A Stronger Economy’ is the overarching theme of the 2018/19 Federal Budget
Whilst superannuation received some attention, the promise of personal income tax cuts was a major focus in this year’s Federal Budget. The Budget did not contain any changes to the legislated increase in the Superannuation Guarantee, nor were there any major changes to the taxation of super or the concessional and non-concessional caps for voluntary contributions.
There were however a diverse range of adjustments to superannuation including changes to insurance for younger members, reform packages to protect super from erosion and restrictions on superannuation account fees were centrepiece of measures announced. From 1 July 2019, the Government will introduce a ‘Protecting Your Super Package’ covering fees, lost member accounts and insurance arrangements.
Major measures on superannuation and pension include:
From 1 July 2018:
- High income earners with multiple employers will be allowed to nominate the wages from certain employers that are not subject to the superannuation guarantee, to avoid breaching the concessional contributions cap;
- Greater monitoring by the ATO to ensure that members adhere to ‘Notice of Intention to Deduct’ requirements and submit their notice before getting a tax deduction for personal contributions;
From 1 July 2019:
- Proposal to remove default insurance for members who have low balances of less than $6,000, or are under the age of 25 years, or whose accounts have not received a contribution in 13 months and are inactive, will need to opt-in for insurance;
- Life insurance can only be offered in super on an ‘opt-in basis’ to new members under 25 years of age;
- The ATO will proactively reunite dormant superannuation funds with a member’s active account, when inactive accounts are less than $6,000;
- Fees when exiting a super fund will be banned and administration/investment fees will be capped at 3% pa on accounts with balances of less than $6,000;
- Exit fees will be banned on all superannuation accounts, regardless of the balance of the account;
- The Pension Loans Scheme will be available to all Australians over Age Pension age and the maximum payments will increase to 150% of the full Age Pension;
- The Medicare Levy will remain at 2%. This will not increase to 2.5% from 1 July 2019 as previously announced in the last Budget, it is formally abandoned;
- For members aged 65-74 they will not have to meet the work test requirements to make contributions to super in the first year after they stop working. This is so long as their super savings are less than $300,000;
- The Pension Work Bonus will allow pensioners to earn an extra $50 a fortnight without reducing their Age pension eligibility payments. The Pension Work Bonus will also be expanded to include self-employed people who will be able to earn up to $7,800 a year; and
- New Age Pension means testing rules will be introduced for pooled lifetime income streams;
Details of specific superannuation measures
Insurance in Superannuation
The Government will consult on proposals to abolish default insurance cover within superannuation for young people under 25, those with balances of less than $6,000 and inactive accounts that have not received a contribution for 13 months. These proposals would protect the superannuation balances of these members from being eroded by insurance premiums, although leave many younger and low balance members, without life insurance cover. Funds will be required to notify affected members by 1 May 2019 in order to provide them with the opportunity to elect to continue their insurance. Super funds will be prohibited from automatically providing insurance to new members under age 25. Members will still be able to opt-in to insurance however, underwriting is likely to be required.
Lost super member auto-consolidation of multiple accounts
All superannuation accounts that have not received a contribution for 13 months, with balances below $6,000, will be classified as inactive and transferred to the ATO. The ATO will be given powers to use data matching to automatically consolidate these accounts with members’ active accounts when the balance of their consolidated account is $6,000 or more. The Government expects the new system will reunite $6 billion of superannuation money with around 3 million members’ active accounts in 2019-20.
The Government has proposed measures to tackle the impact of superannuation fees on member balances. Exit fees will be banned on all superannuation accounts, regardless of the balance of the account.
Cap on fees for superannuation accounts with low balances
The Government will introduce a cap on fees for superannuation accounts with low balances.
- If the balance of a member’s superannuation account is less than $6,000, the maximum amount of administration and investment fees that can be deducted from the account in the following six-month period is 1.5% of the balance, or $90 per six months;
- There is no restriction on member-agreed advice fees;
- There is also no maximum amount of administration and investment fees that can be deducted for balances ‘above’ $6,000.
