Budget 2018/19

Overview

This year's Budget includes a diverse range of amendments to superannuation, with keynote reform packages to protect super from erosion and introduce a new retirement income framework.

The major measures with direct impact on superannuation include:

  1. making insurance opt-in for members who have low balances of less than $6,000, are under the age of 25 years, or whose accounts have not received a contribution in 13 months and are inactive
  2. capping passive fees for accounts less than $6,000 and banning exit fees for all super accounts
  3. requiring the transfer of all inactive superannuation accounts under $6,000 to the ATO
  4. a new retirement income framework, with a retirement covenant requiring trustees to offer comprehensive income products for retirement (CIPRs) and to provide simplified, standardised information on retirement income products, and new means test rules for pooled lifetime income streams
  5. a limited, one-year exemption from the work test for voluntary super contributions for people aged 65-74 with superannuation balances below $300,000
  6. allowing high income earners with multiple employers to nominate that wages from certain employers are not subject to the superannuation guarantee, to avoid breaching the concessional contributions cap.

Significantly, there are no major reforms to the tax rules for superannuation and—contrary to media speculation in recent weeks—no changes to the legislated schedule for increasing the superannuation guarantee contribution rate to 12 per cent.

Details of specific superannuation measures

1. Protecting your super: fees, insurance arrangements, inactive low-balance accounts

The Budget contains a major package of reforms under the banner 'protecting your super', with measures targeted at limiting fees charged by funds, making insurance opt-in for some individuals, requiring all low-balance inactive accounts to be transferred to the ATO, and expanding the ATO's activities to proactively re-unite lost and low balance accounts.

A draft of legislation to implement the package has been released for consultation.

1.1 Changes to insurance in super

The Government will change the insurance arrangements for certain cohorts of superannuation members. Insurance within superannuation will move from a default framework to be offered on an opt-in basis for:

  • members with low balances of less than $6,000
  • members under the age of 25 years
  • members whose accounts have not received a contribution in 13-months and are inactive.

These changes are intended to:

  • protect the retirement savings of young people and those with low balances by ensuring their superannuation is not unnecessarily eroded by premiums on insurance policies they do not need or are not aware of
  • reduce the incidence of duplicated cover so that individuals are not paying for multiple insurance policies, which they may not be able to claim on.

The changes will take effect on 1 July 2019, and affected superannuants will have a period of 14-months to decide whether they will opt-in to their existing cover or allow it to switch off.

The government has also indicated it will consult publicly on ways in which the current policy settings could be improved to better balance the priorities of retirement savings and insurance cover within super.

1.2 Passive fees capped, exit fees banned

The government will introduce a three per cent annual cap on passive fees charged by superannuation funds on accounts with balances below $6,000 and will ban exit fees on all superannuation accounts.

These changes will take effect from 1 July 2019.

1.3 Transfer of all small and inactive accounts to ATO

The government will require the transfer of all inactive superannuation accounts where the balances are below $6,000 to the ATO. Currently, detailed rules require the transfer of certain “small” superannuation balances (less than $6,000) relating to an individual who meets the definition of a ‘lost member’, as well as ‘insoluble’ accounts of a ‘lost member’. A number of conditions and exclusions apply.

The ATO will expand its data matching processes to proactively reunite inactive superannuation accounts transferred to it with the member’s active account, where possible. This measure will also include the proactive payment of funds currently held by the ATO. The Budget papers indicate an intention that the “majority of accounts transferred to the ATO will be reunited in the year they are received”.

These changes will take effect from 1 July 2019.

2. Retirement income framework

The government has made a number of announcements in relation to a new framework for retirement income.

2.1 Retirement covenant

The government will introduce a ‘retirement covenant’, requiring Super Fund Trustees to formulate a retirement income strategy for superannuation fund members. Trustees will be required to offer Comprehensive Income Products for Retirement (CIPRs)—products that provide income for life—however it will not be compulsory for individuals to take up a CIPR on retirement.

The retirement covenant will be added to the existing covenants (trustee obligations) that the Superannuation Industry (Supervision) Act 1993 (SIS Act) imposes in relation to the governance and operation of registrable superannuation entities.

