Is Australia’s Superannuation Law Equitable? A look back and then forward

This article takes a historical examination of superannuation law and its reform and observes the resulting complexity. Australian Governments over the years have adopted or ignored recommendations from various inquiries addressing superannuation reform and this article finds the major drivers of reform have included efficiency (including by structural change, regulation and cost reduction), flexibility, member protection, integrity, sustainability and equity (including compassionate reasons).  The policy intent of various government reforms has been concerned with equity, although the Howard Government did much to drive inequity through its Simpler Super policy.  The Turnbull Government’s most recent law changes have put back the spotlight on equity, but more could be done to redress the imbalance of tax concessions between high income earners and low income earners to make the superannuation system more equitable.

1. Introduction

In Australia we talk a lot about fairness. We say “let him/her have a fair share”.  If something is genuine, we might say it’s “fair dinkum”.  We have a response to conversations by chipping in with “fair enough.”[1]

Fairness is not just important, but it is vital to the fabric of our Australian way of life. It is embodied in our Australian language and culture[2], and “being fair” is as ordinary as it gets for Australians.  Even our national anthem, “Advance Australia Fair” incorporates “fair” in the notion of its beauty, because “being fair” and “fairness” stem from the same Old English meaning of “pleasing” or “attractive”.[3]

If fairness is an inculcated attribute of the Australian culture, it is remarkable that the 2014 Federal Budget was so displeasing, with the electorate regarding it as the worst budget ever in comparison to the 14 previous budgets.[4]  The National Centre for Social and Economic Modeling (NATSEM) analyzed the 2014 Budget and confirmed the poorest were hit hardest while singles, couples and high-income earner families, were largely unaffected.[5]  This is pertinent to superannuation as the superannuation system is intricately woven into the taxation system and is a very expensive tax concession.

The growing enormity of superannuation is put into perspective when comparing it to the cost of funding aged pensions. The superannuation tax concessions were forecast to be $44.8 bn in 2015-16, growing at 12% p.a. and anticipated to exceed the cost of the aged pensions in 2016-17.[6]

The superannuation industry today is very significant with more than $2 trillion superannuation savings in funds accounts,[7] now exceeding Australia’s GDP of $1.6 trillion. [8] Superannuation savings are deposited in a variety of funds, including retail funds, industry funds, corporate funds, public sector funds, eligible rollover funds and the largest group in both number of members and quantum, the Self Managed Superannuation Funds (SMSFs).

The significance of the superannuation nest egg cannot be denied, but so too it can not be denied that when people are angry about unfair taxation policies, revolutions and changes of government have occurred throughout history. For example, the French Revolution,[9] American Independence Day,[10] the regressive UK Poll Tax,[11] and in Australia the very unpopular Resources Super Profits Tax (later known as the Minerals Resources Rent Tax). [12]

And history has shown that that inequity, or the perceived inequity, has been revolutionary in the superannuation system too. For example, the Australian Democrats sought reduced superannuation benefits for federal politicians given the very generous pension system established in 1948[13] was out of step with community expectations.[14]  Ultimately, this defined benefit scheme was abolished for new politicians elected after 9 October 2004 whose entitlement became a more moderate 15.4% accumulation scheme[15] that was equivalent to public servants’ entitlements and was therefore more closely aligned to community standards.

More recently, economic history involves austere times since the 2008 global financial crisis, and during that time governments sought to reign in expenditure to support budget savings.[16] Overwhelming evidence as provided by the 2014 Luxleaks[17] and the 2016 Panama Papers[18] have revealed that many multinationals and high wealth individuals are shifting profits to low taxing jurisdictions and not paying their fair share of tax.

The issue for superannuation is similar.  i.e. whether the wealthy are benefitting from tax concessions in the superannuation system compared to lower income earners.  Questions arise, such as; Are the laws regarding taxation of superannuation fair and equitable?  Does the design of the taxation law regarding superannuation advantage certain groups while disadvantaging others? Do our law-makers believe such inequities should be reformed?

Before answering these questions, it is appropriate to sketch the history of superannuation laws, examining if they were introduced for fairness and equity reasons or other drivers and policy considerations.  A review of Parliament’s intention[19] will assist understanding whether the current superannuation system is fair and equitable through purposeful design by law-makers, or not.

2. Overview of Australia’s Superannuation System

2.1 Background

Taxation of superannuation is essentially a federal matter, legislated by the Australian Government.[20]  Australia’s retirement income policy[21] or superannuation policy, is based on a three pillar system, each involving different levels of taxation.  These are:

1st pillar   –  Age pension (means tested)

2nd pillar  –  Private contributions (from personal savings and investments)

3rd pillar – Contributions by employers (via Superannuation Guarantee or further voluntary contributions including salary sacrificing)

An excellent summary of the current and complex system of superannuation and its many complex rules can be gleamed from the CPA Australia Superannuation Guide: 2015-16.[22]  Update this

As an overview, generally superannuation contributions for taxed funds[23] are taxed at 15% on fund entry, 15% on fund income, and benefits (income and lump sums) are tax free for members of taxed funds who are 60 and over, but taxable to some extent for members who retire below age 60.

In contrast, benefits received from untaxed funds (e.g. public sector funds), incur a higher level of taxation to the individual in comparison to the tax paid by those that receive benefits from taxed funds.  Those who receive benefits from untaxed funds and are over 60 pay tax at marginal rates but receive a 10% tax offset based on the amount of pension income, while those under 60 receive no concession and pay tax at marginal rates.

Recent superannuation reforms have placed a cap on the level of superannuation accounts (called the $1.6m transfer balance cap) that also minimizes the use of superannuation as a wealth creation tool.  In addition, contribution limits (both concessional and non-concessional) have been reduced to make the superannuation system more sustainable.

As an overview, the Australian superannuation system has been rated very highly in the world according to the Melbourne Mercer Global Pension Index, and places Australia as 3rd in the world amongst 18 countries in comparing pension systems.  Mercer describes the Australian superannuation system as having a sound structure, and rates well in terms of adequacy, sustainability and integrity.[24]

However, the Australian Law Reform Commission succinctly highlights inequity about superannuation:

“High income earners receive a substantial proportion of superannuation tax benefits, while low income earners receive comparatively little benefit, and some of the lowest income earners receive no benefit.’[25]

It is apt now to review the superannuation legislation introduced by different governments and consider what drove these reforms.

