Last year’s Budget changes to superannuation restored equity into a system which was tilted too far towards the wealthy. Nonetheless, these privileged baby-boomers used the media to convince the masses that the government was ripping off their superannuation. Even with changes made in September to remove the dreaded $500,000 cap on lifetime non-concessional contributions, there has been non-stop bleating about the extra taxes.

Not surprisingly, the government ruled out any further tax changes to superannuation in this term to provide certainty and stability – and, more importantly, to get the vote-losing changes off the front pages.

So, it was a surprise to have more changes in this year’s Budget, though they are all designed to be positive to superannuants.

First Home Super Saver Scheme

Australians who have never owned a home will be encouraged to save for a housing deposit. The money will be collected and housed in a superannuation fund although the records will be maintained by the ATO.

The administration is complex and it would have been much better to pay the contributions direct to the ATO which could have kept the full records and paid out the benefit when required for a home deposit. The reason a superannuation fund is used is to avoid the need for another account – and the ATO does not need to guarantee the interest on the deposit.

Here are the basic rules:

• An individual can make voluntary contributions of $30,000 but no more than $15,000 in any financial year.
• The contributions come out of pre-tax earnings like concessional superannuation contributions. Most will come from deductions from salary but individuals can pay them to the fund separately and claim them as personal contributions.
• As these contributions count towards the concessional cap of $25,000, they will be restricted for medium/high income earners. Someone on a salary of more than $106,000 will pay an SG contribution exceeding $10,000, so they won’t be able to pay the maximum annual housing contribution of $15,000.
• Within the fund (or funds if a member chooses to use the facility in more than one fund), the contributions will be taxed at 15%. If the employee’s income is low (as could happen if the member has a wealthy partner or parent to support them), LISTO will apply and this rate will be reduced.
• It is possible to make non-concessional contributions to build the deposit amount. These will not incur tax on withdrawal for the housing deposit.
• The contributions will not be segregated within the superannuation fund so they will earn the normal investment earnings of that investment strategy (usually the MySuper option).
• The Super Deposit will accrue interest at the 90 day Bank Bill Rate + 3%, which is a lot more than would be earned in a bank account or term deposit. This will be calculated by the ATO which will maintain the account details not the fund! No fees will be deducted from the nominal account.
• When the individual draws the benefit to make a house deposit, the benefit (apart from any non-concessional contribution) will be taxed at their marginal personal tax rate less a 30% offset.

The ATO will need to know the member’s marginal tax rate before paying the benefit. However, this won’t be known until the end of the financial year so it will have to estimate it when the money is withdrawn. It is not clear if it will then be adjusted when the tax return is finally lodged.

There are a few implications of this policy:

• It applies from 1 July 2017 – so there is not much time to get the structure in place!
• It will make young people more engaged with their superannuation account. Funds could target young members for consolidation and the benefit of this new facility.
• The ATO rather than the fund will know the member’s balance, though we expect superannuation funds will produce calculators for their members. From a fund perspective, the amounts received will distort areas such as reserves and asset allocation. While the amounts will be a relatively small share of all assets, it is another imposition on a fund.
• Funds should earn more than the interest paid and the excess will stay in the fund. Conversely, if there were a downturn and low or negative earnings, the deposit withdrawn could lead to a deficit in the member’s account which would be subsidised by the SG account. As the housing deposit amount will be held for relatively short periods (perhaps no more than 2 to 3 years), superannuation funds should consider putting the contributions into a more conservative investment option. Even if this is not done, funds will need to set out in the PDS for all members the potential issues of having a short-term time horizon.
• The timing of the payment of the deposit will be interesting. If someone buys at auction and needs a 5% deposit, at what time do they draw the money? Presumably, the ATO will need proof of purchase before releasing the deposit.
• If the youngsters end up deciding not to buy a house, they will not be able to withdraw the deposit and use it for other purposes – it will be locked up in superannuation.

This policy has been introduced at a time when the Productivity Commission is reviewing efficiency of the superannuation system. It is ironic that most of the inefficiency comes from years of government policy changes.

Reducing Barriers to downsizing

It is well known that many retirees live in large homes. They are often comfortable living in familiar surroundings but large amounts of real estate are tied up which could be released for families.

Many retirees do downsize, though some end up buying a smaller but more expensive abode, so they don’t release much capital. Many are discouraged from releasing extra capital as the state stamp duties are unconscionable and as the released funds are then counted towards the asset test for the Age Pension.

