Superannuation contributions

Types of superannuation contributions

8.20 The Income Tax Assessment Act 1997 (Cth) refers to two categories of contributions. These are ‘concessional contributions’^[35] (also known as ‘before-tax’ or ‘deducted’ contributions) and ‘non-concessional contributions’^[36] (also known as ‘after-tax’ and ‘undeducted’ contributions). Concessional contributions include employer contributions—including mandatory and voluntary contributions, and most contributions made by self-employed persons.^[37] Non-concessional contributions include members’ personal contributions and contributions for a spouse.

8.21 A further type of superannuation contribution comprises government contributions and co-contributions under the Superannuation (Government Co-contribution for Low Income Earners) Act 2003 (Cth).^[38]

Concessional contributions

Superannuation Guarantee and other mandatory employer contributions

8.22 Mandatory (‘mandated’) employer contributions include SG contributions as well as contributions made under an industrial agreement or award.^[39] The SG contribution is currently equivalent to 9% of an employee’s ordinary earnings.^[40] Although SG contributions are made by the employer, the Tax Review noted that ‘the incidence is likely to fall on the employee through lower real wages’.^[41] Employers are currently not required to pay SG contributions for employees 70 years and over.^[42]

8.23 Employers may fund SG contributions by making contributions under ‘salary sacrifice’ arrangements. In these arrangements, an employee agrees that an employer will pay a portion of salary or wages directly into superannuation—that is, from pre-tax income. The employee pays less income tax as a consequence, and the arrangement may also have tax benefits for the employer.

8.24 Amendments that commence on 1 July 2013 will change superannuation laws to gradually increase the minimum superannuation contribution rate from 9% to 12%. They will also remove the maximum age limit for an employee at which the SG no longer needs to be provided.^[43] The Minister for Superannuation, the Hon Bill Shorten MP, stated that removing the age limit will ‘provide an incentive for those older Australians who wish to remain in the workforce longer not to be discriminated against if they do so’.^[44]

8.25 A number of stakeholders to this Inquiry welcomed this reform.^[45] For example, COTA Australia (COTA) stated that it would remove ‘one of the more significant barriers to older people wanting to stay in employment’.^[46] The LCA supported the measure on equity grounds—stating that it is ‘difficult to identify a sound policy reason for employers to have different obligations for remuneration of employees based solely on their age’.^[47]

8.26 However, the Australian Industry Group (AIG) raised a concern that removing the maximum SG age limit ‘may raise costs of employment and have a detrimental impact on the incentive to employ older people’.^[48] COTA similarly expressed concern that this may affect employers’ willingness to employ older workers, suggesting this is ‘something that will need to be monitored’.^[49]

Voluntary employer contributions

8.27 Employees may enter into arrangements with employers to deduct extra portions of money from their salary and pay it into their superannuation accounts. The Superannuation Industry (Supervision) Regulations 1994 (Cth) (SIS Regulations) restrict contributions to superannuation funds, other than mandatory employer contributions, based on the age of the fund member as follows:

• under 65 years—no restrictions;

• 65 to 75 years—contributions can be made when the member meets a work test: they must be ‘gainfully employed’ on at least a part-time basis, that is, at least 40 hours over a 30-day period in the financial year; and

• 75 years and over—contributions cannot be made.^[50]

8.28 There are therefore two limits on mature age workers who wish to make voluntary contributions: an absolute limit on those aged 75 years and over; and a conditional limit on those aged 65 to 75 years. The work test aims to ensure that persons in the latter age group can only make voluntary contributions when they ‘maintain a bona fide link with the paid workforce’.^[51]

Contributions by self-employed

8.29 Self-employed persons may, but are not required to, make superannuation contributions for themselves.^[52] Contributions by the self-employed are concessional when they claim a deduction for them, as discussed below.

