Issue 534, 13 May 2014 – Budget 2014 Edition
In this issue:
- Overview
- Details of specific superannuation measures
- Other Budget measures that impact on superannuation funds
- Also worth noting
Overview
The underlying cash deficit is forecast to be $29.8 billion.
For superannuation, the major measures with direct impact are:
- changes to the schedule for increasing the Superannuation Guarantee rate to 12 per cent
- ability to withdraw excess non-concessional contributions
- changes to various Commonwealth superannuation arrangements
Importantly, the Budget does not contain any changes to the taxation of superannuation benefits, or to contribution caps or the preservation age. The government’s response to the recent report by the National Commission of Audit (NCOA), released with the Budget papers, notes that: “The superannuation system is being considered by the Financial System Inquiry and will be considered by the Tax White Paper process.”
Other measures that may also impact superannuation funds include:
- the deferral of the new tax system for managed investment trusts
- the announcement of a major infrastructure growth package
- changes to the Australian Transaction Reports and Analysis Centre (AUSTRAC) industry levy
- the reduction in funding for ASIC and the ATO
- the abolition of First Home Saver Accounts.
There are a range of other measures that will also have an impact on retirement incomes more broadly, including:
- a phased increase in the qualifying age for the Age Pension to 70 years, along with changes to indexation, eligibility thresholds, and deeming thresholds
- inclusion of tax-free superannuation income in the eligibility test for the Seniors Health Card
- confirmation that the government will proceed with a paid parental leave scheme, including superannuation
- an increase in the wage subsidy for the employment of mature age job seekers.
Details of specific superannuation measures
- Change to schedule for increasing Superannuation Guarantee rate to 12 per cent
The government has announced that it will change the schedule for increasing the Superannuation Guarantee (SG) rate to 12 per cent.
The SG rate is currently scheduled to increase to 9.5 per cent from 1 July 2014, with further 0.5 per cent increases until it reaches 12 per cent by 1 July 2019. The government had included amendments in the Minerals Resource Rent Tax Repeal and Other Measures Bill 2013 to pause the rate of increase at 9.25 per cent for two years, however that Bill failed to pass the Senate.
The government has now announced that the SG rate will increase from 9.25 per cent to 9.5 per cent from 1 July 2014 as currently legislated, to give certainty to employers and employees.
The rate will remain at 9.5 per cent for four years until 30 June 2018, then increase by 0.5 percentage points each year until it reaches 12 per cent in 2022-23.
- Ability to withdraw excess non-concessional contributions
The government will allow individuals the option of withdrawing superannuation contributions in excess of the non-concessional contributions cap, thereby avoiding excess non-concessional contributions tax.
Currently, contributions that exceed the non-concessional contributions cap are taxed at the top marginal tax rate. As these contributions are sourced from income that has previously been taxed, the overall tax rate paid on these amounts can be as high as 93 per cent.
Under the proposal, individuals will be able to choose to withdraw excess contributions made after 1 July 2013, and any associated earnings, with those earnings subject to tax at the individual’s marginal rate. Individuals who choose to leave their excess contributions in the fund will continue to incur excess non-concessional contributions tax.
This measure delivers on the government’s election commitment to develop an appropriate process that addresses all inadvertent breaches of the contribution caps where the error would result in a disproportionate penalty. It will ensure the treatment of excess non-concessional contributions is broadly consistent with that applying to excess concessional contributions.
Final details of the policy will be settled following consultation with key stakeholders in the superannuation industry.
- Superannuation laws – miscellaneous amendments
The government has indicated that it will make a series of minor – but unspecified – amendments to taxation and superannuation laws to correct technical defects, remove anomalies and address unintended outcomes which have recently been identified. While the government has provided some examples of amendments in relation to taxation laws, no examples of superannuation-related amendments have been provided.
The Budget papers indicate that these changes are part of the government’s commitment to the care and maintenance of the taxation and superannuation systems, and the government’s broader deregulation agenda. This measure is estimated to have a negligible impact on revenue over the forward estimates period.
