Introductory Info

Date introduced: 27 October 2021
House: House of Representatives
Portfolio:Treasury
Commencement: Schedules 1 and 2 the day after the Act receives Royal Assent. Schedules 3 to 6 the first 1 January, 1 April, 1 July, or 1 October to occur after the day this Act receives Royal Assent.

The Bills Digest at a glance

The Treasury Laws Amendment (Enhancing Superannuation Outcomes For Australians and Helping Australian Businesses Invest) Bill 2021 (the Bill) amends multiple Acts to implement a range of Budget initiatives in the superannuation and taxation systems.

In superannuation, the changes are:

• Removing a current $450 minimum monthly salary or wage threshold below which a worker currently receives no superannuation guarantee payment.
• Increasing the maximum realisable amount of savings in a First Home Super Saver Scheme (FHSSS) account from $30,000 to $50,000.
• Reducing the age by which a downsizer contribution to superannuation can be made, from 65 years to 60 years.
• Changing work test arrangements for making concessional, non-concessional and salary sacrificed contributions to superannuation by those aged 67 to 75.
• Allowing some superannuation trustees to choose how they calculate their exempt current pension income when their fund is completely in the retirement phase, removing some regulatory costs.

In taxation, the key change is extending the availability of the temporary full expensing of depreciating assets introduced in the 2020-21 Australian Government Budget as a COVID-19 response measure.

There are several likely positive outcomes, including:

• Additional superannuation for low income, underemployed and casualised workers, with potentially positive lifetime savings outcomes (especially for women).
• The potential for increasing housing supply from additional downsizing, including an increase in housing efficiency from closer alignment of people per bedroom.
• More retirement income certainty for those who may not have had access to superannuation in their early career.

However, the extent of the benefits arising from several of the proposed changes is unclear including:

• A potential gain for those saving for a first home. However, the benefits are unclear.
• An equity argument that the downsizer and work test rules may favour asset rich households, especially those with significant unearned home equity.
• Unclear benefits from the methodology changes for calculating exempt current pension income, with some experts saying complexity will increase.

There is little public commentary on the Bill.

 

Purpose of the Bill

The Treasury Laws Amendment (Enhancing Superannuation Outcomes for Australians and Helping Australian Businesses Invest) Bill 2021 (the Bill) seeks to amend four Acts:

• Superannuation Guarantee (Administration) Act 1992 (the SGA Act)
• Taxation Administration Act 1953 (the TA Act)
• Income Tax Assessment Act 1997 (the ITA Act)
• Income Tax (Transitional Provisions) Act 1997 (the ITTP Act).

The amendments propose myriad changes to superannuation and taxation. Superannuation changes include extending the superannuation guarantee to low-income adult wage and salary earners, updating first home superannuation linked savings terms, reducing the age to make downsizer contributions to superannuation, removing a work test for superannuation contributions, and removing regulations for exempt current pension income assessments.

The change in taxation settings is extending a temporary full expensing measure introduced in response to COVID-19.

Structure of the Bill

The Bill comprises six schedules.

Schedule 1 amends the SGA Act to remove the $450 minimum monthly salary or wage threshold below which a worker currently receives no superannuation guarantee payment.

Schedule 2 amends the TA Act to increase the maximum realisable amount of savings in a First Home Super Saver Scheme (FHSSS) account from $30,000 to $50,000.

Schedule 3 amends the ITA Act to reduce the age by which a downsizer contribution to superannuation can be made, from 65 years to 60 years.

Schedule 4 amends the ITA Act to change the work test arrangements for making concessional, non-concessional and salary sacrificed contributions to superannuation by those aged 67 to 75.

Schedule 5 amends the ITA Act to allow superannuation trustees to choose how they calculate their exempt current pension income when their fund is completely in the retirement phase, removing some regulatory costs.

Schedule 6 amends the ITTP Act to extend the eligibility for the temporary full expensing of depreciating assets introduced in the 2020-21 Australian Government Budget.

Background

The Bill makes amendments that implement a range of budget measures from 2019-20, 2020-21 and 2021-22.

For the superannuation measures:

• the basis for the exempt current pension income amendment is a 2019-20 budget measure. The measure aims to remove perceived red tape in the superannuation system
• the remaining amendments, including the $450 threshold, the FHSSS increase, the downsizer contribution and work test, were announced as part of the 2021-22 Budget measures. Each of the measures supports a change in the welfare of different superannuation customers.

The exempt current pension income amendment was subject to exposure draft consultations during 2021, which are discussed under Key issues and provisions.

On taxation measures, the temporary full expensing amendment is a continuation of a 2020-21 Budget measure. The initial measure aimed to support the economic response to the COVID-19 pandemic, and the new measure extends the support for one year.

Committee consideration

Senate Economics Legislation Committee

The Bill has not been referred to the Senate Economics Legislation Committee.

Senate Standing Committee for the Scrutiny of Bills

The Bill has not been considered by the Senate Standing Committee for the Scrutiny of Bills at the time of writing.

Policy position of non-government parties/independents

At the time of writing the position of non-government and independent Members and Senators on the specific measures proposed by the Bill could not be determined.

Most of the schedules relate to budget measures. Commentary linked to the budget measures suggests there is generally support for the superannuation amendments. Anecdotally, concerns have been raised that the downsizing and work test measures benefit asset rich and wealthier individuals.

However, during the limited debates on the initial enactment of the temporary full expensing measure in 2020, concerns were raised about the long-term impact of the measure. These concerns related in particular to the link between the measure and industry investment in labour productivity initiatives; the overall impact the measure would have on increasing aggregate business investment, and the medium term impact of bringing forward future investments.  

