Wow…. did we see all that coming in this year’s Federal Budget?
Whilst we expected to see a range of measures introduced in this year’s Federal Budget, did we expect to see the Government make so many significant changes that impact not just those in accumulation, but many in post-retirement as well.
In reforms not seen in superannuation since Peter Costello handed down the Federal Budget in 2006, we have seen the Treasurer, Scott Morrison deliver measures clearly targeting sustainability of tax concessions and greater equity of these superannuation concessions across all taxpayers. It certainly has elements of ‘Robin Hood’ in it, but in reality when listening to the superannuation debate over the past 12 months, you got a clear sense that a re-weighting of super tax concessions was always on the cards. Just how far was the Government prepared to go in a budget that is so tightly linked to any potential re-election.
Well, read on to find out!
A reduction in the concessional contribution cap
From 1 July 2017, the Government will reduce the concessional contribution cap to $25,000. The concessional contribution cap currently sits at $30,000 for those under 49 at 1 July each year, or $35,000 for those above 49 at 1 July (temporary cap). Just like in ‘Back to Future’, Great Scott… this change resets the contribution caps back to 2012-13.
Lowering the Div 293 threshold
It was one of the worst kept secrets… however political pressure clearly got the better of the Government deciding to settle on a reduction of the ‘income‘ threshold at $250,000. This level matches the previously announced threshold by the Labor Government should they win the next Federal election. This will take effect from 1 July 2017.
Allowing catch up of concessional contributions
From 1 July 2017, the Government will allow individuals with a super balance of less than $500,000 to utilise a rolling concessional contributions cap for a period of five consecutive years. The unused portion of the concessional contribution cap can be accrued and carried forward.
The basis for this change is to allow for people with interrupted work patterns to benefit through periods of time where they may have an ability to catch up if they have a capacity to do so.
Jane has had extended time out of the workforce, having accumulated approximately $150,000 in super. During the 2017/18 and 2018/19 income years, she had concessional contributions for each year of $10,000. For each of these completed years where she did not utilise the $25,000 concessional contribution cap, she can carry forward these amounts meaning that in the 2019/20 year her concessional contribution cap is $55,000 subject to her balance remaining under the $500,000 threshold for that income year.
Removal of ‘work test’ for 65 – 74
From 1 July 2017, the Government will remove the restriction on people between 65 to 74 to be gainfully employed for at least 40 hours within a 30 day consecutive period prior to making a contribution into super. This applies for both concessional and non-contributions, along with extending to spouse contributions for people aged under 75.
This decision allows older Australians to consider making additional contributions into superannuation that may result from events such as downsizing the family home. Importantly, it removes the contrived arrangements by individuals needing the find work to make contributions into super up to reaching age 75.
Tax deductions for personal super contributions
Finally… long overdue, we finally see a level playing field for everybody to make personal contributions into super and claim a tax deduction.
From 1 July 2017, the Government will provide greater flexibility for individuals to claim a tax deduction for personal super contributions. The current 10% rule provides a ridiculous framework that limits an individual’s ability to make additional contributions where their salary represents more than 10% of their assessable income. This new measure will allow all individuals, regardless of their employment circumstances to make concessional contributions up to the concessional contribution cap ($25,000). Where a person is partially self-employed and is in receipt of salary and wages, they will be eligible to make personal contributions into super and claim a tax deduction.
Low Income Super Tax Offset (LISTO)
Let’s be honest, nothing new here… With the existing low-income super contribution legislation to cease on 30 June 2017, the Coalition Government has effectively given the legislation a lifeline to ensure that low-income earners are not burdened with a 15% contributions tax rate when they would have paid a lower tax rate on these amount if they had received the amounts as assessable income.
The LISTO provides a non-refundable tax offset of up to $500 on concessional contributions where the member has adjusted taxable income of up to $37,000.
Introduction of a lifetime cap
The Government will introduce a $500,000 lifetime non-concessional contribution (NCC) cap that takes into account all non-concessional contributions made on or after 1 July 2007. This measure takes effect from, 7.30pm on 3 May 2016 (Federal Budget night). No retrospectivity will be applied to individuals who may have made non-concessional contributions in excess of the $500,000 lifetime threshold between 1/7/2007 to 3 May 2016. However, any excess contributions made after commencement will need to be removed or else be subject to penalty tax (see – ATO timing of contributions and Liwszyc v Commissioner of Taxation  FCA 112).
The lifetime NCC cap will be indexed to average weekly ordinary times earnings (AWOTE).
