- More than ten measures announced in this year’s Federal Budget impact on the super sector
- Many small changes will be made to the superannuation system
- Other major measures announced are on infrastructure, the black economy and tax cuts
It’s clear the government have several major themes with this budget such as infrastructure, black economy measures, tax cuts and so on.
Those of us in the super sector might have been expected that this year we might get off lightly.
Well our expectation has not been met - there are more than 10 areas that will impact us in some way or another.
Triennial SMSF audits
From 1 July 2019, SMSFs with a history of “good record-keeping and compliance” will only need to have their audited every three years.
We will have to wait until we see what this term means in legislation and ATO implantation but conceptually as most SMSFs appear to well run (there are few funds each year that appear to break the super rules) this might apply to many SMSFs.
This will have a big impact on some of our members who are specialist SMSF auditors and have created businesses specialising in this area.
Personal Super Contribution Tax Deduction Administration Changes
The government have recognised the integrity problems in the administrative paper war used for individuals to claim their personal super contributions as a tax deduction.
This process is - individuals fill out a special form, their super fund send a special form back and the deduction is allowed. Unusual rules exist when the super fund can reject the taxpayers application for this deduction. Some taxpayers claim the deduction without completing the paper-work (which means they get the deduction but the contribution is not taxed by the super fund).
When most working taxpayers were given the ability to claim these contributions we expressed a concern to the government about the current process and suggested it needed significant reform.
In this announcement the government says it will provide additional funding to the ATO to ensure greater compliance and will alter the process for those self-filing their own income tax return. This whole process starts in July 2018 and doesn’t appear to require legislative or regulatory amendments.
This is a start but we expect there to be further reform in this area in future years. We will be keen to ensure that those who do the right thing – often because they might use a Chartered Accountant to prepare their tax return – will not be unfairly burdened with additional paper-work because the minority are abusing the system.
Work Test Concession for those aged at least 65 but under 75 with lower balance super
A lower superannuation balance is defined as below under $300,000. For those caught by the above age range and super balance amount will be able to make voluntary super contributions in the first year they do not satisfy the annual work test – that is, at least 40 hours of work in less than 31 consecutive days.
This rule will apply in the following ways:
- How $300,000 will be determined by reference to the Total Super Balance rules
- This means it will be a person’s TSB at the end of the previous financial year
- It apply to personal deductible, salary sacrifice and personal after-tax contributions? The new carry forward unused concessional contribution cap rules will also be available
Conceptually we welcome this measure however we think the post 65 super contribution rules are unnecessarily complicated. We think this measure increases this complexity.
We think the government should consider simply removing the work test for those aged under 75.
Super Guarantee for high income earners – back to the future
Higher income earners will be able to opt out of the Super Guarantee from July 2018.Higher income earners will be defined as those with “income” of at least $263,157. Based on the announcement it would appear that it will only apply for income amounts greater than that threshold. The idea is to ensure these taxpayers do not receive compulsory contributions higher than the $25,000 concessional contribution cap.
It will be important to ensure that the threshold is easy to amend as the concessional cap is indexed and the SG rate is increased.
It will be free to impacted employees how they negotiate this change with their employers. However some employees will not be able to enact this change because of industrial, award or enterprise agreements or they belong to an employer sponsored defined benefit scheme.
This measure is similar to the pension Reasonable Benefit Limit SG opt out that applied until 2007.
Even though only a small number of taxpayers will be impacted by this change we are pleased it has been proposed.
Expansion in Maximum Number of SMSF and Small APRA Fund Members
As well telegraphed before budget night SMSFs and SAFs will be permitted to have six members. It will apply from July 2019. It will be interesting to see if by that date all States and Territories have, if necessary, amended their Trustee Acts to permit more than four individual trustees. It may be that practically this measure can only apply to corporate trustees.
We are in favour of this measure.
Testamentary Trust Integrity Measure
While not strictly a super measure this measure is an estate planning provision. From 1 July 2019, minors, who are taxed as adults on testamentary trust distributions, will only be eligible to receive this concession on income generated from the deceased’s assets (“or the proceeds of the disposal or investment of these assets).