Concessional contributions are tax deductible

8.30 Employers are currently entitled to income tax deductions for contributions made for employees under the age of 75 years, and for contributions mandated by industrial agreements or awards.^[53] The self-employed may also claim a tax deduction for contributions made until they reach the age of 75 years.^[54] Tax deductions may be claimed for both mandatory and voluntary contributions.^[55]

8.31 From 1 July 2013, employers will be able to claim tax deductions for SG contributions for employees aged 75 and over.^[56] This aligns ‘the availability of an income tax deduction to an employer with the measure to remove the Superannuation Guarantee maximum age limit’.^[57]

8.32 The measure does not extend to remove the age limits on tax deductions for voluntary contributions for employees or for contributions for self-employed persons. This is consistent with SIS Regulations restriction on persons aged 75 years and over making voluntary contributions.

Contribution splitting

8.33 Members of a superannuation fund may apply to split certain concessional superannuation contributions with their spouse.^[58] The Superannuation Industry (Supervision) Act defines ‘spouse’ to include a person:

• who is in a relationship with a member where the relationship is registered under certain state and territory laws (including registered same-sex relationships); and

• who lives with the member on a genuine domestic basis in a couple relationship.^[59]

8.34 Members cannot split their contributions for a spouse aged 65 years or older, or a retired spouse who has reached ‘preservation age’—that is, the age at which a person may access superannuation benefits when retired.^[60] Maximum limits apply to the amount of superannuation that may be split, and the member is limited to one application per financial year.^[61]

Non-concessional contributions

Personal contributions

8.35 Individual fund members may make voluntary personal contributions to their superannuation funds from after-tax income or capital. Employees cannot claim a deduction for personal contributions.^[62] The age-based restrictions in the SIS Regulations apply to voluntary personal contributions.^[63]

Spouse contributions

8.36 A person may make a non-deductible superannuation contribution on behalf of a spouse, and may be eligible for a tax offset when the spouse is receiving low or no income (less than $13,800 for the income year).^[64] Spouse contributions can be made where the spouse is aged under 65 years, or has reached 65 but not yet 70 years and is gainfully employed on a part-time basis. Contributions cannot be made on behalf of a spouse aged 70 years and over.^[65]

Government contributions

Co-contributions

8.37 Low-income earners making personal after-tax superannuation contributions may be eligible for Australian Government co-contributions under the Superannuation (Government Co-contribution for Low Income Earners) Act 2003 (Cth) and regulations. The purpose of government co-contributions is to help low-income earners save for retirement.^[66] The co-contribution amount depends on the personal contribution amount and the individual’s income.

8.38 In 2012–13, it is proposed that the maximum co-contribution amount will be $500—reduced from a maximum of $1,000 in 2011–12. It is also proposed that reductions will be made to the higher eligibility threshold and matching rate. These proposed changes are not yet law at the time of writing.^[67] They are a consequence of the introduction of the Low Income Earners Government Contribution scheme (discussed below) on 1 July 2012.^[68]

8.39 Persons aged 71 years and over are ineligible for government co-contributions.^[69] This affects workers who are aged 71 but under 75 years (as noted above, persons 75 years and over cannot make voluntary contributions to their superannuation funds).

Low Income Earners Government Contribution

8.40 In addition to the co-contribution scheme, the Australian Government has introduced the Low Income Earners Government Contribution.^[70] This will provide workers earning less than $37,000 a year with a superannuation contribution of up to $500 annually.^[71] This measure is aimed at improving the fairness of the SG system^[72]—particularly in relation to tax concessions:

Currently, 3.6 million low-income Australians, including around 2.1 million women get no (or minimal) tax benefit from contributing to superannuation, due to the fact that the 15 per cent superannuation contribution tax is above or equivalent to their income tax rate.^[73]

8.41 This measure will ‘effectively return the tax on the superannuation contributions made to their fund’.^[74] In contrast with the co-contribution scheme, no age test will apply to the Low Income Earners Government Contribution.

Removing age restrictions on contributions?

8.42 Age-based restrictions on contributions may constitute barriers to accumulating superannuation for mature age persons. A question for this Inquiry is whether they also constitute a barrier to mature age workforce participation. In the Issues Paper, the ALRC asked if the various age limits affected mature age participation in the workforce, and if changes should be made.^[75] This section outlines stakeholder responses and proposes reforms removing age limits on contributions.

8.43 The age limits regarding superannuation contributions are summarised in the table below. The SG age limit has not been included, given that the Australian Government has legislated for its removal.