From July 2018, people who have attained age 65 (and who have owned their home for at least ten years) will be able to make a non-concessional contribution into superannuation of up to $300,000 from the proceeds of selling their home. Couples can make payments of $300,000 each.

This contribution can be made irrespective of other superannuation rules such as the ‘work test’, the restrictions on contributing if over age 75 and the $1.6m pension transfer cap.

This is great news for wealthy people. It makes the pension transfer cap $1.9m each for them provided they sell their home. Note they do not need to buy a new home and they can even buy a more expensive house!

For the masses, it is not a good idea. A couple owning a home and with other assets including superannuation of $350,000 would be eligible for a full Age Pension of $34,800. If they capitalise $600,000 and put it into superannuation (or the bank), they lose the whole pension. While they will start getting a part pension later as they spend their assets, the pain is likely to be too great to endure.

Superannuation funds will now need to be able to accept non-concessional contributions from retirees who would otherwise be ineligible. This will require new documentation verifying the source of the funds (from a sale of a family home owned for more than 10 years). Another costly imposition on the industry!

Pension bribe

The January 2017 changes to the means test on the Age Pension caused 92,000 recipients of the Age Pension to lose their entitlement. To pacify them, they have had their Pensioner Concession Card (but not their pension) returned – for life! This example of grandfathering is another cause of unnecessary complexity from government.

The card gives older Australians on welfare several benefits. These include cheaper medicine under the PBS and many discounts on State or local government services, including energy bills, property and water rates, public transport and car registration.

Composite Ombudsman

A new ombudsman, the Australian Financial Complaints Authority (AFCA) will replace the Financial Ombudsman Service, The Credit and Investments Ombudsman and the Superannuation Complaints Tribunal. ASIC will have oversight of this body. All superannuation funds and organisations (such as Rice Warner) holding AFSLs will be members and bound by AFCA’s decisions.

The monetary caps of these organisations differ but AFCA will have a monetary limit of $1m for claims, though amounts on superannuation disputes will not be limited. There will be consultation about whether mortgages and general insurance will also shift to a limit of $1m.

The new organisation will obtain binding outcomes from banks, superannuation funds and financial institutions. Meanwhile, the existing bodies will continue until 2020 to provide a transition for existing claims.

CGT relief on super fund mergers

When superannuation funds merge, this crystallises capital gains and losses for the fund transferring assets to the other. There has been tax relief on mergers (or fund wind-ups) since 2008 but this was due to end on 30 June. The relief has been extended to 30 June 2020.

While the application of CGT has not been a barrier to past mergers, it will help funds ensure that members are not worse off due to any merger or Successor Fund Transfer.

There are several merger discussions within the industry and we expect more activity within this period.

Future Fund

The Future Fund assets were originally locked up until the 2021FY. By then, the Howard/Costello government had expected ongoing contributions from Budget surpluses would have left the fund able to meet all future unfunded liabilities for federal public servants. Part of the Coalition’s rationale for the fund was to lock up future surpluses so ‘Labor would not squander them’. Sadly, no surpluses have been made since so the fund cannot yet meet all these liabilities.

The government has extended the lock-up for another year. Given the fund has a target earnings rate of CPI + 5.5% and the government can borrow to fund its deficit at less than 3%, it makes sense not to spend the Future Fund assets too early.   Better to lock them up for another decade even if future earnings are more modest than the past.

Super Fund borrowings

As expected from consultation and draft legislation, from 1 July 2017, the Government will include the use of limited recourse borrowing arrangements (LRBA) in a member’s total superannuation balance and transfer balance cap.

This is to close a potential loophole whereby an SMSF member could take out a large loan to get below the $1.6m pension transfer cap. This would make earnings tax-free on all assets. Later, the loan would be repaid from earnings. Further, as the cap had not been reached, it would be possible to make further non-concessional contributions (which could later repay the loan).

Now, the loan is added back to the asset meaning the excess over $1.6m will still be taxed – and no future non-concessional contributions can be paid.

This change will curb the growth in property acquisitions by SMSFs. Once a typical fund with two members exceeds $3.2m (including the value of the loan), it will no longer be able to receive further non-concessional contributions. This will mean the loan will need to be serviced from the property rent and income from any other asset of the fund (and the $50,000 a year of concessional contributions which two members could make between them).