Impact of Treasurer's super proposals on employers and employees

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Impact of Treasurer's super proposals on employers and employees

On 25 February 2004, the Federal Treasurer released a policy paper outlining measures to 'improve the accessibility, flexibility and integrity of the retirement income system'.

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On 25 February 2004, the Federal Treasurer released a policy paper outlining measures to 'improve the accessibility, flexibility and integrity of the retirement income system'. 

According to the Treasurer, the paper highlights the need for people to prepare and plan for the lifestyle they want in retirement and proposes measures that will make that lifestyle attainable. Many of these measures are due to commence this year.

A person’s lifestyle after retirement is usually affected by what has happened decades before. Retirement income is based not just on post-retirement pension payments, but also on savings during years of paid work (for most people from employer or personal superannuation contributions), investments or windfall gains such as inheritances.

One of the aims of the Treasurer’s paper is to encourage changes in the workplace and in the superannuation system that will make people less reliant on social security payments after they retire because they have built up adequate resources during their pre-retirement years. 

This article discusses those changes announced by the Treasurer that will inevitably have an impact on employers and employees.

1.  Breaking the connection between participation in the workforce and contributing to superannuation

The paper proposes that anyone under the age of 65 be allowed to contribute to a superannuation fund, even if they are not in the workforce.

Under current rules, a person is entitled to make contributions if they are gainfully employed - either as an employee or as a self-employed person.  Personal contributions can generally only be made by a person who works at least 10 hours a week.

In exceptional cases,  others may contribute: (a) persons who are under 65 and were in the workforce within the last two years, (b) those who are on authorised leave for less than seven years so that they can raise children, (c) a person under the age of 65 who ceased employment because of ill-health; and (d) a person who receives the Baby Bonus, as long as contributions are made within 12 months of the person being notified of entitlement to the bonus.  Unlimited contributions may also be made for a spouse, and contributions of $3,000 per three-year period may be made for a child under 18.

The Government proposes that this workforce-contribution connection be removed from 1 July 2004.  This will mean that anyone under 65 will be able to contribute to a fund.  The source of the contribution will not matter - it may, for example, come from employment, from investments or from a gift.  A non-working spouse may make contributions out of after-tax income derived by the working spouse.  A student could make contributions out of income derived by a parent.

Deduction for contributions

People who become eligible to contribute as a result of this measure may also be able to claim a tax deduction for their contributions. Entitlement to a deduction is, of course, only of value if there is assessable income against which the deduction can be offset.  A contribution by a non-working spouse out of after-tax income derived by the working spouse would therefore be of little value unless the non-working spouse had income (e.g. dividends or rental income) to soak up the deduction.

The Treasurer specifically states that people under 18 will have to satisfy a work test in the year they contribute to qualify for a deduction.  This presumably will mean that a contributor aged under 18 who wants to claim a deduction will have to be 'gainfully employed' for at least 10 hours a week (rather than merely deriving passive income, for example from dividends).

Annual work test for contributors aged over 65

Currently a person aged over 65 must work at least 10 hours a week to be entitled to contribute to a fund. If the person does not work 10 hours in a week, contributions are not allowed. The fund must also pay out a member’s benefits if they fail this work test.

The Government believes that this 'weekly' work test is too stringent and does not accommodate more flexible working arrangements, such as seasonal and irregular part-time work. The current test, it believes, imposes an administrative burden on individuals and funds.

From 1 July 2004, an 'annual' work test will replace the weekly test. Presumably this will involve a minimum number of hours worked over the period of the whole year. 

This will allow people to move in and out of the workforce, or to work long hours one week and few or none in another, without losing the right to contribute or having benefits necessarily paid out.

2. Transition from working to retirement

Currently, a worker aged below 65 can only have access to accrued superannuation by leaving employment or retiring from the workforce. In some cases this may cause workers to retire early.

