The Treasurer repeated his promise that, “There will be no new taxes on superannuation under this government” and indeed that is what was delivered in the 2015/16 Budget.
Whilst the 2014 Financial System Inquiry (FSI) included a number of recommendations related to superannuation, including possibly aligning pre – and post – retirement tax rates and reviewing the potentially distorting effects of the current capital gains tax and dividend imputation policies, the Budget has steered clear of these issues for now. These issues will be picked up by the Government’s Tax White Paper process, which commenced with a discussion paper issued in March and will continue over the rest of 2015. More changes to super are unlikely to occur before the 2016 election.
The Budget also confirmed that changes to the indexation of aged, disability support and veterans’ pensions, carer payments and the single parenting payment won’t happen in the coming year. A change to the indexation of these benefits would have seen them grow more slowly, but the controversial nature of this change has seen it excluded from this year’s Budget.
So what was in the 2015/16 Budget? Although superannuation was largely left untouched, we have provided some initial thoughts and commentary on the 2015/16 Federal Budget announcements below:
Government Balances Short-Term Fiscal Accommodation with Larger Deficits
The 2015/16 Budget has taken a step back from last year’s austerity. An expanded fiscal deficit, relative to the targets set a year ago, is now projected to be at 2.1% of GDP ($35.1bn) in 2015/16 and 1.5% of GDP in 2016/17 ($25.8bn)1. A medium term stance to tighten up fiscal policy has been maintained however and, like last year, a surplus is predicted by 2019/20. The economic assumptions underlying these figures are generally conservative and realistic in our opinion. However, there are still some downside risks to the volatile iron ore price which is assumed to be US$48 per tonne as well as risks to the exchange rate assumption of US$0.77. Overall, the economic views in the Budget are reasonable and we believe that the gradual winding back of the deficit as set out by the Government is achievable. The economy is in a position to absorb the medium term fiscal consolidation but will embrace the immediate relief in 2015/16 Budget after a loss of confidence in the wake of last year’s Budget.
In our view, at a time when Australian consumer confidence levels are low and business sentiment is mediocre, this Budget will be seen as constructive for financial markets. With no major corporate tax or welfare surprises, combined with a small cut to the small business tax rate and jobs initiatives, we do not see this Budget as posing any concerns for the equity market. Further, it will likely be seen in a positive light by the Reserve Bank, which may now feel less pressure to ease monetary policy in the near term. Debt rating agencies and Australian bond investors can also take comfort in the peak net debt-to-GDP ratio forecast of 18% (in 2016/17), which will help maintain Australia’s AAA sovereign debt rating.
Age Pension Eligibility Changes
Probably the biggest post-retirement change included in the Budget was in relation to the eligibility criteria for the Age Pension, which was flagged in a pre-Budget release by the Minister for Social Security.
There are three changes that have been made, which collectively mean that more people will qualify for a full Age Pension, but fewer people will qualify for a part Age Pension:
1.Asset test threshold upper limit decreases: At present, a retired couple owning a family home and holding up to $1.15 million in assets qualifies for a part pension. From 1 January 2017, this threshold will be reduced to $823,000 and this will reduce the number of people eligible for a part Age Pension. There are similar changes to thresholds for single homeowners and non-homeowners.
2.Asset test threshold lower limit increases: At present, a retired couple owning a family home and holding less than $286,500 in assets can qualify for a full Age Pension. From 1 January 2017, this threshold will be increased to $375,000 and this will increase the number of people eligible for a full Age Pension. Similar changes apply for single homeowners and non-homeowners.
3.Taper rate increases: The ‘taper rate’ for the assets test determines how much Age Pension someone receives. At present, the Age Pension entitlement is reduced by $1.50 a fortnight for every $1,000 of assets over the full Age Pension threshold. From 1 January 2017, the taper rate will increase to $3 per $1,000 of assets over the full Age Pension threshold and in effect narrow the band of people eligible for a part Age Pension and reduce the pension payable to those that are still eligible.
When taken together with last year’s Budget, which delayed the Superannuation Guarantee increases, the direction of the overall policy indicates a greater expectation that Australians will plan and provide for more of their own retirement in the future. Therefore, it will be important for future retirees, who may now be faced with the prospect of a reduced or no Age Pension, to review their financial position and consider the impact of the changes on their retirement planning.
