With many policies from the 2017 Federal Budget implemented and the 2018 Federal Budget only a couple of months away, it’s a good time to recap what is currently shifting in the retirement space. By understanding recent and upcoming changes, advisers can better support their clients and continue to help them meet their retirement objectives both before the end of the year and as changes occur. In this article we provide a summary of recent passages of legislation, current Bills being debated in parliament and policy proposals currently in consultation with the Government.
Super and retirement
From 1 July 2018 contribution opportunities for those aged 65 or over will expand to include downsizer contributions. These contributions enable eligible individuals to contribute up to $300,000 from the sale of one eligible property to super within 90 days of change of ownership, without needing to satisfy the work test or contribution caps.
An eligible property must have been owned by the individual, their spouse or their former spouse for 10 continuous years just before the sale of the property. Additionally, the individual must satisfy all the requirements (apart from the fact that their spouse owned the property) to qualify for a full or part capital gains tax (CGT) exemption for that property.
For clients who will be eligible to make these contributions, consider the following:
- downsizer contributions will form part of the super benefit’s tax-free component. To maximise the effectiveness of re-contribution strategies, downsizer contributions should be made after the re-contribution strategy has been implemented;
- although downsizer contributions do not count towards an individual’s concessional contribution (CC) or non-concessional contribution (NCC) caps, they do contribute to their overall total super balance (TSB). That is, eligible clients who have a TSB equal to or greater than $1.6million can make downsizer contributions. However, the amount of the downsizer contribution will count towards clients’ TSB and therefore could impact their ability to make future NCCs or catch-up CCs;
- amounts made as downsizer contributions can be rolled into a retirement phase income stream if a client has not already exhausted their transfer balance cap;
- downsizer contributions are not treated differently for Centrelink purposes and will be assessable under the Age Pension Income and Assets Tests. Age Pension entitlements could be impacted where capital is accessed from an individual’s exempt principal home;
- even though dubbed ‘downsizer contributions’, eligible retirees can use this strategy even if they upgrade their home or choose to rent; and
- although the intention is for downsizer contributions to be made without having to meet the work test, the regulations still need to change to accommodate this. Draft regulations have been released, but it is not legislated just yet.
Innovative income streams
From 1 July 2017, an alternative definition of tax-free retirement income stream that is not based on minimum drawdowns took effect. This change facilitated the development of new income streams types for the Australian market, including deferred lifetime annuities (DLAs). The new rules require a super retirement income stream offered under those rules to meet a capital access schedule in order to receive an earnings tax exemption. An example of the capital access schedule for a 65 year old is depicted in Chart 1.
Chart 1: Application of the capital access schedule for a product purchased by a 65 year old male
Whilst enhanced income streams will offer additional flexibility for retiree clients, the Department of Social Services (DSS) has not yet confirmed their treatment (see below).
Objective of super
From 1 July 2017 we saw many changes implemented as part of the 2016-17 Federal Budget. One change which has not yet become law is the objective of super.
The relevant Bill proposes that:
“The primary objective of the superannuation system is to provide income in retirement to substitute or supplement the Age Pension.”
This would confirm the primary objective of superannuation in legislation. This means that new Bills and regulations relating to super would need to include a statement of compatibility with this objective.
On 19 February 2018 an advisory group was established to assist in the next phase of development for a framework for My Retirement products, also known as Comprehensive Income Products for Retirement (CIPRs).
The advisory group includes nine experts across consumer and industry retirement fields. They have been tasked with providing feedback and advice to the Treasury regarding potential options for a retirement covenant within the Superannuation Industry Supervision (SIS) Act 1993. This would include a framework for super providers to design and offer a masscustomised, composite retirement income solution to their members upon their retirement, i.e. My Retirement products.
This highlights the Government’s commitment with evolving the retirement landscape and increasing the availability and choice of products that efficiently manage longevity.
The new framework has implications to the advice market that professionals should be aware of.
In summary, “it would be anticipated that a financial adviser providing personal advice on retirement income products would be required to disclose in the Statement of Advice why their recommended product would better meet the individual’s needs over the mass-customised CIPR offered by the individual’s trustee(s)”.1
Reversionary transition to retirement income streams
The consultation period for draft legislation to always allow a Transition to Retirement Income Stream (TRIS) to automatically transfer to eligible dependants upon death, closed on 23 February 2018. This change would allow the original TRIS to be paid to the dependant rather than having to be commuted and a new income stream started. Currently, funds are finding administrative issues when dealing with the inability for a TRIS to automatically revert where a dependant has not met a condition of release. These issues would be alleviated if this measure were to become law.
Catch-up concessional contributions
Clients are able to carry forward unused CCs from 1 July 2018 to be used from 1 July 2019. Clients can make catch-up CCs providing when they make a contribution their TSB was less than $500,000 on 30 June of the previous financial year. Unused amounts can be carried forward on a rolling basis for a period of five years and will expire after five years.
