Issue 601, 3 May 2016
In this issue:
- Overview
- The objective of superannuation
- Details of specific superannuation measures
- Other noteworthy measures
Overview
The 2016/17 Budget contains extensive and significant changes to superannuation.
The government has proposed a package of reforms that will deliver an estimated net gain to the revenue of over $3 billion over the next four years. These affect many aspects of the superannuation framework, including the amount that can be taken into the retirement phase, the tax arrangements and caps for contributions, the circumstances in which contributions can be made, and the availability of concessional tax treatment in respect of certain types of income streams.
The major measures with direct impact on superannuation are:
- a $1.6 million superannuation transfer to income stream balance cap will apply from 1 July 2017
- a $500,000 lifetime cap for non-concessional contributions will apply, effective immediately
- the concessional contributions cap will be reduced to $25,000 from 1 July 2017
- the income threshold for 30 per cent tax rate for concessional contributions (Division 293 tax) will be reduced to $250,000 from 1 July 2017
- individuals with balances under $500,000 will be able to make catch-up concessional contributions from 1 July 2017
- the criteria for deductibility of personal contributions will be extended to all individuals from 1 July 2017
- a new Low Income Superannuation Tax Offset (LISTO) will replace the Low Income Superannuation Contribution (LISC) from 1 July 2017
- the work test for individuals aged from 65 to 74 years of age to make superannuation contribution rules will be removed from 1 July 2017
- the anti-detriment provision for death benefits will be removed from 1 July 2017
- earnings on assets supporting transition to retirement income streams will be taxable from 1 July 2017
- eligibility for the low income spouse superannuation tax offset will be expanded from 1 July 2017
- the tax exemption for earnings on assets supporting income streams will be expanded to cover deferred annuities and group self-annuitisation products from 1 July 2017
- the Superannuation Complaints Tribunal (SCT) will receive increased funding of $5.2 million to help it deal with legacy complaints and improve internal processes
- APRA will receive increased funding to modernise its data capabilities
ASIC will receive additional funding to enhance consumer protection and prepare it for the move to an industry funding model, and there will be a review of disputes resolution and complaints bodies in financial services.
The objective of superannuation
Separate to the Budget papers, the Treasurer and Assistant Treasurer have confirmed that the government will proceed to enshrine in law that the objective for superannuation is “to provide income in retirement to substitute or supplement the Age Pension”.
The government will embed the objective in a stand-alone Act, with an accountability mechanism to ensure that new superannuation legislation is considered in the context of this objective. The subsidiary objectives will be set out in explanatory material to the Act, and the government will consult on the form of the legislation.
The government notes that the objective has “been an important anchor for the development of the superannuation changes included in the Budget”.
Details of specific superannuation measures
1. Superannuation transfer balance cap of $1.6 million
From 1 July 2017, the government will introduce a $1.6 million transfer balance cap on the total amount of accumulated superannuation an individual can transfer into the retirement (income stream) phase.
Where an individual accumulates amounts in excess of $1.6 million, they will be able to maintain this excess amount in an accumulation phase account (where earnings will be taxed at the concessional rate of 15 per cent). Members already in the retirement phase, with balances above $1.6 million, will be required to reduce their retirement balance to $1.6 million by 1 July 2017, by either transferring the excess back into an accumulation superannuation account or withdrawing the excess amount from their superannuation.
Individuals who breach the cap will be subject to a tax on both the amount in excess of the cap and the earnings on the excess amount, similar to the tax treatment that applies to excess nonconcessional contributions.
The cap will be indexed in $100,000 increments, in line with the consumer price index.
Where an individual seeks to make more than one transfer into a retirement phase account, a proportionate method will be used to measure the percentage of the cap previously utilised and therefore how much cap space an individual has available. Subsequent fluctuations in retirement accounts due to earnings growth or pension payments will not be considered when calculating cap space.
