ASFA Action 12 May 2015 

Issue 566, 12 May 2015 

In this issue: 

• Overview 

• Details of specific superannuation measures 

• Other Budget measures that impact on superannuation funds 

• Also worth noting 

 

Overview 

Industry will welcome the confirmation that this year’s Budget does not contain any changes to the taxation of superannuation benefits or contributions, or to the preservation age. The Treasurer has reiterated the pledge that there “will be no new taxes on superannuation under this Government”, and said he wants to “reassure all Australian workers they can have confidence in their retirement plans”. 

For superannuation, the major measures with direct impact are: 

• a package of amendments to streamline the lost member and unclaimed superannuation rules 

• extension of the rules allowing early release of superannuation benefits for fund members suffering a terminal medical condition 

• a proposed increase in the annual supervisory levy, to fully recover the cost of superannuation activities undertaken by the Australian Taxation Office (ATO) and the Department of Human Services. 

The Budget also includes a number of more general measures which will impact superannuation funds. These include: 

• delivery of tax cuts for small business, with confirmation that no changes will be made to the franking credit rate 

• a new power allowing the Commissioner of Taxation to make a legislative instrument to modify the operation of the tax law 

• funding to deliver an improved experience for clients in their dealings with the ATO, including through a ‘digital by default’ service for provision of information and making payments and improvements to data and analytics infrastructure 

• funding to support the initial implementation of the Digital Transformation Agenda, which will deliver a better user experience for individuals and businesses engaging with government, reduce red tape and increase the efficiency of government service delivery 

• funding for investigations and prosecutions by the Serious Financial Crime Taskforce, established to address superannuation and investment fraud, identity crime and tax evasion 

• a one-off increase in the value of the ‘penalty units’ prescribed in all Commonwealth legislation from $170 to $180, with ongoing indexation 

• confirmation that new tax rules for managed investment trusts will apply from 1 July 2015, with a 12 month transition period. 

There are also a range of other measures which have an impact on retirement incomes more broadly, including: 

• ‘rebalancing’ of the social security assets test and taper rate 

• refinement of the way that some defined benefit income streams are counted against the social security income test 

• confirmation that previously announced changes to the indexation of the age pension and related payments will not proceed 

 

Details of specific superannuation measures 

1. Lost and unclaimed super – cutting red tape
   The Government will implement a package of measures that will reduce red tape for superannuation funds and individuals by removing redundant reporting obligations and by streamlining lost and unclaimed superannuation administrative arrangements.

The Budget papers provide no detail, however ASFA has been advised that the measures include: 

• Removing the requirement for funds to lodge twice yearly Lost Members Statements, as the ATO can now derive sufficient data from the annual Member Contributions Statement 

• Updating the definition of ‘uncontactable’ to account for contemporary forms of member communication (eg. online communication) 

• Simplifying the definition of ‘lost member’ by removing the ’employer-sponsored’ arm of the definition 

• Improving the ability of Eligible Rollover Funds to reunite members with their lost superannuation 

• Allowing the ATO to pay unclaimed superannuation directly to a person who is suffering a terminal medical condition 

• Working with the New Zealand government to investigate whether it is possible for the ATO to pay unclaimed superannuation directly into a KiwiSaver account. 

The measures will have effect from 1 July 2016, and their cost of implementation will be met from within the existing resources of the Australian Taxation Office. 

2. Early release of superannuation due to terminal medical condition
   As announced on 7 May, the government will amend the regulations governing early access to superannuation benefits for people suffering from a terminal medical condition.

Under the current regulations, a person will only qualify for early access on the grounds of suffering a ‘terminal medical condition’ if they obtain certification from medical specialists that they have less than 12 months to live. The government is now proposing to extend this life expectancy period to 24 months, with effect from 1 July 2015. 

This measure is estimated to have a cost to revenue of $0.3 million over the forward estimates period. 

3. Full Cost Recovery of super activities – ATO and Department of Human Services
   The Government will raise additional revenue of $46.9 million over four years from 2015-16 by increasing the annual supervisory levies paid by financial institutions to the Australian Prudential Regulation Authority.

This will provide for full cost recovery of the cost of superannuation activities undertaken by the ATO and the Department of Human Services, consistent with the Government’s cost recovery guidelines. 

ASFA note – the Department of Human Services has responsibility for approving fund members’ claims for early release of their superannuation on ‘compassionate grounds’. The Budget Papers do not contain any reference to the introduction of an ‘industry funding’ or ‘cost recovery’ model for ASIC, as was recommended in the final report of the Financial System Inquiry. 

 

Other Budget measures that impact on superannuation funds 

More general Budget announcements that will impact superannuation funds include: 

1. Tax cuts for small business, no change to franking credit rate
   As expected, the government has announced a 1.5 per cent reduction in the tax rate for small companies (those with aggregated annual turnover under $2 million), from 30 per cent to 28.5 per cent.