Limits on voluntary contributions

8.44 The Tax Review recommended that the restriction on persons aged 75 and over from making voluntary contributions should be removed—but that a work test should continue to apply for persons age 65 years and over.^[76] The ALRC agrees with the recommendation of the Tax Review as it may encourage mature age workforce participation, as discussed below.

8.45 Most stakeholders who responded to this issue considered that the 75-year age limit should be removed.^[77] A number of stakeholders argued that the 75-year age limit on voluntary contributions constituted a workforce disincentive.^[78]

8.46 Stakeholders gave a range of arguments for this reform, beyond improving mature age workforce participation. While the aim of this Inquiry is to consider reforms to remove barriers to work for mature age persons, it is worth noting other potential benefits that may flow from the removal of the 75-year age limit on contributions. Stakeholders argued that the age limit should be removed:

• as it restricts the ability of mature age workers to save for their retirement— particularly affecting ‘people on low incomes who may wish to work longer to build their superannuation level and women who may have returned to the workforce after long absences’;^[79]

• for equity reasons, with one stakeholder arguing that the age limit is discriminatory;^[80]

• as mature age workers should have choices in this regard—if ‘they choose to input into superannuation then they should be able to do so’;^[81] and

• for consistency—as the SG age limit has been lifted, so too should the 75-year age limit on voluntary contributions.^[82]

8.47 The ALRC considers that removing the 75-year age limit on voluntary contributions may correct undesirable messages about retirement age expectations conveyed by the existing restriction. Importantly, this reform will also introduce consistency in the treatment of voluntary and SG contributions—and consistency in message across these laws.

8.48 In relation to the work test that applies from the age of 65 years, stakeholders had mixed views. Opposition to the work test was expressed most strongly by the Government of South Australia and the Association of Independent Retirees (AIR).^[83] The Government of South Australia argued that the ability to make voluntary contributions should be guaranteed at all ages, ‘irrespective of work patterns’. It added that to

deny workers this right not only acts as a disincentive and goes against government policy to support people to stay in work longer and be self funded in retirement, it also arguably constitutes discrimination on the basis of age.^[84]

8.49 AIR noted that ‘the interest of many retired people in work is to supplement their income, not to meet basic living necessities’. It commented that many people do not have interest in, or opportunities for, work as required by the work test. AIR observed that retirees may work in ways not accommodated by the work test—on a short-term basis, or otherwise less than 40 hours in 30 days. It gave examples such as working at polling booths during elections, emergency work in teaching or nursing, or standing in for a family member.^[85]

8.50 In contrast, the LCA considered that age-based restrictions on superannuation accumulation are ‘an appropriate component of superannuation regulation’, and that the work test ‘is an appropriate basis for framing the restrictions’.^[86] The LCA supported retaining the work test for persons aged over 65 years, as did the Australian Institute of Superannuation Trustees (AIST) and AIG. These stakeholders considered that the 75-year age limit should be removed if the existing work test were extended to apply to this older cohort.^[87]

8.51 The position of the LCA, AIST and AIG reflect the Tax Review recommendation on this issue, which was explicitly endorsed by the LCA. In making this recommendation, the Tax Review stated that the 75-year age limit is unnecessary if other age-based restrictions on accessing superannuation tax concessions are retained. These restrictions include contribution caps (discussed below) and the work test. It noted that restrictions are consistent with ‘the primary purpose of the retirement income system, which is to smooth income over a person’s lifetime rather than be a concessional estate planning vehicle’.^[88]

8.52 In line with the Tax Review recommendation, the ALRC considers that the work test should be retained and extended to persons age 75 years and over. This gives workers who wish to continue to accumulate superannuation an incentive to continue to participate in the workforce at a minimum level. Further, imposing a work test on older workers facilitates the primary policy purpose of superannuation as a retirement income vehicle. As noted by the Australian Government in 2004:

removing the work test for people aged over 65 is inconsistent with superannuation’s intended role as [a] retirement vehicle. Without a work test people could abuse the taxation concessions provided to superannuation.^[89]

8.53 It noted that retaining the work test is necessary for the ‘integrity’ of the superannuation system.^[90]

8.54 The ALRC considers that retaining the work test for persons aged 65 years and over is therefore logical, particularly given the proposed removal of the 75-year age limit for voluntary contributions.

