Federal Budget 2009
What it means for investors
In contrast to the 2008 Labor Budget, the 2009 Budget announced substantial changes to superannuation taxation, amidst a huge $58bn projected deficit in the new financial year.
Key changes include:
- Reduced limits on Concessional contributions
- Temporary reductions in co-contributions
These changes are made without substantially altering the value of superannuation as an effective way of saving for retirement income.
However, the stability of the Superannuation landscape is again being tested with the changes ensuring more uncertainty for a system that has been the subject of constant change over the past 25 years.
Communicating the changes to superannuation fund members will continue to be a key challenge for the industry.
1. Contribution limits
The Budget significantly reduces the limits on concessional superannuation contributions. From 1 July 2009 the concessional contribution limit will be reduced from $50,000 to $25,000. The limit will continue to be indexed. The budget does not confirm whether the indexation will remain in steps of $5,000 but we assume this will be the case.
Transitional provisions in respect of concessional contributions for those aged over 50 will continue to apply until 30 June 2012, but the limit has been halved, to $50,000. This limit is not indexed.
The non-concessional contribution limit remains at $150,000 per annum for the 2009/2010 year, where previously it was due to be indexed from 1 July 2009. Beyond 1 July 2010 it will be calculated as six times the level of the (indexed) concessional contribution cap. The ability to “bring forward” non-concessional contributions and contribute up to $450,000 (based on the current limit) in a financial year remains.
Grandfathering arrangements will apply for defined benefit members as at 12 May 2009. We understand that this means that the relevant member’s concessional contributions in respect of the defined benefits will be capped at the new limits. A similar arrangement applied when the concessional contribution cap was first introduced for members of defined benefit funds as at 5 September 2006.
Our Comments:
- The changes do not detract from the tax advantaged status of saving through superannuation and for most people there will still be plenty of scope to make additional salary sacrifice contributions.
- Individuals wishing to accumulate above average superannuation balances will need to take a longer term view of saving for retirement as the ability to make large concessional contributions in the final few years of employment is now much reduced.
- These changes are likely to be detrimental for those wishing to accumulate above average superannuation savings and who are forced to save late in their working life, for example, women who have spent time out of the workforce.
- The grandfathering provisions for defined benefit members, which protect existing defined benefits at 12 May 2009, will apply to a significantly larger proportion of members than the previous grandfathering provisions because of the lower limits. This means that there will be much less opportunity for higher paid DB members to make voluntary salary sacrifice contributions in addition to their defined benefit. Also, when considering benefit changes and particularly benefit improvements, superannuation trustees will need to consider whether such changes could result in the grandfathering provisions ceasing to apply.
- It will be important to remind members that they bear the responsibility for monitoring the level of their contributions and that substantial tax penalties apply if the contribution limits are exceeded.
2. Co-contributions
The Government has temporarily reduced the rate of co-contribution from 150% to:
- 100% of the amount contributed by the member for the three years from 1 July 2009 to 30 June 2012. This means the maximum co-contribution payment for these years will be $1,000.
- 125% of the amount contributed by the member for the two years from 1 July 2012 to 30 June 2014. This means the maximum co-contribution payment for these years will be $1,250.
From 1 July 2014 the co-contribution will return to its current level.
Our Comments:
- Despite the change the co-contribution scheme remains a very attractive proposition for those who can afford to contribute.
- Changes to income tests from 1 July 2009 mean that salary sacrifice contributions will be counted as income when assessing whether an individual qualifies for a co-contribution. This will effectively put an end to the strategy of making salary sacrifice contributions in order to reduce assessable income and qualify for a higher co-contribution.
3. Account based pensions
Despite speculation no changes have been made to transition to retirement pension (TRP) arrangements.
The pension drawdown relief announced for 2008-09 has been extended for the 2009-10 financial year. The minimum drawdown amounts will be 50% of the usual minimum requirements.