Finally, under current rules, recipients of the Age Pension can continue to receive a full rate pension whilst absent from Australia for up to 26 weeks at a time. From 1 January 2017, the maximum period of absence will be reduced to 6 weeks. Pensioners who have lived in Australia for less than 35 years will be paid a reduced rate of pension, based on their Australian Working Life residence (period living in Australia as a permanent resident between age 16 and Age Pension age). Pensioners who have lived in Australia for more than 35 years, or who are terminally ill or severely impaired, will not be affected.
Whilst the 2014 Financial System Inquiry (FSI) included a number of recommendations related to superannuation, including possibly aligning pre – and post – retirement tax rates and reviewing the potentially distorting effects of the current capital gains tax and dividend imputation policies, the Budget has steered clear of these issues for now. These issues will be picked up by the Government’s Tax White Paper process, which commenced with a discussion paper issued in March and will continue over the rest of 2015. More changes to super are unlikely to occur before the 2016 election.
The Budget also confirmed that changes to the indexation of aged, disability support and veterans’ pensions, carer payments and the single parenting payment won’t happen in the coming year. A change to the indexation of these benefits would have seen them grow more slowly, but the controversial nature of this change has seen it excluded from this year’s Budget.
So what was in the 2015/16 Budget? Although superannuation was largely left untouched, we have provided some initial thoughts and commentary on the 2015/16 Federal Budget announcements below:
Government Balances Short-Term Fiscal Accommodation with Larger Deficits
The 2015/16 Budget has taken a step back from last year’s austerity. An expanded fiscal deficit, relative to the targets set a year ago, is now projected to be at 2.1% of GDP ($35.1bn) in 2015/16 and 1.5% of GDP in 2016/17 ($25.8bn)1. A medium term stance to tighten up fiscal policy has been maintained however and, like last year, a surplus is predicted by 2019/20. The economic assumptions underlying these figures are generally conservative and realistic in our opinion. However, there are still some downside risks to the volatile iron ore price which is assumed to be US$48 per tonne as well as risks to the exchange rate assumption of US$0.77. Overall, the economic views in the Budget are reasonable and we believe that the gradual winding back of the deficit as set out by the Government is achievable. The economy is in a position to absorb the medium term fiscal consolidation but will embrace the immediate relief in 2015/16 Budget after a loss of confidence in the wake of last year’s Budget.
In our view, at a time when Australian consumer confidence levels are low and business sentiment is mediocre, this Budget will be seen as constructive for financial markets. With no major corporate tax or welfare surprises, combined with a small cut to the small business tax rate and jobs initiatives, we do not see this Budget as posing any concerns for the equity market. Further, it will likely be seen in a positive light by the Reserve Bank, which may now feel less pressure to ease monetary policy in the near term. Debt rating agencies and Australian bond investors can also take comfort in the peak net debt-to-GDP ratio forecast of 18% (in 2016/17), which will help maintain Australia’s AAA sovereign debt rating.
Age Pension Eligibility Changes
Probably the biggest post-retirement change included in the Budget was in relation to the eligibility criteria for the Age Pension, which was flagged in a pre-Budget release by the Minister for Social Security.
There are three changes that have been made, which collectively mean that more people will qualify for a full Age Pension, but fewer people will qualify for a part Age Pension:
1.Asset test threshold upper limit decreases: At present, a retired couple owning a family home and holding up to $1.15 million in assets qualifies for a part pension. From 1 January 2017, this threshold will be reduced to $823,000 and this will reduce the number of people eligible for a part Age Pension. There are similar changes to thresholds for single homeowners and non-homeowners.
2.Asset test threshold lower limit increases: At present, a retired couple owning a family home and holding less than $286,500 in assets can qualify for a full Age Pension. From 1 January 2017, this threshold will be increased to $375,000 and this will increase the number of people eligible for a full Age Pension. Similar changes apply for single homeowners and non-homeowners.