8.55 Further, to ensure that the intended policy purpose of superannuation is not undermined—given the proposed removal of the 75-year age limit—the ALRC is considering whether the work test should be amended. A minimum of 40 hours over a 30-day period in a financial year may not be sufficient to ensure the intended bona fide link with the workforce. The ALRC is interested in stakeholder comment in this regard.

8.56 The ALRC also seeks comment regarding any other changes that should be made to the work test. For example, the Superannuated Commonwealth Officers Association (SCOA) suggested that a work test could be introduced at the earlier age of 55 years. It noted that the work test encourages workforce participation only from age 65, so that persons under this age who wish to contribute to superannuation have less incentive to keep working.^[91]

Income tax deductions for voluntary contributions

8.57 The ALRC considers that the proposed reform to lift the 75-year age limit on voluntary contributions should prompt two consequential reforms:

• employers should be able to claim income tax deductions for voluntary contributions made for employees aged 75 and over; and

• self-employed workers should be able to claim income tax deductions for contributions made from the age of 75 years.

8.58 This would align the availability of the income tax deduction with the proposed measure to enable voluntary contributions for persons aged 75 years and over.

8.59 The Government of South Australia argued for the second reform proposed above. It considered that the reform should follow changes to enable employers to claim income tax deductions for SG contributions for employees aged 75 years and over. The Government of South Australia stated that, given

the large number of small businesses and family businesses in South Australia, which must also be reflected in other parts of the country, this limitation on self-employed appears inequitable and could serve to discourage small business.^[92]

8.60 The proposed reforms are necessary to ensure that, should the 75-year age limit on voluntary contributions be removed, voluntary contributions are as available to persons aged 75 years and over as to persons in other age groups. The benefits of removing the 75-year age limit on voluntary contributions will be significantly limited if employers do not offer workers of this age the option of making voluntary concessional contributions (that is, via salary sacrifice) because they cannot claim income tax deductions. Extending the deduction to the self-employed ensures fair and consistent treatment. ^[93]

Spouse contributions and contribution splitting

8.61 The ALRC’s preliminary view is that certain restrictions on spouse contributions and contribution splitting should be removed—that is:

• the 65-year age limit on spouses for contribution splitting; and

• the 70-year age limit on spouses for spouse contributions.

8.62 The following restrictions should be retained:

• the restriction on contribution splitting for retired spouses who have reached preservation age; and

• the condition that spouse contributions may only be made for spouses aged 65 years and over when they meet a work test.

8.63 In addition, the removal of the 65-year limit on contribution splitting should be conditional. The spouse should be required to meet a work test the same as, or similar to, the work test that applies for spouse contributions as well as for voluntary personal contributions. Further, any reforms to enhance the work test for voluntary personal contributions (see Question 8–1) should also apply to the work tests for both spouse contributions and the proposed work test for spouse contribution splitting.

8.64 These proposed reforms may be problematic in some respects, as discussed below. The ALRC welcomes stakeholder comment.

8.65 Key stakeholders differed in their responses regarding the age limits on spouse contributions and contribution splitting. The LCA argued that the age limits should be retained as they strike an ‘appropriate balance with the policy goal of providing the opportunity for couples to fund superannuation for a non-working spouse or under-funded spouse’.^[94]

8.66 Other key stakeholders considered that the age restrictions should be removed.^[95] The Government of South Australia referred to gender disparity between the superannuation savings of men and women, noting that ‘women may have no superannuation at all were it not for contributions made on their behalf by their spouse’. It further commented that the restrictions are ‘arguably sexually discriminatory’.^[96]

8.67 While COTA supported removing the age limits, its comments may imply support for a work test. It argued that where people ‘continue to work then they should be able to continue to contribute to superannuation on the same basis as anyone else in the workforce and not be subjected to discrimination on the basis of age’.^[97]

8.68 The ALRC considers that the proposed reform—to remove age limitations on spouse contributions and contribution splitting but retain or impose work tests—balances the concerns of stakeholders and other competing objectives. This proposal introduces, or preserves, a workforce incentive for spouses; facilitates the policy intention of superannuation as a retirement income vehicle; and also removes age limits that send messages about retirement expectations.