To broadly replicate the effect of the $1.6 million transfer balance cap, pension payments over $100,000 per annum paid to members of unfunded defined benefit (DB) schemes and constitutionally protected funds providing defined pensions, will continue to be taxed at full marginal rates, however the 10 per cent tax offset will be capped at $10,000 from 1 July 2017. For members of funded DB schemes, 50 per cent of pension amounts over $100,000 per annum will now be taxed at the individual’s marginal tax rate. The government has indicated that less than one per cent of DB fund members in retirement phase will be affected by this change.
Consultation will be undertaken on the implementation of this measure for members of both accumulation and DB schemes.
This measure is estimated to have a gain to revenue of $2 billion over the forward estimates period. The Budget papers note that the average superannuation balance for a 60 year old Australian nearing retirement is $285,000, and less than 1 per cent of fund members will be affected by the balance cap.
2. Lifetime cap for non-concessional superannuation contributions
Effective immediately (that is, from 7.30 pm (AEST) on 3 May 2016), the government will introduce a $500,000 lifetime non-concessional contributions cap for all Australians under the age of 75.
This will replace the current arrangements, which allow individuals to make non-concessional contributions of up to $180,000 per year (or $540,000 every three years if aged under 65).
The new lifetime cap will take into account all non-concessional contributions made on or after 1 July 2007 (from which time the Australian Tax Office (ATO) has reliable contributions records). It will be indexed to average weekly ordinary time earnings.
If, after commencement, an individual makes contributions that cause them to exceed their cap they will be notified by the ATO to withdraw the excess from their superannuation account. Individuals who choose not to withdraw will be subject to the current penalty arrangements for excess non-concessional contributions. If an individual has exceeded the cap prior to commencement, they will be taken to have used up their lifetime cap but will not be required to take the excess out of the superannuation system.
After-tax contributions made into DB accounts and constitutionally protected funds will be included in an individual’s lifetime non-concessional cap. If a member of a DB fund exceeds their lifetime cap, ongoing contributions to the DB account can continue but the member will be required to remove, on an annual basis, an equivalent amount (including proxy earnings) from any accumulation account they hold. The amount that could be removed from any accumulation accounts will be limited to the amount of non-concessional contributions made into those accounts since 1 July 2007. Contributions made to a DB account will not be required to be removed. The government will consult to ensure broadly commensurate and equitable treatment of individuals for who no amount of post 1 July 2007 non-concessional contributions is available to be removed.
The lifetime cap is estimated to have a gain to revenue of $550 million over the forward estimates period. The government notes that as well as improving the sustainability of the superannuation system, the new lifetime cap will provide Australians with flexibility around when they choose to contribute to their superannuation.
3. Concessional contributions caps reduced to $25,000
From 1 July 2017, the government will lower the annual concessional contributions cap to $25,000 for all individuals. The cap will index in line with wages growth.
Currently, a concessional contributions cap of $30,000 per year (subject to indexation) applies for individuals under the age of 50, and a transitional cap of $35,000 per year applies for those people aged 50 and over.
The transitional cap for those aged 50 and over will be removed from 1 July 2017, and all individuals will be subject to the same cap of $25,000 per year (subject to indexation). The Budget papers indicate that the lower cap in 2017/18 will affect about three per cent of superannuation fund members, with average incomes of around $210,000 and average superannuation balances of around $760,000.
From 1 July 2017, the government will include notional (estimated) and actual employer contributions in the concessional contributions cap for members of unfunded DB schemes and constitutionally protected funds. Members of these funds will have opportunities to salary sacrifice commensurate with members of accumulation funds. For individuals who were members of a funded DB scheme as at 12 May 2009, the existing grandfathering arrangements will continue.
The Budget papers do not provide a separate estimate for the gain to the revenue from this measure however, the combined effect of this change and the changes to the threshold for the 30 per cent tax rate on concessional contributions (see measure number 4 below) will be a gain to the revenue of $2.5 billion over the forward estimates period.
4. 30 per cent tax on concessional contributions: threshold reduced to $250,000
The ‘income’ threshold at which the 30 per cent rate of tax applies to an individual’s taxable concessional contributions will be reduced to $250,000 from 1 July 2017.