More details are outlined under Key issues and provisions.

Position of major interest groups

Whilst there has been little public commentary on the Bill itself, commentary linked to the associated budget measures suggests:

• the superannuation measures on thresholds, the FHSSS, downsizing contribution and work test are broadly supported
• there are mixed views about the long-term impact on gender equality from the change in threshold, however most commentary is supportive
• industry groups have observed there will be an impact on operating costs from the removal of the $450 threshold
• accounting, actuarial and self-managed superannuation fund groups raised significant concerns with an exposure draft of the exempt current pension income changes, and there is no indication on whether they consider the Bill addresses those concerns.

Given the myriad changes these issues are discussed under Key issues and provisions.

Financial implications

Each Schedule has a different expected financial impact. These are summarised in Table 1.

Table 1: Financial impacts of all amendments ($m, nominal)

Amendment	Type	2021-22	2022-23	2023-24	2024-25
Removing the $450 threshold[1]	UCB impact	-	-	-10.0	-10.0
First Home Super Saver Scheme[2]	Receipts	-6.0	-6.0	-6.0	-7.0
Repealing the work test[3]	Receipts	-	-	-10.0	-20.0
Temporary full expensing extension[4]	Receipts	-	-600	-10,900	-6,400

Note: UCB means underlying cash balance. A negative sign for receipts means a reduction a reduction. A positive sign for payments means an increase. A dash means nil, ellipsis means minor or inconsequential impacts.

Source: Explanatory Memorandum, Treasury Laws Amendment (Enhancing Superannuation Outcomes for Australians and Helping Australian Businesses Invest) Bill 2021, 3-6.

The downsizer contribution and exempt current pension income measures are stated to have no budget cost.[5] Overall, the impact on the current financial year is $6 million in lower receipts, and $17.975 billion over the forward estimates.

The temporary full expensing extension cost is in addition to costs in the 2020-21 Budget. The 2020-21 Budget temporary full expensing measure was ‘ … estimated to decrease receipts by $26.7 billion over the forward estimates period and $3.2 billion over the medium-term.’[6] Similarly, the 2021-22 Budget extension was stated to ‘… decrease receipts by … $3.4 billion over the medium term’ despite reducing receipts by $17.9 billion over the forward estimates.[7] The difference between the higher short term, and lower medium term impact reflects the impact of bringing forward depreciation decisions of business which are otherwise forecast into receipts.

Some of these figures differ from those in the budget papers. Table 2 illustrates the data from the 2021-22 Budget for the measures contained in the Bill. Consistently, exempt current pension income and the downsizer contribution were expected to create no impact. Data for the FHSSS and temporary full expensing are consistent. The Budget included additional payments for the $450 threshold and work test amendments not captured or examined within the EM.

Other related budget narratives include:

• the 2019-20 Budget announcement of the red tape reforms for exempt current pension income noting ‘this measure will start on 1 July 2020 and is estimated to have no revenue impact over the forward estimates period.’[8] When updated in 20201-21, the Government noted ’the revised start dates for these measures are estimated to result in an unquantifiable impact on the underlying cash balance over the forward estimates period’[9]
• the 2021-22 downsizer ‘… measure is estimated to result in a negligible decrease in receipts over the forward estimates period’.[10]

Table 2: Initial Budget measures for all amendments ($m, nominal)

Measure	Type	2021-22	2022-23	2023-24	2024-25
Removing the $450 threshold[11]	Payments	2.0	4.8	13.8	10.9
First Home Super Saver Scheme[12]	Receipts	-6.0	-6.0	-6.0	-7.0
Repealing the work test[13]	Receipts			-10.0	-20.0
	Payments	1.7	1.5	0.3	0.2
Temporary full expensing extension[14]	Receipts		-600	-10,900	-6,400

Source: Australian Government, Budget Measures: Budget Paper No. 2: 2021-22, 26, 17, 19 and 29.

Statement of Compatibility with Human Rights

As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed each Schedule to the Bill for its compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act. The Government considers that each Schedule to the Bill is compatible.[15]

The Bill was considered by the Parliamentary Joint Committee on Human Rights. In its Scrutiny Report of 10 November 2021, the committee offered no comment on the Bill.[16]

Key issues and provisions: superannuation system changes

The Bill proposes changes in the superannuation and taxation systems. Superannuation is one of the three pillars of the Australian retirement income system, along with aged pensions and voluntary savings. Most employed Australians are engaged in the superannuation system.

The Bill’s proposed changes in relation to superannuation do not interact with the proposed changes to the taxation system. As such, each system’s change is dealt with separately.

Schedules 1 to 5 propose five changes effecting specific groups of people within the superannuation system.

Some of the proposed amendments have lingered as unresolved issues in policy since 1992, whilst others emerged from two recent reviews conducted by the Productivity Commission (PC) and the Retirement Income Review announced by Treasurer Frydenberg on 27 September 2019.[17] 

The PC inquiry into the efficiency and competitiveness of superannuation in 2018 recommended an independent public inquiry into the role of compulsory superannuation in the broader retirement income system.[18]

The resulting Retirement Income Review was undertaken by an independent panel, chaired by Mike Callaghan, with Carolyn Kay and Dr Deborah Ralston as panel members. On 20 November 2020 Treasurer Frydenberg released the Final Report for the Retirement Income Review (Review report),[19] and many of the Bill amendments are related to recommendations.