3.Taper rate increases: The ‘taper rate’ for the assets test determines how much Age Pension someone receives. At present, the Age Pension entitlement is reduced by $1.50 a fortnight for every $1,000 of assets over the full Age Pension threshold. From 1 January 2017, the taper rate will increase to $3 per $1,000 of assets over the full Age Pension threshold and in effect narrow the band of people eligible for a part Age Pension and reduce the pension payable to those that are still eligible.
When taken together with last year’s Budget, which delayed the Superannuation Guarantee increases, the direction of the overall policy indicates a greater expectation that Australians will plan and provide for more of their own retirement in the future. Therefore, it will be important for future retirees, who may now be faced with the prospect of a reduced or no Age Pension, to review their financial position and consider the impact of the changes on their retirement planning.
Finally, under current rules, recipients of the Age Pension can continue to receive a full rate pension whilst absent from Australia for up to 26 weeks at a time. From 1 January 2017, the maximum period of absence will be reduced to 6 weeks. Pensioners who have lived in Australia for less than 35 years will be paid a reduced rate of pension, based on their Australian Working Life residence (period living in Australia as a permanent resident between age 16 and Age Pension age). Pensioners who have lived in Australia for more than 35 years, or who are terminally ill or severely impaired, will not be affected.
Age Pension limits for some recipients of defined benefit income streams Some retirees receive pensions known as ‘defined benefit income streams’ from public sector or corporate defined benefit funds. Under the current rules, all or part of the income from their defined benefit pension can be excluded from the income test for Age Pension eligibility.
The Government has announced that, from 1 January 2016, the proportion of income that can be excluded from the income test will be capped at 10%. Recipients of Veterans’ Affairs pensions or defined benefit income streams paid by military superannuation funds will be exempt from this measure.
The extent to which this measure will reduce an individual’s social security benefits will depend on personal circumstances. It will be important for trustees and administrators to understand the nuances of this change as it is likely that pensioners will question the impact of the change for them and potentially need guidance.
Terminally ill to gain earlier access to superannuation
As announced by the Assistant Treasurer in the week before the Budget, superannuation fund members suffering terminal illnesses will be able to gain unrestricted tax free access to their superannuation if they are likely to die within two years. This is less restrictive and likely to give earlier access than the current requirement which requires a member to have less than 12 months to live. Early access will continue to be subject to certification from two medical practitioners (including a specialist). The new measure is expected to apply from 1 July 2015 and is a welcome change for superannuation fund members, as it means they could use the available funds to better access medical treatments or simply fulfill their goals while they are still alive.
Those superannuation funds that provide an insured terminal illness benefit are likely to need to amend their insurance policies to reflect the revised access arrangements for the terminal illness definition. Depending upon a superannuation fund’s insurance policy, it may also have an impact on insurance premiums for death cover, as insurers may need to factor in advance payment of up to two years for death benefits if they are paid on terminal illness.
Superannuation supervisory levies to increase
There will be increased supervisory levies on superannuation funds to fully recover the cost of superannuation activities undertaken by the Australian Taxation Office and Department of Human Services. The Government expects to collect about $12 million per year in additional funding from 1 July 2015 ($46.9 million over four years).
These additional levies are expected to double the funding applied to the Australian Taxation Office and Department of Human Services compared with 2014/15 expectations, and represent an increase of around 9% in the total supervisory levies expected to be collected for 2014/15 of $130.1 million.
Removal of red tape around lost and unclaimed super monies
From 1 July 2016, some improvements will take effect to remove redundant reporting obligations for superannuation funds and to streamline lost and unclaimed superannuation administrative arrangements. The changes are intended to make it easier to reunite individuals with their lost and unclaimed superannuation.
No further details about this measure have been provided in the Budget papers.
Serious Financial Crime Taskforce
As announced by the Treasurer last week, the Government will provide $127.6 million over four years to establish a Serious Financial Crime taskforce for investigations and prosecutions that will address superannuation and investment fraud, identity crime and tax evasion.
The actions of the Task Force are expected to provide a net increase to Government revenues, as well as assisting in maintaining the integrity and community confidence in Australian financial markets and regulatory systems.
Managed Investment Trusts
Managed investment trusts are unit trusts that are used as a collective investment vehicle (managed investment scheme under the Corporations Act). The Government is finally proceeding with the implementation of a new tax system for managed investment trusts with a 12-month transition period from 1 July 2015 to 1 July 2016. The changes were originally announced in 2010 (to apply from 1 July 2011) and have been deferred numerous times over the intervening period.