The higher rate of tax (‘Division 293 tax’) has applied from 2012/13 to reduce the tax concession on contributions for individuals whose ‘income’ is greater than $300,000 a year. ‘Income’ for this purpose has an extended meaning—it includes an individual’s taxable income, plus their concessional (pre-tax) superannuation contributions (less any amount in excess of the concessional contributions cap) and some other adjustments, including reportable fringe benefits and net investment losses.
The Division 293 tax is currently charged at 15 per cent of an individual’s taxable concessional contributions above the $300,000 threshold, in addition to the normal 15 per cent rate that applies to taxable contributions. For individuals who are members of a DB fund, the additional Division 293 tax may be calculated on their ‘notional contributions’.
The government has now announced that the ‘income’ threshold will reduced from $300,000 to $250,000 from 1 July 2017, to improve sustainability and fairness in the superannuation system by limiting the effective tax concessions provided to high income individuals. The lower threshold will also apply to members of DB schemes and constitutionally protected funds covered by the tax. Existing exemptions (such as State higher level office holders and Commonwealth judges) will be maintained.
The Budget papers note that to be liable for a total of 30 per cent tax, a person would need to have at least $250,000 in combined income and concessional superannuation contributions. In 2017/18, approximately one per cent of fund members are expected to pay additional contributions tax as a result of this measure. These individuals will have an average taxable income of $266,000 and an average superannuation balance of $535,000.
The Budget papers do not provide a separate estimate for the gain to the revenue from this measure however, the combined effect of this change and the changes to the concessional contributions cap (see measure #3 above) will be a gain to the revenue of $2.5 billion over the forward estimates period.
5. Catch-up concessional contributions for those with balances under $500,000
From 1 July 2017, the government will allow individuals with superannuation balances under $500,000, who have not reached their concessional contributions cap in previous years, to make additional concessional contributions.
Currently, the amount of concessional contributions that can be made by or for an individual is subject to an annual cap (this cap is currently $30,000 for individuals under age 50 and $35,000 for individuals aged 50 or over, but is proposed in this Budget to be reduced to $25,000 for all individuals – see measure number 3 above).
The government is now proposing that unused concessional contributions cap amounts accrued from 1 July 2017, will be able to be carried forward on a rolling basis for a period of five consecutive years.
The measure will also apply to members of DB schemes and consultation will be undertaken to minimise additional compliance impacts for these schemes.
The government notes that this reform will address the impact that an annual cap has on the ability of people with interrupted work patterns—for example women or carers—to accumulate superannuation balances commensurate with those who do not take breaks from the workforce.
This measure is estimated to have a cost to revenue of $350 million over the forward estimates period.
6. Tax deductibility of personal superannuation contributions
From 1 July 2017, all individuals up to the age of 75 will be able to claim an income tax deduction for personal superannuation contributions.
Currently, an income tax deduction for personal superannuation contributions is only available to people who earn less than 10 per cent of their income from salary or wages.
This means those who earn at least 10 per cent of their income via salary or wages are restricted from receiving tax concessions on their retirement savings. It similarly means that some employees are prevented from fully accessing the tax concessions simply because their employer does not allow them to make pre-tax contributions through salary sacrifice.
From 1 July 2017, all individuals, regardless of their employment circumstances, will be allowed to make concessional superannuation contributions up to the concessional cap. Amounts contributed under this rule will count towards the individual’s concessional contributions cap, and will be subject to 15 per cent contributions tax.
To access the tax deduction, individuals will lodge a notice of their intention to claim the deduction with their superannuation fund or retirement savings provider (as is currently the case for those already eligible to claim a deduction for their personal contributions). Generally, this notice will need to be lodged before they lodge their income tax return. Individuals can choose how much of their contributions to deduct.
Individuals that are members of certain prescribed funds would not be entitled to deduct contributions to those schemes. Prescribed funds will include all untaxed funds, all Commonwealth DB schemes, and any State, Territory or corporate DB schemes that choose to be prescribed. If a member of a prescribed fund wishes to claim a deduction, they may choose to make their contribution to another eligible fund.