Each schedule is dealt with separately.

The $450 superannuation guarantee threshold

Currently, under the SGA Act employers are generally required to make superannuation guarantee contributions for ‘workers’ (including employees and certain subcontractors).[20] Of direct relevance to the Bill, currently subsection 27(2) of the SGA Act provides that superannuation contributions do not need to be made for some employees, including those receiving salary or wages of less than $450 in a month. General current superannuation guarantee rules for employers are published through the Australian Taxation Office (ATO).

Previous examination of the $450 threshold

As noted, the PC inquiry into the efficiency and competitiveness of superannuation recommended the Australian Government commission an independent public inquiry into the role of compulsory superannuation in the broader retirement income system.[21] The PC observed:

the inquiry should examine the economic and distributional impacts of the non-indexed $450 a month contributions threshold. These public policy issues have not been subject to review since they were (partially) considered by the FitzGerald Report on National Savings in 1993.[22]

The threshold accordingly received considerable attention in the Review report, which noted the technological and policy advances that were subsequently referred to by the Ministers at budget and with the tabling of the Bill. The Review report observed the threshold has not changed since being introduced in 1992, and noted:

about 300,000 people, or 3 per cent of employees, are affected by this exemption. They are mainly young, lower-income, part-time workers — around 63 per cent are female. The exemption means affected workers receive less remuneration for the same hour of work as an unaffected colleague.[23]

Specifically, of 311,000 employees under the threshold (in 2020), 197,000 were female and 114,000 were male. Further, the Review report noted the negative impact of the threshold—reducing retirement savings—fell disproportionately on Aboriginal and Torres Strait Islanders.[24] Importantly the Review report also considered the outcome from lifting the threshold:

Removing the $450-a-month threshold would not materially improve retirement outcomes, but it would improve equity in the retirement income system. This would increase hourly remuneration for impacted workers, who are generally young, low-income and female. The change would be unlikely to affect the wage rates of these employees as their total wages represent less than 0.1 per cent of the national wage bill and they are predominantly on award wages. Removing the threshold would likely remove incentives to restrict employees’ monthly hours.[25]

Policy announcement

The change was announced in the Australian Government 2021-22 Budget as the ‘removing the $450 per month threshold for superannuation guarantee eligibility’ budget measure.[26] According to the Minister for Superannuation, Financial Services, and the Digital Economy, the goal of the policy change is to:

… remove a structural discrimination that has been part of the superannuation system since 1992, improve equity in the superannuation system and increase the economic security of women in retirement.[27]

The second reading speech for the Bill noted:

this exemption was introduced in 1992 to reduce the administrative burden on employers, however significant technological advancements in recent years have significantly diminished this burden. Importantly, recent superannuation reforms, such as the Protecting Your Super package, have also reduced the eroding impact of high fees and insurance premiums on small superannuation balances, paving the way for the removal of the $450 rule.[28]

The issue has also been the focus of recent election policies. Prior to the 2019 election, the Australian Labor Party (Labor) proposed phasing out this threshold.[29]

Removal of the threshold

Schedule 1 of the Bill makes one amendment to the SGA Act. This removes the minimum income threshold for the payment of superannuation guarantee contributions contained in subsection 27(2). Item 2 of the Schedule sets out the application of the amendment, being the earlier of either 1 July 2022 or the date the Act receives Royal Assent. 

The effect of the change will be that employers will be required to make superannuation contributions on behalf of all employees over the age of 18, regardless of the amount of salary or wages they were paid in a month.[30] Importantly however, the Bill does not remove the other existing exemptions for:

• part‑time employees under the age of 18 (section 28) and
• earnings paid to members of the armed force Reservists (section 29).

Stakeholder reactions

The measure has received positive coverage. The Association of Superannuation Funds of Australia commented:

… women and young Australians were particularly adversely affected by the threshold. ‘ASFA has consistently advocated for the removal of the $450 threshold to give low income and casual employees an entitlement to super that higher paid employees have as a right’.[31]

Many budget related articles consider the impact to be a positive step towards better retirement outcomes for women. However, others have noted some negative consequences. Chartered Accountants Australia noted:

we commend the government on its efforts to close retirement inequities between men and women in the budget, [but] the proposed changes are inefficient and it’s incumbent on the superannuation sector to ensure that the extra money is not lost in fees and insurances.[32]

The main reasons advanced in relation to the above is that after taxes are considered, significantly less than the superannuation guarantee payment would be paid into superannuation accounts, plus the change would increase administrative costs.

In addition, some industry stakeholders argued the measure would increase the cost to employing workers. For example, the Restaurant and Catering Industry Association noted ‘there is certainly a risk that this increases costs in a sector of the economy that contains large pockets of businesses who remain significantly down compared to pre-pandemic levels’, while the Australian Retailers Association observed ’it’s important to recognise that this measure does introduce an additional employment cost that will be borne by businesses.’[33]

In that regard, the Explanatory Memorandum notes:

The original rationale for the $450 threshold was to minimise the administrative burden on employers administering small amounts of superannuation contributions. Technological advances and the digitalisation of payroll systems, for example Single Touch Payroll, diminishes the rationale for a minimal threshold which adversely impacts low-income workers and women.

