Contrary to the announcements made by the Labor Party in April, the government confirmed in the Federal Budget that no tax changes will be made to superannuation this year.
The Opposition proposed cutting the current tax free status available to retirees on superannuation earnings to introduce a tax of 15% on earnings over $75,001. The proposals also included reducing the ‘higher income earner’ threshold for those who incur 30% tax on contributions from $300,000 to $250,000.
The lack of change will provide retirees and those planning for their future with much needed certainty after months of speculation about exactly how much change was coming.
Instead, it will be the outcome of the tax White Paper Process and the Murray Financial System Inquiry that all should be anxiously waiting for. The paper raised a number of concerns over the fairness and complexity of the superannuation tax system.
The tax paper, due for review in late 2015, is to carefully consider the behaviours that can be encouraged by any proposed changes, along with the impact this may have on many average Australians.
Age pension assets test
As was previously announced by the government, the age pension asset test will be increased for both single and couple homeowners, to $250,000 and $375,000 respectively. For non home-owners, this will increase to $450,000 for singles and $575,000 for couples. This increase, however is offset by the reduction in the taper rate – meaning that for every $1,000 of assets over the relevant limit, the age pension entitlement will be decreased by $3.00 per fortnight, capping out at $823,000 for couples (down from $1.151million) and $547,000 for singles (down from $775,500). Essentially, this means that those who were previously entitled to even a part age pension with assets of less than $775,500 (single homeowner), or $1,151,500 (couple homeowner) may find themselves no longer eligible.
According to government statistics, this change will provide benefit, or have no impact on, more than 90% of those who receive some form of age pension. The behaviour this encourages in the future remains to be seen, with some concerns that the measures may discourage savings in non home assets.
These changes are due to commence on 1 January 2017, so some planning may be required for those who are looking to receive some form of government support in retirement.
Indexation to CPI
An unpopular announcement from last years’ budget has been scrapped, with the government confirming that the age pension will continue to be indexed according to the original method of either CPI or the pensioner and Beneficiary Living Cost Index, whichever is higher.
Continuing on from this is the dropping of the previously announced pause to the increase in income test free areas for pensions. These will continue to be indexed annually by CPI.
Also announced before budget night was the extension of the terminal illness access provisions to superannuation. Under the previous rule, two medical experts were required to confirm the member would not survive 12 months. The amendment will extend this to two years.
SMSFs & borrowings
In a somewhat surprise move, the government has remained silent on the future of Limited Recourse Borrowing Arrangements in self-managed superannuation funds (SMSFs). The attention given to these by the Murray Financial System Inquiry suggests this may be addressed in the not too distant future.
Defined benefit pension
In a move to counteract a generous loophole created in 2007, the government confirmed a new 10% cap will apply to the deductible amount calculation for defined benefit pension recipients. This applies to those who receive an income stream from a superannuation fund that is based on years of service and final salary, rather than actual contributions. The current rules allow some who are beneficiaries of certain large state government public sector schemes to have their income disregarded from the income test for an age pension, meaning someone entitled to a $120,000pa pension may still be entitled to age pension. These changes will apply from 1 January 2016, and the government stated this will impact approximately one third of current recipients.
Contrary to calls from industry, the government has announced the supervisory levies currently payable to the Australian Tax Office for the administration of superannuation funds will increase next year.