Super changes from the Budget
Continuing to provide for a safer environment and incentives to increase spending by taxpayers to stimulate the economy remained a consistent measure and is in line with the October 2020 Federal Budget. Whilst many measures had been announced prior to the formal delivery of the 2021/22 Federal Budget, there were a number of additional measures released that have the potential to impact on the wealth plans of a number of Australians. Many of these announcements could be regarded as a soft start to an election campaign by the Government, with expected commencement dates of 1 July, 2022 – which is later than when the next Federal election will be held.
For many, the key takeouts may have centred on the extension of the low and middle income tax offset (worth up to $1,080) for another 12 months through to 30 June, 2022, or the absence of any announcement of a change to the rate of superannuation guarantee (SG) payments. From this it can be inferred that the rate of SG will increase to 10% from 1 July, 2021, and then continue to rise in annual increments of 0.5% until it reaches 12% from 1 July, 2025.
However, there were also a number of other superannuation announcements that could have a significant (and positive) impact on the wealth plans of many Australians, which include increasing the amount that can be accessed from super towards the purchase of a first home and, at the other end of the home ownership journey, a lowering of the eligibility age to make a downsizer contribution to super.
It is proposed that the work test will only apply for personal deducted contributions from age 67, with application for non-concessional or salary sacrificed contributions not applying until age 75. This has the potential to remove the need for any bring-forward provisions under the legislation or can at least allow for advisers to discuss alternative potential arrangements for those still waiting for the legislated increase in eligibility age from 65 to 67 to pass through Parliament.
Beyond wealth, the Budget did also have a focus on health issues for Australians, with measures announced to improve access to mental health services which, for a number of people, has had a heightened focus since the onset of COVID-19. Additionally, a number of measures were focussed on women, with some aimed at addressing the retirement savings gap between males and females – an issue noted in the Retirement Income Review (RIR) report delivered at the end of 2020.
For advisers, the 2021/22 Federal Budget certainly provides a great opportunity to engage with clients and discuss what opportunities are ahead. Whilst they may not be available until 1 July, 2022, planning for the potential opportunities can start now.
Following is a summary of some of the major proposals and how they may affect your clients. Of course, it is always important to remember that at this point, the Budget night announcements are only statements of intended change and are not yet law.
SUPERANNUATION REFORMS
The 2021/22 Federal Budget contained a number of superannuation measures. These measures include making contributions and managing retirement income stream, providing prospective first home buyers additional opportunities to save for a home using their superannuation and self-managed superannuation fund (SMSF) members greater access to making contributions while overseas.
REPEALING THE WORK TEST FOR CERTAIN VOLUNTARY SUPERANNUATION CONTRIBUTIONS
Effective date: From 1 July, 2022.
Affected clients: Individuals aged 67 to 74 (inclusive).
Individuals aged 67 to 74 (inclusive) will be eligible to make, or receive, certain voluntary super contributions without the need to meet the work test. Eligible contributions will include non-concessional contributions (including bring-forward contributions), or salary sacrifice contributions, subject to existing contribution cap limits.
Individuals aged 67 to 74 (inclusive) will still have to meet the work test (or work test exemption) to make personal deductible contributions.
The Government has stated that removing the requirement to meet the work test under the above conditions will simplify the rules governing super contributions and will increase flexibility for older Australians to save for their retirement.
REDUCING THE ELIGIBILITY AGE FOR DOWNSIZER CONTRIBUTIONS
Effective date: From 1 July, 2022.
Affected clients: Individuals aged 60 plus.
The eligibility age to make a downsizer contribution into superannuation will be reduced from 65 to 60 years of age.
The downsizer contribution was first introduced from 1 July, 2018, allowing eligible individuals to make a one-off, post-tax contribution to super of up to $300,000 (per person) from the sale proceeds of their home. Downsizer contributions do not count toward an individual’s non-concessional contribution cap, and do not have a total superannuation balance eligibility criterion.
The Government has stated that 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.
FIRST HOME SUPER SAVER SCHEME – INCREASING THE MAXIMUM RELEASABLE AMOUNT TO $50,000
Effective date: From 1 July, 2022.
Affected clients: Prospective first home buyers.
Under the existing First Home Super Saver Scheme (FHSSS), the maximum releasable amount of voluntary concessional and non-concessional contributions will be increased from $30,000 to $50,000.
There is no change to the existing eligible voluntary contribution limit of $15,000 per year. Eligible voluntary contributions (up to $15,000 per year) made from 1 July, 2017, will continue to count towards the total amount able to be released. The Government has stated that this measure will ensure the FHSSS continues to help first home buyers in raising a deposit more quickly.
FIRST HOME SUPER SAVER SCHEME – TECHNICAL CHANGES
Effective date: Retrospectively from 1 July, 2018.
Affected clients: Prospective first home buyers.
Further to the increase in the maximum releasable amount, the Government will make four technical changes to the legislation underpinning the FHSSS. These changes aim to improve the schemes operation, as well as the experience of first home buyers using the scheme.
The four changes include:
- 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; and
- Clarifying that 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.
Remove the $450 per month threshold for superannuation guarantee eligibility
Effective date: From 1 July, 2022.
Affected clients: Low income and part time workers.
The current $450 per month minimum income threshold, under which employees do not have to be paid the SG by their employer, will be removed.
Expanding the SG coverage for lower income workers is intended to improve equality in the superannuation system.
The Government has stated, citing the RIR, that around 300,000 individuals would receive additional SG payments each month.
SMSF – LEGACY RETIREMENT PRODUCT CONVERSION
Effective date: From the beginning of the first financial year after Royal Assent of the enabling legislation.
Affected clients: Members with a market-linked, life-expectancy and lifetime product.
The Government is providing individuals the ability to exit specific legacy retirement income products over a limited two year period.
The concession will be provided for any conversion of the following legacy retirement products which first commenced prior to 20 September, 2007:
- Market Linked Income Streams (MLIS);
- Term Allocated Pensions (TAPs); and
- Lifetime Pension and Annuity products.
Individuals will have the option to voluntarily transition to more flexible retirement products such as an account-based pension. Individuals will be able to choose to exit these products by fully commuting the legacy pension and rolling over the underlying capital, including any reserves, into an accumulation account. The choice can then be made to commence a new retirement product, take a lump sum benefit, or retain the funds in the accumulation account.
Importantly, any commuted reserves will not count towards an individual’s concessional contribution cap and will not trigger excess contributions. Instead, they will be taxed as an assessable contribution of the fund at the 15% tax rate.
If an individual does elect to commute an eligible pension, they will not be subject to a re-assessment of the social security treatment of the legacy product for the period before conversion. Flexi-pension products, lifetime products offered by large Australian Prudential Regulation Authority (APRA) regulated or public sector defined benefit schemes are not included in the measure.
SMSF – RELAXING RESIDENCY REQUIREMENTS
Effective date: From the beginning of the first financial year after Royal Assent of the enabling legislation.
Affected clients: Members of SMSFs or a small APRA-regulated fund (SAF).
The Government will relax the residency requirements for SMSFs and SAFs by extending the central management and control temporary absence period for members of SMSFs from the current two years up to five years, and removing the active member test.
SMSF and SAF members will now have the opportunity to continue to make contributions to their preferred fund while temporarily overseas. This measure will allow comparable contribution treatment to members of SMSFs and SAFs to that of APRA-regulated funds while overseas.
Tim Howard is technical consultant and Neil Sparks is national manager for SMSF strategy at BT.
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