Note that this measure will replace the existing annual NCC cap which is current linked to the concessional contributions cap.
John wishes to make a non-concessional contribution of $100,000 into his SMSF before 30 June 2016. In reviewing his previous history of non-concessional contributions since 1 July 2007, it is noted that he has made prior non-concessional contributions of $450,000. As a result, he can only make a further $50,000 of non-concessional contributions against his lifetime NCC cap. If he contributes the $100,000, he will have an excess non-concessional contribution with the excess to be returned through the refunding of non-concessional contributions laws.
Increasing the low-income spouse super contribution tax offset
From 1 July 2017, the Government will increase the income threshold for the low-income spouse from $10,800 to $37,000. This provides the contributing spouse with a tax offset of up to $540 for the first $3,000 of after-tax (non-concessional) contributions made into a complying super fund.
Payment of Income Streams
Introduction of $1.6m post retirement balance cap
It is clear that the Government is resetting the rules for paying pensions as part of their approach to setting an objective for superannuation. They have been quite clear in their messaging that superannuation is not an estate planning tool. In the budget, this was delivered in a loud and clear message…
From 1 July 2017, we will see an introduction of a $1.6 million transfer balance cap on amounts moving into pension phase. Subsequent earnings on these balances will not be restricted (i.e. they can grow or reduce accordingly). As a result of this measure, it significantly limits the extent of exempt current pension income (ECPI) applying to assets supporting the payment of pensions. According to the Government, it better targets the sustainability and fairness of tax concessions within super.
Where a member has a balance in excess of $1.6 million, they will be able to maintain this excess within superannuation, however it cannot be transferred into the post-retirement cap. As a result of it remaining in accumulation phase, a 15% tax rate will apply to fund earnings the accumulation benefit generates.
Importantly, this measure does not grandfather existing pensions. For members already in retirement phase whose balance is above $1.6 million, they will be required to reduce their pension balance to $1.6 million by 1 July 2017. Excess balances for these members may be converted back to accumulation.
Failure to comply with this balance transfer cap will mean that the member will be subject to an excess transfer amount (including on earnings), similar to how the treatment of excess non-concessional contributions tax applies.
Consultation with industry will be undertaken on these measures.
Some initial thoughts…
I can see this measure hitting on two fronts (Government wins):
- The Government reduces the level of tax concession being applied via exempt pension income; and
- The proportioning rule doesn’t apply to these amounts meaning the fund earnings are attributable to taxable component, potentially impacting the tax consequence of a death benefit
Integrity of Transition to Retirement rules
The Government has been concerned about the abuse of the transition to retirement strategy for some time. In reality, the outcomes of the strategy have been dramatically extended beyond its original policy intent. To address this issue, the Government from 1 July 2017 will remove the tax exemption on fund earnings from assets supporting a transition to retirement income stream (TRIS). In addition to this change, it will also remove the ability for a member to elect under Regulation 995-1.03 of the ITAR to have the payment treated as a lump sum for tax purposes.
Some initial thoughts…
The change is significant with no grandfathering. However, this effectively acknowledges that the Reg. 995-1.03 TRIS election strategy is a viable option for the 2015-16 and 2016-17 income years.
Removal of anti-detriment payments
When it comes to fairness of the system, I’m all for the removal of anti-detriment. Inconsistently applied across super funds, there was a myth that it was a strategy more heavily used in SMSFs rather than APRA-regulated funds. This couldn’t be further from the truth. In reality, the funding requirement needed to make an anti-detriment payment was far more difficult to achieve in an SMSF than APRA-regulated fund.
The removal of this tax saving amount provision from 1 July 2017 will mean that death benefit payments will be better aligned across all super funds, along with bequests made outside of super.
So, did the Treasurer get it right?
Scott Morrison has been faced with some of the most difficult portfolio positions in Government – as Immigration Minister he helped stop the boats, as Minister for Social Services he helped negotiate a reduction around the Age Pension tests, and now as Treasurer he’s delivering a budget that needs fiscal responsibility given we have an economy in clear transition.
It would be very easy to argue that detrimental changes mean he got it wrong. No one likes retrospective rule changes. However, one could argue that the Treasurer might have found a balance that shows superannuation is an important retirement tool, but also as an economy facing strong headwinds, we have to live within our means… Sure, would I have preferred various super rules to not have changed? Absolutely, but let’s measure these legislative outcomes on where we sit today. We might not like it, but in reality the balance wasn’t that far off in my view.
What do you think?