Our Comment:
While there have been no direct changes to the transition arrangements, members who salary sacrifice large amounts to superannuation while supplementing their income with a pension may be affected by the reduction to concessional contribution limits. Members should review their strategy for the coming financial year to ensure that contribution levels and the amount of income drawn are appropriate. Despite this TRP strategies can still produce material tax savings for middle and high income earners.
The Government has not considered it necessary to take any other action to restrict access to transition to retirement pensions. This is a positive outcome as we believe that TRPs are a useful tool for older employees who wish to scale back their working hours, and use supplementary superannuation income to make this possible.
The extension of the drawdown relief is a positive step for many self-funded retirees who continue to experience markedly reduced capital values in their pension accounts. Allowing a reduced drawdown ensures that the impact of selling investments at a loss is minimised and capital values have a greater chance of rebounding. Members may also enjoy increased entitlements to aged pension benefits if they elect to receive a reduced income from superannuation, allowing them to maintain an appropriate level of income while depleting their superannuation resources as little as possible.
4. Unclaimed money
The Government has amended the general unclaimed money regime and will require superannuation funds to transfer the following lost superannuation accounts to unclaimed monies from 1 July 2010, namely those accounts:
- with balances less than $200 (small accounts);
- which have been inactive for a period of 5 years and have insufficient records to identify the owner of the account (insoluble accounts).
Former holders of these lost accounts will still be able to reclaim their money from the Tax Office at any time. Individuals who believe that they may have a lost account are encouraged to use the current ATO system "SuperSeeker", available on the Tax Office Website to find out if they have any lost superannuation and consider beginning the process of consolidating it into an active account.
Superannuation funds will have to work out their unclaimed money on a date set by the Commissioner of Taxation and pay and report these amounts by a set date. The purpose of this change is to ensure consistency with the new temporary resident unclaimed money arrangements.
5. Capital gains tax – extension of capital loss rollover for complying superannuation fund mergers
The Government has enhanced the optional capital gains tax loss rollover that was announced originally on 23 December last. The rollover will be extended to 30 June 2011.
As previously announced, the measure will now apply also to mergers involving pooled superannuation trusts, where the continuing entity has at least five members, and to mergers involving the complying superannuation business of life insurance companies.
The measure will permit merging superannuation entities in a net capital loss position to elect to rollover assets with accrued capital gains as well as assets with accrued capital losses.
In addition, the rollover will be expanded to permit the transferring superannuation entity’s previously realized net capital losses to be transferred to the continuing superannuation entity and the rollover or transfer of revenue losses to the continuing entity.
6. Changes to Age Pension Age
The Government will increase the qualifying age for the Age Pension and the Commonwealth Seniors Health Card for men and women to 67 years of age from 2023. The transition to the higher Age Pension age will commence in July 2017, with the qualifying age increasing by six months every two years, to reach 67 on 1 July 2023.
Our comments:
- The increase in Age Pension age, although unlikely to be popular, reflects the reality that Australians are living longer and the age pension is a substantial and growing expenditure.
- Age Pension age for males has been fixed at 65 since the age pension was introduced in 1909 even though life expectancies have increased significantly.
- In introducing this change Australia is following the lead already set by a number of other countries.
- The long phase-in period allows ample time for individuals to adjust their retirement plans if necessary.
7. Increased Age Pension
From 20 September 2009 the full-rate pension for singles will increase by $32.49 per week, an increase to two thirds of the combined pension for couples. The full-rate pension for couples will increase $10.14 per week per couple.
From 20 September 2009, the income test for the Age Pension will be changed so that for singles the pension will be withdrawn by 50 cents for every dollar of income, up from 40 cents. For couples the pension will be withdrawn by 25 cents for every dollar of income, up from 20 cents.
The Government believes around 70% of existing pensioners will be better off immediately under the new arrangements. Transitional arrangements for part-rate pensioners mean that they will continue to receive their current entitlements plus an additional $10.14 per week.
