2017 Federal Budget Update
Budget 2017 Overview
The following information is an overview of six key areas which may impact superannuation in the coming year and beyond. Please note that all of these proposed initiatives are subject to legislation being passed. Full details of the proposals are not yet available, and we will provide you with full details and potential impacts when further details are to hand.
1. Super savings boost for first home buyers
The ‘First Home Super Savings Scheme’ uses the tax advantages of super to help first home buyers save for a housing deposit. From 1 July this year you’ll be able to use your super to assist with saving for a home deposit, provided your fund participates in the scheme after it is legislated. The government has indicated that it will allow first home buyers to withdraw future voluntary contributions to superannuation made from 1 July 2017—over and above any compulsory contributions— for a first home deposit, along with associated deemed earnings.
First home owners can save up to $15,000 per year from 1 July by contributing pre-tax earnings into their super fund, up to a $30,000 per person lifetime total limit. Bear in mind that an overall $25,000 annual cap on pre-tax super contributions (that includes super contributions made by your employer) also applies, and this may reduce the amount you can save to less than $15,000 per year.
These contributions and the earnings they generate are taxed at the favourable rate of 15%. When you buy your first home, these contributions can be withdrawn to help fund the deposit. In addition, this measure allows you to withdraw an additional amount of your balance calculated at a rate stated by the government, to account for earnings within your fund.
Withdrawals – which can be made any time after 1 July 2018 – will be taxed 30% below your marginal tax rate. The Treasurer says the boost provided by super over a typical deposit account in this way will accelerate savings by ‘at least 30%’. Couples saving for a home can tip $60,000 jointly into super to reach their deposit goal.
The government gives an example of how the scheme can work:
Michelle earns $60,000 a year. Using the scheme she salary sacrifices $10,000 of her pre-tax income into her superannuation account, boosting her balance by $8500 after the 15% contributions tax. After three years, she can withdraw $27,380 plus earnings on those contributions, paying tax of $1620, leaving her with $25,760 for her deposit. That works out to about $6240 more than if she had saved in a standard deposit account.
2. Incentives for downsizing the family home
At the other end of the housing chain, homeowners aged 65 and over will be incentivised to trade down to a smaller home. The thinking behind this idea is to free up housing stock that can have a knock-on impact right down the chain, by encouraging empty nesters to ‘right-size’ their home.
People over 65 years old will be able to make a non-concessional contribution of up to $300,000 from the sale of their principal residence into their superannuation fund, so long as they have lived in their home for at least 10 years. Both members of a couple will be able to take advantage of this measure for the same home.
These contributions will be in addition to those currently permitted under existing rules and caps and they will be exempt from the existing age test, work test and the $1.6 million balance test for making non-concessional contributions. The Budget materials confirm that sale proceeds contributed to superannuation under this measure will remain subject to the Age Pension assets test.
3. Supporting housing affordability – National Housing Finance and Investment Corporation – bond aggregator scheme for institutional investors.
The National Housing Finance and Investment Corporation (NHFIC) will operate an affordable housing bond aggregator, to provide cheaper and longer term finance for community housing providers by aggregating their borrowing requirements and issuing bonds to the wholesale market at a lower cost and longer term than bank finance. It is anticipate that the government will provide around $63.1 million over four years to the Department of Treasury to establish the NHFIC.
The affordable housing bond aggregator opens up an interesting opportunity for super funds to invest in housing bonds, subject to their investment objectives being met. While funds invest for a range of reasons – with environmental, social, and governance considerations influencing decision making – the main driver is maximising returns. The NHFIC will need to be competitive to attract funds such as ours to this scheme, ensuring that we get the best returns for our members.