The $450 threshold also helped prevent the creation of low-balance accounts that could get eroded by fees and insurance premiums. However, recent Government changes have reduced the impact of these risks. The Treasury Laws Amendment (Protecting Your Superannuation Package) 2018 capped administration and investment fees at 3 per cent of a member’s balance for low-balance accounts and insurance for inactive accounts may no longer be offered without a direction from the member. Further, the Treasury Laws Amendment (Putting Members’ Interests First) Act 2019 made insurance opt-in for members aged under 25 and for members with a balance less than $6,000.[34]

First home superannuation savings

The First Home Super Saver Scheme (FHSSS) was introduced under the First Home Super Saver Tax Act 2017. There was extensive commentary at the time the scheme was launched, positive and negative.[35] The FHSSS is designed to allow individuals to save money for a first home faster than would otherwise be possible by allowing them to make contributions to their superannuation fund. In turn:

• the contributions and associated earnings are concessionally taxed and 
• those amounts can be withdrawn for the purpose of purchasing or constructing a first home (concessional tax treatment also applies to the amount withdrawn and used for that purpose).[36]

Section 138-35 of the TA defines and sets the current limits on eligible contributions and release limits for the FHSSS at $30,000. Details about the current settings for the FHSSS are published by the ATO.

Review of the FHSSS

The FHSSS has not been the subject of detailed review. However, the Review report observed that the impact of the scheme is unclear and noted:

… FHSSS allows people to save money for their first home inside their superannuation fund, using the concessional tax treatment of superannuation to save faster. This incentive’s effectiveness is unclear, with only 8,216 people accessing the FHSSS since its introduction in 2018. The average amount withdrawn was $12,882.[37]

By way of context, over the 12 months from July 2020 to June 2021 the Australian Bureau of Statistics report there were 193,384 new loan commitments by first home buyers.[38]

Policy announcement

The proposed change was announced as part of the Australian Government 2021-22 Budget as the ‘First Home Super Saver Scheme—increasing the maximum releasable amount to $50,000’ budget measure. The main reasons given for the change are:

• assisting first home buyers access concessional taxation for their savings and
• to create a higher deposit in a rising house price market.[39]  

In the second reading speech, the Minister noted:

this increase recognises that deposit requirements have increased with house price growth over recent years and this change will help first home buyers to save a deposit more quickly.[40]

Proposed change to FHSSS limits

Schedule 2 of the Bill makes one amendment to the TA Act. Item 1 of Schedule 2 increases the amount which can be released by participants in the FHSSS to $50,000. Item 2 of the Schedule sets out the application of the amendment. The Taxation Commissioner will apply the amendment to requests made after 1 July 2020.

Stakeholder reactions

Whilst there has been minimal commentary on this aspect of the Bill, a commentator on the Budget announcement argued:

Every government initiative to help first home buyers simply increases the number of buyers in the market fighting over a rapidly declining amount of residential housing stock. This feeds the vicious cycle of prices going up.

The only good thing about it [the FHSSS measure] is the guaranteed 3 per cent earning rate while the money is in super. The sting is that the contribution loses 15 per cent going in and is taxed at marginal rates less a 30 per cent rebate on the way out. It's of small benefit to most first homebuyers, especially when one considers the huge amount of paperwork involved to take part in it.[41]

Arguably, some of the additional demand from this measure may be offset by changes in the downsizer contribution. Longer term, one media report saw the change as a precursor to additional changes allowing superannuation to be used for housing generally:

the measure is being seen as a possible precursor to a more controversial policy opening up superannuation balances to fund property purchases, as advocated by vocal Coalition MPs Andrew Bragg and Tim Wilson. Treasurer Josh Frydenberg told the Financial Review last week that although the budget would not contain changes allowing the use of super to buy a house, the government had not given up on the idea. “We just continue to examine all options. We don’t close doors,” he said.[42]

Downsizer contributions

Schedule 3 of the Bill makes one amendment to the ITA Act which impacts downsizer contributions. Details about the current settings for the downsizer contributions are published through the ATO.

Currently contributions to superannuation are subject to various annual caps.[43] One exception to those annual caps is downsizer contributions and Section 292‑102 of the ITA Act sets out the features applying to downsizer contributions. Under this section people are allowed to make a:

• one-off, post-tax contribution to their superannuation of up to $300,000 per person ($600,000 per couple)
• from the sale of a principal place of residence which has been held for a minimum of 10 years.

Relevantly, paragraph 292-102(1)(a) provides that a downsizer contribution is only permitted where the taxpayer is 65 years or over (for couples, only one member needs to satisfy the ownership requirements to allow both to make a downsizer contribution).[44]

Review of downsizer contributions

In the Review report it was noted that between 1 July 2018 and 17 January 2020, more than 9,000 people made downsizer contributions, with an average contribution of $230,000.[45] More recently, these data were updated. Over the period from 1 July 2018 to 31 May 2021 Treasury reported around 24,500 individuals have used the downsizer contribution. Of these 55 per cent were women. A total of $5.8 billion in downsizer contributions have been made over that period, of which $3.2 billion was made by women and $2.6 billion by men. The average individual contribution has been $237,000, with females on average committing $239,000 and males $237,000.[46]

The measure may impact on overall contributions caps as individuals enter the retirement phase of their superannuation journey. Industry experts observed that ‘people with balances over the transfer balance cap ($1.7m from 2021-22) are also able to make a downsizer contribution, however the downsizer amount will count towards that cap when savings are converted to the retirement phase.’[47]

The significance of the incentive for older people is unclear. The Review report noted (citing the PC):

Selling or downsizing the family home in retirement to convert home equity into financial assets can reduce a retiree’s Age Pension payment due to the assets test. This can deter retirees who may want to move to more suitable accommodation and/or release equity from their home to increase their income. The significance of this disincentive is not clear. Retirees report the impact on Age Pension has a limited effect on their decision to downsize (Productivity Commission, 2015a). Retirees also face significant transaction costs to right-size, such as moving costs and stamp duty.[48]