- Commonwealth Superannuation arrangements
ComSuper
As recommended in the recent NCOA report, the government will merge ComSuper with the Commonwealth Superannuation Corporation, so that the management of Commonwealth superannuation will be undertaken by one body. This will take effect from 1 July 2015, and is consistent with the government’s aims to reduce duplication, improve coordination and increase efficiency in how public funds are used to deliver services to the community.
Replacement of Military Superannuation and Benefits Scheme with a funded accumulation scheme
From 1 July 2016, the government will establish a modern, fully funded, accumulation superannuation scheme for new members of the Australian Defence Force (ADF). The existing Military Superannuation and Benefits Scheme (MSBS) will be closed to new members from this date. Closure of the MSBS was recommended by the NCOA.
The introduction of new, fully funded arrangements will reduce the government’s unfunded superannuation liability by an estimated $126 billion by 2050.
Existing MSBS members who leave and then rejoin the ADF will be able to rejoin their existing MSBS arrangements. There will be no change to the superannuation arrangements for existing MSBS members, but they may elect to be covered by the new arrangements.
Under the new arrangements, the government will pay a 15.4 per cent contribution to a member’s chosen superannuation fund. The contribution rate will increase to 18 per cent for any period in which members are serving in war-like operations.
Serving ADF personnel covered by the new arrangements will also be covered by statutory death and disability arrangements consistent with the defined benefit arrangement currently in place under the MSBS. The new arrangements will be more flexible than the MSBS, as members will be able to transfer superannuation benefits to a fund of their choice.
Defence Forces Retirement Benefits (DFRB) and Defence Force Retirement and Death Benefits (DFRDB) superannuation schemes
The government will allocate $1.4 billion over four years as a result of improvements to the indexation of payments made under the Defence Forces Retirement Benefits (DFRB) and Defence Force Retirement and Death Benefits (DFRDB) superannuation schemes. The impact of this measure is $135.1 million in underlying cash terms over the forward estimates.
From 1 July 2014, DFRB and DFRDB superannuation scheme members aged 55 and over will have their superannuation benefits indexed by the better of the Consumer Price Index and the Pensioner and Beneficiary Living Cost Index, with reference also to a benchmark level of Male Total Average Weekly Earnings.
Additionally, the government will exempt DFRB and DFRDB members from any Division 293 tax liability for the one-off increase in the capitalised value of the benefit arising from the new indexation arrangements. (Division 293 tax is imposed on concessional contributions made by individuals whose income and relevant concessionally taxed contributions exceed $300,000.) This measure delivers on an election commitment.
- Social Security Agreement with India covering Age Pension and removing superannuation double coverage
The government will provide $11.7 million over four years to establish a new bilateral Social Security Agreement with the Republic of India. The new Agreement will cover provisions relating to the Age Pension, and remove the double coverage of superannuation contributions for workers seconded to either country.
This measure aligns with the government’s commitment to reduce the administrative burden for Australian businesses, while still providing appropriate social security protection and superannuation entitlements for Australian citizens.
The Social Security Agreement will commence from 1 July 2015, subject to the completion of legal and treaty processes for both countries.
- Higher Education Superannuation Programme – resumption of payments to universities in NSW
The government will resume making payments under the Higher Education Superannuation Programme to eligible universities, subject to agreement with the NSW Government, to meet the Commonwealth’s share of certain superannuation expenses. The resumption of payments for staff who are members of the State Superannuation Scheme, with State Authorities Superannuation Scheme and State Authorities Non-Contributory Superannuation accounts, will align the arrangements for NSW with other participating states.
The expenditure for this measure has not been disclosed, as the arrangement is subject to negotiation with the NSW Government.
Other Budget measures that impact on superannuation funds
Budget announcements that will impact superannuation funds include:
- Deferral of start date of new tax system for managed investment trusts
The government has announced that it will defer the start date of the proposed new tax system for managed investment trusts by 12 months to 1 July 2015.
The deferral will allow the industry and the ATO additional time to make necessary system changes to implement the new tax system, as well as providing the government with more time to consult with industry regarding the implementation of the reforms.
This measure is estimated to have a gain to revenue of $75.0 million over the forward estimates period.
The tax law will also be amended to allow managed investment trusts and other trusts treated as managed investment trusts to continue to ignore the trust streaming provisions for the 2014/15 income year. This will ensure these interim arrangements for managed investment trusts continue to apply until the commencement of the new tax system for managed investment trusts.
