The Federal Budget released on 9 May 2017 by the Treasurer was, in many respects, a welcome relief for both pre-and post-retiree individuals given the plethora of changes to superannuation and income streams announced in the 2016 Budget, with most of those changes to take effect from 1 July 2017. This latest Budget appears less likely to significantly impact retirement planning but does give an increased level of flexibility in the capacity for further superannuation contributions to be made (and additional income streams to be commenced) for those downsizing their home. In addition, the Government announced proposals for the First Home Super Saver Scheme which will allow voluntary contributions (either or both of concessional and non-concessional contributions) up to the value of $30,000 to be withdrawn for a first term deposit along with the associated deemed earnings on such contributions.
As always, it is important to note that the measures announced in the Federal Budget have yet to be implemented and will require the passage of legislation through both houses of Parliament and may be subject to substantial change.
A snapshot of some the changes follow.
There are relatively few superannuation measures announced in the Budget, two of which are quite welcome with the remainder being essentially integrity measures designed to ensure that the Government’s recent introduction of further legislation affecting limited recourse borrowing arrangements (and the inclusion of these in an individual’s annual total superannuation balance) and the treatment of non-arm’s-length arrangements receive the appropriate treatment.
First Home Super Savings Scheme
From 1 July 2017 it is proposed that individuals will be able to make voluntary contributions to superannuation of up to $15,000 per year and $30,000 in total per individual to be withdrawn for the purpose of purchasing a first home with both voluntary concessional and non-concessional contributions qualifying. These contributions (less tax on concessional contributions) along with deemed earnings can be withdrawn for a deposit from 1 July 2018 and, when withdrawn, the taxable proportion of the withdrawal will be included in the assessable income of the individual, who will receive a 30% tax offset.
Features associated with this measure include:
- contributions will count towards the relevant existing concessional and non-concessional contributions caps;
- superannuation guarantee contributions will not be included given that these are mandated, not voluntary;
- earnings will be calculated at the 90 day bank bill rate plus 3 percentage points (i.e. the same as the ATO’s Shortfall Interest Charge, currently 4.78%);
- the ATO will administer the scheme, will calculate the amount that can be released and provide release instructions to superannuation funds; and
- the amount withdrawn (including the taxable component of the withdrawal) will not flow through to the income tests used for tax and social security purposes such as the calculation of HECS/HELP repayments, family tax benefits or the childcare benefit.
Comments: it will be interesting to understand the practical applications of the scheme, particularly considering the timing issues associated with the payment of a deposit and the capacity for the ATO to be able to calculate a withdrawal amount and for the superannuation fund to process a withdrawal request within an appropriate timeframe. It will also be interesting to model the benefit of this Scheme for individuals whose adjusted taxable income is less than $37,000 and whom are eligible for the Low Income Superannuation Tax Offset (“LISTO”) and the Government Co-contribution (in the event that the individual makes a qualifying non-concessional contribution as well). Some first home buyers may also be unwilling to utilise the Scheme if their additional contributions cannot be accessed until retirement if they don’t end up buying a home.
Contributing the proceeds of home downsizing to superannuation
From 1 July 2018 it is proposed that individuals aged 65 and over will be able to make a non-concessional contribution of up to $300,000 from the proceeds of the sale of the home with these contributions being in addition to the existing contribution caps. Contribution eligibility requirements such as the work test and restrictions on contributions from age 75 will not apply to these contributions and, importantly, the requirement to have a total superannuation balance of less than $1.6 million to be eligible to contribute will also not apply.
Features associated with this measure include:
- the property must have been the principal place of residence for a minimum of 10 years;
- both members of a couple will be able to take advantage of the measure for the same home, thus $600,000 per couple can be contributed to superannuation through the downsizing cap;
- amounts will count towards the transfer balance cap when used to commence a retirement income stream; and
- contributions will be subject to social security means testing when added to a superannuation account.
