A positive superannuation budget for SMSFs

13 May 2021

Meg Heffron

Managing Director

The 2021 Federal Budget did not include many superannuation measures but those that did make the cut were good news for SMSFs.

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There were essentially three broad groups of changes:

  • Additional opportunities to make contributions (mostly only applicable for those 60 and older),
  • Changes to the residency rules for SMSFs (applicable for those who might live or work overseas for a time)
  • Some relief on strange pensions known as “legacy pensions” – complying lifetime, life expectancy and market linked pensions (you will know if this impacts you).

Key contribution changes

If the changes are legislated as announced (which is always a big “if”) we will see some important new rules from 1 July 2022.

Firstly, since 2018 those who sell their home had an opportunity to make special contributions known as “downsizer” contributions. There are several eligibility conditions (for example, the home has to have been owned for 10 years) and rules (for example, the contribution must be made within 90 days of settlement). But broadly speaking these rules allow an extra $300,000 (or $600,000 for a couple) to be added to super as long as the contribution is made after age 65. Regardless of how much they already have in super.

Budget announcement: these contributions will  be available from 60 rather than 65.

Secondly, those making super contributions between 67 and 74 can currently only do so if they meet a “work test” (at least 40 hours’ paid work in a 30 day period earlier in the financial year).

Budget announcement: the work test will be removed for most contributions. 

All the other rules will remain the same – for example, contribution caps are unchanged, the rules that limit non-concessional contributions based on the amount already in super will still be in place etc. Unfortunately it appears that the change won’t apply for those who are making personal contributions for which they claim a tax deduction (eg to offset the tax paid on their other income). People wanting to make these contributions will still need to meet a work test after their 67th birthday.

It appears that another change will also be snuck into these adjustments.

Budget announcement: the ability to make “bring forward” contributions will be extended to 74

Bring forward contributions is the term used to describe the situation when someone making non-concessional contributions (contributions from their own money for which they don’t claim a tax deduction) makes several years’ worth at once (bringing forward future years’ contribution limits and using them “now”).

The last year for doing this has traditionally been the year in which someone turns 65. The 2019 Federal Budget proposed to increase this to 67 (from 1 July 2020) but the change never made it through the Senate. Now, it looks like the magic age will increase to 74 – a great chance for those allowed to do so to top up their super. Remember that the bring forward opportunity (like everything else in superannuation) comes with rules. For example, the ability to use them depends on how much is already in super. Those with large balances already can’t take full advantage of them.

Residency

SMSFs have long experienced difficulty when one or more of their members move overseas. It’s extremely important to make sure that the fund still satisfies the definition of “Australian superannuation fund” at all times, otherwise it is immediately subject to very significant taxes.

Two changes have been announced in the budget to make life easier for those who might live or work overseas.

Budget announcement: removal of the “active member” test

Currently a fund can potentially fail the Australian superannuation fund definition when members who are not Australian tax residents make contributions. It can be a real “gotcha” moment and means our advice is usually to just ensure that anyone who is not an Australian resident makes their contributions to another fund, not their SMSF.

Removing this test makes sense.

Budget announcement: tweaking the “central management and control” test

The second change on residency makes slightly less sense in that it appears a lot more beneficial than it actually is.

If residency is top of mind for you, this is probably the test you have focussed on in the past.

It is the requirement that central management and control (high level decision making about your SMSF) is “ordinarily in Australia. You might have been advised in the past, for example, to have an enduring power of attorney in place to allow someone back in Australia to manage your fund for you while you’re overseas. That’s all about the central management and control test. This test mentions a 2 year time period and it’s often assumed that this is a genuine safe harbour – as long as someone is overseas for less than 2 years, all will be fine. In fact it’s much more nuanced. Whether the absence is shorter than, or longer than, 2 years is far less important than whether or not it is always intended to be temporary. Someone who moves permanently overseas but just hasn’t been there for 2 years yet has a residency problem now, not when the 2 years is up.

So we were surprised to see the Government propose to change this to 5 years. It doesn’t really do much for anyone as the trickiest part of residency is being confident about the intention to be away temporarily and what to do when circumstances change.

Legacy pensions

Finally, at long last, those trapped in these old style pensions will have an escape. 

Budget announcement: a 2 year window in which pensioners can stop these pensions and leave them in an accumulation account, convert them to an account-based pension or cash them out of super entirely.

But let’s not get too excited – there are some quirks and we have some concerns with some of the language. If you have one of these pensions you are probably well versed in the terminology so the detailed explanation we prepared for accountants and advisers here will probably make perfect sense to you. The short version is that if you are receiving a market linked pension this is likely to be music to your ears. If you are receiving a defined benefit pension (eg a lifetime or life expectancy pension), we need more detail before we know how many fist bumps are appropriate.

All in all, these days no news is good news when it comes to SMSFs, superannuation and Federal Budgets. This year, we went slightly better than “no news” and got some positive change that could be even better with some tweaks when the changes are legislated over the next 12 months.


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