Protecting smaller super balances
There are three measures here – all applying from 1 July 2019:
- Smaller super account balances – defined as $6,000 or less – will have a maximum fee of 3% of the account balance. This will create administrative complexity for funds charging percentage, flat dollar fees and/or transaction based fees
- A ban on all exit fees – some funds will need to restructure how they handle an allowance for such transaction processing costs
- Insurance in super – currently members can be automatically signed up for insurance even if they don’t want it; the system will move to an opt-in basis for super fund members that satisfy 1 of 3 criteria – be aged under 25, have an account balance under $6,000 or not have had contributions for at least 13 months; those impacted by this change will have 14 months to decide if they will opt-in or have their insurance automatically switched off.
The government will grant more powers the ATO to reunite smaller lost balances with active accounts.
The government also says “it will consult publicly on ways in which the current policy settings could be improved to better balance the priorities of retirement savings and insurance cover within super”. It would be a surprise if this did not mean additional changes.
These small balance problems arise because the Super Guarantee threshold cuts in at too low a threshold. We have long advocated that given many of these lower income earners will likely end up on the full aged pension the government would be better to significantly increase the compulsory employer super contribution threshold.
Enduring Powers of Attorney Changes
As part of the government’s attempts to prevent elder abuse the Federal government will liaise with State and Territory governments to “establish a National Register of Enduring Powers of Attorney”. This was one recommendation by the Australian Law Reform Commission (ALRC) in its recent inquiry into elder abuse. CA ANZ told the ALRC that it did not oppose this suggestion but expressed concern about its likely cost to individuals and small business simply because they wish to complete transactions with greater flexibility.
There is no announced start date for this register. This is unsurprising given the inter-governmental negotiations that need to take place.
As the government do not know the design of this register they have not allocated funding for it in this year’s budget.
New Retirement Income Product – Developments Announced
The government first raised the idea of developing a new retirement income product as part of 2016 Budget reforms.
As part of the ongoing development of these products the following design features have been announced:
- New retirement income covenant – super fund trustees will require trustees to “develop a strategy that would help members achieve their retirement income objectives” – we will know more about this measure when the government releases a position paper on this new requirement
- Means testing of new pooled lifetime income streams – that is, purchase after June 2019, until age 84 (or at least 5 years) 60% of income will be assumed to be income and 60% of the purchase price will be counted as an asset for the assets test; once those ages or time period is exceeded then on 30% of the income will be counted and 30% of the asset counted• New pension disclosure rules – the government would like to simplify and standardise these rules and will develop these rules after appropriate consultation.
These products will not be compulsory for retirees to use.
Age Pension Employment Income Threshold Increased
From 1 July 2019 this will be increased from $250 to $300 per fortnight – that is, a 16.6% increase. Since this measure was introduced in 2009 consumer inflation has increased by over 19% and average wages have increased by 31.3%.
Ideally the government should provide real incentive here and increase this amount each half year by the same rate that the age pension is indexed by.
Pension Loan Scheme – aka, Government Reverse Mortgage Product – Access Expanded
A reverse mortgage is a product that allows an older home owner to borrow money and secure the debt using a mortgage over their house. Typically the interest on the loan is capitalised and on death, or leaving the house to move to assisted living, the house is sold and the loan repaid.
For many years the government has offered a reverse mortgage style product called the Pension Loan Scheme but only allowed limited access.
From 1 July 2019, it will permit unlimited access to this product for all retirees and increase the amount of money that can be paid from it – up to $11,700 (single) and $17,787 (couples) per annum. The amount paid is tax-free.
The maximum that can be paid is based on a person’s age, how long they wish to receive payments, value of their home and the amount of age pension they receive.
The government has said that its current interest rate – 5.25% per annum – will continue to apply to existing and current loans.
ATO debt collections
The government will provide additional funding – over $133m over four years – to “increase debt collections” and improve “the timeliness of debt collections”.
It has been structured to improve the collection of all Commonwealth taxes and compulsory employer super contributions and related tax debts.
Increased APRA fund levy
The government will increase the supervisory levy applying to APRA regulated super funds. The government have said the additional revenue is needed to fully recover the ATO’s super activities.
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