Over the past few years, the Federal Budget has remained relatively quiet on the superannuation (and SMSFs) front, mostly due to the Government’s election commitment to not tinker further with super.
In this budget, we have seen the Government announce a number of proposed super measures – importantly, all positive that create greater flexibility with contributions and finally address a number of SMSF specific measures that the sector has been demanding to reform for some time.
So, what has the Government announced in the Federal Budget that will impact SMSFs? let’s take a look at the summary below, along with my comments on each of the measures that have been announced:
First Home Super Saver Scheme
The Government has announced that it will increase the maximum releasable amount of voluntary concessional and non-concessional contributions under the First Home Super Saver Scheme (FHSSS) from $30,000 to $50,000.
Voluntary contributions made from 1 July 2017 up to the existing limit of $15,000 per year will count towards the total amount able to be released. The increase in maximum releasable amount will apply from the start of the first financial year after Royal Assent of the enabling legislation, which the Government expects will have occurred by 1 July 2022. This measure will ensure the FHSSS continues to help first home buyers in raising a deposit more quickly.
It should be noted that the budget papers have also indicated a number of technical changes to the FHSSS legislation, including:
- increasing the discretion of the Commissioner of Taxation to amend and revoke FHSSS applications
- allowing individuals to withdraw or amend their applications prior to them receiving a FHSSS amount, and allow those who withdraw to re-apply for FHSSS releases in the future
- allowing the Commissioner of Taxation to return any released FHSSS money to superannuation funds, provided that the money has not yet been released to the individual
- clarifying that the money returned by the Commissioner of Taxation to superannuation funds is treated as funds’ non-assessable non-exempt income and does not count towards the individual’s contribution caps.
These technical changes will apply retrospectively from 1 July 2018.
Maybe it’s just me, but I don’t see an increasing of the FHSSS threshold to $50,000 playing any significant role in this strategy being utilised more heavily. With the bank of Mum & Dad now becoming a top 10 mortgage lender in Australia, I would assume many parents would be assisting children from with tax-free pension fund environments, rather than getting them to save through a concessionally taxed (15%) investment vehicle. There are definitely opportunities however through family groups making trust distributions to adult children into super for their future benefit to withdraw under the FHSSS.
Reducing the age for downsizer contributions
The Government will reduce the eligibility age to make downsizer contributions into superannuation from 65 to 60 years of age. The measure will have effect from the start of the first financial year after Royal Assent of the enabling legislation, which the Government expects to have occurred prior to 1 July 2022.
Since 1 July 2018, the downsizer contribution rules have allowed people to make a one-off, post-tax contribution into super of up to $300,000 per person from the proceeds of selling their home. Both members of a couple can contribute in respect of the same home, and contributions do not count towards non-concessional contribution caps.
This measure will allow more older Australians to consider downsizing to a home that better suits their needs, thereby freeing up the stock of larger homes for younger families.
The downsizer contribution rules have been a policy success for the Federal Government – in the first year of operation (2018-19), there was over $1 billion in contributions into superannuation from Australians utilising these measures. The interaction between home ownership, age pension and superannuation is a tricky ball for this current and future Governments to juggle. This contribution incentive to those 60 and older opens up a larger number of potential ’empty nesters’.
This proposed change provides some very opportunistic super contribution strategies for those over 60 years, in particular where combining the NCC rules and the downsizer contribution rules (and arguably transition to retirement income streams).
Repealing the work test for voluntary contributions
The Government will allow individuals aged 67 to 74 years (inclusive) to make or receive non-concessional (including under the bring-forward rule) or salary sacrifice superannuation contributions without meeting the work test, subject to existing contribution caps. Individuals aged 67 to 74 years will still have to meet the work test to make personal deductible contributions.
The measure will have effect from the start of the first financial year after Royal Assent of the enabling legislation, which the Government expects to have occurred prior to 1 July 2022.
Currently, individuals aged 67 to 74 years can only make voluntary contributions (both concessional and non-concessional) to their superannuation, or receive contributions from their spouse, if they are working at least 40 hours over a 30 day period in the relevant financial year.
Removing the requirement to meet the work test when making non-concessional or salary sacrifice contributions will simplify the rules governing super contributions and will increase flexibility for older Australians to save for their retirement through super.
The Government unsuccessfully attempted to remove the work test from 1 July 2017, however this time the focus is on voluntary contributions, rather than a blanket contribution landscape to age 74. This is a logical step that will more than likely see passage of this proposed measure through both houses. Importantly, it removes the complexities of convoluted rules such as the work-test exemption and the additional total super balance (TSB) thresholds (i.e. $300,000) that were created with these prior measures.
As mentioned above, expect to see this increase in the age for voluntary contributions be utilised more heavily with the downsizer contribution rules – both in respect of getting additional savings into super, but also as a recontribution strategy to improve the tax-free components of member’s super interests.
