by Alex Polorotoff

The Federal Budget last week provided some welcome changes to the superannuation system.  Here, we’ll briefly outline the key superannuation proposals and how they might impact your SMSF clients.

It must be noted though, these budget proposals are not yet legislated.  These are also due to come into effect in the financial year following receiving royal assent.

CONTRIBUTIONS

Currently, private or domestic workers who work 30 hours within a month will only receive SG contributions if they earn $450 or more per month.  It was proposed to remove this threshold completely, to provide more equity to these workers for their retirement savings.  This may mean some SMSF members will begin receiving employer contributions which could impact their concessional contribution planning for the year.

The eligibility age for downsizer contributions is due to change to 60, down from the current age requirement of 65.  It’s important to note though, the eligibility age is based on the day the contribution is made and not the contract date or when the sale proceeds are received.  However, the contribution must be made within 90 days of the sale proceeds being received.  For SMSF clients who are trying to increase their superannuation balances and are looking to utilise the downsizer contribution, they may also want to consider using their bring-forward non-concessional contributions.  If they are eligible to use the bring-forward provision along with the downsizer contribution, but are approaching their Total Super Balance threshold, they may want to review the order in which they make these contributions.  It might be best to use as much of their bring-forward non-concessional contributions prior to making the downsizer contribution.

There has been discussion around removing the work test for people aged 67-74.  It’s important to note, the proposal announced last week would only apply to salary sacrifice and non-concessional contributions.  Members in this age bracket, and wanting to claim a deduction for personal concessional contributions, will still need to meet the work test prior to making the contribution.  It should also be noted, this wouldn’t apply to other contributions, such as small business CGT contributions.  This proposal however, would allow members aged up to 74 to use the bring-forward provisions.  It may also open up the possibility for SMSF members to start pensions, who may want to implement a withdrawal/recontribution strategy, as they would not need to meet the work test to make non-concessional contributions.

The following items weren’t updated in the Budget and so, will be implemented from 1 July 2021:

• SG will still increase to 10% and then 0.5% each year until it reaches 12%;
• Indexation to contribution caps still applies, so the concessional cap will be $27,500 and the non-concessional cap will be $110,000. There was discussion about having a separate contribution cap for certain members, such as those close to retirement age, but this wasn’t announced; and
• No change to the Total Super Balance threshold as well as other fixed thresholds, such as $500,000 to use unused concessional contributions and $1.6 million to use the segregated method to calculate ECPI. The general Transfer Balance Cap will still increase to $1.7 million.

RESIDENCY FOR SMSFs

There are currently three tests superannuation funds must meet to receive concessional treatment:

1. The establishment/asset in Australia test;
2. The central management and control test; and
3. The active member test.

There were two important proposals that will impact this.  The safe harbour period, which impacts the central and management control test, will increase from two to five years.  This means a member doesn’t need to satisfy this test, as long as their absence from Australia is of a temporary nature during this period. 

It was also proposed to completely remove the active member test.  This not only allows SMSF members working overseas to continue to contribute to their SMSF and receive rollovers, but also allows immigrants to Australia, who are not currently residents, to open and manage their own SMSF.

PENSIONS

The temporary halving of the minimum pension requirement, due to the COVID pandemic, will not be extended.  So from 1 July 2021, the normal minimum requirements will be in place.  Also, the early release condition for victims of domestic violence will not go ahead.

Interestingly, there was no comment on the previously announced measures for calculating ECPI, whereby you could choose your preferred method if the SMSF was in both accumulation and retirement phase and, removing the requirement to obtain an actuarial certificate where the SMSF couldn’t use the segregated method, even though it was still 100% in retirement phase.  We discussed this in more detail in our blog article last week.  These previously announced changes are due to start from 1 July 2021 but this has not been legislated as yet.

Members with complying lifetime, life expectancy and market linked pensions also received welcomed news.  SMSF members with these legacy pensions are proposed to receive a two year amnesty period to be able to commute these to accumulation balances, along with any attached reserves.  Under the current rules, these pensions could only be commuted if the balance would be used to commence another type of these pensions.  For SMSF members, this is even more difficult as they are not allowed to start new complying lifetime or life expectancy pensions so, if they wanted to, they would have to rollover this balance to another type of fund.

Under this proposal, the commuted amount could be used to commence a new Account Based Pension, remain in accumulation, taken out of the fund or, a combination of these.  The commuted reserves would not count towards the concessional contribution cap, as the current legislation requires, but would be taxed at the concessional rate of 15%.  Whilst at first glance this seems like a sensible approach, it would require some planning before making any decisions around commuting these types of pensions:

• The Budget paper suggests this proposal applies to legacy pensions that commenced pre September 2007. We are unsure if these types of pensions that were commuted and recommenced after this date would fall into this category;
• It is unclear which reserve accounts this applies. When the actuary calculates the ‘best estimate’ amount, there may be a solvency reserve to the meet the ‘high degree of probability’ test.  There may also be another reserve account for surplus amounts associated with the pension.  Some of these reserves can be quite large and so, a 15% tax bill on these could be significant;
• Will losing the asset test exemption impact the client;
• Members with these pensions that must take large pension payments, may consider commuting to start an Account Based Pension and choose to take a smaller pension payment; and
• If this type of pension is a Death Benefit Pension, it must still be treated in the same way as any other death benefit. Either a new pension must be started for the balance or it is taken out of the fund as a lump sum.

Clearly there are positives coming out of the Budget announcement, indicating the current Government is aiming to simplify the superannuation system.  However, we are unsure when these proposals might be legislated but the Government indicated 1 July 2022 would be the earliest start date.  There may also be a Federal election before then, so there is still plenty to play out.