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The axe falls on co-contributions

MIDDLE-INCOME earners putting aside voluntary super will pay the price for tax concessions for lower earners as part of the government's cost savings.

MIDDLE-INCOME earners putting aside voluntary super will pay the price for tax concessions for lower earners as part of the government's cost savings.

From July 1 next year, the government will slash the popular super co-contribution from $1 to 50?, reducing the maximum benefit from $1000 to $500.

The measure also means those earning more than $46,920 will no longer get a partial benefit compared with an upper income threshold of $61,920 this year.

Savings will also be made by freezing super contribution caps until 2013 and deferring the introduction of the proposed tax break on interest savings and the standard tax deduction for work-related expenses.

The Assistant Treasurer, Bill Shorten, said the co-contribution was being cut because the new low income super contribution would benefit more than three times as many people.

He said 3.6 million low earners were expected to receive the benefit, which refunds the 15 per cent contributions tax for those earning less than $37,000. It will be streamlined so the refund is paid automatically to members' super accounts without requiring them to lodge tax returns.

But in a new measure, lower earners who receive less than 10 per cent of their income through employment or business will not be eligible.

This is the second time the government has cut the co-contribution: it reduced the rate at which it matches employee's voluntary contributions from $1.50 to $1 in 2009.

While disappointed with the latest cut, the Australian Institute of Superannuation Trustees chief executive, Fiona Reynolds, said reforms had to be targeted to those who needed them most.

"It has been clear for some time that low income earners - who currently do not receive any tax benefits from compulsory super contributions - deserve a better deal," she said.

The Association of Superannuation Funds of Australia chief executive, Pauline Vamos, said many women used the co-contribution and the cut made it even more critical that compulsory super contributions be lifted from 9 to 12 per cent.

Ms Vamos said deferring automatic indexation of super contribution caps until 2013 was also disappointing, especially for people trying to boost their savings. The cap will be frozen until 2014, when it is likely to be lifted from $25,000 to $30,000.

The government will also defer the planned 50 per cent savings discount (already deferred once) and the standard deduction for work-related expenses until July 1, 2013.

Retirees, however, were granted a reprieve as the government announced it would extend the current relief for minimum pension payments for a further year until July 1, 2013, because of continuing volatile investment markets. The relief reduces the minimum amount retirees must take from their pensions by 25 per cent.

It will also abolish the maximum age limit for compulsory super contributions, allowing employers to claim a tax deduction for contributions for workers over 75.

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