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Multi-Asset

The Federal Budget 2021-22: super, contributions and SMSFs

By Graeme Colley
Executive Manager, SMSF Technical and Private Wealth - SuperConcepts Sydney, Australia

This year’s Federal Budget didn’t disappoint as the announcements will allow greater flexibility in making superannuation contributions; relaxing some requirements impacting self-managed superannuation funds (SMSFs); and freeing up other super concessions. These announcements are all useful and practical changes and are anticipated to commence from 1 July 2022. Let’s have a look at the announcements – starting with the abolition of the work test for personal non-deductible contributions.

Abolition of the work test for contributions from 1 July 2022

A work test currently applies to anyone wishing to make personal contributions between the ages of 67 and 74 years old (inclusive). It requires a person to work at least 40 hours in 30 consecutive days in a financial year before they are able to make personal contributions to super. The work test also applies salary sacrifice arrangements.

From 1 July 2022, the government proposes to abolish the work test for non-concessional contributions (including ‘bring forward’ contributions) and salary sacrifice contributions for anyone aged between 67 and 74 years old. It also applies to contributions made for a person’s spouse.

However, the work test will continue for anyone wishing to claim a tax deduction for personal superannuation contributions.

The benefits of abolishing the work test will provide greater flexibility:

  • to move non-superannuation assets such as cash, listed shares and other permitted assets into the SMSF as non-concessional contributions;
  • To transfer any inheritances to the SMSF as non-concessional contributions before reaching the age of 75; and
  • to enable couples to rebalance their superannuation to make the most of their Total Super Balance Cap and Transfer Balance Cap.

Example 1

Nadine is 69 years old and has been retired for many years, she wishes to contribute $100,000 to her SMSF. If the government’s proposal is passed by the parliament then Nadine’s SMSF can accept the contribution on or after 1 July 2022. However, Nadine will not be able to claim a personal tax deductible contribution for any part of the contribution she makes.

Example 2

Vicky wishes to make contributions of $110,000 on 1 August 2022 for her spouse John who is age 74 who has not worked for many years.

Example 3

Louise and Benjamin are both 68 years of age and wish to balance up their super. Louise has an accumulation balance of $1.7 million and Benjamin has an accumulation balance of $1 million. If Louise withdraws $100,000 from her accumulation balance, she can make a spouse contribution for Benjamin. Over time, if Louise continues to draw an amount from her accumulation balance and contribute a spouse for Benjamin it may result in equalising their superannuation balances.

Reduction in age to qualify for the downsizer contribution

The downsizer contribution allows a one-off, post-tax contribution to super of up to $300,000 for each member of a couple after selling their main residence. Downsizer contributions are not counted against the person’s non-concessional contribution cap.

Currently, the legislation requires the person to be at least 65 years old to qualify for the downsizer contribution. However, the government proposes to reduce the earliest qualifying age to 60 years old which is expected to apply from 1 July 2022.

The issues that arise out of the age reduction in the qualifying age for the downsizer contribution are:

  • greater flexibility in funding for retirement for an individual or a couple who sell their home from age 60 and increase their superannuation balance;
  • allowing anyone to use the downsizer contribution where they have a Total Super Balance greater than the threshold, or have maximised their non-concessional contributions, and wish to increase their super balance;
  • access to a full or partial age pension may be compromised as the downsizer contribution will increase the person’s super balance, which may reduce the amount of pension payable due to the impact of the means test limits;
  • anyone who has fully used their pension Transfer Balance Cap may not be able to transfer downsizer contributions into retirement phase. 

More super for lower income earners, including women, part-time and casual workers

Under the super guarantee legislation, as a general rule, an employer is required to contribute up to 9.5% of an employee’s ordinary time earnings. However, currently an employer is not required to make super contributions for anyone who is paid less than $450 per calendar month. The government proposes to remove this threshold from 1 July 2022 which will provide super contributions for about 300,000 lower income earning individuals, 63% of whom are women.

Abolition of the $450 threshold will:

  • provide increased superannuation contributions for low-income individuals, including women, part-time and casual employees and anyone who has a number of employers.
  • remove any motivation by employers to limit hours for employees to minimise superannuation costs.