By way of context, between 2016-17 and 2018-19, the latest period with data, the total number of retirees in Australian increased from 3.5 million to 3.9 million people, with an additional 500,000 intending to retire within five years.[49] 

Policy announcement

The change was announced as part of the Australian Government 2021-22 Budget as the ‘flexible Super—reducing the eligibility age for downsizer contributions’ budget measure.[50] The Minister noted in the second reading speech that the measure:

… will improve flexibility for older Australians to contribute to their superannuation savings. This may encourage more older Australians to downsize to homes that better meet their needs, ultimately increasing the supply of larger homes for young families.[51]

In this sense, the measure is marginally linked to the changes in FHSSS, in that more downsizing may release additional stock into the housing market.

Proposed change to downsizer contributions

The Bill will lower the age limit from 65 to 60, lowering the age at which downsizer contributions can be made by five years.[52]

Section 2 of the Schedule sets out the application of the amendment, being on or after 1 July 2022. The EM observes that additional amendments will be required to the Superannuation Industry (Supervision) Regulations 1994 and the Retirement Savings Accounts Regulations 1997 to ensure superannuation funds and retirement saving account institutions accept the contributions.[53] No date is scheduled for these amendments.

Stakeholder reactions

After the Budget announcement, one media article mentioned the competing issue of transactions costs for those who downsize,[54] while another observed the measure, in conjunction with the work test changes, seems to preference wealthier and asset rich households.[55]

Superannuation contribution work test and adjusting bring forward rules

The Bill proposes to introduce a work test requirement for those aged 67 to 75 wishing to make personal tax-deductible superannuation contributions, remove a work test for the same age group to make non-concessional and salary sacrificed contributions, and allow the same age group access to ‘bring forward’ arrangements.

Currently superannuation funds can only accept a personal superannuation contribution from an individual aged between 67 and 75 years if the individual meets a work test.[56]The work test, generally, requires an individual to ‘ … be gainfully employed for at least 40 hours during a consecutive 30-day period in the financial year in which the contributions are made’.[57] Individuals can also claim a tax deduction for making personal superannuation contributions, but, if the taxpayer is aged 67 to 75 years, such deductions can only be claimed where the work test is satisfied.[58] Details about the current settings for age restrictions for contributions are published by the ATO.

The Bill will have a consequential impact on ‘bring forward’ eligibility. Under current settings eligible individuals may be able to access ‘bring forward’ arrangements. If eligible, these allow taxpayers to ‘bring forward’ their non-concessional contributions from two or three future years if they meet certain eligibility criteria including:

• being under 67 years of age in the financial year in which they make the contribution and
• their total superannuation balance is less than the threshold.[59]

The effect is that, under these settings, the ‘bring forward’ arrangement allows that eligible individuals under 67 years of age in an income year ‘… may be able to bring forward 2 years’ worth of entitlements to make non-concessional contributions, and so can make 3 years’ non-concessional contributions in an income year without exceeding their non-concessional contributions cap.’[60] Details about bring forward arrangements are published by the ATO.

Proposed changes to the work test and deductibility of personal contributions

The first two amendments in the Bill relate to Subdivision 290‑C—Deducting personal contributions of the ITA Act, specifically Section 290‑165 which deals with age‑related conditions and the tax deductibility of personal superannuation contributions. The Explanatory Memorandum notes:

Historically, the work test has applied as a condition on a superannuation fund accepting contributions rather than as a condition on an individual claiming a deduction for the contribution. This reflects that the work test applied irrespective of whether the individual claimed a deduction or not.[61]

That is, currently superannuation funds can only accept a personal superannuation contribution from an individual aged between 67 and 75 years if the individual meets the work test, which is set out in the Superannuation Industry (Supervision) Regulations 1994 and Retirement Savings Accounts Regulations 1997.[62] Provided the work test is satisfied, section 290-165 of the ITA ACT provides that the contribution will be deductable where the contribution was be received on or before the day that is 28 days after the end of the month in which the member turns 75.

According to the Explanatory Memorandum:

These changes effectively relocate the existing work test from the SIS Regulations and the RSA Regulations. It is intended that amendments to those regulations be made to remove the work test as a general condition for funds to accept personal contributions.[63]

The Bill first creates a heading ‘condition if you are under 18’, which maintains a minimum age setting in the ITA Act. The Bill proposes Subsection 290-165(1A) of the ITA Act which introduces a ‘work test condition for ages 67 to 75’, which operates by reference to the definition of gainfully employed: ‘employed or self‑employed for gain or reward in any business, trade, profession, vocation, calling, occupation or employment.’[64] The new work test in proposed subsection 290-165(1A) is satisfied where the taxpayer was gainfully employed or, if not:

• the taxpayer was gainfully employed for at least 40 hours in any period of 30 consecutive days during the income year (the previous income year) ending before the income year in which the contribution was made
• the taxpayer had a total superannuation balance of less than $300,000 at the end of the previous income year
• no contributions made by the taxpayer (or in respect of them you) in the previous income year or any earlier income years, was accepted by a superannuation fund or an RSA and
• the taxpayer had not deducted a contribution in the previous income year or any earlier income years on the basis of satisfying the above requirements.