The Government has consulted closely on the design and legislation for the new tax system for managed investment trusts. Exposure draft legislation is expected to be released for public comment in June.
- Infrastructure
The government has introduced a major infrastructure growth package, to fast-track investment in critical infrastructure across the country.
The package includes:
- $5 billion over five years to establish an Asset Recycling Initiative, which will provide state and territory governments with incentive payments to unlock capital from state-owned assets and reinvest the proceeds in new productivity-enhancing economic infrastructure. The Budget Outline specifically notes that the Initiative will “leverage a significant increase in private sector investment and create opportunities for investors, including superannuation funds, to invest in quality infrastructure”.
- an initial $5.9 billion to an asset recycling fund to build productive infrastructure. The fund will also receive further contributions following the sale of Medibank Private and any Commonwealth assets, and will begin on 1 July 2014.
- $3.7 billion for targeted infrastructure investments to deliver priority infrastructure projects and upgrades.
- Changes to AUSTRAC industry levy
The government will increase revenue by $79.1 million over four years, through a phased increase in the AUSTRAC industry levy.
AUSTRAC currently recovers around 53 per cent of its total expenses from industry. Under this measure, industry contributions to AUSTRAC’s total expenses will increase to 70 per cent in 2014/15, 90 per cent in 2015/16 and 2016/17, and 100 per cent in 2017/18.
The government will also remove the current $300 base component fee for AUSTRAC’s 3,638 smallest regulated entities, which will no longer be subject to any charge. Under the new arrangements, only the largest (around 1,029) reporting entities will be required to contribute towards AUSTRAC’s expenses.
ASFA note: currently the levy is imposed upon the trustee company of the superannuation fund, based on the assets of the trustee company, as opposed to the assets of the fund. Accordingly, most, if not all, superannuation fund trustees are classed as small regulated entities and pay only the $300 base component fee, which is to be abolished under this proposed measure.
- Cuts to funding of ASIC, ATO
The government will achieve savings of $120.1 million over five years by reducing funding to ASIC.
The Budget papers note that “ASIC will adjust its priorities to ensure it continues to meet its statutory objectives”.
The government will achieve further savings of $142.8 million over three years from 2015/16 by reducing the ATO’s departmental resourcing.
The ATO will bring forward staff reductions that were already planned in response to efficiency dividends and decisions of the former government. As these staff reductions have already been factored into the forward estimates, there will be no net increase to the total staff reductions planned.
- Abolition of First Home Saver Accounts Scheme
The government will abolish the First Home Saver Accounts (FHSA) scheme, due to the low take-up rate. Only 46,000 FHSAs were in existence at December 2013, with a combined balance of $521.5 million.
The abolition will be rolled out as follows:
- any new accounts opened from Budget night will not be entitled to the existing Government co-contribution or any tax or social security concessions
- existing account holders will continue to receive the government co-contribution and all tax and social security concessions associated with the accounts for the 2013-14 year
- the Government co-contribution will cease from 1 July 2014
- the tax and social security concessions will be withdrawn from 1 July 2015
- from 1 July 2015, account holders will be able to withdraw their account balances without restriction.
Also worth noting
- Age Pension: changes to qualifying age, eligibility thresholds, indexation and deeming rates
Increase in the Age Pension qualifying age to 70 years: As recently foreshadowed, the government has indicated that it will increase the eligibility age for the Age Pension to 70 years.
The Age Pension age is currently scheduled to reach 67 years on 1 July 2023, under phased increases implemented by a previous government. In this Budget, the Treasurer has announced that the pension age will continue to increase, by six months every two years, from the qualifying age of 67 years that will apply by that time, to gradually reach a qualifying age of 70 years by 1 July 2035.
People born before 1 July 1958 will not be affected by this measure.
The government notes that this measure has a long implementation timeframe to allow people who would be affected to consider their retirement income arrangements, and it will “contribute to the repair of the Budget over the medium to long term”.
ASFA note: while the recent NCOA report recommended an increase in the Age Pension qualifying age to 70 years, it suggested phasing the increase in over a longer period, to reach “around 70 by 2053”. If that recommendation had been adopted, the proposed change would not have affected anyone born before 1965.