Importantly, the Budget papers confirm that the current maximum franking credit rate for a distribution will remain unchanged at 30 per cent for all companies, maintaining the existing arrangements for investors, including superannuation funds and self-funded retirees. 

The government has also announced a five per cent tax discount on income from unincorporated small business activity. The discount will be five per cent of the income tax payable on the business income received from an unincorporated small business entity, capped at $1,000 per individual for each income year, and delivered as a tax offset. 

The tax cut and tax discount will take effect from the 2015-16 income year, and are estimated to have a cost to revenue of $3.3 billion over the forward estimates period. 

2. Tax administration – statutory remedial power for the Commissioner of Taxation
   The government will provide the Commissioner of Taxation with a power to make a legislative instrument to modify the operation of the tax law to ensure that the law’s purpose or object is achieved.

The nature and volume of tax law and its evolution has sometimes produced unforeseen or unintended outcomes when applied. The statutory remedial power will allow the Commissioner to administer the law consistently with its purpose or object, where it has no more than a negligible budget impact and provided it has a beneficial outcome for affected taxpayers. This measure will reduce the regulatory burden on taxpayers by enhancing certainty. 

A legislative instrument made by the Commissioner will be subject to extensive consultations and disallowance by Parliament. 

The measure will have effect from the date of Royal Assent of the enabling legislation, and is not expected to have any revenue impact over the forward estimates period. 

3. Reducing red tape – reforms to the ATO
   The government will provide $130.9 million over four years (including capital of $35.6 million) to deliver an improved experience for clients in their dealings with the ATO.

Red tape will be reduced and future administrative savings delivered through investment in three foundational initiatives: a digital by default service for provision of information and making payments, improvements to data and analytics infrastructure and enhancing streamlined income tax returns through the myTax system for taxpayers with more complex tax affairs. 

The package of service improvements supports the government’s commitment to reduce red tape and forms part of the government’s digital transformation agenda. 

The costs of this measure will be met from within the ATO’s existing resourcing. The measure has no net impact on total ATO resourcing over the forward estimates period, and delivers on the Government’s election commitment. 

4. Digital Transformation Agenda – Stage One and establishment of the Digital Transformation Office
   The Government will provide $254.7 million over four years from 2015-16 to support the initial implementation of the Digital Transformation Agenda, which will deliver a better user experience for individuals and businesses engaging with government, reduce red tape and increase the efficiency of government service delivery.

This measure includes the provision of $95.4 million over four years from 2015-16 to establish the Digital Transformation Office (DTO) as a new Executive Agency within the Communications portfolio. 

This measure also provides funding for the implementation of projects that form Stage One of the Digital Transformation Agenda. This includes: 

• $33.3 million for the development of a trusted digital identity framework, which will provide individuals and businesses with easier ways to access government services 

• $7.1 million for the development of a whole-of-government digital mailbox solution to enable individuals and businesses to receive and transact with digital messages and documents from government in a seamless, secure environment 

• the development of a mandatory digital service standard to ensure government information and services are delivered in a simple, efficient, effective and consistent manner, with costs to be met within the core funding provided to the DTO. 

5. Serious Financial Crime Taskforce
   The government has provided funding of $127.6 million over four years for investigations and prosecutions by the newly established Serious Financial Crime Taskforce.

The Taskforce, announced by the Treasurer on 5 May, is being established to address superannuation and investment fraud, identity crime and tax evasion. It will include the Australian Taxation Office, Australian Crime Commission, Australian Federal Police, Attorney-General’s Department, Australian Transaction Reports and Analysis Centre, Australian Securities and Investments Commission, Commonwealth Director of Public Prosecutions and Australian Customs and Border Protection Services. 

The Taskforce will build on the work done by Project Wickenby which finishes in 2015. It will enable the best practice and experience gained to be continued, and for agencies to extend their cooperative work across the broader serious financial crime risk. 

The measure is estimated to increase revenue by $419.7 million and expenses by $130.8 million, with a net improvement to the Budget of $288.9 million over the forward estimates period. 

6. Managed investment trusts – transition period to apply the new tax system
   The Government is proceeding with the implementation of a new tax system for managed investment trusts with a 12 month transition period. The new tax rules will now apply from 1 July 2016, however managed investment trusts can choose to apply them from the earlier start date of 1 July 2015.

This measure is estimated to have a gain to revenue of $70.0 million over the forward estimates period as most managed investment trusts are expected to apply the new rules from 1 July 2016. 

7. Commonwealth penalty units – increase in value to reflect inflation
   The government will increase the value of the ‘penalty units’ prescribed in all Commonwealth legislation from $170 to $180, with effect from 31 July 2015.