8. Paid Parental Leave
The Government will introduce a Paid Parental Leave scheme from 1 January 2011. The government funded scheme will provide eligible parents with up to 18 weeks of leave at the Federal Minimum Wage, currently $543.78 per week. These payments will be treated as taxable income and will affect entitlement to family assistance payments, but will not be counted as income for income support payments.
Primary carers will be eligible for the scheme if they:
- earned less than $150,000 in the full financial year prior to the birth or adoption of a child;
- have worked at least 330 hours over the 10 months preceding the birth or adoption of a child; and
- have also worked continuously with one or more employers for at least 10 of the 13 months before the expected date of birth or adoption.
Parents who choose to receive Paid Parental Leave will not receive the Baby Bonus, except in cases of multiple births where parents will not receive the Baby Bonus for the first child only.
Consideration of superannuation payments while on statutory Paid Parental Leave will be deferred until the review of the scheme which will take place in 2013.
Our Comment:
The Australian Taxation Office has prepared a draft ruling advising that it considers that salary paid while on parental leave and other ancillary leave payments are ordinary time earnings for superannuation guarantee purposes. This ruling was due to be finalised last week, but it has not yet been released. The Government has stated that it will clarify that superannuation guarantee contributions will not apply to voluntary paid parental leave payments, and will review this position when it reviews the treatment of superannuation under the paid parental leave scheme. The Government has stated that it will also defer the application of superannuation guarantee contributions for ancillary leave payments until this review is completed in 2013.
9. Personal income tax thresholds
The Government has confirmed it will deliver on its existing promises from the 2008 budget.
From 1 July 2009:
- The 30% tax threshold will increase from $34,001 to $35,001.
- The 40% marginal tax rate will reduce from 40% to 38%.
From 1 July 2009 |
|
Tax threshold ($) |
Tax rate % * |
0 - 6,001 |
0 |
6,001 - 35,000 |
15 |
35,001 - 80,000 |
30 |
80,001 - 180,000 |
38 |
180,001+ |
45 |
* Plus Medicare Levy |
|
From 1 July 2010:
- The 30% tax threshold will increase from $35,001 to $37,001.
- The 38% marginal tax rate will reduce from 38% to 37%.
From 1 July 2010 |
|
Tax threshold ($) |
Tax rate % * |
0 - 6,001 |
0 |
6,001 - 37,000 |
15 |
37,001 - 80,000 |
30 |
80,001 - 180,000 |
37 |
180,001+ |
45 |
* Plus Medicare Levy |
|
10. Trans-Tasman retirement savings portability
The Government has agreed to establish a trans-Tasman retirement savings portability scheme. The effective date and final details of the scheme are currently being settled with New Zealand. The scheme will permit the transfer of superannuation savings between certain Australian superannuation funds and New Zealand KiwiSaver funds. Currently, Australian superannuation may only be transferred to funds within Australia.
Our Comment:
This is a positive step to encourage the free movement of workers between Australia and New Zealand. It will allow individuals to more easily consolidate their Australian and New Zealand superannuation.
11. Managed Investment Trusts – election to allow capital gains tax to be the primary code for disposal of eligible assets
The Government has announced that it will implement the Board of Taxation’s interim advice on taxation of managed funds.
A managed investment trust (MIT), (provided it is not taxed like a company) will be able to make an irrevocable election to apply the capital gains tax (CGT) regime to disposals of eligible assets (primarily shares in a company, units in a unit trust and real property investments) . This will entitle resident investors to the CGT discount on eligible taxable gains distributed by the MIT.
This measure will promote parity of taxation on disposal of assets between MITs and complying superannuation funds and is proposed to take effect from all assets disposed in the first income year that commences on or after the 2008/2009 year.
Russell Budget Alert is produced exclusively for the information of Russell Investments’ clients. This information is general in nature and should not be used or relied upon as a substitute for specific advice or as a basis for making decisions. Further professional advice should be sought before any action is taken based on matters discussed in Russell Budget Alert.
The contents of Russell Budget Alert may be freely republished provided Russell Investments is acknowledged as the source.