No major new super measures, but 1 July reforms loom large
The Government did not announce any new major superannuation measures in the Budget. This will be a welcome relief for the super industry, which already has enough on its plate with major reforms set to start on 1 July 2017. As is the case with any large-scale changes such as the 1 July 2017 super reforms, refinements are often necessary to address unanticipated consequences as part the implementation process.
Super changes announced
A range of superannuation measures were announced in the Budget, including:
- the current tax relief for merging superannuation funds will be extended until 1 July 2020;
- the non-arm’s length income provisions will be amended from 1 July 2018 to reduce opportunities for members to use related-party transactions on non-commercial terms;
- limited recourse borrowing arrangements will be included in a member’s total super balance and the $1.6 million pension transfer balance cap from 1 July 2017;
- a person aged 65 or over to make a non-concessional contribution of up to $300,000 from the proceeds of selling their home from 1 July 2018; and
- a first home super saver scheme will allow future voluntary contributions to superannuation to be made by first home buyers from 1 July 2017 to be withdrawn for a first home deposit, along with associated deemed earnings.
Merging super funds: tax relief extended until 1 July 2020
The Government will extend the current tax relief for merging superannuation funds until 1 July 2020 to remove tax as an impediment to fund mergers and industry consolidation.
Since December 2008, tax relief has been available for APRA regulated superannuation funds under Div 311 of the ITAA 1997 to transfer capital and revenue losses to a new merged fund, and to defer taxation consequences on gains and losses from revenue and capital assets. This tax relief was due to lapse on 1 July 2017. It will now be extended until 1 July 2020.
The Government said that this tax relief for merging funds will be temporarily extended as the Productivity Commission completes a review into the efficiency and competitiveness of the super industry. According to the Government, extending this relief will ensure super fund members’ balances are not reduced by tax when superannuation funds merge.
Merger tax relief will apply until 1 July 2020.
Note that the Government also released exposure draft legislation on 13 April 2017 proposing to expand the tax relief available to superannuation funds when mandatorily transferring assets as part of the transition to the MySuper rules (generally by 1 July 2017).<
Super fund related-party transactions: non-arm’s length income rules to be amended
The non-arm’s length income (NALI) provisions for super funds will be amended from 1 July 2018 to reduce any opportunities for members to use related-party transactions on non-commercial terms to increase superannuation savings.
Specifically, the NALI provisions in s 295-550 of the Income Tax Assessment Act 1997 will be amended to ensure expenses that would normally apply in a commercial transaction are included when considering whether the transaction is on a commercial basis. A super fund’s non-arm’s length income (also known as “special income”) is taxed at 47% instead of the 15% concessional rate.
The measure will seek to ensure that the super reform legislation operates as intended. Essentially, it appears to be aimed at preventing individuals from using non-arm’s length arrangements with their superannuation fund to circumvent the pension balance cap and total superannuation balance threshold.
Super borrowings: LRBA integrity measure for pension cap
As an integrity measure, the use of limited recourse borrowing arrangements (LRBAs) by superannuation will be included in a member’s total superannuation balance and for the purposes of the $1.6 million pension transfer balance cap from 1 July 2017.
According to the Government, LRBAs can potentially be used to circumvent contribution caps and effectively transfer growth in assets from the accumulation phase to the retirement phase that is not captured by the pension transfer balance cap. From 1 July 2017, the outstanding balance of an LRBA will be included in a member’s annual total superannuation balance. In addition, the repayment of the principal and interest of an LRBA from a member’s accumulation account will be a credit in the member’s pension transfer balance account. The measure is expected to save only $4 million over the forward estimates.
The Government previously released exposure draft legislation on 27 April 2017 proposing to include the use of LRBAs by self managed super funds in a member’s total superannuation balance and the $1.6 million pension transfer balance cap. Importantly, that draft legislation only proposed to apply on prospective basis in relation to borrowings that are entered into on or after the commencement of the Bill. So the Budget proposal to apply such an integrity measures to outstanding LRBA balances from 1 July 2017 seems a significant shift in policy.
Super contributions of proceeds up to $300,000 from downsizing a home
The Government will allow a person aged 65 or over to make a non-concessional contribution of up to $300,000 from the proceeds of selling their home from 1 July 2018. These contributions will be in addition to those currently permitted under existing rules and caps and they will be exempt from the existing age test, work test and the $1.6 million total superannuation balance test for making non-concessional contributions (which applies from 1 July 2017).
The measure will apply to sales of a principal residence owned for the past 10 years or more. Both members of a couple will be able to take advantage of this measure for the same home. The measure seeks to reduce a barrier to downsizing for older people to enable more effective use of the housing stock by freeing up larger homes.
Note that the proceeds from downsizing a home in this manner are not proposed to be exempt from the Age Pension assets test.
First home super saver scheme
The Government will encourage home ownership by allowing future voluntary contributions to superannuation made by first home buyers from 1 July 2017 to be withdrawn for a first home deposit, along with associated deemed earnings.
Concessional contributions and earnings that are withdrawn will be taxed at marginal rates less a 30% offset. Combined with the existing concessional tax treatment of contributions and earnings, this will provide an incentive that will enable first home buyers to build savings more quickly for a home deposit.
Under the measure up to $15,000 per year and $30,000 in total can be contributed, within existing caps. Contributions can be made from 1 July 2017. Withdrawals will be allowed from 1 July 2018 onwards. Both members of a couple can take advantage of this measure and combine savings for a single deposit to buy their first home together.
This measure is expected to have a cost to revenue of $250 million over the forward estimates. The ATO will be provided with $9.4 million to implement the measure.
A previous scheme, the First Home Saver Accounts (FHSA) scheme, was abolished from 1 July 2015, although people still have until 30 June 2017 to make claims for government contributions. The scheme operated on the basis that people made contributions to a FHSA which then resulted in a government contribution, the amount of which depended on how much the individual’s personal contribution was. To claim a government contribution, the person must have been a resident of Australia for tax purposes.
The main features of that FHSA were as follows:
- The government made a 17% contribution on the first $6,000 a person deposited each financial year. For example, a personal contribution of $1,000 would result in a government contribution of $170.
- The interest a person earned on their account was only taxed at a rate of 15%.
- The person had to save at least $1,000 each year over at least four financial years before they could withdraw the money. The four years did not have to be consecutive.
- The maximum account balance was capped at $90,000. After savings reached this level, only interest and earnings could be added to the balance.