Penalty units are used to describe the amount payable for fines under Commonwealth laws, including superannuation-related and tax laws. Commonwealth penalties are generally expressed in terms of penalty units (rather than specific values) to assist in the consistent adjustment of penalties across the Commonwealth statute book. 

The government will also introduce ongoing indexation of penalty units based on the Consumer Price Index. Indexation will occur on 1 July every three years, with the first indexation occurring on 1 July 2018. This measure is estimated to have a gain to revenue of $45.0 million over the forward estimates period. 

The proposed increase in the value of a penalty unit is broadly consistent with inflation since the value was last adjusted in December 2012, while the introduction of indexation will ensure that in future financial penalties for Commonwealth offences will keep pace with inflation. 

 

Also worth noting 

1. Social Security Assets Test – rebalance asset test thresholds and taper rate
   The Budget papers confirm the announcement, on 7 May, that the government would amend the assets test for determining eligibility for the age pension, and reverse changes made in 2007 to the asset test ‘taper rate’.

The measure will achieve savings of $2.4 billion over five years and will, according to the government, “improve the targeting of Australian Government payments to those most in need by providing additional assistance for those with moderate asset holdings, while reducing assistance to those with more significant asset holdings”. 

The proposed changes will increase the ‘assets free area’ – the value of assets a person can have in addition to their family home, in order to qualify for a full pension. From 1 January 2017, the ‘assets free area’ will increase from $202,000 to $250,000 for single home owners and from $286,500 to $375,000 for couple home owners. Pensioners who do not own their own home will also benefit by an increase in their threshold to $200,000 more than homeowner pensioners. 

The government will reduce the maximum value of assets over and above the family home that a person can hold to qualify for a part pension. The new thresholds will be $823,000 for a homeowner couple (down from $1.15 million) and $547,000 (down from $775,000) for a single homeowner. 

The proposal will also reinstate the $3 ‘taper rate’ that applied from 1993 until 2007, when it was halved. This means for every additional $1,000 in assets above the ‘asset free’ threshold for a full pension, fortnightly payments will once again be reduced by $3. 

All those affected by the scaling back of the maximum asset threshold will be guaranteed eligibility for the Commonwealth Seniors Health Card or Health Care Card, which provides the same concessional access to pharmaceuticals as given to those on the pension. 

2. Age pension – proposed indexation changes abandoned
   The government has also confirmed that proposed changes to the indexation rules for the age pension and pension linked payments, as announced in last year’s Budget, will now not proceed. Those changes would have tied indexation to the Consumer Price Index (CPI), with effect from 1 September 2017.

As a result of the decision not to proceed with the proposed changes to the indexation arrangements, pensions and related payments will continue to be indexed to the higher of increases in the CPI or the Pensioner and Beneficiary Living Cost Index, and benchmarked to Male Total Average Weekly Earnings. 

3. Defined benefit income streams – improve integrity of social security income test arrangements
   As part of the changes to the age pension income test announced on 7 May, the government announced that it will introduce an ‘income deduction cap’ on defined benefit (DB) schemes.

Under current arrangements, some DB superannuants are able to have a large proportion of their superannuation income excluded from the pension income test. 

The Budget papers confirm that the government will ensure that a larger proportion of a superannuant’s actual DB income is taken into account when applying the relevant social security income test. Under this measure, the proportion of income that can be excluded from any income test (the deductible amount) will be capped at 10 per cent from 1 January 2016. 

Recipients of Veterans’ Affairs pensions and/or DB income streams paid by military superannuation funds are exempt from this measure. 

The government has indicated that the changes will improve fairness and equity in social security payments, and achieve savings of $465.5 million over five years. 

ASFA note: The Minister’s press release on 7 May indicated that this measure will particularly impact recipients of DB income stream from some large State Government public sector schemes and large corporate DB schemes. The Minister indicated that around two-thirds of those who are involved in these schemes are already within that 10 per cent cap, and will be unaffected. In addition to the exclusion for military and veterans pensions, the Minister’s press release also indicated that the measure will not apply to income stream products purchased from retail providers, or to self-managed superannuation funds and small APRA funds. 

4. 2014-15 Budget measures not proceeded with – maintaining eligibility thresholds for Australian Government payments for three years, resetting the income test deeming rate thresholds
   The Government has confirmed that it will not proceed with elements of its 2014-15 Budget measures that related to:

• maintaining the pension income test free areas and deeming thresholds over three years from 2016-17, for payments including the Age Pension, Carer Payment, Disability Support Pension, and the Veterans’ Service Pension. The pension income test free areas and deeming thresholds will continue to be indexed annually by the Consumer Price Index. This decision has a cost to the revenue of $128.0 million over three years from 2016-17. 

• resetting the income test deeming rate thresholds. This decision has a cost to the revenue of cost of $89.1 million over three years from 2016-17.