Treasurer Scott Morrison handed down his first Budget on Tuesday night and Professional Planner brings you all the industry reaction and commentary, updated as it comes to hand.
Superannuation
The Treasurer Scott Morrison and Assistant Treasurer and Minister for Small Business Kelly O’Dwyer said a package of superannuation tax reforms was designed to “improve the sustainability, flexibility and integrity of the superannuation system”.
It said the Government will enshrine in law that the objective for superannuation is “to provide income in retirement to substitute or supplement the Age Pension”. This reflects extensive consultations following the recommendation of the Financial System Inquiry. And it said it would better target superannuation tax concessions “to those who need incentives to save for their retirement, making the superannuation system more fiscally sustainable and increasing confidence that the settings are consistent with the objective of superannuation”.
It said “retargeting” includes:
• introducing a $1.6 million balance cap on the total amount of superannuation that can be transferred into the tax-free retirement phase;
• extending the 30 per cent tax on concessional contributions to those earning over $250,000 (including concessional contributions);
• reducing the annual cap on concessional contributions to $25,000;
• introducing, from tonight, a lifetime cap of $500,000 on non-concessional contributions; and
• introducing the Low Income Superannuation Tax Offset to replace the Low Income Superannuation Contribution when it expires on 30 June 2017, to support low income earners to save for their retirement by ensuring they don’t pay more tax on their contributions than their take-home pay. Read full statement
The Budget changes make super less attractive but “boost the role of family trusts”, said Michael Hutton, wealth management partner with HLB Mann Judd Sydney. Hutton said the $500,000 lifetime limit on non concessional superannuation contributions is “a massive change” on the current allowable amount of $180,000 a year.
“This will severely inhibit middle-income earners who receive an inheritance or sell an asset,” he said.
“The fact that these changes apply from Budget night and dates back to 1 July 2007 is unprecedented. People looking to make a large non concessional contribution sometime soon have been blindsided.”
Hutton said the quality of the ATO records will be a large determinate of whether these changes can be efficiently monitored.
“The ATO will very shortly be hit with requests from a few million of their best customers for a summary of non concessional contributions made over the past nine years,” he said.
“Let’s hope their records are good.”
Hutton said the $1.6 million pension limit will be subject to some interesting industry consultation over the next year.
“This strikes me as administratively very difficult as daily pricing is not always available,” he said.
“It will lead to strategies like segregating assets so the best performers are in the pension part and worst performers in accumulation.”
He also raised questions about the structure of the $1.6 million pension account limit per person.
“Presumably this equates to $3.2 million for a couple,” he said.
“But what about the situation where one member has $4 million in super but the stay at home partner has $200,000. Is this disadvantaging that couple? Will there be any opportunity to equalize the accounts?”
The Financial Planning Association of Australia (FPA) described the superannuation changes as “super spaghetti and said it has concerns with increased complexity, changes to the transition to retirement (TTR) strategy announced in the Federal Budget announcement and called on its members to carefully consider the effect on clients.
Its chief executive officer, Dante De Gori, said the TTR strategy helps thousands of middle to low income earners but has “effectively been killed off by the Government, meaning almost all financial planners and clients will need to carefully review the circumstances of those approaching retirement”.
“The FPA believes that the ‘effective’ abolition of TTR is a net negative for low to middle income earners,” De Gori said.
“The tax exemption for earnings on assets supporting TTR income streams will be removed, and concessional contribution caps reduced.
“These changes mean financial planners must help clients navigate an increasing number of rules and consider the retrospective nature of these changes particularly around tax and super.” Read full statement.
The Self-Managed Superannuation Funds Association (SMSFA) also flagged concerns, for SMSFs. It said the Federal Government’s decision to reduce the concessional contribution cap down to $25,000 is a backward step that will “severely reduce the ability of people to save adequately for retirement”.
SMSF Association CEO/Managing Director Andrea Slattery said the decision when coupled with other flawed measures in the Budget, “will send shock waves through an SMSF sector that was hoping the broad parameters of the system had been settled”.
“This is clearly not the case with concessional caps being cut to $25,000 (currently $30,000 for people aged under 50 and $35,000 for those 50 and over), and when coupled with other measures represents the most significant changes to the superannuation system since the 2007 Budget,” Slattery said. “We strongly believe that adequate concessional contribution caps are vital to allow people to save for a secure and dignified retirement.”
The association also raised a number of other concerns with Tuesday night’s announcements. Read full statement
The Association of Superannuation Funds of Australia (ASFA) said the significant announcements made on superannuation involve over $3 billion in net additional tax revenue being raised over the forward estimates period from superannuation contributions and investment earnings, and around 560,000 people will be affected by the changes.
The association said it welcomes the introduction of the Low Income Superannuation Tax Offset (LISTO), which will provide a benefit of up to $500 a year for more than three million people, of whom around two-thirds are women.
ASFA said it has long advocated for support for low income earners contributing to superannuation. The LISTO scheme provides this and makes the superannuation system stronger.
“While ASFA has previously supported a $2.5 million cap on balances that can be transferred to the tax free retirement phase, the Budget proposal for a cap of $1.6 million goes much further.” it said.
“A $2.5 million cap will have an impact on over 50,000 people, and involve additional revenue of under $500 million a year—while a $1.6 million cap will affect more than 100,000 people and result in additional revenue for the government of $1.15 billion by 2019/20. ASFA will need to do work to understand the impact on retirement incomes.” Read full statement.
The reduction on concessional caps to $25,000 a year for all individuals is a trade-off according to the Institute of Public Accountants (IPA).