Item 3 will introduce a ‘maximum age condition’ heading in front of the existing subsection 290-165(2) of the ITA Act and amend the wording of the subsection making personal contributions non-deductable for those aged over 75 by providing: ‘You cannot deduct the contribution if it is made after the day that is 28 days after the end of the month in which you turn 75’.

The effect of the introduced work test, and the amendment made by item 3, is that those aged 67 to 75 years can claim a deduction for personal superannuation contributions if they meet the new work test in the income year in which the contribution is made. The EM explain that the changes mean the work test will shift from being a condition for superannuation funds accepting contributions, to one which is a condition on individuals making a contribution. The existing related obligations on superannuation funds under the Superannuation Industry (Supervision) Regulations 1994 and the Retirement Savings Accounts Regulations 1997 will be removed. [65]

However, as discussed below individuals will not face a work test for non-concessional contributions or salary sacrificed contributions.

Proposed changes to bringing forward concessional contributions

Superannuation contributions have different taxation treatments depending on whether they are concessional or non-concessional. A concessional contribution is made to a superannuation fund before income tax, and is then taxed at a rate of 15% in the superannuation fund.[66] In general, non‑concessional contributions include:

• contributions the taxpayer or their employer makes from the taxpayer’s after-tax income
• contributions the taxpayer’s spouse makes
• personal contributions made by the taxpayer that were not claimed and allowed as an income tax deduction.[67]

Concessional contributions to superannuation are subject to various annual caps.[68] An exception to those caps is ‘bring forward arrangements’. As noted earlier, these arrangements allow eligible taxpayers to ‘bring forward’ certain contributions.

The Bill will allow individuals aged 67-74 years, who cannot currently ‘bring forward’ non-concessional contributions, to do so from the 2022-23 financial year.[69] This is consistent with the changed ages for the work test.

Item 5 of the Schedule sets out the application of the amendment, being for contributions made on or after 1 July 2022.

Policy announcement

The work test changes were announced as part of the Australian Government 2021-22 Budget as the ‘Flexible Super—repealing the work test for voluntary superannuation contributions’ budget measure.[70] In the second read speech, the Minister noted:

these changes will improve flexibility for older Australians to make or receive contributions to their superannuation. It will allow retirees, who have not had the benefits of a mature super system throughout their working life, and may have accumulated savings outside of super, to get more out of the super system.[71]

Stakeholder reactions

As the initiative was released at Budget time, most commentary relates to the announcement rather than the Bill. One commentator believes the work test in combination with the downsizer contribution makes only the wealthy ‘winners’.[72] Another notes that the work test change ‘ … gives seniors more choices to structure their retirement finances and minimise tax.’[73] The Self-Managed Superannuation Fund (SMSF) Association observed:

the work test has had its complexities. There has often been confusion over what constitutes ‘gainful employment’ so that individuals can qualify for the work test, and whether the work test needs to be satisfied before the contribution can be made. So removing this test significantly simplifies the rules for members and for super funds needing to administer those rules.[74]

Exempt current pension income

Some superannuation funds are eligible for an exemption of income from taxation when paying superannuation income streams. When a superannuation fund is in its retirement phase income that a superannuation fund receives from assets used to meet liabilities which cover superannuation income stream benefits (for example, pensions) is known as exempt current pension income (ECPI).[75] Details about current settings for ECPI are published by the ATO. Funds which do not have liabilities relating to retirement phase stream benefits generally cannot access the exemption.[76]

Currently under the ITA Act, there are two methods for calculating ECPI:

• the segregated method and
• the proportionate method.[77]

When each method must be applied by a superannuation fund, and a description of the methods’ operation, are summarised at pages 22 to 24 of the Explanatory Memorandum of the Bill.

In summary, if a fund has segregated current pension assets and is fully in retirement phase at any time in an income year then the trustee is required to use the segregated method to calculate the ECPI of the fund. Segregated current pension assets are created when:

…the fund segregates its assets as specifically relating to its liabilities…in respect of RP [retirement phase] superannuation income streams of the fund…exempt income is that part of the fund’s income that is derived from the segregated current pension assets.[78]

In contrast, to the extent that a fund does not have segregated current pension assets, then the fund’s ECPI must be calculated using the proportionate method.[79]

This means currently trustees must calculate ECPI using the segregated method or the proportionate method, depending on the nature of the liabilities held at a point in time, closely linked to whether the fund is entirely in a retirement phase.

Review of how exempt current pension income is calculated

Between 21 May 2021 and 18 June 2021, the Treasury published exposure draft legislation on ‘Reducing red tape for superannuation funds – ECPI measures’ for consultation.[80] Although the draft differed to the Bill it is useful to understand the policy context.

The exposure draft explanatory materials outlined the genesis of the change, noting:

On 8 March 2017, the ATO finalised Law Companion Ruling 2016/8 Superannuation reform: transitional CGT relief for complying superannuation funds and pooled superannuation trusts (LCR 2016/8) [link added]. In LCR 2016/8, the ATO set out the view that where a fund’s assets are held solely to discharge liabilities in relation to retirement phase interests for any part of the income year, those assets are segregated current pension assets for that period. In accordance with that view, the fund must use the segregated method to calculate its ECPI for that part of the income year. Assets of a fund will not be segregated current pension assets where they are held in an unallocated reserve or are used to support defined benefit pensions where the assets are in excess of the amount actuarially determined to be necessary to discharge its liabilities in respect of those pensions.