3.      Major Superannuation Reforms

The following discussion provides the background to the current architecture of the superannuation system. While most Australian governments have commissioned a review of the superannuation system, not all reviews have successfully influenced government policy. There has been a constancy in tinkering by governments resulting in increasing complexity in the superannuation system.

3.1 Menzies Government Reforms

Prior to the Menzies government, tax concessions were introduced in 1915 allowing employers a tax deduction for superannuation and fund income was made exempt from tax while only 5% of a capital lump sum on retirement was included in a retiree’s income[26] The Menzies Government commissioned the Ligertwood Committee to report on taxation which recommended in relation to superannuation that self-employed persons be allowed a limited deduction and that superannuation funds remain tax exempt.[27]  (Funds remained exempt if they complied with the 30/20 rule re Commonwealth bond holdings.[28]  This rule was abolished in 1984).

3.2 Whitlam Government Reforms

The Whitlam Government commissioned the Asprey Committee to review the taxation system.  The Asprey Committee recommended the superannuation system remain the same or alternatively, that changes to contributions, income and benefits only apply to new schemes.  It also reported that the taxation on lump sum benefits was very low and had been unchanged since 1915.[29]  Whitlam also commissioned the Hancock Inquiry[30] to examine superannuation, and the inquiry’s recommendations about introducing a national partial contribution scheme were delivered to the following Fraser Government, but were rejected.[31]

3.3 Fraser Government Reforms

The Fraser Government commissioned the Campbell Inquiry[32] that examined the Australian Financial System and in relation to the superannuation system, the Campbell Inquiry recommended:

  • that the fund income (contributions and investment) should be taxed based on an average marginal tax rate for members,
  • all contributions should be tax deductible (employer and member), and
  • all benefits, lump sum or pension should be tax free.[33]

These changes were aimed at improving equity in the system.[34] However, the Fraser Government did not adopt these recommendations and issued a media release that it would not change superannuation regarding the taxation of lump sums.[35]

3.4 Hawke Government Reforms

Despite various committee inquiries, governments prior to Hawke made little change to the superannuation system, in particular lump sum superannuation payments.  However, the Hawke Government changed the low taxation of lump sums on retirement from 5% to a 30% maximum.[36]

As previously mentioned, the Hawke Government focused on driving worker productivity improvements through the Accord.  Wage increases were made up of  an increased wage component and amounts withheld by employers under the 3% award superannuation. As Treasurer under the Hawke Government, Paul Keating launched the ‘Taxation of Superannuation’ statement which meant funds would be taxed 15% on contribution and 15% on income in the fund, but tax free at exit, which was analogous to the treatment of how after taxed monies were paid to bank deposits.[37]

Also, Treasurer Keating of the Hawke Government introduced the RBL regime that limited the amount of concessionally taxed income anyone could receive over a lifetime at the benefits stage, and this applied whether retirement income was paid as a lump sum or a pension.  Originally, a $400,000 RBL applied to lump sums on retirement and an $800,000 RBL applied to a retirement pensions.  RBLs were indexed and concessional treatment was afforded providing more than half of the benefits were taken in the form of a pension.

RBLs were an equity measure aimed at ensuring that the concessions for superannuation were fairly shared by all Australians, and prevented the practice by employers paying large lump sums benefitting senior executives just before retirement.[38]  Therefore, “tax free at exit” mentioned above, was only when lump sums and pensions paid were below the respective RBL.[39]

3.5 Keating Government Reforms

While in the Hawke Government, Paul Keating worked on a paper with Brian Howe (at that time, the Minister for Social Security). “Better Incomes: Retirement Income Policy into the Next Century” proposed a future 3 tier system for superannuation.[40]  The Keating Government then established the 3rd pillar of the superannuation system and did introduce a national superannuation scheme in the form of SG[41] that was on a platform of equity.

In his second reading speech, the then Treasurer John Dawkins advised that the introduction of the Superannuation Guarantee would “provide a coherent and equitable framework to progress retirement income objectives”.[42] In addition, Dawkins stated access to superannuation would now be much more equitable and the system would move from a concessionally taxed system for high-income earners to a national retirement savings for most Australians.[43]

SG would commence with contributions by employers of 3% that would increase to 9% by 2002.

3.6 Howard Government Reforms

The Howard Government made many changes to the superannuation system. An important equity measure was to introduce the Super Surcharge to tax further high income earners,[44]  but this was repealed by the same government in 2005 on the basis it was no longer necessary given the healthy financial position of the government, and not because of equity reasons.  The Wallis Inquiry commissioned by the Howard Government examined the Financial System and the inquiry recommended fund members be given a “choice of fund” and where they put their superannuation funds, the aim being to increase competition between funds.[45]

Most significantly, the Howard Government introduced Simpler Super (as previously discussed) that provided tax free benefits to members aged over 60 who received a lump sum or pension from taxed funds. [46]  Generous contribution limits were permitted ($50,000 concessional and $100,000 non-concessional contributions) and in the year prior to the introduction of Simpler Super, the Howard Government permitted contributions of up to a million dollars as a transitional measure.  This also included abolishing RBLs and replacing them with an Excess Contributions Tax and also making transfers between funds easier.

3.7 Rudd Government Reforms

The Rudd Government introduced laws to reduce discrimination with same-sex couples including superannuation fund benefits and death benefits, which is an equity matter.[47]  However, a less sympathetic approach was made in regard to temporary residents where higher tax rates were imposed on their superannuation benefits,[48] and any amount outstanding after 6 months were to be returned to the ATO.[49]

The Rudd government reduced the level of concessional contributions as an equity measure from $50,000 to $25,000 that would over time increase in $5,000 increments.  This reform also then impacted on the annual non-concessional contribution limits which were 6 times the concessional level  i.e. 6 x $25,000 = $150,000.[50] 

Of importance, the Rudd Government commissioned the Henry Review[51] that highlighted the inequity of the superannuation system, noting that high-income earners benefited much more than low income earners from the tax concessions. In relation to the Henry Review, the Rudd Government agreed to increasing the superannuation rate to 12%, increasing the age limit for SG to 75, providing an annual superannuation co-contribution of $500 to low income earners, increasing concessional contributions from $25,000 to $50,000 for members near retirement age (50 and over) with account balances less than $500,000.[52] The Gillard Government then legislated these measures.