No commencement date has been indicated for this measure. The government will shortly release a consultation paper outlining its proposed approach to the covenant.

The potential introduction of a retirement covenant was first raised by the government in February, in the context of its ongoing work to develop a framework for CIPRs.

2.2 Standardised product disclosure metrics

The government will amend the Corporations Act 2001 to introduce a requirement for providers of retirement income products to report simplified, standardised metrics in product disclosure to assist customer decision-making.

No commencement date has been indicated for this measure.

2.3 Means testing for lifetime products

The government has indicated that it will amend the pension means test rules to encourage the development and take-up of lifetime retirement income products to address longevity risk – the risk that individuals will outlive their savings.

The new means test rules will apply to pooled income streams from 1 July 2019. The rules will assess a fixed 60 per cent of all pooled lifetime product payments as income. 60 per cent of the purchase price of the product will be assessed as assets until the age of 84 years, or a minimum of 5 years, and then 30 per cent for the rest of the person’s life. Pooled lifetime income streams purchased before 1 July 2019 will be grandfathered.

The means test measure follows the changes to the income stream rules announced in the 2016-17 Budget and introduced with effect from 1 July 2017 via the Treasury Laws Amendment (2017 Measures No. 1) Regulations 2017. They also facilitate the development of CIPRs.

The Department of Social Services has undertaken a number of consultations on the means testing of pooled lifetime income streams, including as recently as January 2018. The rules outlined in the Budget will assess a lower amount of the income and purchase price against the means tests than the January 2018 proposal.

3. Contributions work test: exemption for recent retirees

The government will introduce an exemption from the work test for voluntary contributions to superannuation, for people aged 65-74 with superannuation balances below $300,000, in the first year that they do not meet the work test requirements.

Currently, the work test restricts the ability to make voluntary superannuation contributions for those aged 65-74 to individuals who self-report as working a minimum of 40 hours in any 30 day period in the financial year.

The work test exemption will apply from 1 July 2019 and is intended to give recent retirees additional flexibility to get their financial affairs in order in the transition to retirement.

Existing contribution cap rules will continue to apply to contributions made under the work test exemption.

4. Super guarantee — preventing inadvertent concessional cap breaches by certain employees

The government will allow individuals who have multiple employers and income in excess of $263,157 to nominate that their wages from certain employers are not subject to the superannuation guarantee (SG) from 1 July 2018.

The measure is intended to allow eligible individuals to avoid unintentionally breaching the $25,000 annual concessional contributions cap as a result of multiple compulsory SG contributions. Breaching the cap otherwise results in these individuals being liable to pay excess contributions tax, as well as a shortfall interest charge.

The Budget papers indicate that employees who use this measure could negotiate to receive additional income, which is taxed at marginal tax rates. Due to this, the measure is estimated to have a gain to revenue of $2.0 million over the forward estimates period through the timing of income tax collection, which is collected sooner than excess contributions tax.

5. Personal contributions: better integrity over claims for tax deductions

The government will provide $3.1 million to the ATO over the forward estimates to improve the integrity of the ‘notice of intent’ (NOI) processes for claiming personal superannuation contribution tax deductions.

Currently, some individuals receive deductions on their personal contributions but do not submit a NOI, despite being required to do so. This results in their funds not applying the appropriate 15 per cent tax to their contribution. As the contribution has been deducted from the individual’s income, no tax is paid on it at all.

The additional funding will enable the ATO to develop a new compliance model, and to undertake additional compliance and debt collection activities. The ATO will modify income tax returns to alert individuals to the NOI requirements with a tick box to confirm they have complied. The ATO will also provide guidance to individuals on how to comply if they have not yet done so. This will ensure that any deductible contributions are appropriately taxed by superannuation funds and enable the ATO to deny deductions to individuals who do not comply with the NOI requirements.

This measure will commence from 1 July 2018.

6. Transition to retirement income streams and deferred annuities: technical amendments

The Budget papers note that the government will make a series of minor and technical amendments to Treasury portfolio legislation to clarify the law, correct technical or drafting defects, remove anomalies and address unintended outcomes.

