The Federal Budget 2017 includes several changes to superannuation, the biggest of which relate to housing.
The 2017 Budget proposes a higher super contributions cap for the proceeds of downsizing homes and allowing first home buyers to withdraw voluntary contributions from super. Other changes include integrity measures, tax relief for merging super funds and a one-stop shop financial dispute resolution body.
Note that these measures have been proposed by the Government, but not yet legislated.
Extra contribution cap for downsizing home
Older people will be able to make extra super contributions from the proceeds of selling their home, from 1 July 2018.
From this date the Government intends for people aged 65 or over to be able to make a non-concessional contribution of up to $300,000 from the proceeds of selling their home on top of the existing non-concessional caps. The contribution will also be exempt from the age test, work test and the limit on non-concessional contributions for people with super balances over $1.6 million, according to the Budget papers and fact sheets.
“This measure will apply to sales of a principal residence owned for the past ten or more years and both members of a couple will be able to take advantage of this measure for the same home.”
“This measure reduces a barrier to downsizing for older people. Encouraging downsizing may enable more effective use of the housing stock by freeing up larger homes for younger, growing families.”
The Budget fact sheets say that these contributions will not be exempt from the Age Pension asset test or the Transfer Balance Cap.
The SMSF Association has welcomed the measure, with CEO John Maroney saying it will help people make top-up contributions to super, allowing them to fund a dignified and secure retirement.
“While the measure may not be a significant trigger to encourage downsizing, we welcome the ability for older Australians to top up their superannuation where downsizing their home provides them with funds to do so,” Mr Maroney said.
The measure is estimated to cost $30 million over the four-year forward estimates.
First home buyers will be able to use super to save for a deposit by withdrawing future voluntary contributions, and associated earnings, from superannuation, under the First Home Super Saver Scheme.
“The Government will encourage home ownership by allowing future voluntary contributions to superannuation made by first home buyers from 1 July 2017 to be withdrawn for a first home deposit, along with associated deemed earnings.”
Note that, as of 1 July 2017, the First Homer Super Saver Scheme has not been legislated, and there are questions over if it will pass the Parliament when it is introduced.
“Under the measure up to $15,000 per year and $30,000 in total can be contributed, within existing caps. Contributions can be made from 1 July 2017. Withdrawals will be allowed from 1 July 2018 onwards. Both members of a couple can take advantage of this measure to buy their first home together,” says the Budget papers.
The ATO notes that voluntary contributions, for the scheme, includes concessional contributions (including salary sacrifice contributions) and non-concessional contributions. The amount that can be released is a maximum of $30,000 voluntary contributions plus the deemed earnings.
“Concessional contributions and earnings that are withdrawn will be taxed at marginal rates less a 30 per cent offset,” says the ATO.
“When non-concessional amounts are withdrawn, they will not be taxed,” says the relevant Budget fact sheet.
“The amount of earnings that can be released will be calculated using a deemed rate of return based on the 90 day Bank Bill rate plus three percentage points.”
The Budget website includes a tool to “help people understand the advantages of saving for a home deposit through superannuation”: First Home Super Saver Scheme – Estimator.
Labor will not be supporting the First Home Super Saver Scheme, according to a joint statement by Shadow Treasurer Chris Bowen and Shadow Minister for Small Business and Financial Services Katy Gallagher.
“The First Home Super Saver Scheme will do nothing to address housing affordability but will work to undermine Australia’s world class superannuation system and Labor will not support it,” says the statement.
“Rather than encouraging a raid on superannuation savings the Government should be supporting first home buyers by introducing policies that will actually work – reforming negative gearing and capital gains tax concessions.”
SMSF Association CEO John Maroney said the scheme offers super funds an “excellent opportunity” to engage younger fund members.
“The first home buyers’ proposal strikes the right balance between encouraging young people to save for a first home deposit in a concessional tax environment, but also protecting their retirement savings for the longer-term,” he said.
However the Tax Institute says the change will be of only minimal benefit for first home buyers.
“The First Home Super Saver Scheme is also a significant measure and appears to be attractive on its face. However, upon closer inspection, the relative saving of only paying tax at the super fund rate on the relevant contributions has only marginal utility to first home buyers who are likely to be on lower income tax rates,” said the Tax Institute’s Senior Tax Counsel, Professor Robert Deutsch.
Meanwhile the Association of Superannuation Funds of Australia (ASFA) is concerned about the administrative implications of the policy. ASFA CEO Dr Martin Fahy said it would be important that the scheme not impose “any significant” administrative burden on super funds, because this would increase costs for all fund members.
“ASFA recognises the importance of home ownership as a key pillar for achieving comfort and dignity in retirement, however the design of any new first home saving arrangement should never impose on the primary role of super being saving for retirement,” he said.
The measure is estimated to cost $250 million in lost revenue over the forward estimates, with another $9.4 million in costs to the ATO to implement the changes.
LRBA integrity measure
The Government will, from 1 July 2017, “improve the integrity of the superannuation system” by including the use of Limited Recourse Borrowing Arrangements (LRBAs) in the calculation of the Total Superannuation Balance and Transfer Balance Cap.
“Limited recourse borrowing arrangements can be used to circumvent contribution caps and effectively transfer growth in assets from the accumulation phase to the retirement phase that is not captured by the transfer balance cap.”
The measure is estimated to save $4 million over the four-year forward estimates.
Non-arms length transaction integrity measure
Changes will be made to reduce opportunities for super funds members to use related party transactions on non-commercial terms to increase their superannuation, from 1 July 2018.
“The non-arm’s length income provisions will be amended to ensure expenses that would normally apply in a commercial transaction are included when considering whether the transaction is on a commercial basis.”
This measure is estimated to raise $20 million over the forward estimates
Tax relief for merging super funds extended
The tax relief for merging superannuation funds will be extended until 1 July 2020. It was set to lapse from 1 July 2017.
“The tax relief will be temporarily extended as the Productivity Commission completes a review into the efficiency and competitiveness of Australia’s superannuation industry.”
“This measure is estimated to have an unquantifiable cost to revenue over the forward estimates period.”
The extension of the merger tax relief was welcomed by ASFA.
“Mergers of funds are one means by which they can realise scale efficiencies, so removing this significant barrier is welcome in a competitive superannuation industry that is continuously improving its efficiency and productivity,” said ASFA CEO Dr Fahy.
One-stop shop financial dispute resolution: AFCA
The Government will roll existing financial dispute resolution bodies into a single new body, the AFCA.
“AFCA will be an industry funded complaints resolution body for all financial and superannuation disputes”, replacing the Financial Ombudsman Service (FOS), the Credit and Investments Ombudsman (CIO) and the Superannuation Complaints Tribunal (SCT).
The Ramsay Review into the financial system’s external dispute resolution and complaints framework had recommended that the FOS and CIO be replaced with a single body. However it also recommended that the SCT remain separate, at least for the time being.