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2011-2012 Federal Budget

The Russell Budget Review

Changes to super announced by Government - November 2011

In late November 2011 the Federal Government announced a number of proposals as part of the Mid-year Budget Outlook.

It is worth noting that the announcements are proposals at this stage so they still need to be passed through Parliament before becoming law. If a proposal is passed into law we will note it below.

Proposed changes to super announced November 2011:

Sweating the small (super) stuff - May 2011

The Gillard Government's first Federal Budget in May 2011, hailed as the no-frills Budget, produced no significant new measures for superannuation and investments. Select from the list below to read Russell's analysis of the 2011-12 Budget.

Superannuation

Investments
Other measures

Superannuation

Superannuation was not at the forefront of this year's Federal Budget, with no significant new measures announced, other than those previously foreshadowed. It is important to remember that all of the following proposals will not be implemented unless and until the relevant legislation is passed by Parliament. It is possible that some of the proposed changes will not take effect at all, will take effect at a later date than originally proposed and/or will take effect in a modified way.

Some relief from excess contributions tax

Pre-Budget speculation focused on the high-profile issue of the punitive rates of tax applying to superannuation members who inadvertently breach contribution caps. The Government has responded by announcing that it intends to provide eligible individuals with the option to have excess concessional contributions taken out of their superannuation fund and assessed as income at their marginal rate of tax, rather than incurring excess contributions tax.

Although little detail has been provided, it appears that the measure will apply where an individual has made excess concessional contributions of up to $10,000 (not indexed) in a particular year and will be available only for breaches in respect of 2011-12 or later years, and only for the first year in which a breach occurs. This will allow those who have breached the cap for the first time, by $10,000 or less, the option to have these contributions refunded and taxed at their potentially lower marginal tax rate rather than the 46.5% effective excess contributions tax rate.

Russell notes confusion around the calculation of concessional contributions for defined benefit members in particular situations remains. It is hoped that this will be addressed in the near future, following representations by the Institute of Actuaries to Treasury.

Contribution caps for over 50’s

A change to the concessional contribution cap for those over 50 has been announced (with effect from 1 July 2012, when the current transitional arrangements will end). Instead of a cap of $50,000, the cap will be set at an amount that is $25,000 over the ‘general’ concessional contribution cap and so will increase in line with the increase of the general cap. This will only be available to individuals who have total superannuation balances of less than $500,000. No further clarity has been provided as to how this will be implemented.

Account based pension minimum draw downs

The Government will phase out the pension drawdown relief that has been provided over the last three years. Minimum payment amounts for account-based, allocated and market linked (term allocated) pensions will be reduced by 25% for 2011-12 and will return to normal in 2012-13.

NOTE: the above change has not taken place. In November 2011, the government announced its intention to extend the relief to 2012/13 and in February 2012 this proposal was passed into law. The Minimum payment amounts for account-based, allocated and market linked (term allocated) pensions will be reduced by 25% for 2011-12 and 2012-13.

Assisting members to track their employer contributions

The Government has announced that it intends to reintroduce the requirement, first aired in 2003, for employers to provide information on payslips about the amount of superannuation paid into an employee’s superannuation account. Further, it is proposed that employees and employers will receive quarterly notification from their superannuation fund if regular payments cease, with effect from 1 July 2012.

These measures are intended to help employees keep track of their employer’s contributions and take action where there is a shortfall, but will result in additional work for administrators. There is likely to be scepticism about the usefulness of this measure without additional initiatives to increase levels of member (employee) engagement with their superannuation savings.

Continuation of the freeze on the Government co-contribution thresholds

Unwelcome news is that the Government will continue the freeze, for an additional year to 2012-13, of the indexation applied on the income threshold above which the maximum superannuation co-contribution begins to phase down.

Under the superannuation co-contribution scheme, the Government provides a matching contribution for certain contributions out of after-tax income. The matching contribution is up to $1,000 for people with relevant income of up to $31,920 in 2010-11 (with the amount available phasing down for income up to $61,920). This measure will continue to freeze these thresholds at $31,920 and $61,920 respectively.