3.8 Gillard Government Reforms

The Gillard Government made the most changes to the superannuation system.  It legislated to increase SGC using a phased-in approach to 12%.  For example, the SG rate increased to 9.25% during the Gillard Government’s office.[53]

The government introduced a new low income superannuation government co-contribution (LISC) to a maximum of $500 – the government provided a matching contribution to eligible personal contributions made by a contributor with an adjusted taxable income less than $37,000.[54]  Various technical changes were made to the LISC,[55] including that reportable fringe benefits were to be included in the income calculation.[56]  Most importantly, a reduction of the government co-contributions to $500[57] occurred given the LISC was introduced which also provided a maximum of $500 benefit.

In addition, the Gillard Government supported the Rudd Government commissioned Cooper Review.  The Cooper Review was set up to examine the efficiency, governance, structure and operation of the Australian superannuation system.  The Cooper Review found that the system was too costly in terms of fees and that “choice of fund” failed to deliver a competitive market to reduce costs.[58] To address these inefficiencies, the Gillard Government adopted most of the Cooper Review recommendations and Stronger Super policy was introduced.  This policy ensured from 1 July 2013 prudential and administrative standards were strengthened and also sought to reduce costs and inefficiencies, including the creation of a low cost default fund account (MySuper). [59]

In 2012, a ‘superannuation roundtable’[60] involving academics and industry found the top five percent of taxpayers received one quarter of the value of superannuation tax concessions.[61]  As an equity measure, the Gillard Government then increased contributions tax in regard to concessional contributions deductions from 15% to 30% for those on income levels greater than $300,000.[62]

3.9 Abbott Government Reforms

Under the Abbott Government the SG rate increased to 9.5%.[63] The Abbott Government in its election platform advised that it would only make changes for superannuation every 5 years.  It deferred SG rate increases until 2021, and reviewed concessional contribution caps and abolished the LISC.[64]  The LISC was abolished (but is to remain in force until 1 July 2017) as part of a deal to abolish the Minerals Resource Rent Tax.[65]

3.10 Turnbull Government Reforms

The Turnbull Government May Budget 2016 was launched on the platform of the need to support those at most risk such as low income earners that would depend on the Age pension and reduce access to tax concessions by the most wealthy income earners.[66] The Treasurer Scott Morrison confirmed these laws were introduced to improve the fairness, sustainability, flexibility and integrity of the superannuation system.[67]

These superannuation reforms apply from 1 July 2017 and these measures include:

  • Introducing a $1.6m transfer balance cap – which limits superannuation being used as a tax minimization vehicle
  • Lowering the concessional contributions cap – of $30,000 to $25,000[68] and the over 50s cap of $35,000 is abolished.
  • Lowering the non-concessional cap – from $180,000 in a year or $540,000 for 3 years using the “bring forward option”. This option will now be $100,000 (being four times the concessional cap[69] of $25,000) in a year or $300,000 over 3 years using the “bring forward option”.[70]
  • Lowering the adjusted income[71] threshold – from $300,0000 to $250,000[72] where effectively a 30% tax is imposed on contributions over the threshold and applies to high income earners.
  • Replacing the LISC with a low-income superannuation tax offset (LISTO) – the LISC was abolished by July 2017 but is being replaced by the LISTO for those with an adjusted taxable income less than $37,000.  The LISTO is also up to $500 benefit.[73]
  • Increasing access to superannuation concessional contributions – by abolishing the 10% work test[74] which will assist both the self-employed who failed the work test and employees whose employers did not offer salary sacrifice.

4. Equity Reforms in Superannuation  – Appendix A

The preceding historical review provides a background to the major reforms that have been introduced by successive governments. It helps to explain the fundamental elements of the current superannuation system and puts into perspective how its architecture has evolved over the last century.

Appendix A provides a visual timeline of the major equitable reforms provided by successive governments. The timeline shows that governments from Hawke onwards, other than the Abbott Government, have been concerned with reforms regarding equity in superannuation.

Equity reforms have been significant that are universal in their application.  For example, these equity reforms included increasing the lump sum tax on retirement, imposing Reasonable Benefit Limits on superannuation lump sums and pensions, imposing a charge on employers who fail to provide minimum superannuation payments to all of their employees, abolishing age restrictions for SG contributions and imposing penalties on those who over-claim superannuation contributions through an excess contributions tax and reducing concessional deductions. Recent reforms involve lowering both concessional and non-concessional caps which are also a sustainability measure and abolishing the work test to enable an increased number of Australians to access concessional contributions.

But more targeted reforms are also important in terms of equity even though their application is not as universal.  Various policies included the application of the superannuation surcharge and the increased contributions tax to higher income earners, and for low income earners, assistance through government co-contributions and low income support contributions. Recent reforms have introduced a $1.6m transfer balance cap and further reduced the adjusted taxable income so more high income earners pay increased contributions tax (30% on entry to the fund, not 15%) and also sought to maintain support for low income earners via introduction of a tax offset that replaces the abolished LISC.

Finally, equity reforms are important even though they apply to individuals and smaller groups. Examples of these include removing same sex discrimination in the superannuation system and requiring trustees to provide reasons for decisions to individual applicants.  Further, reforms based on compassionate grounds can also be viewed as a matter of fairness e.g. releasing tax free benefits for those with a medical terminal condition or releasing benefits for those that satisfy grounds of financial hardship.

In short, the above analysis identifies that most Australian governments from the Hawke Government onwards, (other than the Abbott Government) have been concerned with specific equity reforms that apply universally or are targeted.

5. Parliaments Intentions – Appendix B

Research has been undertaken by examining more than 80 Acts from over the last century relating to superannuation in the taxation system (refer Appendix B for a summary of the legislation).  The purpose of this review was to understand why successive governments considered they introduced superannuation reforms.

Accordingly, this research was undertaken by reviewing Parliament’s intentions through second reading speeches and other extrinsic materials, and in a handful of cases,  inferred given no intention was stated.

5.1 Were superannuation reforms introduced due to equity or other considerations of governments?

Broadly, it has been found that the purpose of superannuation reforms has been efficiency (including by structural change, regulation and cost reduction), flexibility, member protection, integrity, sustainability and equity (including compassionate reasons).