Currently, this leads to unnecessarily complicated compliance obligations. Rather than being required to use different methods to calculate ECPI for different periods in the same income year, it may simplify compliance obligations if, in such circumstances, trustees could choose to apply the proportionate method for the whole of the income year based on a single actuary’s certificate.[81]

This reference is repeated in the EM for the Bill.[82]

Policy announcement regarding calculation of exempt current pension income

The proposed change was first announced as part of the Australian Government 2019-20 Budget as the ‘Superannuation—reducing red tape for superannuation funds’ budget measure.[83] The measure was revised in the 2020-21 Budget which announced ‘Revised start dates for tax and superannuation measures’. This had the effect of delaying the initial proposed commencement from 1 July 2020 to 1 July 2021.[84]

As noted, between 21 May 2021 and 18 June 2021, the Treasury published exposure draft legislation on ‘Reducing red tape for superannuation funds – ECPI measures’ for consultation.[85]

Compared to the exposure draft legislation, the proposed Subsections 295-385(9) and (10) in the Bill are substantively the same. In the exposure draft, the proposed Subsection 295-385(8) was less streamlined:

8. Despite subsections (3) to (6), an asset of a * complying superannuation fund:
1. is a segregated current pension asset of the fund at a particular time in an income year if:
1. the trustee of the fund chooses under subsection (9) to treat the asset as being a segregated current pension asset at that time; and
2. at that time all assets of the fund are supporting 15 *RP superannuation income stream benefits of the fund that are prescribed by the regulations for the purposes of paragraph (4)(b); or(b) is not a segregated current pension asset of the fund at a particular time in an income year if the trustee of the fund chooses under subsection (9) to treat the asset as not being a segregated current pension asset at that time.[86]

Proposed change to how exempt current pension income can be calculated

The Bill will allow superannuation trustees to make a choice about which method to use for calculating ECPI by removing the obligation to use one method or the other.

Item 5 of Schedule 5 does this by inserting proposed subsections 295-385(8) to (9) which will allow a trustee to choose to treat all fund assets as not being segregated current pension assets for an income year if all the fund's assets are held solely to discharge liabilities in relation to retirement phase interests for part of that income year.[87]

Section 2 of Schedule 5 sets out the application of the amendment, being from the 2021-22 income year and later.

Stakeholder reactions

Chartered Accountants Australia & New Zealand (CA) and Certified Practicing Accountants (CPA) Australia made a joint submission on the exposure draft legislation. On the ECPI proposal, while the submission agreed with the characterisation of the issue and associated complexity, the accounting groups stated that ‘our preference is that the government does not proceed with this suggested amendment’:[88]

… we believe it [reduction in complexity] will only be the case for a small minority of superannuation funds, where the segregated current pension assets method and proportionate method produced the same ECPI. However, for many superannuation funds it is likely that different outcomes can result from these two methods. For example, capital losses are treated differently under the two ECPI methods.

As trustees will be permitted to move into and out of both methods at multiple times throughout a year it will be necessary for trustees and their tax advisers to carefully model each available option to ensure they are maximising their beneficiaries’ best interests (potentially soon to involve beneficiaries best financial interests) and are not breaching a trustee covenant.

As a result, we believe this potential change may lead to greater complexity for some funds and hence greater costs for them.[89]

Instead, the CA and CPA preferred an amendment which removed the requirement for an actuarial certificate for ECPI calculations for part of an income year, noting that ‘it is the view of the Major Accounting Bodies that this recommended amendment would provide the greatest reduction in red tape for the small fund sectors in relation to the calculation of ECPI.’[90]

Similarly, the Actuaries Institute, who are actively involved in supporting trustees, provided a submission that suggested complexity would increase. They noted ‘… we are concerned that the draft legislation to affect the proposal to offer funds the choice of which method to use to claim ECPI during periods when the fund was solely in retirement phase is likely to achieve the opposite of what the proposal intended. Providing superannuation funds with more options for how they calculate their tax liabilities will increase complexity and administration costs. In addition, allowing funds to optimise their tax outcome in this way will inevitably reduce tax revenue.’[91]

The Self-Managed Superannuation Fund (SMSF) Association made similar observations about increased complexity and the impact on Commonwealth revenues. They observe, ‘allowing trustees now to choose their preferred calculation method will require further changes to software and accounting and administration processes. It will create further complexity and cost as software systems and administration processes will need to be able to support both calculation methods, including tax optimisation tools to enable trustees and practitioners to identity the most tax efficient calculation method given the specific circumstances of the fund.’[92] The SMSF Association proposed as an alternative ‘ … legislation that would allow trustees to apply the proportionate method to all assets of the fund, for the entire year of income. The trustees would be required to obtain an actuarial certificate to determine the taxable/tax free percentage to be applied to the fund income for that financial year.’[93]

Key issues and provisions: taxation system changes

Schedule 6 of the Bill amends depreciations settings for certain companies, which impacts on their taxation obligations. As noted earlier, it has no direct relationship to the Bill’s superannuation related measures.

Temporary full expensing measure

Details of the temporary full expensing scheme which is now in operation are published by the ATO. In general terms, full expensing is where a taxpayer can deduct the full cost of:

• eligible depreciating assets or
• improvements to those assets and to existing eligible depreciating assets made during an income year.