SMSF directors

The Government has announced that it will make minor amendments to superannuation legislation so that where the trustee of a self managed superannuation fund is a body corporate, a parent or guardian may be a director of the body corporate in place of a member who is a minor.

Funding for Stronger Super measures

A number of funding measures were announced to enable APRA, ASIC and the ATO to facilitate the introduction of the Stronger Super measures. These will variously be funded by an increase in the levy on APRA-regulated superannuation funds, a $30 increase to the SMSF levy from the 2010-2011 year and the introduction of SMSF auditor registration fees from 1 July 2012.

Restatement of previous announcements

As previously announced, the Government will allow superannuation fund trustees to make greater use of tax file numbers to locate member accounts and to facilitate the consolidation of multiple member accounts. (Note that this legislation has now been passed. Fund trustees can use TFNs to locate multiple accounts within the fund. The more significant changes will likely commence on 1 January 2012.)

The Government also reiterated its recently announced extension of the temporary loss rollover relief for merging superannuation funds from 30 June 2011 to 30 September 2011. (Note that draft legislation was released for comment in July.)

There was no further mention of the following changes announced in last year's Budget, that have not yet been introduced, so Russell assumes these will be implemented as planned.

increase in SG from 9% to 12%, to be phased in over the period from 2013 to 2019
extend SG to workers aged between 70 and 74, from 1 July 2013
introduction of an annual Government contribution of $500 for workers paid up to $37,000 a year, from 1 July 2012 (Note that in relation to this last measure, a discussion paper was issued by Treasury in June.)

Investments

Infrastructure

Continuing the series of 'leaked' budget measures, the Budget contains measures to encourage superannuation (and other private sector) investment into infrastructure as an asset class. The measures remove a current tax inefficiency which can deny tax deductions for losses sustained in the early years of an infrastructure project when the structure or ownership of the infrastructure project changes. The new tax rules will also preserve the real value of infrastructure tax losses carried forward over time.

The enhanced role of Infrastructure Australia, along with a National Priority List of infrastructure projects, should also be welcomed by superannuation funds and other infrastructure investors to increase certainty given the long-term nature of infrastructure investments.

Instalment warrants

The Government has recognised the increased use of instalment warrants by providing clarity around the tax treatment of these types of investments. Tax laws will be introduced to confirm an investor holding an instalment warrant over a security or bundle of securities to be the owner of the securities. This provides the investor with the tax benefits associated with ownership of the relevant asset (for example, franking credits) and ensures no capital gains tax is triggered when the last instalment payment is made.

Low income tax offset (LITO)

The Government will remove the ability of minors (children under 18 years of age) to access the low income tax offset (LITO) to reduce tax payable on their unearned income, such as dividends, interest, rent, royalties and other income from property, with effect from 1 July 2011. This measure will discourage income splitting between adults and children. Income earned by minors from work will still be eligible for the full benefit of the LITO.

Other measures

Australian Charities and Not-for-profits Commission

After a lengthy review into the not-for-profit sector, the Government has announced the establishment of the Australian equivalent of the UK Charities Commission – "a one-stop-shop for the support and regulation of the NFP sector". This announcement is likely to be welcomed by the NFP sector currently challenged by a complex and fragmented policy and regulatory setting for mission-driven entities.

The new statutory entity will be known as the Australian Charities and Not-for-profits Commission and is intended to operate by 1 July 2012.

Proposed changes to super announced November 2011:

Concessional contributions - indexation deferred

Concessional contributions are “before-tax” contributions such as the compulsory employer Superannuation Guarantee (SG) or your own (voluntary) salary sacrifice contributions. There is a cap (limit) on the amount of contributions you can make in any one year.

The $25,000 cap for those under age 50 was expected to rise with indexation to $30,000 for 2013/14. The government proposes to defer indexation until 2014/15. This means the contribution cap for those aged 50 or under will remain at $25,000 for 2011/12 and 2013/14.

There were no proposed changes to the cap for those aged 50 or over. This means the $50,000 cap will remain for 2011/12. This cap is set reduce to $25,000 in 2012/13 for account balances above $500,000. The cap will remain at $50,000 in 2012/13 for account balances $500,000 or less.

