Even though there was much speculation before the Budget about the superannuation changes it might contain, I was nonetheless surprised about the wide range of measures that it contained. This is the most comprehensive package of change to super in over a decade. I provide a summary of most but not all of these below.
The Government will be raising another $6 billion in revenue from the top 4% of super account holders and will spend $3 billion of that on the other 96% – especially low income earners and women.
As expected, the Budget announced a super tax offset for low income earners that will be funded by reduced tax concessions for high income earners:
- The Low Income Superannuation Contribution scheme (LISC) scheduled to be abolished from June 2017. LISC will be continued as the Low Income Superannuation Tax Offset (LISTO). People earning less than $37,000 receive a super rebate of up to $500. This will benefit 3 million Australians, including 2 million women.
- The threshold for the 30% concessional contributions tax (previously applying to those earning over $300,000) has been reduced to $250,000. About 3% of Australians will have to pay the higher contributions tax but implementation of this extended measure is likely to involve a high degree of administration.
Unexpected Budget Changes
Personal super contributions will be tax deductible for everyone, not just the wholly self-employed. This effectively means that everyone will have access to salary sacrifice and won’t be constrained by the terms of their employment contracts. Lots of people may receive a benefit from participation and cost to the Government is estimated at $1 billion.
There will be a $1.6 million cap on the amount of super that can be transferred tax-free into retirement phase. While this won’t affect many people, it will save the Government over $2 billion. This will be retrospective back to 2007, and amounts over the cap will either have to stay in an accumulation account (and attract 15% tax on earnings) or be taken out of super.
In probably the least popular superannuation measure, the concessional caps are to be reduced to $25,000 for all people – a reduction of $5,000 for people less than 50 years of age and $10,000 for those over 50. However, if you have an account balance of under $500,000, any unused concessional caps will be able to be rolled over for 5 years. Like the LISTO, this is specifically marketed by the Government as a measure intended to improve super for women.
A lifetime non-concessional cap of $500,000 will be introduced, replacing the current cap of $180,000 per year (or $540,000 brought-forward every three years). While this seems like a very significant reduction, it may not impact very many people.
People aged 65 to 74 will be able to continue making contributions to their superannuation, regardless of their employment status. The current strict work tests will be abolished.
The existing spouse tax offset which currently applies to spouses earning $10,000 will be made available to spouses earning up to $40,000. This will soundly increase the number of couples that will be able to access this tax benefit.
Super is fit for Purpose
In a particularly surprising move, the Government has confirmed it will legislate the objective of super as being the provision of retirement income to supplement or substitute the age pension. This is the definition recommended by the Financial System Inquiry, but was not expected to be progressed until later this year.
The little known, often misunderstood and inconsistently applied anti-detriment payment arrangements are being axed. These payments involved the refund of contributions tax to deceased super fund member’s estates.
In a curious exchange of tax exempt statuses, the earnings tax exemption in retirement products will be extended to most annuities, while the earnings tax exemption will be removed from Transition to Retirement (TTR) income streams. The first measure is a welcomed removal of a barrier to innovative product development, while the latter is intended to reduce the use of TTR for tax minimisation.
The Government intends that these changes will also be replicated in defined benefit funds.
Implementation of Super Changes
The implementation of these changes will require the support of considerable legislative change, with the interaction between different elements needing to be carefully managed to ensure that unintended consequences don’t occur.
Super funds will also need to gear up to make very extensive process and policy changes to accommodate these changes as they apply retrospectively as well as in the future. The administration of super will become even more crucial as the industry transforms to support these changes and potentially more.
Executive Superannuation Policy Advisor, VIC