This report highlights the following superannuation and retirement related announcements in the Federal Budget.
- Superannuation tax reform still on agenda
- SMSFs & limited recourse borrowings
- Access to super for terminal illness extended
- Superannuation supervisory levies to be increased
- Lost & unclaimed superannuation claims processes to be simplified
- Age Pension assets tests
- Defined benefit super schemes & aged pension exemption
- SMSF trustee penalties to increase
No superannuation tax changes
As promised by the Treasurer prior to the Budget, the Government did not announce any major tax changes to superannuation.
In a press release last week, Mr Hockey pledged that there will be "no new taxes on superannuation" under this Government and that, "I want to reassure all Australian workers they can have confidence in their retirement plans," Mr Hockey said.
The Reserve Bank's decision to reduce interest rates to 2.0% prompted the Treasurer to say “now was not the time to hit superannuants who are facing potentially many years of lower returns on their savings in bank accounts.”
Tax reform of superannuation is likely to become a political football, in light of the Labor party’s announcement on 22 April 2015 to curtail some superannuation tax concessions if elected in the next term.
Opposition leader Bill Shorten’s plan is to limit the tax-free earnings status on annual superannuation fund earnings above $75,000, and increase tax on contributions from 15% to 30% for those on other than a basic income.
The current Government's Tax Discussion Paper released on 30 March 2015 is already considering the appropriateness of the tax arrangements for superannuation in terms of their fairness and complexity and how they could potentially be improved.
The Treasurer has said that the Government will issue a report covering tax options later this year, then seek public and industry feedback on reform proposals before putting forward any new superannuation policy in a Tax White Paper in 2016, presumably for the Coalition to take to the next election.
SMSFs & limited recourse borrowings
The Budget did not implement the Murray Financial System Inquiry (FSI) recommendation to ban limited recourse borrowing arrangements (LRBAs) for self managed superannuation funds (SMSFs).
The Murray report recommended the restoration of the general prohibition on direct borrowings by superannuation funds, citing financial risk concerns of introducing debt into the retirement system, and potentially increasing reliance on the aged pension.
The report also recommended that SMSFs with existing borrowings should be permitted to maintain those borrowings but only until the particular investment under the LRBA is sold.
Access to super for terminal illness extended
The Government confirmed in the Budget that it will extend early access to superannuation for people with a terminal medical condition. Currently, a person with a terminal illness requires two medical practitioners to certify that they are likely to die within 12 months, in order to be allowed unrestricted access to their superannuation benefits, tax free.
The Government acknowledged that this can be a difficult prognosis to certify and so far has not achieved the policy objective of allowing terminally ill persons to access their superannuation to relieve the financial burden associated with treatment costs or who want to make the most of their time with their family.
The Government will change the life expectancy certification period from 12 months to 24 months.
Superannuation supervisory levies to be increased
The Government announced in the Budget an increase to the “supervisory levies” paid by financial institutions to fully recover the cost of superannuation activities undertaken by the Tax Office and the Department of Human Services.
The measure is expected to raise an additional $46.9m over 4 years and would be implemented from 1 July 2015. Currently, SMSFs pay an annual supervisory levy to the ATO of $259 p.a.
Lost & unclaimed superannuation claims processes to be simplified
Effective from 1 July 2016, the Government will reduce red tape for superannuation funds and individuals so as to make it easier for individuals to be reunited with their lost or unclaimed superannuation.
Age Pension assets tests
The Government confirmed in the Budget that as announced on 7 May 2015, the age pension assets test threshold for a single homeowner will be increased to $250,000 (currently $202,000) and $375,000 for a homeowner couple (now $286,500), effective from 1 January 2017.
The assets test threshold for non-homeowners will be increased to $200,000 over the homeowner pensioners, i.e. $450,000 for single non-home owners and $575,000 for a couple.
However, the assets test shade out or “taper” rate at which the age pension begins to phase out will be increased from $1.50 of pension per fortnight to $3.00 of pension for each $1,000 of assets over the relevant assets test threshold.
This means that the maximum value of assets that a homeowner couple can hold to qualify for a part pension will be reduced from $1.151m to approximately $823,000 and $547,000 for a single homeowner instead of the current $775,500.
Pensioners affected by the changes will be guaranteed a seniors health care card.
Further, pensions will no longer be index linked to CPI, but will continue to be indexed in line with current arrangements (higher of CPI or average weekly earnings benchmark).
The deeming threshold changes announced in last year’s budget will not proceed.
Defined benefit super schemes & aged pension exemption
The Government confirmed that they will reduce the deductible or “tax free” amount for pension income received from a defined benefit superannuation scheme that is counted for social security income test eligibility.
This change was previously announced on 7 May 2015 by the Minister for Social Services, Scott Morrison. The proposed 10% cap on the deductible amount for defined benefit superannuation schemes seeks to close an unintended loophole that opened up in 2007 thanks to some legislative changes at that time.
For example, a couple with a defined benefits scheme income of say $120,000 a year is currently able to reduce what is assessed by the pension income test by around 50%; treating this portion of their income as a draw down. The remaining $60,000 is then assessed as income under the income test for the pension which results in them receiving a pension in part of some $7,500 per year on top of the $120,000 they were drawing down from the scheme.
Recipients of Veterans' Affairs pensions and defined benefit income streams paid by military superannuation funds will not be affected, nor will most retail public offer superannuation funds or SMSFs, which do not provide these types of pensions.
SMSF trustee penalties to increase
Hidden in the Budget was an increase in monetary penalties that can be levied against SMSF trustees for prescribed breaches of the rules.
The penalties which became effective from 1 July 2014, are levied on SMSF trustees who breach certain rules such as late lodgement of the SMSF annual return or providing financial assistance to members.
Examples would include SMSF trustees who breach the prohibition on lending money to members or relatives and SMSF trustees who purchase residential property from the members or related parties. Penalties will increase from $10,200 to $10,800 for each individual trustee.
The proposed increases are scheduled to take effect from the end of July 2015.
Now, more than ever, it is important to ensure your SMSF remains compliant with rules.
© Hanrick Curran 2015