Appendix B shows that efficiency of the system including structural reform, regulation and cost reduction was the dominant purpose in terms of the quantum of legislative reforms. The Howard and Gillard Governments in particular, focused on efficiency reforms.  The other reforms such as flexibility, member protection, integrity, and sustainability are fairly evenly spread government reforms and all these reforms together have contributed to a ‘well rounded’ superannuation system.

Although, second in quantum, equity has for the most part has been an important consideration for most Australian government policies.  Previously discussed, some of these reforms are universal, while others apply to smaller groups of Australians, but nonetheless, all of the reforms contribute to improving equity in the superannuation system.  Arguably, the SG scheme introduced by the Keating Government in 1982 was the greatest reform, and in particular in terms of equity.  This reform established the 3rd pillar of the superannuation system, being a national superannuation scheme available to all Australian workers.

However, equity of the superannuation system was undermined by the Howard Government reforms through the introduction of the Simpler Super policy by abolishing RBLs, allowing very large contributions limits and allowing pensions and lump sums to be tax-free on exit. In addition the Howard Government, which introduced superannuation surcharge on the grounds of equity, subsequently repealed the surcharge on grounds that it was no longer needed given the healthy Budget position,[75] rather than on grounds of equity. In addition, the Abbott Government reduced equity in the system by repealing the LISC.

With this history in mind, it is no wonder fairness about superannuation ultimately became a recent election issue. The Turnbull Government measures sought to redress the imbalance in equity in the superannuation system by distributing resources from high income earners to low income earners and also sought to make the system more sustainable as it further provided net savings for the government to ease its Budget position. [76]

5.2 Have the recent Turnbull reforms moved equity forward enough?

Equity in the superannuation system under the Turnbull Government has moved in the right direction, but has it been enough?

For example, is the $1.6m transfer balance cap set at the right level? Should it be higher or lower?  The Treasurer stated that only 1% would be disadvantaged by introduction of the $1.6m cap measure.[77]  There has been a lack of challenge to the level of the $1.6m transfer balance cap given the low level of account balances nationally,[78] so that the vast majority of Australians would consider this balance of $1.6m to be very generous, and unattainable for them anyway.

Another reason for the lack of challenge is that the Turnbull Policy is essentially the same as the Labor policy. If a fund is able to generate 4.5% income on this cap, this would generate $72,000 fund income.[79] It is interesting to note that Labor said on 22 April 2015, they would limit tax-free earnings on assets supporting income streams to $75,000. [80] The Labor policy is therefore essentially in alignment with the asset benchmark cap albeit expressed through a different lens (assuming 4.5% rate[81] of earnings and no additional assets beyond the $1.6m cap).[82]

But what is remarkable when deciding whether the $1.6m is a fair level or whether it is too generous, can be answered by reference to history.  The author has calculated that the $1.6m benchmark cap introduced has broadly aligned to the abolished pension RBLs. [83]  Basically the Turnbull Government have returned to Keating’s original policy intent to provide benefits on a reasonable basis.[84]

Further, the taxing of superannuation earnings at only 15% remains very generous and can explain that despite the Turnbull reforms, higher income earners will not move their excess funds above the $1.6m cap out of superannuation to other investments.  These balances will be retained in the fund as the tax on these earnings remains only 15%, compared to other investments, where tax would otherwise be paid at the marginal rate of tax.  However, given the proposed objective of superannuation “To provide income in retirement to substitute or supplement the Age Pension”,[85] which is currently before Parliament and has been recommended by the committee to be passed by the Senate, [86]    concessions should not be granted in relation to excess balances over $1.6m. (Afterall, high income earners will not rely on the pension and have no need to supplement it).

And in comparison to the welfare system, the $1.6m balance cap is very generous, especially for couples.  For example, government support for the pension and the health care card both cut out around income levels of $50,000 for an individual and $75,000 for a couple.[87]  On this basis, a single person who had a $1.6m superannuation balance that provided a $72,000 income is much higher than the welfare benchmarks and would clearly not be entitled to the pension or health benefits.   The same applies for a couple that both benefit from the $1.6m cap, each with $72,000 income or combined income being $144,000.  It can be questioned as to why has such a large cap balance been designed under the superannuation system, given the high pension incomes would more than replace and support the aged pension.  How is it equitable that the superannuation system provides such large concessions in comparison to the benchmarks of the welfare system?

Further, the $1.6m balance cap provides a very affordable lifestyle.  ASFA advises a retired couple household income that provides a modest lifestyle is currently in the order of $35,000 and for a comfortable lifestyle is $60,000.[88] The $1.6m cap balance therefore provides more than a comfortable lifestyle with potential income of $72,000 if only one income earner, and very, very comfortable lifestyle where couples generate $144,000 superannuation income.

On reflection, the Turnbull Government reforms to the superannuation system have been more pronounced in terms of equity in comparison to other governments, but they are not ground breaking as was the Keating’s government introduction of the 3rd pillar via the SG.

For example, the superannuation tax concessions cost $31.8 bn in 2012-13,[89] and the Turnbull Government has only addressed $5.2bn over 4 years (net savings of $2.8bn over a 4 year period).[90] Accordingly, there are many more billions of dollars of concessions that might be saved if they were not extended to higher income earners under the current superannuation system.

This rudimentary calculation is further supported by Ingles and Denniss[91] who found using Treasury data from 2013-14, that the top 10% of income earners received 31.8% of the superannuation concessions.  Murray from the Financial Systems Inquiry reported in Chart 6 (sourced by Treasury) that the top 20% of income earners received more than 50% of the superannuation tax concessions. (Note: this was based on 2011-12 data from the ATO). [92]

It is concluded that the Turnbull Government made one giant step in introducing its superannuation reforms but this was only a small step for Australians and further equitable reforms are warranted.

Equitable measures should redistribute resources from high income to low income and must be consistent with the proposed government objective regarding superannuation to replace the pension or supplement it and include consideration of sustainability.

It is submitted, the Government could include consideration of all or some of the following reform measures to reduce current concessions afforded to high income earners:

  1. Tax income from existing assets in a fund greater than the $1.6m cap at marginal rates
  2. Reduce the $1.6m cap where the income arising more than supplements the age pension (i.e. approximately $50,000 for an individual)
  3. Reduce the double benefit to couples given both individuals can avail the $1.6m cap
  4. Abolish the $250,000 income threshold and tax superannuation contributions at marginal rates of tax (allowing a 15% rebate) or lower the $250,000 income threshold (this could be $206,480 in line with the SG limit, or perhaps $180,000 to align with the top tax marginal rate threshold)
  5. Abolish SGC contributions for very high income earners
  6. Allow tax free benefits but tax superannuation pensions above the point where the government no longer supplements a person’s or couple’s earnings with pension benefits (i.e. $50,000 for an individual or $75,000 for a couple) or re-introduce something like a superannuation surcharge.