Removing the $450 SG threshold
The Government will remove the current $450 per month minimum income threshold, under which employees do not have to be paid the superannuation guarantee (SG) by their employer. The measure will have effect from the start of the first financial year after Royal Assent of the enabling legislation, which the Government expects to have occurred prior to 1 July 2022.
This measure will improve equity in the super system by expanding the superannuation guarantee coverage for cohorts with lower incomes. The Retirement Income Review estimated that around 300,000 individuals would receive additional superannuation guarantee payments each month, 63% of whom are women.
This can only be seen as good policy to help low income earners, in particular women that may be working less hours due to family commitments.
SMSF legacy pension conversion
The Government will (finally) allow individuals within SMSFs to exit a specified range of legacy retirement products, together with any associated reserves, for a two-year period. The measure will have effect from the first financial year after the date of Royal Assent of the enabling legislation. The measure will include market-linked, life-expectancy and lifetime products, but not flexi-pension products or a lifetime product in a large APRA-regulated or public sector defined benefit scheme.
Currently, these products can only be converted into another like product (e.g. complying lifetime pension into a market linked pension) and limits apply to the allocation of any associated reserves without counting towards an individual’s contribution caps. This measure will permit full access to all of the product’s underlying capital, including any reserves, and allow individuals to potentially shift to more contemporary retirement products.
Social security and taxation treatment will not be grandfathered for any new products commenced with commuted funds and the commuted reserves will be taxed as an assessable contribution.
In what has been a ‘bug-bear’ of the SMSF industry for sometime, there is now an opportunity for a number of legacy pension recipients to exit from these income streams into a more simplified arrangement (i.e. Account Based Pension). The balancing act will be the trade-off in simplicity for some versus the asset-test exemption (or partial exemption) that may currently provide a higher level of age pension entitlement.
Interestingly, the crediting of reserve transfers will count as an assessable contribution, not towards the individual’s caps, but rather be taxed at 15% upon transfer from the reserve to the member’s accumulation account. Subject to the size of the transfer, this could be a significant amount that is subject to tax at 15% and may therefore see the individual reconsider restructuring the income stream under these arrangements. It would be interesting to see whether the conversion period requires the whole income stream and reserves to be commuted are will allow for partial conversion?
Relaxing the SMSF residency rules
The Government will relax residency requirements for SMSFs and SAFs by extending the central control and management test safe harbour from two to five years for SMSFs, and removing the active member test for both fund types. The measure will have effect from the start of the first financial year after Royal Assent of the enabling legislation, which the Government expects to have occurred prior to 1 July 2022.
This measure will allow SMSF and SAF members to continue to contribute to their superannuation fund whilst temporarily overseas, ensuring parity with members of large APRA-regulated funds. This will provide SMSF and SAF members the flexibility to keep and continue to contribute to their preferred fund while undertaking overseas work and education opportunities.
Another area that has seen many budget submissions made over time to try and simplify how the residency rules impact SMSFs – this is a great result for the ongoing advocacy within the SMSF sector. Given the ever-increasing globalisation of the workforce (at least up until COVID-19), the extension of time for the CM&C test to 5 years is certainly a welcome change. However, it is the removal of the active member test that will have a greatest impact, allowing members the flexibility to contribute whilst absent from Australia. A big win!
What we didn’t see?
Sometimes when analysing the budget papers, it’s sometimes about what’s not included, rather than what was included that can create some important headlines. Consider some of the following that we didn’t see included within this year’s Federal Budget:
- For the 2019-20 and 2020-21 financial years, the Government previously announced 50% temporary minimum pension relief for accounts based pensions. There had been some question as to whether this temporary reduced amount may transition back to normal with a 25% reduced amount, as was the case in 2008 (GFC). Well, there was nothing in the budget regarding an extension of the temporary minimum pension relief , which means from 1 July 2021, pensioners are likely moving back to standard factors. ** UPDATE: The Government has now extended the 50% temporary minimum pension for the 2021-22 financial year **
- ECPI red-tape measures – proposed to start from 1 July 2021, we are yet to hear anything from Treasury in respect to the ‘choice’ of ECPI method to determine tax exemption within a SMSF, along with changes to disregarded small fund assets (DSFA). This measure was announced in the 2019 federal budget and then the Government further announced a delayed start date. ** UPDATE – Treasury has now released an exposure draft for these measures **
The other outstanding item within the SMSF sector is increasing the number members from 4 to 6 – finally, this item is to be debated in the Senate this week. Should it make its way through the Senate, we may yet see a 1 July 2021 start date with this increased in SMSF membership measure.
Federal Budget webinar
Smarter SMSF is hosting a complimentary Federal Budget webinar to discuss these measures in more detail on Friday, 14 May 2021 at 12:00pm AEST. Numbers are strictly limited.
For more information about the Federal Budget, visit https://budget.gov.au/