May Federal Budget measures - new Bill introduced

There were several important superannuation measures announced in the May 2021 Federal Budget, mostly relating to contributions. A new Bill handed to Parliament this week will implement them if passed.

The Bill (Treasury Laws Amendment (Enhancing Superannuation Outcomes for Australians and Helping Australian Businesses Invest) Bill 2021) also gives some of the important details missing from Budget night.

Downsizer contributions age reduced to 60

The legislation to implement this measure is very true to label – it simply replaces “65” with “60” in the sections that define downsizer contributions and provides that the change should take effect from 1 July 2022.

It’s literally 3 lines long.

So:

• there is no requirement for the member to be over 60 when contracts are exchanged or settlement occurs, it is all about the age at which the contribution is made,
• unless other changes are made via regulations, the downsizer contribution will be preserved if it is made at a time when the member is not retired or over 65. (Previously this wasn’t a consideration as all superannuation stops being preserved when the member turns 65 and this was the earliest age for a downsizer contribution in any case.)

First Home Super Saver Scheme

An amendment of similar (lack of) complexity increases the maximum amount that can be released under this scheme from $30,000 to $50,000 from 1 July 2022. (All the other rules remain the same)

Removal of the work test

Work tests are actually covered in regulations to the Superannuation Industry (Supervision) Act 1993 and so the Government doesn’t need a Bill passed by Parliament to implement it.

Hence the Bill released this week doesn’t deal with the actual removal of the work test – we assume regulations to do this will be made as soon as the Bill is passed.

Instead, the Bill deals with a component that did require a change to the Income Tax Assessment Act 1997. That was the Government’s announcement that the work test would still apply if the member wanted to claim a tax deduction for his or her contribution. The Bill does this by placing some additional limits on when a member can claim a tax deduction for his or her contributions after age 67. 

Importantly, it refers to contributions made between 67 and “28 days after the end of the month in which you turn 75” rather than the member’s 75^th birthday. That makes perfect sense – it’s the same language used in the work test at the moment. It suggests that when regulations are made to remove the work test they will do the same – extend the opportunity to make contributions without meeting a work test up until the 28^th day of the month after the member’s 75^th birthday rather than their birthday itself. It’s what we expected but is useful clarity.

Interestingly, it appears that moving the work test from the superannuation regulations to the Income Tax Assessment Act will get rid of the current requirement to meet the work test before the contribution is made. The new wording in the Income Tax Assessment Act simply requires the work test to be met at any time in the financial year.

The Bill also specifically allows someone meeting the rules often described as the “work test exemption” to claim a tax deduction for their personal contributions.

The work test exemption applies in very limited circumstances: the member must have a total super balance of less than $300,000 at the previous 30 June, have met the work test in the previous year and not used the work test exemption rules before.

Someone meeting these rules at the moment can make a personal contribution even if they don’t meet the work test this year. From 1 July 2022 (when these changes are scheduled to take place) members will be able to contribute regardless of whether or not they meet the special work test exemption but they will only be able to claim a tax deduction for it if they meet the work test or work test exemption rules.

We’ll have to wait until the regulations are released, but if the work test is simply removed from the super rules from 1 July 2022 (as appears likely from these changes), CGT cap contributions and personal injury contributions will be able to be made without meeting a work test. 

Bring Forwards

As expected, the new rules also extend bring forward opportunities up until the year in which the member turns 75. In other words, if a member turns 75 in November 2022, he or she will be able to use the bring forward rules in 2022/23. (Of course, they will be unable to make any voluntary contributions at all after 28 December 2022 so they would need to do so earlier in the year.)

The legislative change contained in the Bill is extremely simple – it replaces “67” with “75”. The Explanatory Memorandum specifically states that these amendments aren’t intended to allow people to use caps that they would never have had (ie in the years when they turn 76, 77 etc). But it’s difficult to see how the current legislation stops this from happening - unless there are other changes still coming to support the Government’s intention. The change set out in this Bill would allow someone with a total super balance of less than $1.48m at 30 June 2022 who turns 75 in November 2022 to make non-concessional contributions of $330,000 in October 2022. In doing so they would be using their caps for 2023/24 and 2024/25.

Exempt current pension income

And finally – in a change that is not linked to contributions – the Bill includes an ECPI amendment that actually harks back to the May 2019 Federal Budget and was reiterated in October 2020.

In those announcements, the Government announced two changes to ECPI for SMSFs:

• Allowing all funds that were 100% in retirement phase account-based pensions for the entire year to claim ECPI under the segregated method for that year, bypassing the need for an actuarial certificate. This has been legislated previously and is already in place for 2021/22.
• Allowing funds that switch between being segregated (100% in retirement phase pension accounts) and unsegregated (a mix of retirement phase pension and accumulation accounts) to choose to use the actuarial certificate method.

The second change had not yet been legislated as the initial consultation on the Government’s proposed approach highlighted a number of complexities.

These have now been addressed and the Bill contains a simpler solution.

Essentially the Bill provides trustees in this position an option to choose the actuarial certificate method for the whole year. Alternatively, the trustee can stick with the current rules and use:

• the segregated method to calculate ECPI during any periods when the fund is 100% supporting retirement phase pension accounts, and
• the proportionate or actuarial certificate method for the rest of the year.

The choice on which approach to take:

• doesn’t have to be made in advance – it can be made as part of preparing the tax return,
• is made each year – there’s no requirement to do the same thing every year if a fund is in this position in several different financial years, and
• doesn’t have to be formally reported to the ATO but will of course require relevant records to be kept to substantiate the calculations in the tax return.

This is a vastly simpler approach than the one initially proposed by Government in which the trustee could make different choices for different parts of the year. We expect actuaries, software providers, accountants and financial advisers all just let out a huge sigh of relief.

What is still missing?

There’s no word yet on the Government’s proposed changes to the SMSF residency definition or the proposed relief for legacy pensions. 

We have already released a number of Contribution 'Bites in our newly launched on-demand learning platform 'Education Bites'. Subscribe now for just $55/month to stay up-to-date, informed and increase your skillset.