Two of the measures highlighted were included in the Treasury Laws Amendment (2018 Measures No. 4) Bill 2018, introduced into Parliament in April 2018:

  • amendment of the transition to retirement income stream rules relating to the death of a member
  • amendment of the tax law to address double taxation in respect of deferred annuities purchased by a superannuation fund or retirement savings account.

7. Economic security for women

The Minister has issued a media release accompanying the Budget papers that confirms the government will deliver a detailed ‘economic security statement’ for women in the spring sittings of Parliament.

The Budget papers do not contain any information about what this statement will include, however in recent days the Minister has indicated that this will address issues including the superannuation gap and workforce participation.

8. Funding announcements: Treasury, the regulators, Australian Financial Complaints Authority and the Royal Commission

The government has allocated additional funding for the ATO to support a number of key Budget announcements, and for APRA and ASIC to support their involvement in the Royal Commission into misconduct in the banking, superannuation and financial services industry.

8.1 ATO – collection of super debts, full cost recovery of super activities, improving process for deduction of personal contributions

The ATO will receive additional funding to support a number of superannuation-related measures announced in this year’s Budget:

  • the government will raise additional revenue of $31.9 million over four years from 2018-19 by increasing the Financial Institutions Supervisory Levies collected by APRA. This is intended to fully recover the cost of superannuation activities undertaken by the ATO, consistent with the Australian Government Cost Recovery Guidelines.
  • the ATO will be provided with $133.7 million over the period 2018-19 – 2021-22 to continue to deliver on strategies that sustain an increase in debt collections and an improvement in the timeliness of debt collections. This extends, and rolls into ongoing funding, the 2013 measure Addressing the level of unpaid tax and superannuation in the community that would otherwise terminate on 30 June 2018. The government indicates that the funding will ensure the ATO is able to continue to target those taxpayers gaining an unfair financial advantage over those who pay their fair share of tax and superannuation.
  • the government will provide $3.1 million to the ATO over the forward estimates to improve the integrity of the ‘notice of intent’ (NOI) processes for claiming personal superannuation contribution tax deductions (see item 5 above).
  • the ATO will receive an additional $15.0 million over three years from 2018-19 to support the modernisation of payroll and superannuation fund reporting. The funding will be used to support small businesses with fewer than 20 employees during the transition to Single Touch Payroll Reporting from 1 July 2019. Funding for this measure has already been provided for by the Government. This measure builds on the 2017-18 MYEFO measure titled Superannuation Guarantee Integrity Package – modernising payroll and superannuation fund reporting . A Bill to implement this measure was introduced into Parliament in April 2018.

8.2 Supporting the Royal Commission into misconduct in the banking, superannuation and financial services industry

The government will provide $10.6 million over two years from 2017-18 to ASIC and $2.7 million in 2018-19 to APRA to assist in their involvement in the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

The cost of this measure will be offset by an increase in the APRA Financial Institutions Supervisory Levies of $2.7 million in 2018-19 and an increase in levies of $10.6 million over two years from 2018-19 under the ASIC industry funding model.

Funding of $5.9 million for ASIC in 2017-18 has already been provided for by the Government.

This measure builds on the 2017-18 MYEFO measure titled Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

8.3 ASIC – enhancing female financial capability

The Budget allocates $10.0 million to ASIC in 2018-19 to provide a grant that will support initiatives to enhance female financial capability.

8.4 Australian Financial Complaints Authority (AFCA)

The government will provide $1.7 million in 2018-19 to provide a grant to the Australian Financial Complaints Authority (AFCA) to support its establishment.

AFCA was recently authorised as the new external dispute resolution scheme for the financial services industry. It will commence hearing complaints on 1 November 2018, and will replace the Superannuation Complaints Tribunal (SCT) and Financial Ombudsman Service, although the SCT will continue operating for a period to clear its existing caseload.

Ongoing, AFCA’s activities will be entirely funded by the industry, through membership fees and user-pays fees.

8.5 Treasury – drafting services

The government will provide an undisclosed amount of funding in 2018-19 to the Department of the Treasury for drafting services from legal service providers to progress Treasury portfolio legislation.

This measure builds on an announcement in the 2017-18 Budget.

9. Medicare levy – no increase to rate

As announced on 26 April 2018, the government will not proceed with the 0.5 per cent increase in the Medicare levy proposed in last year’s Budget, to fund the National Disability Insurance Scheme.