Further, support can be provided to low income earners through increased concessional contributions and increasing the LISTO and also bringing forward and fastening the phase-in pace for increasing SG to 12%.

7. Conclusion

The main purpose of this paper has been to examine the history of superannuation law reform with a specific view to identify the policy intent of various governments, and to identify if equity was lacking as a consideration in historical reform.

This paper finds that superannuation reform has been introduced to address efficiency (including structural changes, regulation and cost reduction), flexibility in the system, member protection and integrity of the system, sustainability and equity (including compassionate reasons).

Efficiency and equity have been the primary drivers in superannuation tax reform, but all of the factors aforementioned contribute to a balanced superannuation system considered 3rd best in the world.

But when focusing on equity, the Keating Government created Australia’s 3rd pillar in the superannuation system, being a national savings platform established through SG. Importantly, SG has remained as a successful initiative advancing equity given it has not been undermined by subsequent governments.

However, the Howard Government elevated the level of inequity through its Simpler Super policy, advantaging high income earners so that superannuation became to be used as a wealth creation tool.

The Howard Government and Gillard Government did much to enhance the efficiency of the superannuation system, which indirectly assists equity.  Taken together, the various policies of governments have resulted in developing a complex system that is not understood by most Australians.

The Turnbull Government has sought to redress much of the inequity created from the Howard Government’s Simpler Super policy, but given large concessions afforded to high income earners still prevail, so that further steps could be taken to redress the imbalance between high income earners and low income earners and make the superannuation system more equitable.

Appendix A – Timeline of super reforms concerning equity

   Hawke Government
1983 Taxing lumps sums @ 30% to encourage people to take pensions
1988 15% tax on contributions,15% tax on superfund income (abolishing exemption) andIntroduction of Reasonable Benefit Limits
  Keating Government
1992 Superannuation Guarantee introduced – initially 3% –  phased in to 9% by 2002
   Howard Government
1997 Introduced superannuation surcharge to tax higher income earners
1997 SG contributions – increased age permitted from 65 to 70
1997 Conditions of release extended to include on compassionate grounds and financial hardship
2003 Introduction of superannuation government co-contributions, to benefit low and middle income earners that make personal contributions (undeducted contributions)
2004 Superannuation government co-contribution increased to $1500
2007 Tax free benefits paid to members with terminal illness
 Rudd Government
2008 Unlimited access to superannuation entitlements if diagnosed with a terminal illness
2008 Removal of same-sex discrimination in superannuation
 Gillard Government
2011 Limited refund of excess concessional contributions where breaches are less than $10,000
2012 Government low income superannuation contribution (LISC) introduced – a maximum of $500
2012 High income earners with more than $300,000 to pay increased tax on contributions from 15% to 30%
 Rudd Government (most initiative previously legislated by Gillard Government)
2013 Trustees to provide reasons for decisions re complaints ANDIncrease in time to lodge complaints with Superannuation Complaints Tribunal re Total and Permanent Disability Claims
2013 Relaxing Excess Contributions Tax (ECT) – members can withdraw from fund to pay the ECT  –  and now taxed at marginal rate (not the highest marginal rate)
 2014  Abbott Government(No equity reforms)
       Turnbull Government
2017  Introducing $1.6m transfer balance capLowering concessional contributions cap, non-concessional contributions cap and adjusted income thresholdsReplacing abolished LISC with LISTO

Increasing access to concessional contributions by abolishing work test

Appendix B – Parliament’s Intentions concerning equity

The following historical research has benefitted from a superannuation chronology prepared by the Commonwealth Parliamentary Library.[93]

Parliament’s intentions* re superannuation reforms

Key                 

Column E R            efficiency (including by structure, regulation and cost reduction)

Column F               flexibility

Column M P          member protection,

Column I integrity

Column S               sustainability

Column  A             adequacy

Column E C            equity / compassion

* Intention referenced to extrinsic materials – Budget and second reading speech or explanatory memoranda and explanatory statements or Media Releases.

(Where no intention stated, inferred for a minority of cases)

Parliament’s Intentions ER F MP I S A EC
Income Tax Assessment Act 1915           3  
Menzies Government      1     1  
Hawke Government  4       2   3
 Keating Government  1   1       1
Howard Government  8 7 2 2 4 2 6
Rudd Government  2 1 1 1 2   2
Gillard Government  9   4 2 1   3
Rudd Government (most initiative previously legislated by Gillard Government) 4 2 5 6 1 5 2
Abbott Government 1   1 2
Turnbull Government           2 6
Totals = 113  28  11  14  12  12  13  23

 

Summary of legislation reviewed re Parliament’s intentions re Superannuation

Government  Legislation
Income Tax Assessment Act 1915 Income Tax Assessment Act 1915, Ss 11(f), 14(f), 18(j) 
Menzies Government Income Tax and Social Services Contribution Act 1961
Hawke Government Income Tax Assessment Amendment Act (No 3) 1984.Taxation Laws Amendment Act 1985Insurance and Superannuation Commissioner Act 1987

Occupational Superannuation Standards Act 1987

Income Tax (Fund Contributions) Bill 1988

Taxation Laws Amendment Act (No 6) 1988

Occupational Superannuation (Reasonable Benefit Limits) Act 1989

 

 Keating Government Superannuation Guarantee (Administration) Act 1992Superannuation Industry (Supervision) Act 1993 
Howard Government Superannuation Contributions Surcharge Tax (Assessment and Collection) Act 1997Taxation Laws Amendment Act (No. 3) 1997 Retirement Savings Account Act 1997

Superannuation Industry (Supervision) Regulations (Amendment) 1997

Australian Prudential Regulation Authority Act 1998

Superannuation Industry (Supervision) Regulations (Amendment) 1998

New Business Tax System (Integrity and Other Measures) Act 1999

Superannuation Legislation Amendment Act (No 3) 1999

Superannuation Industry (Supervision) Amendment Regulations 2002 (No.3)