The government considers that this reform will benefit all Australians by allowing them to utilise more of their concessional cap if they have the capacity and choose to do so. This measure is estimated to have a cost to revenue of $1.0 billion over the forward estimates period.
7. Low income superannuation contribution replaced with Low Income Superannuation Tax Offset
From 1 July 2017, the government will introduce a Low Income Superannuation Tax Offset (LISTO) to reduce tax on superannuation contributions for low income earners, replacing the low income superannuation contribution (LISC).
The LISC, which was due to end after the 2016/17 year, is a government payment of up to $500 per year, to help eligible low-income earners save for retirement. The LISC is available where an individual has ‘income’ of $37,000 or less for an income year and they, or their employer, have made concessional (pre-tax) contributions during the year (some additional conditions apply, and ‘income’ comprises the individual’s taxable income subject to some adjustments). The LISC is generally paid directly into the individual’s superannuation fund, and effectively reimburses the amount of tax paid on their concessional contributions. Without the LISC, the tax rate applied to the concessional contributions—likely to comprise mainly compulsory contributions—would be higher than the average tax rate applied to the individual’s personal income.
Like the LISC, the LISTO will be capped at $500 and will apply to individuals with adjusted taxable income up to $37,000 that have had a concessional contribution made on their behalf.
However, rather than a government contribution directly into a member’s account, the LISTO will provide a non-refundable tax offset to superannuation funds, based on the tax paid on concessional contributions made on behalf of low income earners (capped at $500 per eligible individual). The ATO will determine a person’s eligibility for the LISTO and advise their superannuation fund annually. The fund will contribute the LISTO to the member’s account.
The government will consult on the implementation of the LISTO.
The measure is estimated to have a cost to the Budget of $1.6 billion over the forward estimates period.
8. Work test for contributions eligibility removed for those aged 65 to 74
From 1 July 2017, the government will remove the ‘work test’ which currently limits the ability of individuals aged 65 to 74 to make superannuation contributions.
Currently, individuals aged 65 to 74 are only able to make voluntary (non-concessional) superannuation contributions if they meet a work test.
From 1 July 2017, the rules that limit the ability of working Australians aged under 75 to make contributions to their own or their spouse’s superannuation will change. The contributions acceptance rules will be amended to:
- remove the requirement that an individual aged 65 to 74 must meet a work test before making voluntary or non-concessional contributions to superannuation
- allow individuals to make contributions to a spouse aged under 75 without the need for the spouse to meet a work test.
The government notes that these reforms will simplify the superannuation system for older Australians and allow them to increase their retirement savings, especially from sources that may not have been available to them before retirement, including from downsizing their home.
This measure is estimated to have a cost to revenue of $130 million over the forward estimates period.
9. Removal of anti-detriment concession for death benefits
The tax deduction available to funds which pay an ‘anti-detriment payment’ as part of a death benefit paid to certain eligible beneficiaries will be removed from 1 July 2017, providing a Budget saving of $350 million over the four year forward estimates.
The anti-detriment payment is an additional amount that may be paid by a fund when a lump sum death benefit is paid to the deceased member’s spouse (or former spouse) or child (including an adult child), or indirectly to those beneficiaries through the deceased’s estate. It represents a refund of the tax that has been paid by the deceased member on superannuation contributions over their lifetime, and has been in place since contributions first became subject to tax in 1988. It is effectively designed to restore the death benefit to the amount it would have been if the 15 per cent tax on contributions had not been paid.
Trustees are not legally required to make anti-detriment payments, although APRA has encouraged APRA-regulated funds to do so, and the concession is applied inconsistently across the industry. Where the payment is made, the fund is currently entitled to a tax deduction for the additional amount.
The government is of the view that removing the anti-detriment payment provision will better align the treatment of lump sum death benefits across all superannuation funds and the treatment of bequests outside superannuation.
The Budget papers are silent on whether any concession will be granted in respect of DB funds, which may be unable to easily reduce the death benefit payable to reflect the removal of the concession, resulting in an added funding burden on the sponsoring employer(s).
