As we still work through the impact of last year’s Federal Budget in readiness for 1 July 2017, tonight’s Budget delivered a much softer impact for superannuation and SMSFs specifically. A focus on this year’s Federal Budget, delivered by the Treasurer, Scott Morrison, was around dealing with the cost of living pressures and living within our means. Some of these issues had been flagged previously through the Productivity Commission’s review into housing decisions for older Australians and the ongoing work more broadly around superannuation policy for post-retirement.
Importantly, against the backdrop of last year’s super reform measures, this year delivers some positive news for older Australians making contributions into superannuation – you may recall, it was intended in last year’s reforms to extend the contribution rules through to age 74 (without a work test) but was subsequently dropped in negotiations to amend the non-concessional contribution rules.
Here’s a summary of the changes, including my comments on the impacts of these announcements:
We will see the introduction of a lifetime principal residence cap of $300,000 for individuals 65 and over – this effectively allows $600,000 for a couple for after-tax contributions into superannuation. Additional changes will be required around eligibility to contribute where a member has a total super balance beyond the general transfer balance cap ($1.6m). Exclusions for the work test will also be introduced to allow for such a contribution to be accepted by a fund, along with the ability to make contributions into super at any time whilst still alive (no age test).
There appears to be no exemption to be able to convert these proceeds from the sale of a principal residence into a retirement phase income stream where the member’s transfer balance account has already reached $1.6m. Furthermore, it would be a good outcome if the rules provided some flexibility to contribution split such amounts between spouses where one member has met reached their personal transfer balance cap.
To understand how these measures work, let’s look at the following example:
Frank (72) and Lois (70) sell their family home of 35 years to downsize following the last of their children leaving home. As part downsizing, they have surplus funds of $800,000 following the purchase of their new home. Whilst both members have long retired, they are eligible to contribute $300,000 each into superannuation using the lifetime principal residence contribution limit. They are not required to meet the work test to be eligible to make this after-tax contribution. The remaining $200,000 is not eligible to contribute into superannuation.
2. Reducing Pressure on Housing Affordability — first home super saver scheme
The Government will encourage home ownership by allowing future voluntary contributions to superannuation made by first home buyers from 1 July 2017 to be withdrawn for a first home deposit, along with associated deemed earnings.
Concessional contributions and earnings that are withdrawn will be taxed at marginal rates less a 30 per cent offset. Combined with the existing concessional tax treatment of contributions and earnings, this will provide an incentive that will enable first home buyers to build savings more quickly for a home deposit.
Under the measure up to $15,000 per year and $30,000 in total can be contributed, within existing caps. Contributions can be made from 1 July 2017. Withdrawals will be allowed from 1 July 2018 onwards. Both members of a couple can take advantage of this measure to buy their first home together.
This measure is expected to have a cost to revenue of $250.0 million over the forward estimates period. The Government will provide $9.4 million to the Australian Taxation Office to implement the measure.
Unlike the former First Home Saver Account legislation that ceased following the 2014/15 Federal Budget, SMSFs appear for the first time to be able to offer these type of accounts. Importantly, the measure does not extend to being eligible to withdraw compulsory superannuation savings which was speculated within the media over the past couple of months (which I view as a good thing!).
The first attempt of the FHSA scheme announced back in 2008 expected to bring about a flood of new activity for new home buyers – in reality, it was a flop, with an overly complicated and restrictive scheme (e.g. required four years to save before you could release to buy a first home). SMSFs were prohibited from offering these accounts, even when the laws were amended in 2010-11 Federal Budget. In horse racing parlance, this type of legislation does not have ‘good form’, so it will be interesting to see just how effective this reincarnation is?
3. Superannuation — integrity of limited recourse borrowing arrangements
From 1 July 2017, the Government will improve the integrity of the superannuation system by including the use of limited recourse borrowing arrangements (LRBA) in a member’s total superannuation balance and transfer balance cap. Limited recourse borrowing arrangements can be used to circumvent contribution caps and effectively transfer growth in assets from the accumulation phase to the retirement phase that is not captured by the transfer balance cap.
As a result, the outstanding balance of a LRBA will now be included in a member’s annual ‘total superannuation balance’ and the repayment of the principal and interest of a LRBA from a member’s accumulation account will be a credit in the member’s transfer balance account.
This measure will ensure the 2016-17 Superannuation Reform Package operates as intended and is estimated to have a gain to revenue of $4.0 million over the forward estimates period.
This issue was flagged through industry consultation with the super reforms, with Treasury recently issuing an exposure draft on the topic for consultation. It would be fair to say that the calculations to apply credits to a member’s transfer balance account from an accumulation phase interest are overly complex and warrant further industry consultation.
4. Superannuation — integrity of non-arm’s length arrangements
From 1 July 2018, the Government will further improve the integrity of the superannuation system by reducing opportunities for members to use related party transactions on non-commercial terms to increase superannuation savings.
The non-arm’s length income provisions will be amended to ensure expenses that would normally apply in a commercial transaction are included when considering whether the transaction is on a commercial basis.
This measure will ensure the 2016-17 Superannuation Reform Package operates as intended and is estimated to have a gain to revenue of $20.0 million over the forward estimates period.
Non-arm’s length activities have continued to remain high on the Regulator’s radar with a focus on areas including related party LRBAs (e.g. introduction of safe harbour provisions), along with a range of cases that the ATO have successfully challenged fixed entitlement to unit trust income by SMSFs. Whilst needing further details to understand the key areas these measures are looking to target, it remains abundantly clear that non-commercial transactions, in particular in light of restructuring for the super reforms will remain a high priority.
Clearly after the impact of the super reforms in last year’s Federal Budget, this year was going to have minimal impact of superannuation. The focus has and must continue to be towards getting ready for the introduction of the new superannuation measures commencing 1 July 2017.