What this means for you
The concessional contribution caps for 2011/12 will remain at:

$25,000 - if you are under age 50
$50,000 - if you are aged 50 or over

We will keep you updated if further changes are announced or as new rules officially become law. We expect to have clarity on the contribution caps that will apply from 1 July 2012 well before then. Learn more about before and after-tax contributions and contribution limits.

Keep an eye on your concessional contributions

If you are a member of Russell SuperSolution you can check your concessional contributions for this financial year. Find out by simply logging into your account.

Low Income Earners Superannuation Contributions (LISC) - clarification

The LISC was announced in last year’s Budget but is not yet law. The LISC applies to individuals earning less than $37,000. The policy is designed to refund up to $500 of any tax paid on employer Superannuation Guarantee (SG) contributions to the individual. In other words if you earn less than $37,000 you will effectively pay no contributions tax on employer contributions as the amount will be refunded to you.

The announcements in November 2011 gave further details about the LISC and how it would work:

Individuals who derive less than 10% of their income from employment (such as those classified as self-employed) would not be eligible, and
Only LISC's greater than $20 would be payable (to keep administrative costs down)
Individuals will not need to lodge their tax return to qualify. Rather, the government will use other available data to determine eligibility to remove the paperwork burden on individuals.

What this means for you
The government will begin assessing eligibility for the LISC based on incomes during the 2012/13 year and if eligible, recipients would automatically receive the refund on their contributions tax thereafter.

The implementation of the new LISC will have a knock-on effect for the government co-contribution matching scheme, so if you are currently taking advantage of the government co-contribution, please see below for details of its planned changes.

Government co-contribution – matching rate and income threshold reduced

The Government co-contribution scheme encourages individuals who earn $61,920 or less to make voluntary after-tax contributions to super. Currently if you earn $61,920 or less and make after-tax contributions to your super the government will match this amount $1 for $1 subject to a maximum of $1,000. The amount they match will be lodged to your super account.

Under proposed new rules, the government would pay 50 cents for every dollar voluntarily contributed meaning the new maximum that a person could receive is reduced to $500.
In addition, the income thresholds used to determine eligibility for the co-contribution will be reduced to $46,920.

What this means for you
If you are among those who earn between $46,920 and $61,920 and are currently making after-tax contributions in order to receive the government co-contribution, you will likely not be eligible for the co-contribution in future years.

These reductions however, may be partly, or fully, offset by the introduction of a new government incentive: the Low Income Superannuation Contribution (LISC). See above for more details about the LISC.

Reduction in minimum pension payment amounts

Note: this proposed reduction is now law with effect from February 2012

Members of account based pensions (such as the Russell Private Active Pension) must draw down a minimum percentage of their account each year. Since the Global Financial Crisis the government has reduced this minimum amount so that retirees are not forced to draw down as much when markets are low.

The government has announced that pension drawdown relief will continue to be available for the 2012/2013 year at the current reduction of 25% of the standard rate.

What this means for you

If you are a member of an account based pension this is good news. If you want to preserve capital you will not have to sell down as many units to meet the minimum pension payment amount. You only have to withdraw 75% of the standard minimum pension amount. The table below outlines the minimum pension payment amounts that will apply for 2011/12 and 2012/13.

Minimum annual pension payment rates
Age	Standard minimum pension rate	Reduced minimum pension rates for 2011/12 and 2012/13 years
55-64	4%	3%
65-74	5%	3.75%
75-79	6%	4.5%
80-84	7%	5.25%
85-89	9%	6.75%
90-94	11%	8.25%
95 or older	14%	10.5%

Removal of maximum age limit for Super Guarantee

Currently the minimum employer contribution, known as the Superannuation Guarantee or ‘SG, only needs to be paid to employees up to the age of 70. The government had originally intended to increase this to age 75, but now proposes to abolish the age limit altogether. The aim is to provide an incentive for mature workers to remain in the workforce.

What this means for you
From 1 July 2013, all employees over age 70 will be eligible for SG, with no upper age limit. This means as long as you opt to keep working, you will be entitled to receive SG contributions from your employer.