10. Integrity of income streams: TTR earnings to be taxed, lump sum versus income stream payment election to be removed
Currently, a fund is entitled to a tax exemption in respect of earnings it derives on assets supporting a current pension (income stream) liability. This represents one of the particular tax efficiencies of a fund entering ‘pension phase’.
The transition to retirement (TTR) rules allow an individual to access their preserved superannuation monies in the form of a non-commutable, account based income stream, even if they have not retired or satisfied another condition of release such as reaching age 65 or suffering permanent incapacity. An individual can currently commence a TTR income stream when they reach their preservation age (between 56 and 60 years of age, depending on their date of birth). As with most other types of (immediate) income streams, the fund is currently entitled to a tax exemption on earnings from assets supporting a TTR income stream.
To ensure that access to TTR income streams is primarily for the purpose of substituting work income rather than tax minimisation, the government will remove the tax exemption for the earnings derived on assets supporting a TTR income stream from 1 July 2017.
Earnings from assets supporting transition to retirement income streams will now be taxed concessionally at 15 per cent (as is the case for fund earnings on assets which are not supporting a current pension liability). This change will apply irrespective of when the transition to retirement income stream commenced.
Currently, individuals are able to elect that certain superannuation income stream payments be treated as lump sums for tax purposes. These payments are then received tax-free to the extent they are within the individual’s low rate cap (currently $195,000).
The Budget indicates that the government will remove the ability to make this election. It is not specifically stated in the Budget papers, but it appears that this will also apply from 1 July 2017. It is also unclear whether the removal of this election ability is limited to TTR income streams, or will apply for all income streams.
These two measures are estimated to have a gain to revenue of $640 million over the forward estimates period.
11. Low Income spouse superannuation tax offset: eligibility expanded
From 1 July 2017, access to the low income spouse superannuation tax offset will be expanded, by increasing the income threshold for the low income spouse to $37,000.
Currently, the offset is available to any individual who contributes for a recipient whose income is up to $10,800.
The offset will continue to be set at 18 per cent of the amount of eligible contributions, capped at $540 per year. The offset will be gradually reduced for income above this $37,000 and will completely phase out at income above $40,000.
This measure is estimated to have a cost to revenue of $10 million over the forward estimates period.
12. Retirement income products: availability of tax exemption extended to deferred lifetime annuities and group self-annuitisation products
The government will remove barriers to innovation in retirement income stream products by extending the tax exemption on earnings in the retirement phase to products such as deferred lifetime annuities and group self-annuitisation products, which seek to provide individuals with income throughout their retirement regardless of how long they live.
Currently, a tax exemption applies for earnings derived by funds on assets supporting current pension (income stream) liabilities. This exemption does not apply for products such as deferred annuities.
Both the Financial System Inquiry (FSI) and Retirement Income Streams Review recently noted that this limits the ability of providers to competitively offer this wider range of products, and recommended that barriers to new product development be removed.
The government is now proposing that the tax exemption on earnings in the retirement phase will be extended to products such as deferred lifetime annuities and group self-annuitisation products from 1 July 2017. The government will also consult on how these new products are to be treated under the Age Pension means test.
This measure has no fiscal impact on the Budget.
13. Increased funding for the SCT
The government has confirmed that the SCT will receive additional funding of $5.2 million in 2016/17, including $2.7 million in capital funding, to reduce the backlog of complaints and improve internal processes. The cost of this measure will be offset by an increase in the supervisory levies collected by APRA.
This funding was announced on 20 April 2016, as part of a package of proposed measures to strengthen ASIC and improve the handling of consumer complaints in the financial sector (see item number 15 below).
14. APRA: additional funding to modernise data capabilities
The government will provide $9.7 million over three years from 2016/17 to modernise APRA’s data collection and dissemination systems. The cost of this element of the measure will be met from within the existing resources of APRA.