Super guarantee opt-out for high income earners with multiple employers
From 1 July 2018, High-income earners will be protected from inadvertently breaching the annual super contributions limits. Individuals who earn more than $263,157 a year from multiple employers will be allowed to make wages from certain companies exempt from the super guarantee. Employees may be able to negotiate higher income in lieu of super guarantee contributions. Under current rules, individuals earning more than this amount from multiple sources can easily find themselves excess concessional contributions of more than the annual $25,000 limit, resulting in a tax bill.
Work test exemption allowing retirees to make voluntary contributions in the first year of retirement
With effect 1 July 2019, A person aged 65-74 is able to make contributions to superannuation if the work test has been satisfied (i.e.; has worked at least 40 hours in 30 consecutive days) in the financial year the contribution is made. A one year exemption from the work test requirements will apply for those who have less than $300,000 in total superannuation savings. The one year exemption applies to the financial year following the last year the work test was satisfied. This will allow an additional period of time for those eligible to contribute to superannuation. For example, Jane ceases full time work in 2018/19 at age 66. Her total super balance is less than $300,000. Under the current rules, if Jane wanted to contribute to super in 2019/20 (and meets any other eligibility criteria) she would need to meet a work test. However, under the proposed changes, Jane would be able to contribute in 2019/20 without needing to meet the work test (note her total super balance is less than $300k). However, this exemption will only apply in the financial year following the year that she last met the work test. If Jane wanted to contribute any time from 2020/21 she would again need to meet the work test requirements.
As part of the 2017/18 Federal Budget, the Government proposed to increase the Medicare levy rate to 2.5% from 1 July 2019. This proposal has now been abandoned and the Medicare levy rate will remain at 2%.
Monitoring of ‘Notice of Intention to Deduct’ requirements
From 1 July 2018, the ATO will receive $3.1 million to check that individuals are completing ‘Notice of Intention to Deduct’ forms when claiming tax deductions on personal super contributions. Some super fund members are not completing the form, which means the super fund does not deduct the contributions tax, but individuals receive a tax deduction in their tax returns. The Government expects to gain $430 million over the forward estimates through greater monitoring.
Increase to the Pension Work Bonus from $250 to $300 per fortnight
The Pension Work Bonus is an income test concession for age pensioners and Veterans’ Affairs pensioners. Currently, the first $250 of employment income a fortnight is not counted in the Age Pension income test. From 1 July 2019, the Government plans to increase the Pension Work Bonus from $250 to $300 per fortnight and extend eligibility to those who are self-employed rather than only the employed. To ensure the Work Bonus only applies to those actually engaged in gainful work, there will be a ‘personal exertion’ test. This means the Work Bonus would not apply to income associated with returns on financial or real estate investments. The Work Bonus operates in addition to the pension income test-free area. From 20 March 2018, for single pensioners, the pension income test-free area is $168 a fortnight and for couples combined, it is $300 a fortnight. For example, this means a single pensioner over Age Pension age with no other income could earn up to $468 a fortnight ($12,168 pa) from employment or self-employment and still receive the maximum rate of pension under the income test. Pensioners will also continue to accrue unused amounts of the fortnightly Work Bonus, which means future earnings can be exempt from the pension income test. The maximum accrual amount will increase to $7,800 (from $6,500).
Means testing for lifetime products
From 1 July 2019, new Age Pension means testing rules will be introduced for pooled lifetime income streams. The rules will assess a fixed 60% of all pooled lifetime product payments as income, and 60% of the purchase price of the product as assets until age 84, or a minimum of five years, and then 30% for the remainder of the person’s life. These new rules will provide the platform to develop innovative products that can help retirees manage the risk of outliving their income while ensuring a fair and consistent means test treatment of all retirement income products. These changes also pave the way for the development of comprehensive income products for retirement (CIPR). These income products are intended to provide retirees with more choices and flexibility in retirement income products to meet a wider variety of needs and to help boost their living standards. Individuals will not be forced to take up CIPR at retirement, it will simply increase the choice of retirement products available to manage longevity risk. In a further emphasis on retirement income, the government will also introduce a law requiring superannuation funds to “formulate a retirement income strategy” for super fund members.