4. New complaints handling body for superannuation and financial services.
As part of the budget announcement, the government will merge three organisations to create a ‘one-stop shop’ for external dispute resolution for consumers of the financial services industry. Effective from 1 July 2018, the Australian Financial Complaints Authority (AFCA) will replace the Financial Ombudsman Service (FOS), the Superannuation Complaints Tribunal (SCT) and the Credit and Investments Ombudsman. This decision has been driven largely by the outcome from the Ramsey Review, facilitated by an expert panel led by Professor Ian Ramsey. The intent of the panel was to review the financial services sector external dispute resolution and complaints framework.
These recommendations were expected as an outcome of the Ramsay Review, and we acknowledge that the aggregation may drive efficiencies in the system. That said, and in our experience, it will be imperative that there needs to be superannuation specialists in the newly-constituted body. Many of the issues related to superannuation are complex; superannuation is not simple and requires specialist knowledge.
5. The Pensioner Concession Card and the Age Pension eligibility
The Pensioner Concession Card will be reinstated to those who were no longer eligible for the pension due to the changes to the assets test introduced on 1 January 2017.
This means that seniors will regain access to State and Territory-based concessions that were withdrawn after the change.
People on age and disability support pensions and the parenting payment will also receive one-off cash payments to help cover their winter energy bills — $75 for singles and $125 for couples.
Meanwhile, the government will tighten eligibility for the age pension to foreigners and there are some new rules.
To get the Age Pension, you must have been an Australian resident continuously for 15 years, unless:
- You have had 10 years’ continuous Australian residence, with 5 years of this residence between age 16 and Age Pension age, or
- You have 10 years’ continuous Australian residence, without having received an activity-tested income support payment (mainly Newstart) for a cumulative period of five years.
Depending on your birthdate, from 1 July 2017 the Age Pension age will be 65 years and 6 months. After that, the eligibility for the Age Pension will go up 6 months every 2 years until 1 July 2023.
6. Medicare Levy
Many tax payers will soon pay higher tax after the government announced an increase in the Medicare Levy to help fund the $22 billion National Disability Insurance Scheme.
The levy is set to increase by 0.5% — to 2.5% of taxable income – from 1 July 2019.
Other tax rates that are linked to the top personal tax rate, such as the fringe benefits tax rate, will also be increased.
The levy will be reduced for some taxpayers. Income thresholds where the Medicare Levy kicks in will increase, so more people on low incomes will pay no Medicare Levy or a reduced level.
1 July Legislation Recap
Superannuation members may face new rules from 1 July 2017 after the Federal Government successfully passed a number of its superannuation changes into law.
The tax concessions offered in the super environment remain generous and the final superannuation reform package, approved by the Senate on 23 November 2016, is in line with the Government’s objective of ensuring the superannuation system is fair, flexible and fit for purpose. The Government will legislate to define the primary objective of the superannuation system: ’to provide income in retirement to substitute or supplement the Age Pension‘, whilst providing an ‘anchor’ for future superannuation reforms.
The following summarises the changes in 2017/2018, providing you with an overview of the new rules and some actions to consider, should the new rules affect your super or pension accounts.
Pensions Capped at $1.6 Million
From 1 July 2017, there will be a limit on how much of your super you can transfer from your super account to a tax-free pension account. This limit is known as the ‘transfer balance cap’.
New and existing pension accounts that support your tax-free retirement income will be counted towards the transfer balance cap.
If you already have more than $1.6m in assets supporting your pension you’ll need to remove the excess. If your balance is between $1.6m and $1.7m on 1 July 2017 you’ll have until 31 December 2017 to comply with the new rules. If you have more than $1.7m, you’ll need to act before 1 July.
You can reduce your pension balance either by rolling the excess amount back into an accumulation account – where you’ll pay 15% tax on any earnings – or investing it outside of super – where you’ll pay your personal rate (ranging from 0% to 47%) on any earnings.
There is no limit on the amount of money you can have in your normal accumulation super account where earnings are taxed at 15%.
Capital gains tax relief is available if you have to move an asset from pension to accumulation phase in order to satisfy the $1.6 million transfer balance cap.
Whether you choose to roll your additional funds back into super or invest elsewhere depends very much on your personal circumstance – particularly your income outside of super – and is something you should consider speaking to an NGS Super financial planner about.
