Treasurer Josh Frydenberg delivered the Federal Budget on Tuesday 11 May 2021. Graeme Quinlan, Senior Adviser and head of the First Financial Investment Committee, hosted a webinar on Thursday 20 May reviewing the measures within the budget that could impact our clients.
He was joined by our external asset allocation consultant, Tim Farrelly, who also provided an updated economic and market outlook. You can watch the recorded webinar for the entire session or read our Federal Budget summary below.
Summary of key measures
When we review the Federal Budget, there are many different measures that we believe could impact our clients.
There are three that are particularly important and could provide significant benefits. Then there are an additional three measures that have moderate importance, but we believe they are still relevant.
All of these measures become effective at the start of the financial year after Royal Assent. This will most likely be 1 July 2022.
Removal of the work test
The work test rule states that once you reach 65, you have to work 40 hours in a consecutive 30 day period to be able to contribute to your superannuation. This has been a difficult rule to police and the Government has chosen to remove it. The only criteria now will be age-based and you must be younger than 75 years and 28 days to make contributions such as salary sacrifice or non-concessional (after tax). It does not include personal concessional (tax deductible) contributions.
This will have some implications for financial strategies as we could consider a recontribution strategy or equalisation strategy. An example of the equalisation strategy would be to withdraw funds from one spouse’s super and contribute back into the other spouse’s account in order to equalise their balances.
There is a cap of $1.6million (soon to be $1.7M) in pension mode per person but when equalised across both spouses’ accounts this could be up to $3.2million. When combined with the bring forward rule where you can contribute up to $330,000 once every 3 years, there may be opportunities to make significant contributions to your superannuation all the way up to 75 years of age. It is worthwhile discussing your personal situation with your adviser to find out more.
Changes to downsizer rule
The downsizer rule is effectively an exceptional contribution measure that sits outside the normal contribution rules. If you sell your home and it has a principal place of residence capital gains tax exemption you have a 90 day window to make further contributions, of up to $300,000 per person, to your superannuation. Originally you had to be at least 65 years old, but this will now be brought forward to 60 years.
How this could be substantial is if you combine it with the changes to the previous measure. It creates the potential for up to $1.26million in contributions. For example, a senior couple contributes $300,000 each as part of the downsizer rules and an additional $330,000 each using the bring forward rules. This could give a significant boost to your superannuation and provide exceptional financial security.
Complying pension commutation window
Complying pensions date back to pre-2007 but they are still in existence. They were a specific pension that provided Centrelink concessions, but they were non-commutable… or irreversible. People committed capital in return for Centrelink concessions, but eligibility for the last concessions finished on 20 September 2007. Those concessions are grandfathered, but it is quite possible they are no longer providing any benefit to you and there is therefore very little reason to have this type of pension anymore.
The proposed measure would provide a two year window where people can unwind these pensions if they feel there is no longer any benefit. If the pension is held within super, you can commute it back to accumulation mode, however you will lose your social security exemption and this is something you should assess. But it does mean that the capital will be accessible again and could be quite valuable. We recommend that anyone with this type of pension should review them within the next two years to determine whether they want to make any changes.
SMSF residency relaxation
Historically, there are stringent rules around whether an SMSF is an Australian super fund or not. If it did not comply with the Australian Super Fund residency requirements, it would need to be wound up or face 47% tax on the taxable component. Previously you had to satisfy a control test and there were temporary absence limits of two years. Plus, there was also an active member test.
The changes to these rules now allow for up to five years absence from Australia and the active member test will be abolished. This means it is easier for overseas clients to retain their SMSFs, unless they plan on permanently relocating.
Income tax offset
The Low to Middle Income Tax Offset (LMITO) was due to end, but the Government has chosen to continue it. Together with the Low Income Tax Offset (LITO) this is a positive measure for the effective tax free threshold (the amount you can earn before paying tax, including offsets).
There are limits on how much you can have in superannuation and also minimums you must withdraw every year, so many clients end up building money in their personal names.
It is therefore important to know how much you can invest in your own or in joint names before you reach the effective tax free threshold. As an example, for a senior couple this is $30,592 each before you have to pay any tax.
Tax residency simplified
The tests determining tax residency will change and rather than the subjective ‘permanent place of abode’ test, the new primary test will be the 183 day rule. This means you need to reside in Australia for just over six months every year to be recognised as an Australian resident and taxed accordingly.