Treasurer, Josh Frydenberg, delivered the Federal Budget on 2 April 2019. Below is our summary of the Federal Budget superannuation essentials as well as the ALP policy proposals.
Federal Budget – Superannuation Essentials
Work Test Requirement
From 1 July 2020, individuals aged 65 and 66 will be able to make voluntary concessional and non-concessional superannuation contributions, without need to meet the “work test”.
Currently, individuals aged 65-74 must work at least 40 hours in any 30-day period in the financial year in which the contributions are made (the “work test”) in order to make voluntary personal contributions
This will give people nearing retirement the opportunity to increase their retirement savings regardless of their working arrangements.
Spouse Contributions Age Limit
From 1 July 2020, the age limit for spouse contributions will increase from 69 to 74 years.
Currently those individuals aged 70 years and over cannot receive contributions made by another person on their behalf.
Streamlining Requirements for the Exempt Current Pension Income (ECPI) Calculation
The Budget includes measures to reduce costs and simplify reporting for superannuation funds by streamlining the administrative requirements for the calculation of the ECPI from 1 July 2020.
Superannuation fund trustees will be allowed to choose their preferred method of calculating ECPI where they have interests in both the accumulation and retirement phases during an income year.
It has been confirmed that superannuation funds will not need to obtain an actuarial certificate when calculating ECPI using the proportionate method, where all members of the fund are fully in the retirement phase for all of the income year.
Tax Relief for Merging Funds
The current tax relief for merging superannuation funds was due to expire on 1 July 2020. This will now be made permanent. This will ensure fund member balances will not be impacted by tax when their funds merge.
The aim of this tax relief is to remove tax as an impediment to mergers, facilitate industry consolidation and improve retirement outcomes for members.
Self Managed Superannuation Funds (SMSF) are excluded from this tax relief.
Expansion of SuperStream Rollover Standard
The Government will provide $19.3 million to the ATO over 3 years from 2020-21, to send electronic requests to superannuation funds for the release of money required under a number of superannuation arrangements.
This change, which will take effect from 31 March 2021, will be implemented by expanding the electronic SuperStream Rollover Standard used for the transfer of information and money between employers, superannuation funds and the ATO.
To coincide with the expansion of the SuperStream Rollover Standard, the start date of Self Managed Superannuation Fund (SMSF) rollovers into Superstream will be delayed until 31 March 2021.
The Government has confirmed a delayed start date of 1 October 2019 for ensuring insurance within superannuation is only offered on an opt-in basis for accounts with balances of less than $6,000 and new accounts belonging to members under the age of 25.
Extension of Bring-Forward Contribution Eligibility
From 1 July 2020, the bring-forward arrangements which currently apply to individuals aged less than 65 years will be extended to those aged 65 and 66, in line with the removal of the work test for members of this age.
The bring-forward rules allow individuals meeting the age requirement to make three years worth of non-concessional superannuation contributions, thereby contributing up to $300,000 in a single year, with no further non-concessional contributions for the following two years.”
With a Federal Election set to take place in the next three months and a range of significant tax changes being proposed (but largely undiscussed) by the Australian Labor Party, it seems an opportune time to shed some light on the proposed changes proposed if there was to be a change of government.
There are seven major tax changes being proposed by the ALP:
- Taxpayers will no longer be able to receive a tax refund from the receipt of franking credits
- Houses will no longer be able to be negatively geared unless the house is new
- Capital Gains Tax general discount of 50% will reduce to 25%
- Family Trust Distributions to adult beneficiaries will be taxed at a minimum rate of 30% (up from 0%)
- Non-Concessional Superannuation Contribution Limits to fall from $100k to $75k
- Superannuation Fund Borrowing will no longer be able to be used to purchase a property
- Company Tax Rate to drop from 27.5% to 25% in the 2022 tax year
Franking credits represent tax that have already been paid on profits made by a company. In order to avoid the double taxation of those profits, company shareholders were allowed to count franking credits as tax paid on that income and where appropriate receive a refund for that tax where the tax rate was less than that of a company. The proposed legislation will have a significant impact particularly in superannuation funds where retirees are relying on the refund of those credits to make ends meet.
Negative Gearing allows a tax payer to claim a loss on a rental property when the income from that investment does not cover the costs of that investment. That loss can then be offset against other income derived by that taxpayer resulting in a lower tax bill. Negative gearing is a strategy sometimes used by couples to get into the property market when they cannot yet afford to buy a home. The resulting reduction in their taxable income and therefore their tax payable each year allows them to be able to afford to enter the property market.
The General Discount on capital gains was introduced to take into account that a capital gain can take many years to accumulate and is payable when an asset is sold. If that gain was measured and taxed on an annual basis (rather than at the end), the tax payable on those annual gains would be lower because the taxpayers marginal rate of tax would be lower. The 50% discount reflects that when the asset is sold, all capital gains are brought to account in that one year (instead of being spread over many years) which often forces the taxpayer into higher marginal tax brackets resulting in an artificially high tax payable on a gain that has been earned over many years.
Family Trust Distributions have traditionally been taxed at marginal tax rates in the hands of beneficiaries and it is being argued that distributions from trusts are being used to “split” income. The nature of discretionary trusts is that a trustee acts in the best interests of its beneficiaries (including which beneficiaries shall receive the income generated from the assets of the trust). Each beneficiary then pays tax on their distribution based on their individual tax situation. To tax distributions to adults at a minimum rate of 30% goes against the nature of a discretionary trust, when you consider that a trustee could allocate a capital amount of cash to a beneficiary (or a portion of a business) and the interest earned on that cash by the beneficiary would be taxed at the individuals marginal tax rate.
The Contribution Limits for non-concessional contributions into superannuation fell from $180k per year to $100k per year in 2016 and individuals can no longer make this type of contribution when their member balance is over $1.6m. The ALP is proposing to further reduce these contributions to $75k. Individuals do not get a tax deduction for these contributions and the main purpose behind them is for an individual to be able to quickly build their superannuation balance (often after an asset has been sold) prior to retirement so that they will not be reliant on the government for a pension. This change seems to be harming the very people that the ALP hold themselves out to be supporting.
Superannuation Fund Borrowing allows individuals with moderate superannuation fund balances to leverage their superannuation monies into a long-term investment asset (property) which is often appropriate for a longer term investment vehicle like superannuation. This can often mean the difference between retiring with an insufficient superannuation balance or retiring with a comfortable superannuation balance. Superannuation fund members with significant member balances will be able to buy property without borrowing, where as superannuation fund members with modest balances often need the assistance of borrowed funds to enter the property market. The ALP is proposing that the ability of superannuation funds to be able to borrow will be entirely removed.
The Company Tax Rate dropping from 27.5% to 25% allows companies to save tax on their profits while those profits are retained in the company. We note however that much of the profits earned in a company will be distributed to its shareholders in the form of a dividend. The dividend from the company will be franked at 25% instead of at 27.5% and the shareholders will pay tax on the dividend at their marginal tax rates (which in essence will not change). Thus, while the company will pay less tax, the shareholders will pay more tax based on receiving fewer franking credits with their dividend.
To conclude, the major tax changes proposed by the ALP appear to target low to middle income Australians rather than the “top end of town” and appear to be based on the premise of bringing property prices down to make home ownership more affordable. A property price crash would unsettle the economy with potentially significant effects on banks (and their willingness to lend to new borrowers) and businesses depending on how far the ripples reach.
Disclaimer: The information contained is general in nature. Professional advice should be sought before acting on any aspect on this page.