From 1 July 2005, this rigid rule will be replaced by a rule that a worker who is still in the workforce will be able to receive a non-commutable income stream once they reach their superannuation preservation age. Being 'non-commutable', the income stream will not be convertible into a lump sum; rather, it will be received as weekly (or less frequent) payments.

Preservation age

A worker who is still in the workforce will only have access to superannuation after reaching his or her preservation age. A worker’s preservation age will depend on the birth date of the worker, as shown in the table below.

Date of birth Preservation age
Before 1 July 1960  55
1 July 1960 to 30 June 1961 56
1 July 1961 to 30 June 1962 57
1 July 1962 to 30 June 1963 58
1 July 1963 to 30 June 1964 59
after 30 June 1964 60

Older workers may stay in the workforce

The Government hopes that this will encourage workers to continue to work with their employer on a part-time basis, using part of their superannuation to supplement their income, instead of leaving the workforce altogether.  Subject to employers being prepared to take on such workers, it is also hoped that older workers will take up the opportunity of part-time or flexible work, when previously they could not afford to do so.

Some aspects of this policy are yet to be settled - for example, the nature of the non-commutable income stream and whether there will be limits on what can be received. 

3. Eligible termination payments from an employer

From 1 July 2004, all employer eligible termination payments (for example, a redundancy benefit paid by an employer) that are rolled over into a superannuation fund will be preserved in the fund. This will be mean that they cannot be withdrawn from the fund until the member reaches preservation age or retires from the workforce.

The current rule is that an employer eligible termination payment that has been rolled over into a superannuation fund can be withdrawn before preservation age, even though the payment receives the benefit of tax concessions intended to support its use for retirement income purposes. Payments rolled over before 1 July 2004 will not be affected by the change.

4. Superannuation guarantee contributions

One of the most complex concepts in the superannuation guarantee system is the 'notional earnings base' upon which an employer calculates the minimum contribution that must be made for an employee each quarter. 

An employer must contribute 9% of an employee’s notional earnings base.  In many cases, this calculation is straightforward - it is 9% of an amount set out in an award or in an agreement.  In other cases, it is 9% of an employee’s 'ordinary time earnings', the content of which has been set out in one of the Commissioner’s rulings.

Some employers are allowed to make contributions on a notional earnings base that existed in 1991, before the superannuation guarantee legislation was introduced.  These are employers who were contributing, under an award, law or arrangement, for any employee on an earnings base before 21 August 1991 and the earnings base has not since been reduced.  The employer can continue to use that earnings base in determining how much to contribute for current employees, even if that earnings base is lower than ordinary time earnings.

This means that some employees can be paid lower superannuation contributions that other employees in similar circumstances. For example, an employee of an employer who was contributing before 1991 may have contributions being calculated on a lower earnings base than another employee doing the same work but for another employer.  The disparity in contributions may have a significant impact on the employee’s standard of living in retirement.

Ordinary time earnings to be the minimum base

To ensure consistent treatment for employees, ordinary time earnings will become the minimum earnings base for all employees when employers calculate their superannuation guarantee contributions.  Employers will still be able to use another base, for example as set out in an award, but it cannot be below ordinary time earnings. Employers will have until 1 July 2010 to meet this requirement.

No obligation to contribute for employees over 70 years

Despite the thrust of the changes being to encourage continued employment, employers will not be obliged to pay super guarantee contributions from the time an employee reaches 70 years of age. In other words, the current situation has not changed under the proposals.  There may, of course, be such an obligation based on an award provision - as distinct from super guarantee obligations.

The devil is in the detail

Although details of these measures are yet to be released, it is clear that, if enacted as intended, the Treasurer’s proposals could have a significant impact on the interaction between the workplace and the Australian superannuation system. 

Legislation will, however, need to be introduced into Parliament quickly for the intended commencement date of 1 July 2004 to be met.

Related:

A collection of writings on Tax & Superannuation on WorkplaceInfo

 

 

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