Catch-up CCs may mean retirees who are eligible may be able to accumulate CC cap space to be used in future years where assessable income may be high. For example, retirees planning on selling an investment with capital gains could use carried forward CCs to claim a deduction for personal super contributions made in the same financial year as the sale. A retiree must still meet the work test if they are aged 65-74 to be eligible to make a contribution to super.
First Home Super Saver Scheme (FHSSS)
The FHSSS will apply to voluntary CCs and NCCs of up to $15,000 per year and $30,000 in total made from 1 July 2017. Personal contributions, along with deemed earnings (at the rate of the Shortfall Interest Charge, which is 4.77% for April – June 2018), can be withdrawn for a home deposit from 1 July 2018.
Amounts withdrawn that relate to a client’s FHSSS eligible CCs and the total associated earnings will be taxed at their marginal tax rate but with a tax offset of 30%. Amounts withdrawn that relate to a client’s FHSS eligible NCCs are treated as non-assessable non-exempt income.
For clients who are eligible under the FHSSS, consider the following:
- it is important to consider a client’s investment strategy when using the FHSSS. For example it may not be appropriate for clients who have growth orientated investments to be making lump sum contributions or withdrawals;
- and a ‘home’ includes land which is going to be used to build a property but does not include a houseboat, motorhome or vacant land.
Removal of the energy supplement
The Government currently has a measure in parliament to cease the payment of the energy supplement for individuals in receipt of the Age Pension. The measure was introduced on 31 May 2017 but is yet to become law.
Currently, the energy supplement is a non-indexed payment of $14.10 p.f. for singles and $10.60 p.f. for couples each. If passed, new pensioners would be subject to an Age Pension reduced by these amounts.
Note that separate legislation has already passed which ceases the energy supplement for Family Tax Benefit and Commonwealth Seniors Health Card holders who first began receiving their respective benefit from 20 September 2016.
Age Pension reduction for overseas pensioners
This proposal ceases the payment of the pension supplement basic amount after six weeks overseas and stops the payment of pension supplement basic amount immediately for permanent departures from Australia. These amendments apply to all Age Pension recipients overseas before, on or after commencement of this measure. This change would be implemented on the first 1 January, 1 April, 1 July or 1 September after the relevant Bill receives Royal Assent.
Means-testing of retirement income streams
Recently the DSS released for public consultation a position paper regarding the means-test rules for lifetime retirement income streams, including lifetime annuities. Consultation was open from 16 January 2018 to 16 February 2018.
The paper highlights the importance of achieving a means-testing approach that supports the development of retirement income products.
The paper proposed new means-testing treatments for lifetime income streams commenced on or after any change to the current rules. The paper makes a strong case for grandfathering lifetime products purchased prior to the implementation of any new rules.
DSS is currently reviewing submissions received during the consultation period and no final position has been determined. No specific implementation date has been determined. Any change to the future means-testing of lifetime income streams requires a change of law.
Increasing Age Pension age
During this financial year the Age Pension eligibility age increased to 65.5 for those born 1 July 1952 to 31 December 1953. This will progressively increase to 67 for those born on or after 1 January 1957.
It is important to note the Government maintains its policy of continuing to lift the Age Pension age from 67 to 70 from 1 July 2025. This was confirmed by the Government in the Senate on 1 March 2018, however no new legislation has been introduced into parliament.
Tax and other considerations
Increase of Medicare Levy to 2.5%
To cover the cost of the National Disability Scheme (NDIS), the Government is proposing to increase the Medicare Levy from 2% to 2.5% from 1 July 2019.
Many retirees may not be affected by this, as the Medicare Levy only becomes payable for a single pensioner with taxable income above $34,244 p.a. or for a couple with taxable income above $47,670 p.a. (thresholds for the 2016-17 financial year). However, retirees who go back to work, have a high non-super retirement income or anticipate a future high income year, for example, due to selling an investment property with capital gains, may be affected if this measure becomes law.
Reduction of company tax rate to 25%
For the 2017/18 financial year, companies with a turnover of less than $25million (increasing to $50million for 2018/19) have a tax rate of 27.5% (reducing progressively from 1 July 2024 until it is 25% from 1 July 2026). There is currently a Bill in parliament which would progressively increase the annual turnover up from $50million to $100million from 1 July 2019 and then eventually to include all companies by 1 July 2023.
If this Bill becomes law, retirees holding shares in a business subject to a tax rate lower than 30% would have their franking credits from any dividends reduced as a consequence.
Establishment of the Australian Financial Complaints Authority (AFCA)
A new external dispute resolution scheme will be established which will combine three existing schemes; the Financial Ombudsman Service (FOS), the Superannuation Complaints Tribunal (SCT) and the Credit and Investments Ombudsman (CIO). AFCA will aim to deliver higher standards and better outcomes in the financial services market. AFCA will start accepting complaints no later than 1 November 2018.
1Development of the framework for Comprehensive Income Products for Retirement – Discussion Paper, December 2016