The Australian Superannuation rules introduced as far back as 1992 by former Prime Minister (and then Treasurer) the Honourable Paul Keating have been the envy of the pension world not just with the breadth of those reforms but also with the feeling of certainty created by Mr Keating’s long term vision for the future of retiring Australians.
All that changed in 2007 with two events, the first being when former Treasurer the Honourable Peter Costello introduced the Simplified Superannuation rules (from his 10 May 2006 Federal Budget) with the cornerstone being the “tax-free retirement for individuals aged 60 and over” from 1 July 2007. The second event of course was the election of a Labour Federal Government later that same year.
Often called the “curse of a tax-free retirement” Mr Costello’s pleasant surprise soon came under attack by the Labour Government which commenced to wind back the “very generous tax deductions” for higher income earners under the voluntary contribution rules. Of course the GFC did not help anybody and by the end of two terms of Labour Government in 2013, the Budget Deficit had blown out considerably enough to force a return to another Coalition Government in 2013.
Australians are heading to the Polls again on July 3, this year and it is no secret the Government is seeking re-election on its platforms of “jobs and growth” (and tax cuts to grow the economy) while its Labour Opponents are running a campaign based on increased spending in sensitive areas such as Education and proposing to pay for all that (and to some extent the Deficit) with increased taxes. Significantly both Parties are now proposing to wind back “superannuation tax breaks for the rich”. Perhaps the one difference is that while Labour’s platform is social reforms, the Government proposes to use the extra revenue to make much needed other reforms to superannuation.
So let’s look at the Government’s Budget Measures on superannuation reform which with one exception apply from 1 July 2017.
First, what are the proposed new rules “for the rich”. There are five measures that need to be reckoned with. The income threshold for the Division 293 tax is being lowered from $300,000 to $250,000. This is a 15% tax on concessional contributions up to the cap of $35,000 (persons aged 50 and over) and $30,000 (persons under age 50). Division 293 tax is meant to ensure “higher income earners” do not get a greater tax break than lower income earners. This may seem a token measure to snare more individuals but the estimated gain to revenue is $2.5 billion. The concessional contribution caps will be reduced to $25,000 for all ages from 1 July 2017. Again, this may seem a token measure (and will frustrate older Australians) but it is a big factor in the $2.5 billion number.
The next two measures are not token with a cap of $1.6 million being placed on the transfer value into tax-free pension funds from 1 July 2017 and current excess balance pension funds will need to be reduced by the same date to meet the $1.6 million cap. Pension funds may grow above the $1.6 million cap but the excess balance at 30 June 2017 must be transferred to a superannuation accumulation fund where the idea is earnings and future concessional contributions will be taxed at 15%. The estimated gain to revenue is $2.0 billion. The other measure (with a gain to revenue of just $550 million) is placing a lifetime cap on non-concessional contributions (ie your own money) of just $500,000. However, this lifetime limit will commence the counting of non-concessional contributions from 1 July 2007 and any excess amounts must be transferred out of the tax-free pension accounts to an accumulation account by 1 July 2017. This final measure has sparked complaints of “retrospectivity” with disaffected persons and of course the other sides of politics. The very unpopular “excess concessional and non-concessional contribution” taxes remain in place and it will be interesting to see how the Draft Legislation deals with “inadvertent breaches of excess non-concessional contributions into tax-free pension funds.
Past and future foreign superannuation fund transfers into Australian superannuation funds will need careful review, particularly where transfers from the UK are impacted by QROPS rules.
The final measure is touted as an “integrity measure” by removing the tax exemption from 1 July 2017 on pension funds supporting “transition to retirement income streams (pensions)” of recipients over preservation age but not yet retired. Estimated gain to revenue is $640 million.
Secondly, and bearing in mind the extra tax from accumulation fund earnings is meant to offset the “forgone revenue” of the nicer superannuation reforms, let’s look at these much needed reforms.
Individuals with a superannuation balance less than $500,000 may make “catch-up” contributions by accessing unused cap amounts on a rolling basis for a period of five consecutive years. Only unused cap amounts accrued from 1 July 2017 may be carried forward. This will suit people who are in and out of the workforce, particularly women provided they can afford the extra contributions etc. The cost to revenue is estimated at $350 million.
From 1 July 2017, the current restrictions for individuals aged 65-74 making contributions will be removed. They will no longer have to meet the “work test” to make contributions and will be able to receive contributions from their spouse. This means for example, monies freed up from downsizing a house later in life will now benefit from the superannuation rules with both spouses potentially able to utilise the lifetime $500,000 non-concessional contribution cap. The cost to revenue is estimated at $130 million.
The low income spouse superannuation tax offset income threshold will be raised from 1 July 2017 to $37,000. The $540 low income spouse tax offset for the contributing spouse builds on co-contribution and superannuation splitting policies to boost retirement savings. The previous income threshold of just $10,800 limited the spouse tax offset unnecessarily and should have been increased along with the tax-free threshold changes of the Gillard Government. The cost to revenue is just $10 million.
A new Low Income Superannuation Tax Offset (not to be confused with the spouse contribution tax offset above) will be introduced from 1 July 2017 for low income earners. Currently for low income earners there is more tax paid on superannuation contributions than on income paid as salary or wages. The LISTO of up to $500 will apply to members with adjusted taxable incomes to $37,000 and is estimated to have a cost to revenue of $1.6 billion.
And finally, the anomalous distinction between employees, the self-employed and all others which has unnecessarily limited and overly complicated the rules for concessional contributions will be removed from 1 July 2017. Currently employees cannot claim a tax deduction for their own contributions unless their assessable income, employer superannuation contributions and reportable fringe benefits meets a “less than 10%” test of all their assessable income etc. All individuals up to age 75, regardless of employment circumstances will be able to make concessional contributions up to the cap by utilising both employer contributions and claiming deductions for their own contributions. The cost to revenue is estimated at 1.0 billion.
And finally there is one more “sleeper”. Touted this time as both an “integrity and a fairness” measure, the “outdated anti-detriment provision” will be removed. Few people would know what this archaic provision is but the estimated gain to revenue of $350 million should alert estate planners who will know this old rule can result in a refund of a member’s lifetime superannuation contributions tax payments into an estate where the beneficiary is the dependant (spouse, former spouse or child). Lump sum death benefits will remain tax free to dependants but the removal of the anti-detriment provision is said to better align treatment of lump sum death benefits across all superannuation funds and the treatment of bequests outside of superannuation.
I have limited my comments to accumulation funds but note these proposals are meant to apply (somehow) to defined benefit plans and Government plans. Exactly how they will (or won’t) apply will be subject to Draft Legislation and a consultation process. Individuals are reminded not to rely upon the above commentary and should seek appropriate professional advice in relation to their own circumstances. These proposals are not law albeit they are Budget Measures and will be subject to a Consultation Process. They are of course also subject to the results of the Federal Election on 3 July 2016.
Tony Halcrow is a professional tax adviser and commentator. He was previously a National Tax Technical Director with PricewaterhouseCoopers from 1989 and retired in 2015.