There were no earth-shattering superannuation changes in the Coalition’s 2018-19 Federal Budget but there were some additions worth noting that could prove to be a mixed bag for advisers, depending on how much becomes legislation.
One of the most welcome proposals relates to a change in the Centrelink age pension income test, which would remove a major inequity if passed.
There are, in effect, three types of age pension income tests: actual income received, deemed income, and adjusted actual income. This last type applies to account-based pensions commenced prior to January 1, 2015. Under the income test, the amount received is decreased by the purchase price of the pension.
Actual income includes employment income, net business income, income distributed from trusts and private companies, net rental income, and income received from boarders and lodgers. Employment income has added to it reportable fringe benefits and reportable employer superannuation contributions.
Employment income is also adjusted under a work bonus scheme that was introduced to encourage people to work past pension age. Under the bonus, the first $250 per fortnight of employment income is disregarded under the income test, up to a maximum of $6500 a year.
This exemption for income applies only to employment income; small business owners currently have all of their net income counted under the income test. The budget measure that corrects this inequity is part of a policy that increases the work bonus to $300 a fortnight, with a maximum of $7800, but also extends the work bonus to self-employed income. How generous this measure is will depend on the definition of self-employed income.
Less impactful superannuation changes in the budget include:
- All inactive superannuation accounts of less than $6000 will be transferred to the Australian Taxation Office so it can reunite these inactive accounts with the member’s active accounts
- Tightening of the ‘notice of intent’ (NOI) processes for claiming personal superannuation contribution tax deductions
- Individuals with income over $263,157, who have multiple employers, will be able to specify that earnings from some of their employers are not subject to the superannuation guarantee from 1 July 2018
- Maximum number of members for SMSFs increases from four to six from July 1, 2019
- Superannuation fund trustees will be required to develop a retirement plan for members and offer a wider variety of comprehensive income products for retirement.
Potential new work-test strategies
There was one superannuation policy proposal that should provide advisers with some tax-planning and retirement-planning strategies. Under this policy, there would be an exemption from the current work test for contributions by members aged 65-74 with superannuation balances below $300,000, in the first year that they do not meet the work-test requirements.
Currently, once a person ceases work and they are 65 or older, they must pass the work test to make tax-deductible concessional contributions or non-concessional contributions. Exempting people from the work test in the first year they do not pass it would allow them to delay selling investments until after they have retired. For example, a person could cease work when they are 65 or older, commence receiving a tax-free, account-based pension in the following financial year, and in that year sell the property or other investments that result in a capital gain. They can then make a tax-deductible personal super contribution to reduce the tax payable on the gain made.
This would also mean that rather than selling a property or other investments in a year when they are still working – which would result in the capital gain being added to their employment income for that year – they could sell during the following year, thus reducing the marginal rate of tax paid on the gain.
The other policies that affect advisers and their clients all relate to changes to income tax. These include:
- A new tax offset for low- and middle-income thresholds that cuts in as the low-income tax offset decreases and is lost
- Distributions from testamentary trusts to minor beneficiaries will be available only for income generated from the assets placed in the testamentary trust by the deceased
- The $20,000 instant asset write-off has been extended for a further 12 months, to June 30, 2019, for businesses with an aggregated annual turnover of less than $10 million
- Taxpayers will no longer be able to claim a deduction for expenses related to holding vacant land, from July 1, 2019.
Under the current rules, an investor can claim a tax deduction for the holding costs of vacant land, such as interest and rates and taxes, where the intention is to build an income-producing property. The change to the legislation will mean that, unless the land is used to carry on a business, interest and rates will be included in the cost base of the asset.
The new tax offset for low- and middle-income earners will start at $200 for people with income of less than $37,000. It will increase at the rate of three cents per dollar for incomes over $37,000, until it reaches the maximum offset of $530 for incomes up to $90,000. Once a person’s income exceeds $90,000, the offset decreases by 1.5 cents per dollar until it will be totally lost for someone with an income of $125,133.
As usual, what the budget policies will look like after they have gone through both houses of Parliament is anyone’s guess, but it can only be hoped that during the consultation process the possibly disastrous SMSF audit policy will change or be scrapped entirely.
Max Newnham is in public practice, specialising in small business and retirement tax planning. He is an SMSF specialist and advises on portfolio construction and investments.