The changes are intended to reduce compliance costs and make Australian managed investment funds more attractive to investors, particularly international investors. The changes should provide greater flexibility in terms of distribution of income and allocation of tax liabilities to unit holders, flexibility to create new product opportunities and reduce uncertainty and tax compliance costs.
If you would like addition information in relation to how the budget changes may affect you personally, please feel free to contact your adviser.
Thanks to Russell Investments for providing this summary.
1 All references are in Australian dollars unless otherwise indicated.
2. Image Source 2UE
The Government has announced that, from 1 January 2016, the proportion of income that can be excluded from the income test will be capped at 10%. Recipients of Veterans’ Affairs pensions or defined benefit income streams paid by military superannuation funds will be exempt from this measure.
The extent to which this measure will reduce an individual’s social security benefits will depend on personal circumstances. It will be important for trustees and administrators to understand the nuances of this change as it is likely that pensioners will question the impact of the change for them and potentially need guidance.
Terminally ill to gain earlier access to superannuation
As announced by the Assistant Treasurer in the week before the Budget, superannuation fund members suffering terminal illnesses will be able to gain unrestricted tax free access to their superannuation if they are likely to die within two years. This is less restrictive and likely to give earlier access than the current requirement which requires a member to have less than 12 months to live. Early access will continue to be subject to certification from two medical practitioners (including a specialist). The new measure is expected to apply from 1 July 2015 and is a welcome change for superannuation fund members, as it means they could use the available funds to better access medical treatments or simply fulfill their goals while they are still alive.
Those superannuation funds that provide an insured terminal illness benefit are likely to need to amend their insurance policies to reflect the revised access arrangements for the terminal illness definition. Depending upon a superannuation fund’s insurance policy, it may also have an impact on insurance premiums for death cover, as insurers may need to factor in advance payment of up to two years for death benefits if they are paid on terminal illness.
Superannuation supervisory levies to increase
There will be increased supervisory levies on superannuation funds to fully recover the cost of superannuation activities undertaken by the Australian Taxation Office and Department of Human Services. The Government expects to collect about $12 million per year in additional funding from 1 July 2015 ($46.9 million over four years).
These additional levies are expected to double the funding applied to the Australian Taxation Office and Department of Human Services compared with 2014/15 expectations, and represent an increase of around 9% in the total supervisory levies expected to be collected for 2014/15 of $130.1 million.
Removal of red tape around lost and unclaimed super monies
From 1 July 2016, some improvements will take effect to remove redundant reporting obligations for superannuation funds and to streamline lost and unclaimed superannuation administrative arrangements. The changes are intended to make it easier to reunite individuals with their lost and unclaimed superannuation.
No further details about this measure have been provided in the Budget papers.
Serious Financial Crime Taskforce
As announced by the Treasurer last week, the Government will provide $127.6 million over four years to establish a Serious Financial Crime taskforce for investigations and prosecutions that will address superannuation and investment fraud, identity crime and tax evasion.
The actions of the Task Force are expected to provide a net increase to Government revenues, as well as assisting in maintaining the integrity and community confidence in Australian financial markets and regulatory systems.
Managed Investment Trusts
Managed investment trusts are unit trusts that are used as a collective investment vehicle (managed investment scheme under the Corporations Act). The Government is finally proceeding with the implementation of a new tax system for managed investment trusts with a 12-month transition period from 1 July 2015 to 1 July 2016. The changes were originally announced in 2010 (to apply from 1 July 2011) and have been deferred numerous times over the intervening period.
The changes are intended to reduce compliance costs and make Australian managed investment funds more attractive to investors, particularly international investors. The changes should provide greater flexibility in terms of distribution of income and allocation of tax liabilities to unit holders, flexibility to create new product opportunities and reduce uncertainty and tax compliance costs.
If you would like addition information in relation to how the budget changes may affect you personally, please feel free to contact your adviser.
Thanks to Russell Investments for providing this summary.
1 All references are in Australian dollars unless otherwise indicated.
2. Image Source 2UE
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