If you start a pension after 1 July 2017, your opening balance will be restricted to $1.6 million. Later earnings are not included in the cap so your pension account can grow over time to more than $1.6 million.
Speak to one of our financial planners who can help you review your options and advise any actions you need to take if your balance is, or will likely be, over $1.6 million.
Transition pension earnings no longer tax-free
From 1 July, popular transition to retirement (TTR) accounts will lose their tax-free status so earnings will be taxed at 15%, just like a normal super account.
The tax on the income you draw from your TTR will stay the same – your marginal tax rate less 15% if you’re under 60 and tax-free if you’re over 60 – but the tax on earnings means the argument for a TTR strategy after July 1, 2017 may not be as compelling, particularly for those on high incomes and those aged under 60 years.
But if you started a TTR because you wanted to work fewer hours and supplement your income, or because you needed money to pay down some debt, then it might still be right for you.
Five Changes to Super Contributions
Australia’s superannuation system is about to implement five major changes to what you can contribute to your account and how.
These five significant changes will come into effect from 1 July 2017. Make sure you understand what they mean for you and consider speaking to an NGS Super financial planner to help adapt your contribution strategy.
1. Reduced concessional (before-tax) contributions
The concessional contribution cap for before-tax super contributions – including employer Superannuation Guarantee payments and salary sacrifice – will drop to $25,000 a year for everyone; down from $30,000 for those aged under 50 and $35,000 for those 50 or older.
The change will make it more difficult to boost your super quickly in the years leading up to retirement, so you’ll need to start thinking about super earlier in your career.
2. Reduced non-concessional (after-tax) contributions
After-tax superannuation caps will drop to $100,000 a year, down from $180,000. Those under age 65 will still be able to ‘bring forward’ three years of after-tax contributions, but the limit will be reduced to $300,000, down from $540,000.
Under the new rules, you won’t be able to make any non-concessional contributions once your total super balance reaches $1.6 million.
3. Spouse contributions more widely available
The spouse tax offset will be extended to more couples. Before 1 July, 2017, a tax offset of up to $540 is available for individuals who make superannuation contributions to their spouse’s account – if their spouse’s total income is less than $13,800.
Under the new rules the offset will be extended to those whose recipient spouses earn up to $40,000. The offset gradually reduces for incomes above $37,000 and completely phases out at incomes above $40,000.
The move means there is greater flexibility to support your partner and include spouse contributions as part of your overall strategy.
4. Widening access to concessional contributions
All individuals under the age of 65, and those aged 65 to 74 who meet the work test, will be able to claim a tax deduction for personal contributions to eligible superannuation funds up to the concessional contributions cap.
An income tax deduction for personal superannuation contributions before 1 July 2017 is only available to people who earn less than 10 per cent of their income from salary or wages.
5. Introducing catch-up contributions
From 1 July 2018, super members will be able to ‘carry forward’ any unused concessional cap amounts for up to five financial years. This change will apply to people with total super balances of less than $500,000.
Unused amounts ‘carried forward’ can only be used in subsequent years, so the first year in which you’ll be able to take advantage of catch-up contributions is 2019–20.
Catch-up contributions could be helpful for those who take time out of work, whose income varies considerably from one year to the next, or whose circumstances have changed and are now in a position to increase their contributions to superannuation.
NOW IS THE TIME TO ACT
Contribution caps are about to be reduced but current rules apply until 30 June 2017, providing an opportunity to increase your before-tax contributions. So if you have been thinking about putting more money into super, it’s time to act.
Before 1 July:
- before-tax contribution caps are $30,000 a year for those under 50 and $35,000 a year for those 50 plus
- after-tax contribution caps are $180,000 a year
- the three-year bring-forward rule on after-tax contribution is $540,000 for those under the age of 65.
Call the NGS Super advice line on 1300 133 177 for further information, or to speak to a planner.
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