The Federal Government’s 3 May Budget foreshadowed extensive reforms in the area of superannuation. In terms of significance, these measures rival the Simpler Super measures implemented by the Costello/Howard Government in 2007. The announcements include some sensible measures for a Government that is trying to promote contributions for low income earners and those with interrupted working histories, while limiting the tax concessions utilised by high income earners.
There are a number of hurdles which must be overcome before any of these measures become law, not the least of these being the Government being re-elected in July, as well as the measures being negotiated with the minor parties and independents.
Further, some of the measures would seem to present significant administrative challenges for funds, as well as creating complexity for taxpayers seeking to utilise them.
The measures are as follows:
The Government has proposed a number of measures aimed at encouraging the making of contributions gradually over a person’s life.
Reduction in the concessional contributions cap: The Government plans to reduce the annual concessional contributions cap to $25,000 per person.
Making catch-up concessional contributions: From 1 July 2017, a person with an account balance of less than $500,000 will be able to make ‘catch up’ concessional contributions by using any unused portion of their concessional contributions cap from the previous five consecutive years.
- It is not clear from the announcement when a person will be assessed against the $500,000 balance limit (for example, at the beginning of the relevant financial year or at the time of the relevant contribution), or whether that limit can be exceeded at any time over a rolling 5 year period.
- It will be administratively difficult for both members and trustees if the Government intends on it being a requirement that a member’s balance be below $500,000 whenever a ‘catch up’ contribution is made.
- If the $500,000 balance limit is to be assessed at the start of a financial year, it is not clear how the rules will address matters such as temporary reductions in account balances where members have elected to receive payments under a transition to retirement income stream (TRIS).
Abolition of work test: under the current law, contributions (other than mandated employer contributions) can only be made for a member who is aged over 65 and under 75 (for their own benefit or for their spouse) if they satisfy the ’work test’ (ie, they have been gainfully employed on at least a part time basis). The Government plans to harmonise the contribution rules for those aged 64 to 75 by abolishing the ‘work test’ and allowing all individuals aged up to 75 to make contributions.
Eligibility to make deductible contributions: ‘Self-employed’ people who derive less than 10% of their income from employment or employment-related activities are currently able to make superannuation contributions and claim a tax deduction for those contributions. In one of the more significant measures announced in the Budget, the Government plans to remove this limitation so that everyone, including those who are partially self employed or who are not able to salary sacrifice through their employer, can claim tax deductions on personal superannuation contributions.
- The ability to claim a tax deduction in respect of personal contributions may result in many members moving away from salary sacrifice arrangements, and managing their personal contributions themselves.
- Superannuation fund trustees may see a significant increase in the number of ‘notice to claim a tax deduction forms’ that are submitted each year.
- It appears that the introduction of this measure, when coupled with the abolition of the work test, will allow those aged under 75 to contribute their passive income into superannuation and claim a deduction in relation to that contribution.
Low income super contributions will continue: The Government plans to continue the ‘Low Income Superannuation Contribution’ scheme, which it had legislated to terminate on 30 June 2017, under a new name – the ‘Low Income Superannuation Tax Offset’.
Extending Division 293 tax: The income threshold after which an additional 15% of tax (making an effective contributions tax rate of 30%) is imposed on the contributions of ‘high income’ earners is to be reduced from $300,000 to $250,000.
Spouse contributions: People who make contributions for their spouse are currently able to claim a tax offset up to $540 per annum where their spouse earns below $10,800. The Government plans to lift this cap to $37,000.
Lifetime non-concessional contribution limit: In what is likely to be a contentious decision, the Government proposes a significant and retrospective change to non-concessional contributions, under which a lifetime non-concessional contribution limit of $500,000 will apply (including all non-concessional contributions made from 1 July 2007). This will replace the existing rules which allow a person to make non-concessional contributions of up to $180,000 per year (or $540,000 over three years if they are under age 65).
Those who have made contributions above that level before Budget night will be able to retain those amounts within superannuation without penalty. But contributions made after that time, which cause a person to exceed their lifetime cap, will need to be removed or they will be subject to the existing excess non-concessional contributions tax.