8.69 However, some specific reservations about the proposal should be noted. First, AIST stated its understanding that

member splitting and spouse contributions are not commonly used and it is arguable that, for simplicity reasons, these could be removed altogether. These types of rules create confusion and complexity.^[98]

8.70 AIST considered that the age limits on spouse-related contributions ‘have very little effect on mature age participation’.^[99] If the regulations regarding contribution splitting and spouse contributions are not commonly used or understood, removing the specified age restrictions contained in those regulations may have little effect in shaping retirement expectations.

8.71 Secondly, if the specified age restrictions are removed, this may encourage the use of provisions regarding contribution splitting and spouse contributions for tax purposes rather than for retirement savings. This is particularly pertinent for contribution splitting, as these contributions are concessional and are therefore taxed at 15% when entering a superannuation fund—rather than at a member’s personal tax rates. However, it is possible that spouse contributions may be made simply to attract the tax offset.

8.72 The way the proposed measures might increase possibilities for using spouse contributions and contribution splitting for tax minimisation is that, if the specified age limits are removed, a spouse aged 65 years or over will be able to access these contributions immediately. This is because the spouse has reached the unrestricted access age for superannuation benefits. Superannuation benefits are also tax-free at this age.^[100]

8.73 This may be of particular relevance when the member making contributions on behalf of his or her spouse is under 65 years old and is otherwise ineligible to access superannuation benefits. In relation to spouse contributions, this issue is one that exists in the current regulatory framework. That is because the spouse currently has unrestricted access to his or her superannuation benefits from age 65 years, and spouse contributions are conditionally permitted until the spouse is aged 70 years.

8.74 The ALRC is interested in responses to its proposed reforms that address these issues and comments about any other potential difficulties that may arise.

Government co-contributions

8.75 The ALRC proposes that the 71-year age limit on government co-contributions for low-income earners should be removed. A number of key stakeholders indicated support for such an approach.^[101] Several stakeholders considered that this measure would provide an incentive for mature age workers to remain in the workforce.^[102] The Government of South Australia noted that Australian Government policy is to

encourage people to remain in work as long as they are able to, and if a person is still working at and past the age of 71 years, they should not receive less benefit from Superannuation schemes than other low income earners.^[103]

8.76 A further point is that the Low Income Earners Government Contribution does not have an age limit (as discussed above) and ‘it would make sense to have both contributions applied on a consistent basis’.^[104]

8.77 The proposed removal of the 71-year age limit for government co-contributions would provide consistency across both schemes. More importantly, it would address the message about retirement expectations currently conveyed by the age-limit.

Taxing superannuation contributions

Tax rate on contributions

8.78 Concessional contributions are taxed at 15%.^[105] This rate is substantially lower than the marginal tax rates applicable to the income of most full-time earners.^[106] Non-concessional contributions are generally not taxed in the fund, as the member has already paid tax on them.

Contributions caps

8.79 There are restrictions, or ‘caps’, on the contributions that members can make each financial year before they must pay extra tax (‘excess contributions tax’). In effect, the caps limit superannuation contributions. The purpose of the caps is to:

• ensure that superannuation benefits result from contributions ‘that have been made gradually over the course of the person’s life’;^[107]

• ensure that tax concessions for superannuation are fiscally sustainable and appropriately targeted;^[108] and

• restrict the use of superannuation as a tax-minimising vehicle.^[109]

8.80 There are different caps for concessional and non-concessional contributions. Government contributions and co-contributions do not count towards the caps.

Concessional contributions cap

8.81 This section considers the cap on concessional contributions. The ALRC does not propose reforms in this area, as this is predominantly a retirement savings issue, rather than a mature age workforce participation issue. To the extent that the concessional contributions cap may have an effect on mature age workforce participation, that effect is likely to vary depending on individuals’ circumstances and preferences.

