By Anthony Cullen
Senior SMSF Technical Specialist
There were a number of superannuation measures announced in the Federal Government’s 2021/22 budget back in May. Like all budget announcements, we need to wait to see the legislation to truly indicate how the proposals will impact our clients and the industry.
In late October, the Treasury Laws Amendment (Enhancing Superannuation Outcomes for Australians and Helping Australian Businesses Invest) Bill 2021 was introduced to the House of Representatives for debate. This Bill included draft legislation on several, but not all, of the superannuation related budget announcements and it also included details of an announcement from the 2019/20 budget.
This schedule is aimed at amending the Superannuation Guarantee (Administration) Act 1992 to enable employees that earn less than $450 from one employer in a Calendar month the right to receive superannuation guarantee contributions on those earnings.
Historically, super guarantee started at a lower rate than the current 10% amount, and payments by employers did not have the benefits of today’s technologies and the cost and processing efficiencies that come from them. It was cost-prohibitive to pay superannuation on such small amounts, and hence the threshold.
This is no longer the case and it is deemed appropriate to remove the threshold and allow part-time workers to build their superannuation balances. It has also been determined that the vast majority of workers expected to benefit from these changes are women. It is no secret that women tend to have lower superannuation balances than their male counterparts, so anything that may help bridge this gap, however small, can only be a good thing.Unfortunately, for our teenage children/grandchildren, these changes may have no impact on them at all. Employers who employ part-time workers under the age of 18 are not required to pay superannuation guarantee based on their wages. Part-time being defined in the Act as ‘not more than 30 hours per week’. This is specifically addressed in the legislation and is not part of the changes announced in relation to the threshold.
This is a relatively easy amendment to cover. Current laws allow would-be first homeowners to potentially access up to $30,000 of certain contributions and associated earnings from their superannuation fund to help fund the deposit on their first home.
The amendment proposes to increase the amount that can be accessed to $50,000. All other eligibility requirements will remain as they are, including the maximum amount of contributions from any given year that can potentially be accessed at $15,000.
This will mean that to access the higher amount of $50,000, contributions will need to be made over a more extended period.
Another relatively easy amendment to explain. Currently, among other requirements, one must be at least 65 years of age to contribute under the downsizer provisions. The proposed amendment looks to decrease this age to 60 years of age. All other eligibility criteria will remain as it currently is.
Although this may provide greater opportunities for the younger age bracket, it may also result in additional considerations before making such contributions.
Currently, anyone who makes a downsizer contribution could theoretically access it as soon as it has been made by meeting the ‘attaining age 65’ condition of release. This may come in useful in withdrawal and re-contribution strategies if the money is required outside of super to help finance the acquisition of a new property.
Any contribution made under the age of 65, including a downsizer contribution, will be preserved within the fund until the member meets a condition of release.
Possibly one of the main budget announcements that many have been waiting on the detail for. For such a long time, anyone 65 and older needed to meet the ‘work test’ in order to make voluntary contributions to superannuation.
The work test requires that someone must work at least 40 hours in any given 30-day period for gain or reward, for a super fund to be able to accept voluntary contributions on their behalf.
As recently as 1 July 2020, the age limit for the work test was increased to age 67. This latest announcement by the Government attempts to increase the age, yet again, to 75 (28 days after the month in which the member turns 75, to be exact). This is not the first attempt by this Government to achieve this, so we wait with bated breath to see the passage of this latest attempt through Parliament.
Some notable points of interest with the drafting of this legislation:
- It looks to remove the need to satisfy the work test for salary sacrifice contributions along with non-concessional contributions. Anyone between 67 to 75 wishing to make a personal contribution and claim a tax deduction for it will continue to need to satisfy the work test.
- Current law has an emphasis on the trustees of the super fund being able to accept the contributions. This generally results in many people, including the writer, taking the view that the work test needed to be met before the contribution could be accepted by the fund. Some would argue that the Superannuation Industry (Supervision) Regulations (SIS Regs) does not specify this. As true as that may be, from a practically point of view, it is how it is generally administered.
- The current announcements put an emphasis on the member and their ability to claim a tax deduction rather than the ability of the trustee to accept the contribution. This will allow the member to meet the work test at any time during the relevant year, even after the contribution is made. Failure to meet the work test, or not claiming a deduction for the contribution, will result in it being classified as a non-concessional contribution. To that extent, there will be no need for the trustees to consider if the work test has been met or not, and the trustee will be able to accept the contribution.
These changes will come about via new sections being added to the Income Tax Assessment Act 1997. The Government have also committed to removing the trustee acceptance rules from the SIS Regulations in due course. This will occur via a Legislative Instrument rather than via a Bill/Act.
The amendments also propose that this age group will be able to take advantage of the bring-forward rule and the work test exemption rule. All other criteria of the work test exemption will remain as it is; it is only an increase in age requirements that changes.
As for the bring-forward rule, subject to a member’s Total Super Balance (TSB) a member may make non-concessional contributions that utilise the current year cap and up to the next two years’ cap.