The proposed increase in the Medicare levy would have had a flow-on impact to the rate of tax to be withheld or paid in respect of certain superannuation amounts.

Other measures to note

The Budget also contains a number of measures that do not impact directly on superannuation but are of interest from a broader perspective. These include:

1. Support for older Australians

The Budget includes a range of measures intended to support older Australians. While these do not specifically involve superannuation, they will have an impact on individuals’ income and/or financial situation in retirement. These measures include:

  • an increase in earnings cap for the Pensioner Work Bonus from $250 per fortnight to $300 per fortnight. The increased Pensioner Work Bonus will enable pensioners to earn up to a threshold amount—now $7,800 per year—without it affecting their pension. Only the portion of a pensioner’s earnings over that threshold will be counted towards the age pension income test.
  • expansion of the Pensioner Work Bonus to allow self-employed retirees to earn up to $300 per fortnight without impacting their pension.
  • the Pensions Loans Scheme will be expanded to cover all Australians over Age Pension age, and to increase the maximum fortnightly income stream to 150 per cent of the Age Pension rate. The Pensions Loan Scheme effectively provides a reverse mortgage, to enable individuals to use the equity in their homes to increase their incomes. (Currently it applies to part and some nil-rate pensioners, allowing them to top up their Age Pension to the maximum rate. It does not currently apply to maximum rate age pensioners or self-funded retirees).

2. Changes to personal income tax rates and offsets and Medicare thresholds

The Budget makes a number of amendments to marginal tax rate brackets and tax offsets for low and middle-income earners in three stages, as part of a ‘personal income tax plan’.

The changes include:

  • A new Low and Middle Income Tax Offset, a non-refundable tax offset of up to $530 per annum to Australian resident low and middle income taxpayers. The offset will be available for the 2018-19, 2019-20, 2020-21 and 2021-22 income years, as a lump sum on assessment after an individual lodges their tax return. The offset will provide a benefit of up to $200 for taxpayers with taxable income of $37,000 or less. Between $37,000 and $48,000, the value of the offset will increase at a rate of three cents per dollar to the maximum benefit of $530. Taxpayers with taxable incomes from $48,000 to $90,000 will be eligible for the maximum benefit of $530. For incomes from $90,001 to $125,333 the offset will phase out at a rate of 1.5 cents per dollar. The new offset will apply in addition to the existing Low Income Tax Offset (LITO).
  • A package of changes to tax thresholds and the LITO. These include:
    • an increase in the top threshold of the 32.5 per cent personal income tax bracket from $87,000 to $90,000 from 1 July 2018.
    • an increase in the LITO from $445 to $645 and an extension of the 19 per cent personal income tax bracket from $37,000 to $41,000, and a further increase in the top threshold of the 32.5 per cent personal income tax bracket from $90,000 to $120,000. These changes will all apply from 1 July 2022. The increased Low Income Tax Offset will be withdrawn at a rate of 6.5 cents per dollar between incomes of $37,000 and $41,000, and at a rate of 1.5 cents per dollar between incomes of $41,000 and $66,667.
  • extension of the top threshold of the 32.5 per cent personal income tax bracket from $120,000 to $200,000 from 1 July 2024, to recognise inflation and wage growth impacts. Taxpayers will pay the top marginal tax rate of 45 per cent from taxable incomes exceeding $200,000 and the 32.5 per cent tax bracket will apply to taxable incomes of $41,001 to $200,000.

The government has also announced that it will increase the Medicare levy low-income thresholds for singles, families, and seniors and pensioners from the 2017-18 income year. The increases take account of recent movements in the CPI so that low-income taxpayers generally continue to be exempted from paying the Medicare levy.

  • The threshold for singles will be increased from $21,655 to $21,980.
  • The family threshold will be increased from $36,541 to $37,089.
  • For single seniors and pensioners, the threshold will be increased from $34,244 to $34,758.
  • The family threshold for seniors and pensioners will be increased from $47,670 to $48,385.
  • For each dependent child or student, the family income thresholds increase by a further $3,406, instead of the previous amount of $3,356.

Questions?

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Source: Association of Superannuation Funds of Australia (ASFA)