Indexation of pension and pension equivalent payments by the Consumer Price Index: The government will index pension and equivalent payments by the Consumer Price Index (CPI).
This measure will commence from 1 September 2017 for pension payments such as: Age Pension; Disability Support Pension; Carer Payment and Veterans’ Affairs pensions. Currently, these payments are indexed in line with the higher of the increases in the CPI, Male Total Average Weekly Earnings or the Pensioner and Beneficiary Living Cost Index.
Eligibility thresholds to be maintained for three years: The government will maintain eligibility thresholds for Australian Government payments for three years.
Eligibility thresholds for pension and pension related payments – including the Age Pension, Carer Payment, Disability Support Pension and the Veterans’ Service Pension – will be maintained for three years from 1 July 2017.
Eligibility thresholds for non-pension payments (including the Family Tax Benefit, Child Care Benefit, Child Care Rebate, Newstart Allowance, Parenting Payments and Youth Allowance) will be maintained for three years from 1 July 2014.
Assets Test Deeming Rate thresholds reset: The government will achieve savings of $32.7 million over five years by resetting the deeming thresholds used in the pension assets test to $30,000 for singles and $50,000 for couples from 20 September 2017.
The Budget papers note that this measure ensures better targeting of pension payments, by tightening the assets test. The savings from this measure will be redirected by the government to repair the Budget and fund policy priorities.
- Seniors Health Card: inclusion of tax-free superannuation income in eligibility test
As recently recommended by the NCOA, the government will include untaxed superannuation income in the assessment of income to determine eligibility for the Commonwealth Seniors Health Card (CSHC) from 1 January 2015.
The assessment of superannuation income will be the same for CSHC holders as for Age Pension recipients and will align with the 2013-14 Budget measure to deem the balances of account-based superannuation of pensioners from 1 January 2015.
All superannuation account-based income streams held by CSHC holders before the implementation date will be grandfathered under the existing rules.
- Paid parental leave
The government’s Budget Outline confirms recent indications that it will proceed with its paid parental leave scheme, albeit with a reduced income cap of $100,000 per annum.
The Scheme will include superannuation payments. It will support mothers to remain engaged with their employer and help address the disparity between the average retirement incomes of men and women.
- ‘Restart’ – increasing the wage subsidy for mature age job seekers
The government will provide an additional $304.1 million over four years from 2014-15 to boost the wage subsidy for mature age job seekers, through a Restart Programme.
From 1 July 2014, a payment of up to $10,000 will be available to employers who hire a mature age job seeker (including those on the Disability Support Pension) aged 50 years or over.
Payments will commence after the worker has been employed for at least six months and will be paid in instalments after 6, 12, 18 and 24 months of employment.
The Restart Programme will build on the government’s election commitment to introduce a seniors employment incentive payment.
- ASIC functions to be reviewed
The recent NCOA report noted that the functions of ASIC, particularly areas of overlap with APRA and the ACCC, should be considered in the context of the Financial System Inquiry, but in the meantime, ASIC’s registry functions should be transferred to the ATO, its consumer protection functions transferred to the ACCC, and its financial literacy functions should cease.
The Budget papers indicate that the government will conduct scoping studies into the possible privatisation of several government bodies, including the registry functions of the ATO. Its response to the NCOA report, released with the Budget papers, notes that further reforms to reduce the number of government bodies will be considered following the Budget.
- Decision not to proceed with ‘housing help for seniors’ program
The government has indicated that it will not proceed with the previous government’s ‘housing help for seniors’ program, which would have provided a means test exemption for Age Pension recipients who downsized their family home, where at least 80 per cent of the proceeds were deposited into a special account with an authorised deposit taking institution. (This measure was announced in last year’s Budget and mentioned in ASFA Action issue 498.) - Community Development Financial Institutions Pilot Project – one year extension
The government will provide $1.5 million to extend the Community Development Financial Institutions Pilot Project for one year from 1 July 2014.
Community Development Financial Institutions provide small loans and financial literacy education services to individuals who are not able to access affordable and fair financial products and services or who may resort to relying on riskier credit sources. ASFA’s Media Release on the Budget is available here.