8.82 The ‘concessional contributions cap’ is indexed annually to average weekly ordinary time earnings and, in 2012–13, is set at $25,000. Concessional contributions over this cap are taxed at an additional 31.5%.^[110]

8.83 From 2007–8 to 2011–12, an increased transitional concessional contributions cap applied to contributions made by members aged 50 years and over. In 2011–12 this transitional cap was $50,000. In certain previous years—namely 2007–08 and 2008–09—the transitional cap was $100,000.^[111]

8.84 Until recently, it was expected that the $50,000 concessional contributions cap would be retained for certain mature age persons. In the 2010–11 Budget, the Australian Government announced that, from 1 July 2012, the cap would continue for persons aged 50 years or over with superannuation balances below $500,000.^[112] However, in the 2012–13 Budget, the Australian Government announced that it will defer this measure for two years. This means that the general concessional contributions cap of $25,000 will apply to all persons aged 50 years and over until 2014–15.^[113]

8.85 The Australian Government’s rationale for an increased cap is that it allows persons over 50 years ‘to “catch up” on their superannuation contributions at the stage in their lives when they are most able to do so’; and that this should particularly assist those who have spent periods out of the workforce, for example, ‘women with broken work patterns’.^[114]

8.86 Stakeholders supported the increased cap—or opposed its deferral—for reasons related to the adequacy of retirement savings.^[115] The LCA considered the higher caps an ‘equity issue’:

A flat cap for all age groups has the potential to significantly advantage people who have maintained constant full-time employment over their lifetime, compared to people with broken working patterns or periods of part-time employment.

The LCA noted that women are likely to fall into the latter groups.^[116]

8.87 The ALRC has also heard accounts of women who had taken time out of the workforce to attend to caring responsibilities. Upon re-entering the workforce, and reaching a position where they can make substantial superannuation contributions to provide for their retirement, the cap has restricted them from boosting their retirement savings. This situation may be exacerbated for current mature age cohorts, given the superannuation system has not yet matured—as noted above. As a result, these women were less likely to benefit from superannuation accumulation earlier in their working lives.

8.88 The NWRN presented a different viewpoint, stating that while ‘there may be a few isolated examples’ of the scenario described above, ‘putting these larger amounts into super, so close to retirement, is probably not going to bring the financial benefits that come from superannuation funds growing over the longer term, as is intended’. It added:

People who can afford to put more than $25,000 into their superannuation in a single year are not those who would generally be in need of extra support and are most likely to be able to obtain a retirement standard better than the average worker.^[117]

8.89 Similarly, the Australian Council of Trade Unions (ACTU) stated that

A higher cap would likely only benefit those employees on higher incomes who are already more likely to remain in work, and who may already have multiple streams of retirement income.^[118]

8.90 Stakeholders had different opinions about how the concessional contributions cap affected workforce participation.^[119] For example, the ACTU considered that the $25,000 cap ‘is set at an appropriate level to encourage older workers to remain employed for longer and thereby increase their retirement savings’.^[120] AIST considered that the increased contributions cap does not have an effect on workforce participation.^[121] In contrast, the Brotherhood of St Laurence stated that the higher cap is

likely to provide incentives to continue to work through allowing older workers to have a lower tax rate on a proportion of their income and to save a relatively higher proportion of their income in superannuation prior to retirement.^[122]

8.91 The cap may affect workers in different ways, depending on their individual preferences. As noted by the Melbourne Institute of Applied Economic and Social Research (the Melbourne Institute), a higher cap may encourage workers who wish to ‘maximise remaining lifetime income (or make a large bequest) to make considerable gains’—thus providing incentives for workforce participation.^[123] Conversely, a higher cap can assist workers to reach their retirement savings targets earlier than a lower cap—thus facilitating earlier retirement where workers prefer leisure. The Melbourne Institute summarised the effects of an increased cap:

Earlier retirement became more expensive because the net returns from work and investing in superannuation increased. At the same time, extra after-tax income offered incentives for more leisure (full or partial retirement) and less work.^[124]

8.92 In economic terms, such conflicting behavioural consequences are described as the ‘substitution effect’ and the ‘income effect’.^[125]

8.93 While the setting of the concessional contributions cap is an important issue, it is primarily an issue about the adequacy of retirement savings, rather than mature age workforce participation. As noted by AIST, the cap ‘is more linked to adequacy and the affordability for the individual to save for retirement in a tax advantaged environment’.^[126] The ALRC therefore does not make any proposals for change in this area.