According to the Explanatory Memorandum:

Temporary full expensing supports businesses that invest as it significantly reduces the after-tax cost of eligible assets, providing a cash flow benefit. Temporary full expensing also creates a strong incentive for businesses to bring forward investment to access the tax benefit before it expires.[94]

The temporary full expensing concept was first introduced as part of the 2020-21 Budget as the ‘JobMaker Plan—temporary full expensing to support investment and jobs’ budget measure.[95] This measure was implemented through the Treasury Laws Amendment (A Tax Plan for the COVID-19 Economic Recovery) Act 2020 (TLA Covid Act). The TLA Covid Act was introduced and passed between 7 October 2020 and 14 October 2020.[96] The measure was amended by the Treasury Laws Amendment (2020 Measures No. 6) Act 2020 (TLA Act 6). The TLA Act 6 was introduced and passed between 2 December 2020 and 17 December 2020.[97] In the House of Representatives, Labor raised concern over the potential unintended consequences of the measure, noting:

While Labor supports this, it is important to note that any expensing measure must be judged primarily in terms of its impact on employment … it is critical that firms be encouraged to make investments in capital which are complementary to their workforce, rather than supplementary. I am somewhat concerned by a recent report by MIT entitled The work of the future: building better jobs in an age of intelligent machines … That report notes of the United States: ‘A series of tax law changes enacted over the last four decades has increasingly skewed the U.S. tax code toward subsidizing machinery purchases rather than investing in labor (sic). Tax policy offers firms an incentive to automate tasks that, absent the distortions of the tax code, they would accomplish with workers. The U.S. should bring its tax code back into balance to align incentives for innovation in skills development, capital formation, and R&D investment.’ The report recommends that the US ‘Eliminate accelerated depreciation allowances. When enacted, these were intended to be temporary.’ The point that the report makes is that accelerated depreciation measures work best when you're investing in education at the same time as encouraging automation—when you're encouraging upskilling of the workforce in order for workers to become more productive with the additional machinery.[98]

In the Senate, Labor also noted:

Our concerns relate largely to the amendments to the R&D tax incentive cuts and the full expensing of depreciating assets or the instant asset write-off of 100 per cent. That is at a cost of $27 billion. It is a massive measure that I think the Senate should have had the opportunity to inquire into for a bit longer than 48 hours. The member for Rankin in the other place has raised a number of issues around that. One is the fact that there is no long-term solution to business investment in this country. This is a very short-term measure, and it will create a very significant cliff at the end of it, which I'm sure the government acknowledge but which they haven't dealt with in this budget. It doesn't deal with a long-term business investment strategy. We know business investment was tanking in this country long before the pandemic.[99]

Policy announcement

The extension was proposed as part of the 2021-22 Budget as the ‘Temporary full expensing extension’ budget measure.[100]

In the second reading speech for the Bill the Minster observed the measure ‘ … will continue to support our economic recovery by encouraging businesses to make further investments. The time limited nature of the measure provides a strong incentive to bring forward investment projects before it expires.’[101] According to the Treasurer, eligibility for ‘temporary full expensing applies to around $320 billion worth of investment, and over 99 per cent of businesses, employing 11.5 million workers … ’.[102]

Proposed changes to the temporary expensing measure

Schedule 6 of the Bill makes several minor amendments to the ITTP Act. The amendments do not change the nature of the temporary full expensing measure; just the timing of its application.

One group of amendments are within Subdivision 40 BB, which sets out how the temporary full expensing measure works. The subsections amended include:

• 40-150(1): When an asset of yours qualifies for full expensing
• 40-160(3)(1) and (b): Full expensing of first and second element of cost for post-2020 budget assets
• 40-175(b): When is an amount included in the eligible second element.

The amendments are not substantive, in each case merely omitting an existing 30 June 2022 cessation date and adding 30 June 2023, reflecting the one-year extension.

The remaining amendments apply to Division 328 with a range of rules for small business entities. Temporary full expensing is included in the small business component of the ITTP Act because for ‘… small business entities (with an aggregated turnover of less than $10 million) that choose to apply the simplified depreciation rules, temporary full expensing is contained in modifications to those rules made by sections 328-180 and 328-181’.[103] Effectively, small businesses have a choice of different deprecation regimes, including temporary full expensing. The subsections amended include:

• 328-180 (heading) and (1)(b): Increased access to accelerated depreciation from 12 May 2015 to 31 December 2020
• 328-181 (heading) and, (2), (3) and (5)(b): Full expensing—2020 budget time to 30 June 2022.

Again, these are not substantive and only adjust dates. The heading of Section 328-180 is adjusted by substituting 30 June 2023 for 31 December 2020. All other amendments substitute 30 June 2023 for 30 June 2022.

Stakeholder reactions

The policy intent is the bringing forward of investments by eligible businesses which might otherwise have occurred in the future. One observation at budget time was:

… tax breaks simply bring forward the timing of investment decisions– by deciding to buy the vehicle this year rather than putting it off for a year–rather than boosting the overall level of spending. And that means there’s a risk investment spending will wilt in subsequent years, unless further tax relief is forthcoming.[104]

This risk is reflected in the initial budget measure costing, which noted that ‘the receipts impact is reduced over the medium-term as this measure brings forward deductions that would have been made in future years.’[105]

Others have questioned the economic impact on the measure. Treasury have been quoted saying that the full expensing, and related loss carry back provision, would deliver an estimated ‘…boost [to] GDP…around $2.5 billion in 2020-21, $7.5 billion in 2021-22, and $8 billion in 2022-23, and create around 60,000 jobs by the end of 2022-23.’[106] One leading economist noted ‘ … the claim that 60,000 jobs would flow from extending the temporary loss carry back and full expensing tax concessions was ‘a stretch,’ with the connection quite tenuous.’[107]

The EM for the Bill observes that this measure was not subject to a Regulation Impact Statement as it was part of an exemption granted for COVID-19 related measures.[108]