SMSF residency requirements to be relaxed

To gain tax concessions for superannuation funds they are required to meet three tests to qualify as an ‘Australian superannuation fund’. The tests are the establishment test, central management and control test, and active member test. In some situations, SMSFs are unable to meet the definition if members were temporarily absent from Australia and made contributions to the fund. The penalty is that the fund would be taxed as a non-complying superannuation fund and the income and assets are taxed at 45%, resulting in a significant penalty for a relatively minor breach of the rules.

The government has announced that it will relax the residency requirements for SMSFs and small APRA funds (SAFs) by extending the time trustees can be temporarily absent from Australian from two to five years, and continue to meet the central management and control test. In addition, the active member test, which restricted contributions being made to an SMSF or SAF when members were overseas, is proposed to be abolished.

Members of SMSFs and SAFs will have the opportunity to continue contributing to their preferred fund when undertaking work or pursuing other activities overseas. It is anticipated that the change is expected to commence from 1 July 2022, the first financial year after the legislation receives Royal Assent.

Example 4

Dibjot and Gurleen have an SMSF and decide to leave Australia temporarily from 1 July 2022 while they are looking after their ill and aging parents in India. They expect to be absent from Australia for up to 4 years.

The amended legislation will allow them to meet the central management and control test while they temporarily absent from Australia, which allows them to make significant decisions about their SMSF. The proposed change will save them the need to have someone act in their place as trustee of their SMSF. In addition, they will be able to make contributions to their SMSF without having to contribute to a large APRA fund during the time they are absent from Australia.

SMSF conversion of legacy income stream products

Currently, legacy income streams, such as market-linked income stream (MLIS), life-expectancy and lifetime pensions can only be transferred to another similar product. Limits also apply to allocating reserves associated with legacy income streams reserves to ensure the allocation is not counted towards an individual's concessional contribution cap.

The government has proposed that anyone in receipt of a legacy income stream will have the option to exit from these products during a pre-determined two-year period commencing on 1 July after the legislation has received Royal Assent. The proposed window of opportunity will allow full access to all of the product's underlying capital, including any reserves, and permit transfer to more modern products such as account-based pensions.

The concession does not apply to certain pension products, such as flexi pensions or lifetime products provided in APRA regulated funds or public sector defined benefit schemes.

Anyone choosing to fully commute their legacy income stream plus any underlying reserves will have the amount transferred to their accumulation account. They will then have the option to retain the amount in the accumulation account, commence an account-based pension, withdraw a lump sum or a combination.

The amount commuted from the fund’s reserves will not be counted towards an individual's concessional contribution cap and will not trigger excess contributions. However, it will be taxed as an assessable contribution of the fund and taxed at 15%, recognising the prior concessional tax treatment received when the reserve was accumulated and held to pay the legacy income stream.

Social security treatment of legacy income streams

The existing social security treatment that applies to the legacy income stream will not continue for those to take advantage of the conversion. Fortunately, anyone exiting a legacy income stream will not cause re-assessment of the social security treatment for the period before it is converted. Social security and taxation treatment will not be grandfathered for any new products commenced with commuted funds, and the commuted reserves will be taxed as an assessable contribution.

Existing rules for income streams will continue to apply so that individuals starting a new retirement product will subject to the transfer balance cap rules. The existing transfer balance cap valuation methods for the legacy income stream, including on commencement and commutation, will apply.

Example 5: Allowing access to reserves

Jill is 80 years old and has a lifetime pension provided by her SMSF. The lifetime pension, which commenced in 2003, has set annual payments and an associated reserve which supports the pension.

Jill thinks that this product no longer suits her needs as she wants to be able to access her superannuation capital as required. Jill commutes the pension, including the reserve, back into an accumulation account in her SMSF before commencing an account-based pension with all the proceeds. The reserves transferred back to accumulation will be included as assessable income for her SMSF on which she will pay up to 15% tax. Jill has space in her transfer balance cap to commence her new account-based pension.

As the new amount of the account-based pension counts towards the age pension assets test, Jill's part-age pension payment rate will be re-assessed. She now has immediate access to all the capital that was supporting the legacy product and more flexibility in how she draws down her superannuation.

