Changes announced in 2019 Budget
1. Exempt current pension income: In my May 2018 Newsletter, I outlined which calculation method to use when calculating the tax exemption on investment income from assets supporting superannuation retirement pensions. You will see from my article that the required method has become unnecessarily complex since the changes to superannuation law from 1 July 2017. The government announced in the Budget that it will streamline administrative requirements for the calculation of exempt pension income. This means, if the changes take place, from 1 July 2020 SMSFs with interests in both accumulation and retirement phases will be able to choose their preferred method of calculation. They will be able to either apply the actuary’s calculation for the entire income year or only for the periods of the year when their SMSF had both accumulation and pension interests. The proposed changes will also remove the requirement to obtain an actuarial certificate when all members of the SMSF are fully in retirement phase for all of the income year.
2. Work test changes for voluntary contributions: The government will increase the work test age to 67 to align with the age pension age (i.e. the eligibility for the Age Pension is scheduled to be 67 from 1 July 2023). Currently, superannuation fund members aged 65 and 66 can only make voluntary contributions if they meet the part time work test (i.e. 40 hours over 30 consecutive days). If the changes take place, it will allow members aged 65 and 66 to make contributions without meeting the work test. These people will also be able to access the bring forward rule and make up to three years of non-concessional contributions (i.e. $300,000) in a single year.
3. Increase to the age limit for spouse contributions: The government announced in the Budget that the age limit for spouse contributions will be increased from 69 to 74 years from 1 July 2020. Currently those aged 70 or over cannot receive contributions made by their spouse. This also means that spouses, aged 65 and 66 will no longer need to meet the work test to be able to receive spouse contributions.
Changes no longer happening
4. Increasing the numbers in an SMSF: Increasing the number of members in a Self Managed Superannuation Fund (SMSF): Even though, on 3 April 2019, the Bill containing the measure to change the SMSF member limit from 4 to 6 was passed by Parliament, the measure was removed in order to pass other measures in the bill. I believe the Liberal Party still plans to pursue this as it remains one of its key superannuation policies. So at this stage, anyone thinking of asking other family members to join their existing 4 member SMSF will need to consider other options. You may wish to refer to my March 2019 Newsletter that addresses reasons why some members may establish a second SMSF.
5. Limited recourse borrowing arrangements and the total superannuation balance: The government previously announced that SMSF members that entered into a limited recourse borrowing arrangement on or after 1 July 2018, where the lender is a related party of the SMSF, or a member has met a condition of release with a nil cashing restriction (e.g. retirement, terminal medical condition, permanent incapacity, attaining age 65), will have their share of the outstanding loan (at 30 June) added to their total superannuation balance. This measure was designed to stop SMSF members withdrawing their superannuation savings from their SMSF to reduce their total superannuation balance so that they would qualify to use catch-up concessional contributions cap (if their balance is below $500,000) or make further non-concessional contributions (if their balance is below $1.6million). These members then used the money withdrawn as a loan to their SMSF. This Bill has lapsed.
6. Non-arms’ length expenditure: In my February Newsletter, I mentioned that there was a proposal to amend the non-arm’s length income provisions in the income tax law to include expenses. This was to ensure that SMSFs cannot circumvent the rules by using non arm’s length expenditure. This Bill has lapsed.
Changes announced by the Labor Party
7. Franking credits: Also in my February Newsletter, I explained what a franking credit is (also known as imputation credit). If Labor wins the next election, they propose to deny cash refunds of excess franking credits.
8. Non-concessional contributions cap: Labor is proposing to lower the annual non-concessional contributions cap from $100,000 to $75,000. This will impact the bring forward cap which will be reduced from $300,000 to $225,000 (i.e. $75,000 x 3 years).
9. Division 293 Tax: Labor is proposing to lower the income threshold from $250,000 to $200,000 in relation to the imposition of Division 293 tax on concessional contributions of high income earners.
10. Tax deduction for personal superannuation contributions: Labor is proposing to reintroduce the 10% rule to again restrict deductions on personal superannuation contributions.
11. Limited recourse borrowing arrangements: Labor is proposing to ban SMSFs from entering into new limited recourse borrowing arrangements.
12. Pension exemption limit of $75,000 p.a: Labor was proposing to further limit the tax exemption for earnings on superannuation balances in the pension phase that exceed $1.5 million. This means earnings on assets supporting income streams in the retirement phase will be tax free up to $75,000 p.a. for each member (i.e. $1.5 million x 5% p.a. yield). Earnings above $75,000 would be taxed at 15%. Though this has been a long standing policy and there is now some scepticism whether it is necessary to pursue it (considering a very similar framework has been established by the Coalition’s transfer balance cap), it is unclear whether Labor still intends to introduce this policy.
Unfortunately, the only thing that we can be certain of, is that both sides of politics will continue to fiddle with our superannuation system to satisfy their own policy objectives. As long as superannuation represents a big pot of money to government, I’m not confident that this will ever change.
Monica Rule is an SMSF specialist and author. Her advice is general in nature and you should seek advice that relates to your specific circumstances before making any decisions. www.monicarule.com.au