Comments: Whilst the capacity to be able to contribute up to $600,000 in non-concessional contributions in respect of a couple is a welcome measure, for those couples in receipt of the Centrelink age pension, consideration must be given to the impact on the incomes and assets tests. The proposal is likely to be more attractive for clients who are income tested or who are not necessarily receiving a means tested pension. For assets tested part pensioners, the pension would need to earn an after-tax return of at least 7.8% on the amount contributed to superannuation in order to break even.
The Government has announced proposals to further tighten the non-arm’s-length income rules to ensure that expenses that would normally apply in a commercial transaction are included when considering whether a transaction is on a commercial basis.
Comments: This particular measure is aimed at self-managed superannuation funds which conduct transactions often with related parties and is highly unlikely to have any impact at all on the majority of superannuants.
Limited recourse borrowing arrangements – integrity measures
The Government previously released draft legislation on 27 April 2017 which proposed to include LRBAs undertaken by SMSFs in a member’s total superannuation balance and the $1.6 million transfer balance cap on a prospective basis from 1 July 2017. In addition, repayment of the principal and interest of an LRBA from an accumulation account will be credited in the person’s transfer balance account. This was introduced as an integrity measure to curb LRBAs being used to circumvent contribution caps and avoid growth in the assets from the accumulation phase to the retirement phase being captured by the transfer balance cap.
The Budget proposals adjust the draft legislation by identifying that the measures will also apply to outstanding LRBA balances from 1 July 2017 rather than new LRBAs established from that date.
Comments: The draft legislation has already caused significant concerns to be raised with the Government and Treasury in the hope that the draft legislation will be further amended to improve both the legislation and the reporting requirements. This measure will only affect a small number of SMSFs which have undertaken limited recourse borrowing arrangements and is unlikely to be of interest to the majority of superannuants.
Energy Assistance Payment
As was widely publicised prior to Budget night, a one-off Energy Assistance Payment will be made in 2016/17 of $75 for single recipients and $125 per couple for those eligible for qualifying payments on 20 June 2017 and who are a resident in Australia. Qualifying payments include the Age Pension, Disability Support Pension, Parenting Payment, Veterans’ Service Pension, Veterans’ Income Support Supplement, Veterans’ Disability Payments, War Widow Pension, and permanent impairment payments under the Military Rehabilitation and Compensation Act 2004.
Pensioner Concession Card reinstated
Given the reduction in the asset test threshold that came into effect on 1 January 2017, some pension recipients were no longer entitled to pension payments and, as a result, lost their Pensioner Concession Card but were issued with either a Low Income Health Card or Commonwealth Seniors Health Card. The Government will reinstate the Pensioner Concession Card to those who lost their payment as a result of the 1 January changes.
Comments: The Low Income Health Card and the Commonwealth Seniors Health Card do not provide the ancillary benefits of the Pensioner Concession Card (such as access to concessions on certain state administered fees and charges) and, as such, is a welcome concession by the Government.
Residency requirements for pensioners
An individual applying for the Age Pension or the Disability Support Pension is required to have ten years of total residency, including at least one period of five years or more of continuous residency. The Government proposal is that, from 1 July 2018, new applicants will be required to meet one of the following conditions:
- 15 years of continuous residency;
- 10 years of continuous residency with 5 years of this period being during the applicant’s working life (i.e. between ages 16 to 65); or
- 10 years of continuous residency without having received an activity tested income support payment (such as NewStart) for a cumulative period of five years.
Comments: The Government has retained the existing exemptions for humanitarian entrants and for those whose inability to work occurred whilst they were an Australian resident. The Government estimates that this measure will impact fewer than 2,400 people per year.
Reforms to working age payments
A new Jobseeker Payment will replace seven current working age payments under this proposal from 20 March 2020. The Jobseeker Payment will replace the NewStart Allowance, Sickness Allowance, Wife Pension, Partner Allowance, Bereavement Allowance, Widow B Pension and Widow Allowance (the Wife Pension, Partner Allowance and Widow B Pension are already no longer open to new applicants and recipients will generally be transferred to the Age Pension).
