trustee boards, which will lead to more efficient decision making for the benefits of members - and so that is our plan for superannuation. And that plan forms part of our national economic plan for jobs and growth in a stronger new economy.

It’s a package of measures that have a clear objective, are well targeted and flexible, and they have integrity at their core, and what that means at the end of the day, is we will have a more sustainable system — one that will provide a better and more secure future for all Australians. Not a bigger, more burdensome one. Not one that discourages Australians from working hard to get ahead. Not one that kills jobs. A better system — a system that backs in growth and jobs.

Now, I finish by saying that the opportunity to outline some of these key measures defined in this year’s Budget I welcome, and I thank you for the opportunity to do that today.

Hopefully people are getting the message that the country just didn’t need another Budget, they needed a national economic plan and that’s what we have outlined. That’s we delivered. It does push the boundaries as it should, as Australia continues to transition to our new economy and that’s because this Budget doubles as this practical, targeted and responsible economic plan for growth and jobs. That’s what Australians want, and they want a super system we can all have confidence in and that is fit for purpose and sustainable for the future.

They want a tax system that does what a tax system should — encourage work, drive investment, and support savings to deliver higher living standards.

And with the Government’s changes, they can have confidence that we are up to the job of delivering that and have done so in this year’s Budget and I thank you very much for your attention and I look forward to answering your questions.

Thank you.