The government will also provide $11.2 million over four years from 2016/17 to support the maintenance and operation of the new systems, including $3.4 million in amortisation that has no underlying cash or fiscal impact. The cost of this element of the measure will be offset by an $11.2 million increase over four years from 2016/17 in the Financial Institutions Supervisory Levies collected by APRA.
15. ASIC: additional funding to enhance consumer protection, the move to an industry funding model, and review of disputes resolution and complaints bodies
On 20 April 2016, the government announced a package of measures to better protect consumers and strengthen ASIC, including additional funding, the implementation of an industry funding model and a review of the effectiveness of the current dispute resolution and complaints schemes in the financial services sector.
The Budget papers confirm these previous announcements but provide little further detail.
Additional funding to address misconduct
In particular, the Budget papers confirm that ASIC will receive additional funding totalling $127.2 million over four years, comprising $121.3 million over four years from 2016/17 to ASIC and $5.9 million over three years from 2016/17 to Treasury to combat misconduct in Australia’s financial services industry and bolster consumer confidence in the sector.
The additional funding will support increased surveillance and enforcement activities in areas such as financial advice, responsible lending, life insurance, and breach reporting, and enhancements to ASIC’s data analytics.
The funding for ASIC includes $39.2 million in capital over three years from 2016/17, which will support improvements to ASIC’s technology systems to ensure that ASIC is better equipped to detect financial sector misconduct and to improve information management systems to support other work.
Funding will also support ASIC and the Department of the Treasury in accelerating the implementation of law reforms recommended by the FSI.
The cost of this measure will initially be offset in 2016-17 by an increase in the supervisory levies collected by APRA. However, an industry funding model for ASIC will commence in the second half of 2017 (deferred from the original proposed commencement date of 2016/17), and thereafter this additional funding for ASIC may instead be collected as part of that model.
Preparation for the industry funding model
The government has committed to further consultation with industry to refine and settle the funding model.
The government will provide $6.2 million in 2016/17 to build a levy calculator and modify billing and time recording systems in preparation for the implementation of industry charging arrangements for ASIC from 2017-/18.
The government has made a provision of $144.5 million over three years from 2017/18 pending the development of industry charging arrangements for ASIC.
Funding for this measure has already been provided for by the government.
Review of financial services dispute resolution and complaints schemes
The Budget papers also confirm the government’s commitment to establishing a “panel of eminent persons” to review the role, powers and governance of Australia’s dispute resolution and complaints schemes in effectiveness serving consumers of financial services.
The Panel will specifically be asked to assess the merits of integrating these schemes (the SCT, Financial Ombudsman Service and Credit and Investments Ombudsman) to improve the handling of consumer complaints. The Panel is due to report back to the government by the end of 2016. The cost of this measure will be met from within the existing resources of the Department of the Treasury.
Other noteworthy measures
The Budget also contains a number of more general measures that have the potential to impact superannuation funds. These include:
- “efficiency savings” for the ATO of $21.8 million over four years from 2016/17, to be achieved by reducing stand alone and co-located ATO shopfronts in favour of myGov shopfronts, while actively promoting digital service delivery, expanding ATO external compliance assurance processes, and implementing more efficient processes for external scrutiny of the ATO
- a phased reduction in the company tax rate, commencing with a rate of 27.5 per cent for companies with aggregated annual turnover of less than $10 million in 2016/17 but reducing to 25 per cent for all companies by 2026/27. This will have an important flow on effect for investors such as superannuation funds, with franking credits able to be distributed in line with the rate of tax paid by the company paying the distribution
- targeted personal income tax relief to reduce the marginal tax rate on incomes between $80,000 and $87,000 from 37 per cent to 32.5 per cent from 1 July 2016. This may impact individual’s decision making around the tax effectiveness of salary sacrificed contributions to superannuation
- implementation of a new suite of collective investment vehicles
- expansion of tax incentives for investors in early-stage innovation companies
- expansion of funding arrangements to attract more venture capital investment
- funding to promote Australia internationally as a financial technology (FinTech) destination
- commitment to introduce dedicated ‘regulatory reform Bills’ into Parliament to update and improve the tax laws.