After-tax contributions made into defined benefit accounts and constitutionally protected funds will also be included in an individual’s lifetime non-concessional cap, with proposals to have defined benefit members withdraw corresponding accumulation amounts where their lifetime cap is exceeded.
- The immediate and retrospective effect of this announcement is likely to draw significant criticism, and is reminiscent of the Simpler Super reform announced in the 2006 Budget that introduced the contributions caps. After a significant backlash, the then Government conceded and allowed for a transitional period in which people could make a non-concessional contribution of up to $1million in between Budget night 2006 and 30 June 2007. Depending on the results of the election, and the composition of both houses of Parliament, we may see the addition of transitional rules.
- The rules of some defined benefit funds provide that members who withdraw benefits, or cease contributing to the scheme, can lose their membership and therefore the Government will need to consult with these schemes to determine equivalent and equitable treatment of those members.
The Government has proposed measures to limit the tax concessions available to members in the pension phase.
Retirement phase transfer limits: From 1 July 2017, the total amount a member can ‘transfer into the retirement phase’ will be limited to $1,600,000. Earnings arising from a pension account, which cause the account to exceed the cap, may be retained in the ‘retirement phase’ account. However, those who already have more than $1,600,000 in pension accounts will be required to reduce these balances to $1,600,000 before 1 July 2017. Otherwise a tax (similar to that which is applied to excess non-concessional contributions) will be applied on the amount in excess of $1,600,000. Amounts in excess of the $1,600,000 limit will need to be maintained in an accumulation phase account (where earnings on the accumulation accounts will be taxed at 15%).
- Members of defined benefit schemes will not escape this measure as amounts received from any pensions paid from these schemes above $100,000 will be subject to different taxation arrangements.
New retirement income products: In a measure announced in conjunction with the Budget, the Government has said that it will extend the tax exemption on earnings in the retirement phase to products such as deferred lifetime annuities and group self-annuitisation products. This is excellent news for group life and annuity providers and superannuation fund trustees who are looking to develop more flexible post-retirement products such as deferred annuities or lifetime pensions for their membership base.
Transition to retirement income streams lose tax exemption: A TRIS is a pension payable to those who have reached their preservation age (ie, between age 55 and 60 depending on date of birth) but have not yet retired or met another condition of release.
A common strategy involving transition to retirement pensions involves establishing one of these pensions and drawing down an income stream (up to the allowable 10% of the account balance), and then making salary sacrifice contributions into superannuation by a corresponding amount. The strategy has tax advantages because the person making the contributions is able to reduce their personal taxable income (by increasing their salary sacrifice contributions) while receiving a TRIS pension, the income of which is preferentially taxed. Another significant benefit is that any earnings on assets supporting the pension are generally exempt from tax.
From 1 July 2017, the Government intends to remove the exemption which allows the earnings on assets supporting a TRIS to be tax free. Earnings on assets supporting a TRIS will therefore be taxed at the standard superannuation rate of 15%.
The Government also announced that it will close a loophole which allows people in receipt of TRIS pensions to elect to treat pension payments as lump sum payments and therefore utilise their lifetime low rate cap to receive pension payments tax free.
- TRIS pensions and transition to retirement strategies will not cease to exist, but when coupled with other reform measures discussed in this paper, the benefit of commencing these strategies will be significantly limited.
Enshrine the objective of superannuation: The Government has recently been consulting on how it should define the object of superannuation, and has announced that it will enshrine the objective of superannuation in legislation as being: ‘to provide income in retirement to substitute or supplement the Age Pension’.
Abolition of anti-detriment payments: The Government has announced it will abolish the ability for superannuation fund trustees to make ‘anti-detriment payments’, and to claim a tax deduction for those payments under section 295-485 of the Income Tax Assessment Act.
- This represents a re-calibration of the taxation of death benefits that should perhaps have occurred in 2007, when death benefit payments to the majority of dependants were made tax free.