Superannuation Industry (Supervision) Amendment Regulations 2002 (No.2)

Family Law Legislation Amendment (Superannuation) (Consequential Provisions) Act 2002

Superannuation (Government co-contribution for Low Income Earners) Act 2003

Taxation Laws Amendment (Superannuation) Act (No. 2)

Superannuation Safety Amendment Act 2004

Superannuation Industry (Supervision) Amendment Regulations 2003 (No. 5)

Superannuation Industry (Supervision) Amendment Regulations 2004 (No.4)

Superannuation (Government co-contribution for Low Income Earners) Act 2003

Superannuation Industry (Supervision) Amendment Regulations 2005 (No.2)

Superannuation Legislation Amendment (Choice of Superannuation Funds) Act 2004

Superannuation Laws Amendment (Abolition of Surcharge) Act 2005

Superannuation Industry (Supervision) Amendment Regulations 2005 (No.8)

Tax Laws Amendment (Simplified Superannuation) Act 2007

Tax Laws Amendment (2008 Measures No 2) Act 2008 –  Schedule 7

 

Rudd Government Corporations Amendment (Insolvency) Act 2007Superannuation Industry (Supervision) Amendment Regulations 2008 (No.1)Same-sex relationships (Equal Treatment in Commonwealth Laws – Superannuation) Act 2008

Tax Laws Amendment (2008 Measures No. 2) Act 2008

Temporary Residents’ Superannuation Legislation Amendment Act 2008

Tax Laws Amendment (2009 Budget Measures No 1) Act 2009

 

Gillard Government  

 

 

 

 

 

 

 

 

 

 

Gillard (Continued)

 

 

Tax Laws Amendment (2010 Measures No 1) Act 2010Tax Laws Amendment (2011 Measures No 2) Act 2011Tax and Superannuation Laws Amendment (2012 Measures No 1) Act 2012

Tax Laws Amendment (2011 Measures No 2) Act 2011

Superannuation Laws Amendment (Capital Gains Tax Relief and Other Efficiency Measures) Act 2012

Tax Laws Amendment (2011 Measures No 9) Act 2011

Tax and Superannuation Laws Amendment (2012 Measures No 1) Act 2012

Superannuation Legislation Amendment (Stronger Super) Act 2012

Tax Laws Amendment (Stronger, Fairer, Simpler and Other Measures) Act 2012

Tax and Superannuation Laws Amendment (2013 Measures No. 2) Act 2013

Tax and Superannuation Laws Amendment (Increased Concessional Contributions Cap and Other Measures) Act 2013

Superannuation Legislation Amendment (Trustee Obligations and Prudential Standards) Act 2012

Superannuation Legislation Amendment (New Zealand Arrangement) Act 2012

Treasury Legislation Amendment (Unclaimed Money and Other Measures) Act 2012

Superannuation Legislation Amendment (MySuper Core Provisions) Act 2012

Superannuation Legislation Amendment (Further MySuper and Transparency Measures) Act 2012

Superannuation Legislation Amendment (Further MySuper and Transparency Measures) Act 2012

Superannuation Auditor Registration Imposition Act 2012

 

Rudd Government (most initiative previously legislated by Gillard Government) Superannuation Guarantee (Administration) Amendment Act 2012Superannuation Guarantee (Administration) Amendment Act 2012Superannuation Guarantee (Administration) Amendment Act 2012

Tax and Superannuation Laws Amendment (2012  Measures No 1) Act 2012

Tax and Superannuation Laws Amendment (2012  Measures No 1) Act 2012

Superannuation Legislation Amendment (Trustee Obligations and Prudential Standards) Act 2012

Superannuation Legislation Amendment (MySuper Core Provisions) Act 2012

Superannuation Legislation Amendment (Further MySuper and Transparency Measures) Act 2012

Superannuation Legislation Amendment (Reform of Self Managed Superannuation Funds Supervisory Levy Arrangements) Act 2013

Treasury Legislation Amendment (Unclaimed Money and Other Measures) Act 2012

Superannuation Legislation Amendment (Service Provider and Other Government Measures) Act 2013

Superannuation Legislation Amendment (Service Provider and Other Government Measures) Act 2013

Tax and Superannuation Laws Amendment (2013  Measures No 1) Act 2013

Tax and Superannuation Laws Amendment (Increased Concessional Contributions Cap and Other Measures) Act 2013

Tax and Superannuation Laws Amendment (Increased Concessional Contributions Cap and Other Measures) Act 2013

Superannuation Laws Amendment (Capital Gains Tax Relief and Other Efficiency Measures) Act 2013

Tax Laws Amendment (Fairer Taxation of Excess Concessional Contributions) Act 2013

Tax and Superannuation Laws Amendment (Increased Concessional Contributions Cap and Other Measures) Act 2013

 

 

 

Abbott Government Mineral Resources Rent Tax Repeal and Other Measure Act 2013Mineral Resources Rent Tax Repeal and Other Measure Act 2013 (No 2)Tax and Superannuation Laws Amendment (2014 Measures No 1) Act 2014

 

Turnbull Government Treasury Laws Amendment(Fair and Sustainable Superannuation) Act 2016Superannuation (Excess Transfer Balance Tax) Imposition Act 2016Superannuation (Objective) Bill 2016

 

[1]           Christopher Symes, ‘Fair’s fair in Australian insolvency, tacitly.’ being Chapter 21 in Dr Janis P. Sarra  (Ed),  An exploration of fairness; Interdisciplinary inquiries in law, science and the humanities (Carswell, 2013), 317-329

[2]           To be fair, fairness is embodied in Anglo cultures.  But for Australian culture generally refer, Anna Wierzbicka, ‘Australian Culture and Australian English: A Response to William Ramson’ (2001) 21(2), Australian Journal of Linguistics

[3]           Vocabulary.com (accessed 23 February 2017), ‘fairness’  Further, the Macquarie dictionary advises that fair is an adjective, meaning “free from bias, dishonesty or injustice: a fair decision, a fair judge” but also means “beautiful, pleasing in appearance, attractive”.