Non-concessional contributions cap

8.94 This section discusses the non-concessional contributions cap and the related ‘bring-forward rule’. While the bring-forward rule is an age-based restriction, the ALRC does not propose reforms in this area. The rule is primarily an issue about retirement savings rather than workforce participation. In relation to workforce participation, the rule may have conflicting individual effects.

8.95 The ‘non-concessional contributions cap’ is a multiple of the concessional contributions cap. For example, in 2012–13, the non-concessional contributions cap was $150,000—six times the $25,000 concessional contributions cap. Contributions over the non-concessional cap are taxed at 46.5%.^[127]

8.96 Persons under 65 years may bring forward two years’ entitlement for non-concessional contributions.^[128] This is referred to as the bring-forward rule, under which non-concessional contributions of up to three times the non-concessional contributions cap in a year may be made—for example, up to $450,000 in 2012–13. The full amount may be contributed in the first year. Alternatively, a contribution of less than the full amount in the first year may be made, followed by a contribution of the shortfall in the second year, the third year, or across both years.^[129] The bring-forward rule is automatically triggered when a person under 65 years exceeds the non-concessional contributions cap.^[130]

8.97 Persons aged 63 or 64 years can use the bring-forward rule without meeting the work test imposed by reg 7.04(1) of the SIS Regulations in the following years of the three-year period (that is, when they reach 65 years, as discussed above). The bring-forward rule is therefore particularly important for those who are just about to retire and do not intend to continue working after the age of 65, as it can be used ‘as a last-minute dash into super before the gates close’.^[131] However, if the person did not make the full contribution in the first year, and wishes to contribute in the second or third year, he or she must satisfy the work test from age 65 years.

8.98 Several stakeholders argued that the bring-forward rule constitutes a disincentive to workforce participation.^[132] For example, SCOA stated that the rule is a disincentive to remain in the workforce past age 65 years:

as many employees like to make additional non-concessional contributions to a superannuation fund at the time they cease employment. This allows them to set up an adequate account based pension to fund their retirement.^[133]

8.99 However, the ‘income effect’ is also likely to apply. That is, if people are able to contribute large amounts to superannuation in one year (up to $450,000) they may meet their retirement savings targets sooner, and retire earlier. In either case, the rule is likely to affect a small cohort of mature age persons: those who are in a position to contribute more than $150,000 in non-concessional superannuation contributions in one year.

8.100 As the bring-forward rule does not increasea person’s overall cap entitlement—but only allows a person to use more of the cap in one year—it arguably affects substantially only mature age persons who do not work or intend to stop working. If persons continue to meet the work test after age 65 years, they will have the same entitlement over a three-year period as a person of any other age. In this way, the bring-forward rule may be viewed as a specific workforce incentive for persons aged 65 years and over who wish to add more than $150,000 to their retirement savings.

8.101 Consequently, the ALRC does not make a proposal in relation to the bring-forward rule, as it is equally—and perhaps more—likely to operate as a workforce incentive than as a workforce disincentive, due to the application of the work test from the age of 65 years.

8.102 Stakeholders raised certain other concerns about the bring-forward rule. The LCA commented that:

persons aged 65 and over may be in a position, for the first time in their lives, to contribute substantial lump sums into superannuation. For example, they may be able to sell assets or perhaps the family home (in order to downsize), and thus be able to boost their retirement savings. Preventing the use of the ‘bring forward’ rule for these people may represent a missed opportunity in terms of the Government’s goal of having individuals secure their own retirement incomes.^[134]

8.103 While this rule may in some cases limit the accumulation of superannuation for mature age persons, this issue is outside the ambit of this Inquiry.

8.104 ACCI raised a further issue—the detrimental financial impact of breaches of the cap (that is, due to excess contributions tax).^[135] However, an existing law appears to address this issue. To ‘help prevent a person from inadvertently contributing more than the non-concessional contributions cap’,^[136] the SIS Regulations limit the amount of non-concessional contributions that superannuation funds can accept. For persons aged 64 years or less, the maximum contribution amount is three times the non-concessional cap. For persons aged 65 to 75 years, the limit is the non-concessional contributions cap.^[137]