Example 6: Interactions with the transfer balance cap

Mark is 75 years old and has a market-linked pension that first commenced in 2005. Mark commutes the market-linked pension back into an accumulation account, before commencing an account-based pension with some of those proceeds. However, Mark cannot move all the proceeds into an account-based pension because he does not have enough space in his transfer balance cap account. Mark retains the rest of the proceeds in the accumulation account, where earnings are taxed at a rate of up to 15%.

Mark decided the exit is worthwhile to gain extra flexibility in accessing his superannuation. He will continue to receive a part-age pension payment which will remain relatively unchanged.

Example 7: Social security treatment

Roberta is a 70 year old single retiree who has a life-expectancy pension, with no reserve, that first commenced in 2007. Roberta commutes the pension back into an accumulation account with a non-SMSF provider. She then commences an account-based pension with the full balance as she has sufficient space under the transfer balance cap. Roberta was primarily exiting to give herself the option to access the monies as tax-free lump-sum benefits should she need to do so.

Her age-pension payments also increase because of the conversion. This is because Roberta's age-pension amount is being set by the income test, and the deemed income on her new account-based pension is more favourable (a lower amount) than the income from her former life-expectancy pension.

The ability to commute legacy pensions provides the opportunity for pensioners locked into legacy products, which are beyond their useful life and contemporary income streams, to provide more appropriate options for individuals.

Expansion of the First Home Super Saver Scheme

The First Home Super Saver Scheme (FHSSS) will be expanded to increase in maximum amount of voluntary contributions that can be released under the FHSSS from $30,000 to $50,000.

The FHSSS allows individuals to make voluntary concessional (before-tax) and voluntary non-concessional (after-tax) contributions into their super fund to save for their first home. Provided the eligibility requirements are met, an individual can then apply for the release of their voluntary contributions, along with associated earnings, to help purchase their first home. The eligibility requirements are that the person:

  • is a first home buyer;
  • either lives in the premises they are buying, or intends to live in it as soon as practicable; and
  • intends to live in the property for at least six months within the first 12 months they own it.

Currently an individual can have up to $15,000 of their voluntary contributions from a financial year included released as eligible contributions under the FHSSS, up to a total of $30,000 contributions across all years. The proposed change, which is anticipated will commence from 1 July 2022, will increase to the total amount of eligible contributions from $30,000 to $50,000.

In addition to the increase there are a number of technical changes which will be made to the current legislation to improve the ATO’s administration of the FHSSS.

Greater transparency of super in family law proceedings

As part of the 2018 Women’s Economic Security Statement, it was announced that there was to be greater disclosure and visibility of super assets in family law proceedings. The proposal was expected to commence on 1 July 2020. However, the commencement was delayed due to the impact of COVID-19. The proposed legislation which is expected to be introduced into parliament shortly will involve the ATO and Family Law Courts to allow the super assets of the parties to be identified during family law proceedings.

KiwiSuper and unclaimed Super

From 1 July 2021 the ATO will arrange for unclaimed super to be paid directly to KiwiSaver accounts in New Zealand – the equivalent of an Australian super fund.

Super early release for victims of family and domestic violence not proceeding

In view of the government introducing the Women's Safety measures commencing 1 July 2021, it was decided to not proceed with the proposal to extend the early release of superannuation to victims of family and domestic violence. The measures are designed to reduce, and support the victims of family, domestic and sexual violence against women and children.

Summing up

The 2021-22 Federal Budget proposals are attractive propositions for:

  • anyone not able to meet the work tests and wishing to make non-concessional contributions to super;
  • trustees going overseas for an extended period and:
  • wishing to keep control of their SMSF, or
  • make contributions to their SMSF when absent overseas;
  • converting legacy pensions, including underlying capital and reserves to accumulation phase;
  • anyone wishing to access the downsizer contribution; and
  • first homeowners.

But don’t forget these changes are not anticipated to commence until 1 July 2022. So, until that time the current rules continue to apply.

1 Reproduced from Budget Paper No 2 [p 27]; Superannuation Budget fact sheet
2 ibid
3 ibid


 

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Graeme Colley, Executive Manager, SMSF Technical and Private Wealth SuperConcepts
  • Market Watch
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  • Superannuation
  • Tax
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