Comments: A welcome reduction in the number of payments (following the Government’s review) and which should lead to a streamlining and simplification of administration.
New mutual obligations
Job seekers and parents who receive working age income support will have increased activity test requirements from 20 September 2018 under the Budget proposals. Key elements of the proposal include aligning the participation requirements for recipients aged 30 to 49 with those which currently apply to those recipients under the age of 30 and recipients between the age of 50 and 59 will only be able to meet up to half of their participation requirement through volunteering. For recipients between the age of 60 and Age Pension age will have a new activity requirement of 10 hours per fortnight which can be met through volunteering.
Earlier budget measures abandoned
The Government will not proceed with the so-called “zombie measures” which were reported prior to the 2016 Budget.
Strengthening the operation of the aged care sector
The Government will make a number of changes impacting the operation of aged care through two major measures:
- from 1 July 2017 the Government proposes the establishment and support of an industry led aged care workforce task force which will explore options to improve productivity in the aged care workforce and contribute to the development of an aged care workforce strategy, including for regional and remote areas; and
- from 1 July 2018 the Commonwealth Home Support Programme (“CHSP”) and Regional Assessment Services (“RAS”) funding arrangements will be extended. These funding arrangements contribute to essential home support services such as Meals on Wheels, personal care, nursing, domestic assistance, home maintenance and community transport to assist older people to keep living independently in their own home.
Greater choice for at home palliative care
From 1 July 2017, the Government will provide palliative care services for people who would prefer to be cared for in their homes, rather than in a hospital or hospice setting. Funding will be provided through the primary-care networks and is designed to support greater choice for end-of-life care for Australians.
Marginal tax rates are unchanged from those which currently apply and, as already legislated, the Temporary Budget Repair Levy (which imposes and additional 2% on the top marginal tax rate) will expire on 30 June 2017.
Increase to the Medicare levy
The Government has proposed that the Medicare levy (still assessed on taxable income) to increase from 2% to 2.5% from 1 July 2019 with the increase to ensure that the National Disability Insurance Scheme is fully funded. The Medicare levy low income thresholds for singles, families, seniors and pensioners will increase from the current 2017 income year.
Comments: Other tax rates that are linked to the top marginal tax rate will also rise, such as the Fringe Benefits Tax rate, excess non-concessional contributions tax, the taxable Employer Termination Payment in excess of the “whole of income” cap and the ETP cap and the no-TFN tax on superannuation contributions.
Certain lump sum payments from superannuation also attract the Medicare levy and may be affected by this change in the Medicare levy rate. These could include:
- lump sum superannuation benefits for individuals under preservation age (i.e. disability benefits);
- lump sum superannuation benefits for individuals between their preservation age and 60 in excess of the low rate cap; and
- lump sum death benefits paid to non-tax dependents directly from a superannuation fund.
Changes to small business capital gains tax concessions
The Government will amend the small business CGT concessions to ensure that the concessions can only be accessed in relation to assets used in a small business or an ownership interest in a small business. The small business CGT concessions will still be available to small business taxpayers with aggregated turnover of less than $2.0 million or net assets of less than $6.0 million.
Comments: The Government is clearly concerned that some taxpayers are currently able to access the small business concessions for assets which are unrelated to their small business, for instance through arranging their affairs so that their ownership interests in larger businesses do not count towards the tests for determining eligibility for the concessions.
This could have significant ramifications for some small business owners given that the Div 152 concessions will become an important tool for clients to legitimately exceed the $1.6m Total Super Balance limitation from 1 July 2017 as contributions under the CGT Cap regime are an exception to the Total Super Balance restrictions on future contributions.
The Government has not specifically detailed how the rules will be amended.