“While some measures are positive, such as the Low Income Superannuation Tax Offset and extending access to concessional contributions to those partially self-employed/partial wage earners; there are other measures which present a backward step, such as the reduction on concessional caps to $25,000 per annum for all individuals,” said IPA chief executive officer, Andrew Conway. Read full statement.
The Actuaries Institute said it welcomed the 2016-17 Federal budget, including policy changes designed to inject more equity and fairness into the retirement incomes system.
It said the Budget has introduced the largest changes to the superannuation sector since the Costello Budget of 2007. It has further simplified the system while reinstating equity and said 96 per cent of individuals with superannuation will not be adversely affected by the changes.
“Overall the Budget changes improve the system, making it fairer while also increasing revenue to assist the economy in these financially constrained times.”, said Institute President, Lindsay Smartt. Read full statement.
Consumer advocacy group CHOICE said Treasurer and Assistant Treasurer have confirmed a critical superannuation reform, announcing the Federal Government will legislate that the objective of superannuation is “to provide income in retirement to substitute or supplement the Age Pension.”
“The new objective for superannuation is crystal clear: to provide income in retirement. Consumers will benefit from this in the long run as further changes to the law will have to reflect this objective,” said CHOICE chief executive Alan Kirkland.
“It’s a guiding principle to make sure that the money saved in super has to be used for consumer interests – not the many other purposes that people would sometimes like to use it for,” said Kirkland. Read full statement.
The SMSF Owners’ Alliance (SMSFOA) said the Budget was a mixed bag for self-managed superannuation fund trustees. It said the Budget contained “some good news for super savers and some not so good”.
It said the good news is:
• women and others with broken work patterns will be able to make ‘catch-up’ payments
• spouses can help boost each other’s super savings
• the self-employed will be able to make deductible superannuation contributions
• older Australians will not have to pass a work test to make super contributions
• people earnings below $37,000 will not pay tax on their super contributions
• tax exemption on earnings in retirement phase will be extended to other products such as deferred lifetime annuities
It said the not so good news is:
• a new, retrospective tax will apply to some earnings in retirement that are currently tax free
• a lower concessional contributions cap will reduce the flow of savings into super
• the limit on non-concessional contributions will be reduced.
And it said the “well anticipated news” is:
• lowering the income level at which the 15% superannuation surcharge begins to apply to $250,000, matching Labor, rather than the widely speculated $180,000. Read full statement.
Meanwhile, Deloitte described the superannuation changes as reasonable, but said they “could have been more flexible”. Deloitte Superannuation leader Russell Mason said that from July 1, 2017 the concessional contributions cap will be reduced from $35,000 or $30,000 depending on age, to $25,000 a year if your superannuation balance is less than $500,000.
“We believe this is a retrograde step,” he said.
“Reducing the concessional cap and having a rolling five year catch up is not sufficiently flexible, especially for women and older workers. Deloitte has always stated that having a lifetime cap is a better approach.” Read full statement.
Small business
There is more good news for small business in tonight’s Federal Budget, says the Institute of Public Accountants (IPA).
“Last year’s Budget delivered some steps in the right direction with tax cuts and asset write-offs and this year, the Government has kept to their word when it comes to supporting the most critical sector of our economy,” said IPA chief executive, Andrew Conway. Read full statement
The Assistant Treasurer and Minister for Small Business, Kelly O’Dwyer, said in a statement that “Australia’s hard working small businesses are the engine room of our economy.
“As we transition from the mining boom, it is vital that opportunities are created for our small businesses to innovate, grow and employ more Australians,” she said.
“The Turnbull Government will cut the small business company tax rate to 27.5 per cent and make it available to all small companies with an annual turnover of less than $10 million from 1 July 2016. Around 870,000 companies will gain access to the lower rate. Over the next decade, the lower tax rate will be extended to all companies and then progressively reduce to 25 per cent by 1 July 2026.” Read full statement.
The Association of Financial Advisers (AFA) says Budget measures will benefit small businesses, which represent the engine room of the Australian economy.
In a statement AFA chief executive officer Brad Fox said the Government needs to create a paradigm shift by setting a new vision that can inspire the country beyond the post-mining boom era and while it will take time to see if the Budget is enough to create that paradigm shift, it is a step in the right direction.
“The Government has sought to position the nimble, innovative and dynamic small business sector as the means by which Australia can generate the growth and employment that will lead to our next era of prosperity, while also beginning the difficult but essential task of considering the real implications of our ageing population and growing superannuation pool,” Fox said.
“The small business asset deduction initiative is a clear message to small business to invest in assets that increase productivity and profitability. The reduction in company tax rates for small businesses with turnover of up to $10 million a year increases the incentive for small businesses to invest in the future, to hire, to be bold and to seek significant growth. The trainee staff payment is another step towards getting our youth employed and, together with the other small business incentives, will help Australia move a step closer to full employment.”
Fox said supporting small business is an appropriate position for the Government to take, but cautioned that the managerial skills and decision-making frameworks for businesses seeking growth need to be robust.
In considering the impact on financial advice businesses, the AFA believes that the asset deduction initiative will help financial advice practices to bring forward spending on assets which will help them implement current disruptive changes.
“The financial advice profession continues to face a raft of legislative and market shifts with a broad need to find back-office cost savings in the delivery of financial advice while also continuing to further improve the client experience as they receive advice. Assets that support administration, the provision of advice and client communications will be more affordable under the measures introduced,” Fox said. Read full statement.
