Spotlight on the Budget’s superannuation changes

Spotlight on the Budget’s superannuation changes

On Tuesday night, Treasurer Scott Morrison delivered the Turnbull government’s second Budget.

Key Budget measures include:
  • Incentives for older Australians to downsize and invest in super
  • The ability for first-home buyers to save for a home deposit through their superannuation
  • Higher standards for limited recourse borrowing arrangements
  • A $75 billion infrastructure spending package to drive economic growth and employment
  • Major bank levy of 0.06 per cent on the big four plus Macquarie from 1 July 2017
  • An increase in the Medicare Levy to 2.5 per cent of taxable income from 1 July 2019 to fund the National Disability Insurance Scheme
  • Improvements to the Pharmaceuticals Benefits Scheme to reduce out-of-pocket expenses
  • A $347.4 million Veteran’s Affairs package
  • Centrelink crackdown
  • Tertiary education cuts
  • Rental property tax changes
  • An extension of small business capital gains tax concessions
  • Immediate restrictions on foreign property ownership
Rather than touch briefly on each key measure, this technical article delves into the two main superannuation measures.

Incentives for older Australians to downsize and invest in super
Proposed date: 1 July 2018
Australians over age 65 who sell the family home to free up equity to fund their retirement will be able to make an additional non-concessional contribution of up to $300,000 into super, under proposed Budget measures.

Both members of a couple can take advantage of this rule for the same home, resulting in a total possible contribution of $600,000 per couple. Contributions made under this measure will be in addition to all other caps.

No work test or age restrictions apply but an individual or couple must have owned their home for at least 10 years and it must be their principal residence.

Potential implications for your clients
  • Downsizers may risk losing some or all of their Age Pension. While the family home is exempt from the pension assets test, the $300,000 they contribute to super as a result of downsizing will be deemed an assessable asset. This may significantly impact a client’s pension entitlements.
  • Downsizers may need to pay stamp duty on any new home they buy.
  • Earnings on the cash released are taxed unlike capital gains on the family home.
  • This measure may also have implications for clients moving into residential aged care.
  • Many older Australians are emotionally attached to their home and moving out may impact their mental health.
First-home buyers’ super savers scheme
Proposed date: 1 July 2017, first withdrawal available from 1 July 2018
To help young people get into the property market, the Budget proposed to allow first-home buyers to make voluntary super contributions of up to $15,000 per year ($30,000 in total), with the funds quarantined for a house deposit. 

Both members of a couple can use the scheme to buy their first home together.

The Government claims that this could boost house deposit savings by up to 30 per cent compared to saving through a standard bank account. 

Under the proposal, voluntary contributions can either be concessional or non-concessional.

The Australian Taxation Office will administer the scheme and advise super funds of how much can be released using Release Authorities.

The amount that can be withdrawn equals the contributions made plus deemed earnings. Withdrawals will be taxed at an individual’s marginal tax rate however a 30 per cent tax offset will apply and withdrawals must be used for a deposit on a home. Withdrawals will not be assessable by Centrelink or the Department of Veterans’ Affairs as they will be treated as a return of capital. There will be no impact on payments such as Family Tax Benefits.

Potential implications for your clients
  • With voluntary concessional contributions, such as salary sacrifice contributions or personal tax deductible contributions, the standard 15 per cent contributions tax applies.
  • Concessional contributions made under this scheme will count towards the concessional cap of $25,000 in 2017/18 and compulsory employer contributions already count towards this cap.
  • Non-concessional contributions can be used to obtain the concessional 15 per cent earnings tax and potential higher returns available in super however the main benefit applies when using pre-tax dollars. Where a non-concessional contribution is made, no tax applies to the contribution and withdrawals are tax-free. 
While it’s positive to see the Government attempting to introduce reforms that encourage retirees to unlock the equity in their homes to fund their retirement, the downsizing cap won’t be enough to get older Australians to sell their homes nor will it improve housing affordability.

Research by the Australian Housing and Urban Research Institute found the three main reasons why people downsize are because they want a lifestyle change; can no longer maintain their home; or no longer have children living at home.

Only a small number of retirees are motivated to sell for financial reasons, and among them, financial gain is more common than financial difficulty.

As for the first-home buyers’ super savers scheme, the fact that contributions made under this measure will form part of a person’s concessional cap severely limits the level of voluntary contributions that can be made.
A PDS summarising the Budget’s superannuation and social security measures can be found here.

Mel Bendeich is Technical Advice Manager at ClearView.