[4]           Daniel Potrowski, Australians think Federal Budget 2014 is the worst in a very, very long time, according to this graphic, (23 February 2017) News.com.au, 19 May 2014

[5]           NATSEM, NATSEM Budget 2014-15 Analysis, (accessed 23 Feb 2017) University of Canberra, 26 May 2014

[6]           David Ingles and Richard Denniss, ‘Sustaining us all in retirement; the case for a universal age pension, Policy Brief No. 60’. The Australian Institute, April 2014

[7]           2.199 trillion dollars at quarter ended, March 2017 – ASFA, Superannuation Statistics, (accessed 14 March 2017)

[8]           1.660 trillion dollars for 2015-16 financial year.  Australian Bureau of Statistics, 1345.0 – Key Economic Indicators, 2016, (accessed 23 Feb 2017), Canberra

[9]           Thomas Carlyle,  The French Revolution: A history, (accessed 23 February 2017) Tauchnitz, Leipzig, 1851.  Refer also, Antonia Fraser’s Marie Antoinette: The Journey, (accessed 23 February 2017), Anchor Books, 2001

[10]          James Flexner and George Washington,. George Washington in the American revolution 1775 – 1783 (accessed 23 February 2017),  Little, Brown & Co., Boston,  1967.

[11]          Refer Peter Smith, Lessons from the British Poll Tax Disaster (accessed 23 February 2017) (Dec 1991) 44, National Tax Journal  and Michael Crick & Adrian Van Klaveren, Mrs Thatcher’s greatest blunder (accessed 23 February 2017), (1991) 5, Contemporary Record

[12]          Shelley Marshall, How much does it cost to bring down a Prime Minister. The story of the Australian Mining Tax (accessed 23 February 2017), Monash University, October 2012.  Available at SSRN: https://ssrn.com/abstract=2342475 or http://dx.doi.org/10.2139/ssrn.2342475

[13]          Parliamentary Contributory Superannuation Act 1948

[14]          The Parliamentary Contributory Superannuation Scheme & the Judges Pensions Scheme, 25th Report of the Senate Select Committee on Superannuation, September 1997

[15]          Parliamentary Superannuation Act 2004

[16]          Martin Caraher and John Coveney. Food Poverty and Insecurity: The poor in a world of global austerity (Accessed 23 Feb 2017) (2016) Springer International Publishing, pp 1-9.

[17]          Sunday Night, Exclusive 31bn sent offshore to avoid tax, (Accessed 23 Feb 2017) Channel 7, 16 August 2015 and also Eurodad, 50 Shades of tax dodging – the EU’s role in supporting an unjust tax system, (Accessed 23 Feb 2017), 5 October 2015

[18]          Panama papers Q&A – what is the scandal about (Accessed 23 Feb 2017), BBC News, 6 April 2016 and Panama papers – Australia investigates tax evasion (Accessed 23 Feb 2017), BBC News, 4 April 2016

[19]          Extrinsic Materials that are connected to the primary legislation have been used to understand the purpose of the legislation and not to be used to determine the interpretation of the legislation as is contemplated under the Acts Interpretation Act 1901 (Cwth), section 15AB.

[20]          Fairfax v Commissioner of Taxation (1965) 114 CLR 1  (Accessed 23 February 2017) established that the Commonwealth had constitutional power to impose taxation on superannuation fund investment income under the power of ss 51(ii) of the Constitution

[21]          Australia uses the term superannuation, retirement income is usually referred to by the rest of the world.

[22]          Refer CPA Australia Superannuation Guide 2015-16 (Accessed 23 February 2017)

[23]          A taxed fund is one where income of the fund has been taxed – this would apply to the majority of funds such as industry funds, employer funds, retail funds and self managed superannuation funds.  An untaxed fund is one where tax has not been paid e.g. government / public sector funds.

[24]          Mercer, Melbourne Mercer Global Pension Index (Accessed 23 February 2017), Australian Centre for Financial Studies, October, 2016

[25]          Australian Law Reform Commission, The superannuation system – an overview

(Accessed 23 February 2017), Commonwealth of Australia, Canberra

 

[26]          The Treasury, Australia’s Future Tax System, Retirement Consultation Paper, Appendix B: A history of superannuation (Accessed 23 Feb 2017), Commonwealth of Australia, 2008

[27]          ibid, Attachment 2

[28]          Income Tax and Social Services Contribution Act 1961

[29]          Justice K Asprey, op cit

[30]          Treasury, Towards higher retirement incomes for Australians: A history of Australian retirement income since Federation (Accessed 23 February 2017), The Treasury Archive, Canberra

[31]          John Howard (Treasurer), Treasurer Statement, Canberra, 12 July 1979

[32]          Stan Wallis, Australian financial system: final report of the Committee of Inquiry, (Accessed 23 February 2017), Commonwealth of Australia, November 1981

[33]          Kai Swoboda, Chronology of major superannuation and retirement income changes in Australia (Accessed 23 February 2017), Parliamentary Library Australia, 2014

[34]          ibid

[35]          John Howard (Treasurer), Press Release No. 146 (Accessed 23 February 2017), Canberra, 30 July 1992

[36]          Income Tax Assessment Amendment Act (No 3) 1984

[37]          ibid

[38]          ibid

[39]          RBLs when originally introduced in 1984 was $400,000 for lump sums and $800,000 for pensions, and were subject to indexation. Any excessive amount to the respective RBL was called an excessive component, that was taxed at 47%

[40]          ibid

[41]          Superannuation Guarantee (Administration) Act 1992 and Superannuation Guarantee Charge Act 1992

[42]          John Dawkins (Treasurer), 2nd Reading Speech Superannuation Guarantee Charge Bill 1992 House of Representatives, Canberra, 2 April 1992

[43]          ibid

[44]          Superannuation Contributions Tax (Assessment and Collection ) Act 1997

[45]          Superannuation Legislation Amendment (Choice of Superannuation Funds) Act 2004

[46]          Tax Laws Amendment (Simplified Superannuation) Act 2007

[47]          Same-sex relationship (Equal Treatment in Commonwealth Laws- Superannuation) Act 2008

[48]          Superannuation (Departing Australia Superannuation Payments Tax) Amendment Act 2008

[49]          Temporary residents’ Superannuation Legislation Amendment Act 2008

[50]          Tax laws Amendment (2009 Measures No 1) Act 2000

[51]          Ken Henry et al. Australia’s Future Tax System, Commonwealth of Australia, Canberra, 2009

[52]          Kai Swoboda, op cit

[53]          Superannuation Guarantee (Administration) Amendment Act 1992

[54]          Superannuation (Government co-contribution for Low Income Earners) Act 2003

