Although the re-election of the Federal Government on 18 May means that the significant changes proposed by the Labor Party will not go ahead, the Coalition Parties had announced before the election their intention to make a number of small changes to the super system, and we can expect these changes to be implemented in the near future.
What’s not going to happen?
The major changes to superannuation proposed by the Labor Party will not go ahead. These included:
- the abolition of refunds for excess dividend franking credits;
- the reinstatement of the “10% rule”, with the result that tax deductions for personal super contributions could not be claimed by people who derive income mainly salary or wages;
- lowering the annual non-concessional contributions cap from $100,000 to $75,000;
- eliminating limited borrowing recourse arrangements in SMSFs, and
- removing the ability to catch up unused concessional contributions caps over 5 years.
What is going to happen?
We anticipate that legislation will be introduced in due course to implement the following:
- With effect from 1 July 2020, the ability to make voluntary super contributions without satisfying the work test, and the ability to bring forward the next two years’ of non-concessional contributions caps, will be extended to people under 67. At the moment it applies to people under 65.
- The age limit for individuals to receive spouse contributions will be lifted from 69 to 74.
- The maximum number of members in an SMSF will be increased from four to six. It is not clear just how significant this change will be, as at present 93% of SMSFs have only one or two members. Further, SMSFs which have more than three individual trustees face an additional problem, as the super law requires the investments of the fund to be registered in the names of all the individual trustees, but the constitutions of many companies prohibit the entry of more than three joint holders on the share register.
- There will be two changes to simplify the method of calculating a funds’ exempt current pension income (ECPI).
There are two methods for working out the exempt current pension income (ECPI) for a fund which is entitled to some level of income tax exemption for members who are in retirement phase. These are:
- the segregated method, in which specific assets are set aside to meet current pension liabilities and the investment income on those assets is exempt from tax, and
- the proportionate method, in which a proportion (specified in an actuarial certificate) of the fund’s assessable income is exempt from tax.
The first change relates to situations where there were periods during a year in which a fund was entirely in retirement phase and other periods in which it was partly in retirement and partly not (eg. if a contribution was received by a fund otherwise in retirement phase). Until recently it had been industry practice for the fund to effectively use the proportionate method for the whole year and obtain an actuarial certificate which calculated one average ECPI percentage for the whole year.
The ATO had announced that, with effect from 1 July 2017, it would not permit such funds to obtain one actuarial certificate for the whole year, but would require the segregated method to be used for any period in which the fund was entirely in retirement phase, and the proportionate method for other periods. This involved funds in the complication of different tax exemption calculations for different parts of the same year. The Government has announced that legislation is to be introduced to restore the earlier simpler treatment, with effect from 1 July 2020. It is not clear why the return to the earlier approach could not be back-dated to 1 July 2017.
The second change will abolish a redundant requirement which prohibits the use of the segregated method in certain circumstances. Under the current law, where the total superannuation balance of any member of an SMSF or small APRA fund who is in retirement phase was greater than $1.6m on the previous 30 June, the fund is required to use the proportionate approach and obtain an actuarial certificate, even if all the members’ interest are in retirement phase throughout the year, and the actuarial certificate will provide a 100% tax exemption in any case. From 1 July 2020, such funds will be able to use the segregated method and avoid the need to obtain an actuarial certificate.
- The Government plans to implement electronic transmission of superannuation release authorities through the SuperStream system to reduce costs.
It appears that the proposal to allow SMSFs with a good compliance record to be audited every three years instead of annually has been dropped. Most sources in the industry viewed this as unworkable and providing no real benefit.
If you have any questions about any of these proposed changes, or any other issues connected with Superannuation, please contact your Nexia Advisor.