Changes to the repayment of HELP debt
The Government will revise the income thresholds for the repayment of HELP debt, repayment rates and the indexation of repayment thresholds. A new minimum threshold of $42,000 will be established with a 1% repayment rate and a maximum threshold of $119,882 with a 10% repayment rate currently, the maximum repayment threshold for the 2017/18 income year is $103,766 with a repayment rate of 8%.
Capital gains tax changes for non-residents
The Government will make the following changes to capital gains tax rules applicable to foreign tax residents:
- individuals who are foreign or temporary tax residents will no longer have access to the CGT main residence exemption on properties acquired after 7:30pm on 9 May 2017. Existing properties held before this date will be grandfathered and can continue to claim the exemption until 30 June 2019;
- the CGT withholding rate that applies to foreign tax residents will be increased from 10% to 12.5% from 1 July 2017; and
- the property value threshold where the CGT withholding obligation applies will reduce from $2.0 million to $750,000 from 1 July 2017.
Residential property plant and equipment depreciation deductions
With effect from 1 July 2017, the Government has proposed that deductions relating to the depreciation of plant and equipment (i.e. items such as dishwashers and ceiling fans) in residential properties will be limited to investors who actually incur the outlay. This measure is to ensure that subsequent owners of the property will not be able to claim deductions for plant and equipment purchased by a previous owner. Grandfathering will apply to plant and equipment that forms part of a residential investment property as at 9 May 2017 and will continue to give rise to deductions for depreciation under current rules.
Under this measure, the acquisition of existing plant and equipment items will be reflected in the cost base for capital gains tax purposes for subsequent investors.
Comments: It is important to note that this particular measure does not apply to depreciation on building allowances which refers to construction costs of the building itself, such as concrete and brickwork.
Disallowing deduction of travel expenses for residential property
With effect from 1 July 2017, the Government has proposed the disallowance of deductions for travel expenses related to inspecting, maintaining or collecting rent for a residential rental property. This measure is designed to address concerns that many taxpayers are been claiming travel deductions without correctly apportioning costs or have claimed travel costs that were for private travel purposes.
Comments: This measure impacts all property investors including SMSFs, family trusts and companies as well as individuals.
Major bank levy
From 1 July 2017 the Government will implement a levy for banks with licensed entity liabilities of at least $100 billion, with this threshold being indexed to grow in line with nominal gross domestic product. Currently, this will only affect the five largest banks (including Macquarie) but does not apply to superannuation funds or insurance companies. The levy will be calculated quarterly as at 0.015% of the banks’ licensed entity liabilities for an annualised rate of 0.06%. Importantly, the levy will not apply to deposits of individuals, businesses and other entities protected by the Financial Claims Scheme. This measure means that banks will not incur this cost on funds held by an individual of up to the value of $250,000.
Comments: As this is a levy and not a tax (despite giving the appearance of one), presumably the payment of the levy will not give rise to an increase in the companies’ franking accounts for subsequent distribution to shareholders and will therefore affect the grossed up dividend yield of bank shares.
Foreign investors and property
Further to the taxation measures noted above, from 7:30 PM on 9 May 2017 there will be further changes affecting property investments held by foreign residents and which include:
- foreign owned residential property left vacant for more than six months in a year will incur a charge of a minimum of $5000. The amount will be equivalent to the foreign investment application fee paid at the time of application;
- developers who are granted a New Dwelling Exemption Certificate will be subject to a condition which limits the sale to foreign investors of new dwellings in that development to 50%.
Pharmaceutical Benefits Scheme (“PBS”) and Repatriation Pharmaceutical Benefits Scheme (“RPBS”)
The Government has proposed a number of changes to the schemes including new listings and price amendments for both schemes. This will include building on existing statutory price reductions for medicines listed on the PBS to ultimately reduce out-of-pocket costs for medicines for Australians.
Further information on this measure can be found in the PBS website (www.pbs.gov.au)