[55]          Tax and Superannuation Laws Amendment (Increased Concessional Contributions Cap and Other Measures) Act 2013

[56]          Tax laws Amendment (2009 Measures No 1) Act 2000

[57]          Tax Law Amendment (Stronger, Fairer, Simpler and other measures) Act 2012

[58]          Stronger Super (Accessed 23 February 2017), – Government response to the Super System Review –  Commonwealth of Australia, Canberra, 2010

[59]          Superannuation Legislation Amendment (Further MySuper and Transparency Measures) Act 2012

[60]          Wayne Swan (Treasurer) and Bill Shorten (Minister for Financial Services and Superannuation), Superannuation Roundtable, (Accessed 23 February 2017), Joint Media Release, 29 January 2012

[61]          The Treasury, Distributional analysis of superannuation taxation concessions: a paper to the superannuation roundtable, the Treasury, Canberra, April 2012

[62]          Tax and Superannuation Laws Amendment (Increased Concessional Contributions Cap and Other Measures) Act 2013 and also Superannuation (Sustaining the Superannuation Contributions Concession) Imposition Act 2013

[63]          Superannuation Guarantee (Administration) Amendment Act 1992

[64]          Coalition’s policy for superannuation (Accessed 23 February 2017), September 2013

[65]          Mineral Resource Rent Tax Repeal and Other Measures Bill 2013 (No. 2)

 

 

 

[66]          Scott Morrison (Treasurer), Budget Speech 2016-17 (Accessed 23 February 2017), 3 May 2016

[67]          Scott Morrison (Treasurer) and K O’Dwyer (Minister for Revenue and Financial Services), Turnbull Government delivers, more fairer, more sustainable superannuation (Accessed 23 February 2017), Joint Media Release, 23 November 2016

[68]          Section 291-20(2) Income Tax Assessment Act 1997

[69]          Sections 292-85(2)-(4) Income Tax Assessment Act 1997

[70]          ibid

[71]          The adjusted income is income and concessional superannuation contributions combined

[72]          Division 293 Income Tax Assessment Act 1997 and other sections

[73]          Part 2A, Sections 12B – 12G, Superannuation (Government Co-contribution for Low Income Earners) Act 2003

[74]          Section 282-10(1) Income Tax Assessment Act 1997

[75]        Peter Costello (Treasurer), Second Reading Speech Superannuation Laws Amendment (Abolition of Surcharge) Bill 2005, (Accessed 23 February 2017), 26 May 2005

[76]          Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016,  Explanatory Memorandum

[77]          Scott Morrison (Treasurer) 2nd Reading Speech Fair and Sustainable, op cit

[78]          Data reveals much lower account balances on average than $1.6m by reference to age or taxable income.  For example, 2016 ASFA Superannuation Statistics, op cit, reveal median account balances to be  less than $100,000 under retirement age, but highest for 60 – 64 being in the order of  $290,000.  ATO Statistics 2013-14 (Accessed 23 February 2017), based on average account balance – are similar for age (but higher).   In terms of average superannuation account balances by income levels, ATO Statistics 2013-14 (Accessed 23 February 2017), reveal that for persons with less than $80,000 income the average superannuation account balance is approximately $100,000, for those earning up to $180,000 the average superannuation account balance is 200,000 and those with incomes greater than $180,000, the average superannuation account balance is approximately $500,000.

[79]          The median rate for superfunds was only 3% but was 5.6% for the prior year.  However, superannuation funds have had higher than 5% refunds for the last 10 years.  Refer ASFA Superannuation Statistics, op cit

[80]          Bill Shorten (Leader of the Opposition) and Chris Bowen (Shadow Treasurer), Labor’s plan for fair, sustainable superannuation (Accessed 23 February 2017), , 22 April 2015

[81]          The 4.5% rate selected is considered reasonable as a middle range rate given ‘growth’ superfunds achieved between 1.99% and 6.7% performance returns over a 10 year period. Average fund performance was poor in the 2016 year, only 3% but was 5.6% in 2015.  4.5% has been used as an average.  Fund performance over longer periods has traditionally been greater than 5%

[82]          John Rolfe,  ‘Best and worst ‘growth’ superfunds in the last 10 years,  (Accessed 23 February 2017), Newscorp, 2 October 2-16

[83]          Refer ATO website for CPI https://www.ato.gov.au/Rates/Consumer-price-index/  (Accessed 23 February 2017),

[84]        A review of history to the previous RBL policy, shows the final RBLs in 2006-07 were for lump sums, $678,149 and for pensions, $1,356,291.[84]  If CPI indexation is applied by multiplying 108.6 and dividing by 87.7, (i.e. by indexing the RBLs by comparing the June 2007 quarter index to the June 2016 quarter index), the adjusted RBLs would now be for lump sums $839,760 and for pensions $1,679,512.

[85]          David Murray et al, Financial System Inquiry: Final Report (Murray Inquiry) (Accessed 23 February 2017), Commonwealth of Australia, Canberra, November 2014.

[86]          Treasury, Objective of Superannuation (Accessed 23 February 2017), Commonwealth of Australia, Canberra, 9 March 2016

[87]          Centrelink website re pension and health card eligibility –  the cut off point where a pension benefit stops for an individual is $909 per week ($48,000) and a couple no children  is $1,468 per week ($76,000).  These levels are similar for health card eligibility.

[88]          ASFA Media Unit, Retirement Standards (Accessed 23 February 2017), The Association of Super Funds of Australia,  December 2016

[89]          The Treasury, How much does the superannuation system cost? (Accessed 23 February 2017), Canberra, July 2013. Treasury 2013 Budget Paper No 1 projected superannuation concession costs to be $35.6 bn in 2013-14, $39.6 bn in 2014-15, $44.8 bn in 2015-16 and $50.7bn in 2016-2017.

[90]          Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016, Explanatory Memorandum

[91]          David Ingles and Richard Denniss, op cit   Note that Ingles and Denniss recommended abolishing the superannuation system because the cost of its concessions together with the age pension system cost more than providing only a non means tested pension available to all.  (I.e. similar to the New Zealand pension system).

[92]          David Murray et al, op cit

[93]          For further details regarding the history of superannuation, refer Kai Swoboda, Chronology of major superannuation and retirement income changes in Australia , Parliamentary Library Australia, 2014

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