The Pension Loans Scheme – retirees using their home equity to fund retirement
The Pension Loans Scheme is a reverse-mortgage style scheme that enables retirees to release equity in their home in the form of an income stream. Centrelink administers the Scheme. The Scheme is currently only open to retirees who are eligible for a part Age Pension and is not widely used. The Government has proposed to extend the Scheme to all retirees, including full rate Age Pensioners and self-funded retirees. To help retirees turn their assets into income, this involves the government acting like a bank, lending retirees money against the value of their home – typically known as a reverse mortgage or equity release. This will enable single retirees who own their own home to boost their income by up to $11,799 and couples to boost their retirement income by up to $17,800 without impacting their eligibility for the Age Pension or other benefits. They will be able to borrow against the value of their home however the money must be taken as a fortnightly income stream.
Additional Royal Commission funding
The Government has committed to provide $10.6 million over two years from 2017-2018 to ASIC and $2.7 million in 2018-2019 to APRA to assist the regulators in their involvement in the Royal Commission.
Additional AFCA funding
The Government will provide additional funding of $1.7 million in 2018-2019 towards the establishment of the Australian Financial Complaints Authority (AFCA), which kick starts on 1 November, this year.
Funding for financial literacy initiatives
The Government has provided $10 million for initiatives to improve financial literacy among women, as part of a wider $50 million fund to promote the financial capabilities of Australian consumers.
Low and middle income tax offset and low income tax offset
In addition to the existing low income tax offset, the Government will introduce the low and middle income tax offset which will apply from the 2018/19 financial year to the 2021/22 financial year inclusive. The offset will be applied on a tiered basis and this offset applies in addition to the existing low income tax offset, which does not change during the time the new offset applies. From 1 July 2022, the low income tax offset will increase from $445 to $645. This offset will reduce by 6.5 cents for every dollar over $37,000 up to $41,000 for an offset of $385. From $41,000, the offset reduces at 1.5 cents resulting in no offset applying for incomes in excess of $66,667. The low and middle income tax offset is a temporary measure to provide ‘immediate relief’. Once this new tax offset ends however, the implementation of the changes to the low income tax offset and marginal tax rates should provide ongoing relief. With the additional low and middle income tax offset, the effective income tax-free threshold will be lifted from the current $20,542 to $21,595.
Changes to personal income tax threshold
There are a number of proposed changes to marginal tax rates over the next seven years:
- From 1 July 2018 the 32.5% tax threshold is proposed to increase from $87,000 to $90,000.
- From 1 July 2022 the 32.5% tax threshold is proposed to increase from $90,000 to $120,000 and the 19% threshold is proposed to increase from $37,000 to $41,000.
- From 1 July 2024 the 37% marginal tax rate will be abolished, and the 32.5% tax threshold will be increased to $200,000.
Income tax exemption for certain veteran payments
From 1 May 2018, the following components of the Veteran Payment will be exempt from tax:
- Supplementary amounts of this payment, such as pension supplement and rent assistance, when made to veterans directly.
- The full payment plus supplement amounts, when the payment is made to the partner of a veteran who has died.
Removing tax deductibility of non-compliant payments to employees and contractors
To address the problem associated with the black economy, the Government will introduce the Black Economy Package including the removal of tax deductibility of non-compliant payments. Under this measure, from 1 July 2019, business will no longer be able to claim tax deductions for payments to their employees where they have not withheld any amount of PAYG even though PAYG withholding requirements apply. The Government will also remove deductions for payments made by businesses to contractors where the contractor does not provide an ABN and the business does not withhold any amount of PAYG despite the withholding requirements applying. Businesses will need to ensure they meet the PAYG obligations when making payments to employees and contractors to be able to claim a deduction on these payments.
This article is not intended to be financial advice and is of a general nature only that does not take into account your individual objectives, financial situation or needs. While all efforts have been made to ensure the information contained in this article is accurate, errors may occur.