Shortly after the budget announcement, Treasury suggested that the bring forward opportunities would be phased out as one got closer to age 75. The theory is that somebody 75 years or older cannot make non-concessional contributions. Allowing a 74-year-old to access the bring forward provisions would enable them to make contributions that cover years that they would not normally be able to make such contributions.
Interestingly, the drafting of the changes to the legislation does not make any mention of such phasing out provisions. As written, if the legislation was to pass, a 74-year-old could take advantage of the bring forward rule (subject to their TSB).
What is more interesting is that the Explanatory Memorandum attached to the legislation, in paragraph 4.29, mentions that the law’s intent is to limit the ability to utilise the bring-forward rule for those approaching age 75.
In more recent times, the SMSF Association have advised that they received confirmation from Treasury that the proposed legislation only looks to change the age restrictions without imposing any phasing out measures.
The shift in the onus being on the contributor meeting the work test to claim a deduction from the trustees being able to accept contributions may create additional issues for some members. If contributions are made based on the premise the work test will be met at a later point in the year, and for what ever reason that does not happen, the contribution will be classified as a non-concessional contribution, as opposed to needing to be removed from the fund under the current system. This could lead to breaches of the member’s non-concessional cap that cannot be properly rectified until an excess determination notice is received and the subsequent process runs its course.
This schedule relates to announcements from the 2019/20 budget.
Prior to 1 July 2017 the industry approach to Exempt Current Pension Income (ECPI) in a year that supported periods of both pooled and segregated assets was to obtain an actuarial certificate that covered the entire year.
As of 1 July 2017, we have had to adopt the ATO’s view that for periods of segregation (including deemed segregation), the fund must apply the segregation method of ECPI and only apply the proportionate method to the relevant periods, rather than the whole year. That is, any certificates obtained would only cover those periods where the fund had unsegregated assets.
The purpose of the changes in Schedule 5 is to allow the trustees the choice of the method they use to claim ECPI where the fund has both segregated and unsegregated periods in the one year. The default approach is the newly adopted ATO method, and the trustees will need to elect to apply the whole of year proportionate method if that is the preferred option.
The choice made by the trustees to adopt the previously used method is not a formal election that requires anything to be lodged with the ATO. However, there is an expectation that suitable records are maintained to support the decision made by the trustees. A decision not to use the current ATO approach needs to be made prior to the lodgement of the funds SMSF annual return.
The original draft legislation released for consultation earlier in the year suggested that the choice could be made on an asset by asset basis. Based on feedback, the legislation put before Parliament has not been so broad and only allows the trustees to apply their chosen method for all the fund’s assets.
It should also be noted that the option to choose is only available where there are periods of both segregated and unsegregated during the year. A fund entirely in retirement pension mode for the full year will continue to be deemed segregated and can only use the segregated method.
Please note, changes to the disregarded small fund asset rules previously prohibiting the use of the segregated method for certain funds were amended via a separate piece of legislation in September 2021. This effectively removed the requirement to obtain an actuarial certificate where the fund was 100% supporting retirement phased pensions for an entire financial year.
For schedules 1 – 4, the proposed application date of the proposals is the first 1 July after receiving Royal Assent. For the most part, this is expected to be 1 July 2022. That is, there is an expectation that these laws will pass before July next year.
For schedule 5, the proposed application date is 1 July 2021. This is in line with the changes to the requirement for an actuarial certificate from those funds 100% supporting retirement phase pensions from that date onwards.
However, Parliament adjourned for the last time this calendar year on Thursday, 2 December 2021 and is not expected to sit again until 8 February 2022. At the close of business on 2 December the legislation remains in the House of Representative and has not made its way to the Senate yet.
Another factor that may or may not influence whether this legislation passes or not is the timing of next year’s election. Any legislation that is not passed when an election is called, and Parliament is dissolved, effectively becomes null and void. The legislation would need to be reintroduced once Parliament settles into the new regime, whatever that may be, and the process begins from scratch.
Next year’s budget has been proposed to be delivered on 29 March 2022 (rather than the usual early May). This is an early indicator that the election may be called soon after and we will go to the polls in early-mid May.
This doesn’t leave a lot of sitting days for the legislation to pass and receive Royal Assent before the election is expected to be called.
This year’s budget also saw announcements in relation to;
- Resident superannuation funds; in particular changes to the
~ Active member test and ability to make contributions while overseas, and
~ The temporary absence rule when considering the location of the Central Management & Control of a fund.
- Legacy pensions
~Proposals to allow the commutation of older style pensions such as lifetime, life expectancy and market-linked pensions held in self-managed and small APRA funds.
Both of these measures are likely to require greater consultation with industry and stakeholders in order that they are implemented in an appropriate and workable form. We remain hopeful that we will see progress on these measures sooner rather than later. However, a looming election announcement remains in the back of our minds.
To learn more about Director ID changes tune into the latest episode of SMSF Adventures with SuperConcepts here.