Budget 2017/18: Overview & specific superannuation measures
Source: ASFA Action, Issue 627
While not as substantial as the landmark reforms in last year’s Budget, the package of superannuation-related measures announced today by the government will nonetheless have a wide-ranging impact. Key measures include a new role for superannuation in addressing housing affordability issues, changes to the way members’ and beneficiaries’ complaints will be handled, and an extension of tax relief for merging funds.
The major measures with direct impact on superannuation include:
- new measures targeting housing affordability – super contributions from the proceeds of downsizing, a first home super saver scheme and a bond aggregator scheme for institutional investors
- complaints about superannuation to be handled by a new Australian Financial Complaints Authority (AFCA) from 1 July 2018
- tax relief for merging funds extended until 2020
- changes to the treatment of limited recourse borrowing arrangements and non-arm’s length arrangements, as refinements to last year’s Budget super reforms
- refinement of the small business capital gains tax (CGT) retirement concessions
- an increase in the Medicare levy from 1 July 2019
- funding for Treasury, legislative drafting and the regulators.
Details of specific superannuation measures
1. Super to play a role in addressing housing affordability issues
As expected, the Budget contains a diverse package of measures designed to improve housing affordability. Two of these relate to the way in which individuals will be permitted to utilise the superannuation system, while a third is likely to present investment opportunities for superannuation funds.
1.1 Downsizing the family home – contributing proceeds into superannuation
The government will allow a person aged 65 or over to make a non-concessional contribution of up to $300,000 from the proceeds of selling their home from 1 July 2018.
These contributions will be in addition to those currently permitted under existing rules and caps and they will be exempt from the existing age test, work test and the $1.6 million balance test for making non-concessional contributions. The Budget materials confirm that sale proceeds contributed to superannuation under this measure will remain subject to the Age Pension assets test.
This measure will apply to sales of a principal residence owned for the past 10 or more years and both members of a couple will be able to take advantage of this measure for the same home.
The government estimates that this measure will have a cost to revenue of $30 million over the forward estimates period.
1.2 First home super saver scheme: voluntary contributions accessible to fund a deposit
The government has indicated that it will allow first home buyers to withdraw future voluntary contributions to superannuation made from 1 July 2017—over and above any compulsory contributions—to be withdrawn for a first home deposit, along with associated deemed earnings.
The details of the measure are somewhat unclear, as the Budget materials do not always use consistent terminology when referring to the contributions covered by the measure. ASFA understands that the measure will apply to ‘voluntary’ contributions including:
- salary sacrificed contributions
- personal contributions from after-tax monies for which the individual claims a tax deduction, including under rules introduced in last year’s Budget and applying from 1 July 2017 (these are treated as concessional contributions)
- personal contributions from after-tax monies for which no deduction is claimed (these are treated as non-concessional contributions).
Other key aspects of the measure include:
- first home buyers can contribute up to $15,000 per year from 1 July 2017, and will be limited to $30,000 per person in total under the scheme
- concessional contributions and earnings will, while in the fund, continue to be taxed at 15 per cent
- withdrawals of concessional contributions and associated earnings will be taxed at the individual’s marginal rate, less a 30 per cent offset
- existing contribution caps will continue to apply
- withdrawals will be allowed from 1 July 2018 onwards
- both members of a couple can take advantage of this measure to buy their first home together.
This measure is expected to have a cost to revenue of $250 million over the forward estimates period.
The government will provide $9.4 million to the ATO to implement and primarily administer the scheme.
1.3 National Housing Finance and Investment Corporation – bond aggregator scheme for institutional investors
The government will provide $63.1 million over four years from 2017–18 (including $4.8 million in capital) to the Department of the Treasury to establish the National Housing Finance and Investment Corporation (NHFIC).
The NHFIC will operate an affordable housing bond aggregator, to provide cheaper and longer term finance for community housing providers by aggregating their borrowing requirements and issuing bonds to the wholesale market at a lower cost and longer tenor than bank finance.
Establishment of the bond aggregator was foreshadowed by the government in March.
Establishment of the bond market is likely to present investment opportunities for superannuation funds as institutional investors.
2. New complaints handling body for superannuation and financial services – government response to the Ramsay Review
Over the last 12 months, an expert panel chaired by Professor Ian Ramsay has been conducting a review of the external dispute resolution (EDR) and complaints framework (Ramsay Review), including the effectiveness of the current EDR bodies and the merits of replacing them with a ‘one stop shop’. The panel’s final report and the government’s response have been released as part of the Budget (see below for more information).
2.1 A new Australian Financial Complaints Authority
The government will replace the current EDR and complaints framework in financial services with a new dispute resolution framework from 1 July 2018. The Superannuation Complaints Tribunal (SCT), Financial Ombudsman Service (FOS) and Credit and Investments Ombudsman (CIO) will be replaced with the new Australian Financial Complaints Authority (AFCA).
The AFCA will be an industry funded complaints resolution body for all financial and superannuation disputes. Australian Financial Services licensees will be required to be members of AFCA, and its decisions will be binding on all firms.
The SCT, FOS and CIO will continue to operate until they are wound down by 1 July 2020, to allow them to clear their existing caseloads.
ASIC will be provided with stronger powers to oversee the new EDR body, including a general directions power to ensure AFCA complies with legislative and regulatory requirements.
The government will provide $4.3 million to ASIC over four years from 2017–18, including capital of $0.9 million in 2017–18. This will be offset by:
- an increase in levies of $3.6 million over three years from 2018–19 under the new ASIC industry funding model
- a reduction of funding of $7.2 million over four years from 2017–18 associated with the SCT being wound down and no longer operating from 1 July 2020. The financial institutions supervisory levy collected by APRA (part of which is allocated to ASIC to fund the operations of the SCT) will be reduced accordingly.
2.2 Internal dispute resolution
The Ramsay Review’s final report recommended that financial firms—including superannuation trustees—be required to undertake public reporting of their internal dispute resolution (IDR) activity and consumer outcomes.
The government has accepted that recommendation, with the funding provided to ASIC intended to also allow it to develop infrastructure for the reporting and analysis of IDR performance data by financial firms.
2.3 Compensation scheme of last resort for financial services
The terms of reference for the Ramsay Review require it to consider the merits of introducing a compensation scheme of last resort for financial services, and to provide a report to government by 30 June.
The Ramsay Review final report does not address a compensation scheme and accordingly, the government’s response and the Budget papers do not make any announcements in this respect.
2.4 Other Ramsay Review recommendations
The government has now published the final report from the Ramsay Review and its response. In essence, the government has accepted all 11 recommendations from the Review which relate to:
- replacement of the existing EDR and complaints bodies with a single body (see 2.1 above)
- the features , powers and accountability of the new EDR body
- transparency of IDR (see 2.2 above)
- referral of complaints back to the financial firm or superannuation trustee for a final opportunity to resolve them via IDR.
Notably, the Review’s final report does not include a specific recommendation for introduction of a superannuation code of practice, as outlined in its interim report, although it does consider it desirable in the longer term.
3. Fund mergers: tax relief extended
The current tax relief for merging superannuation funds, which was due to lapse on 1 July 2017, will be extended until 1 July 2020.
Since December 2008, tax relief has been available for superannuation funds to transfer capital and revenue losses to a new merged fund, and to defer taxation consequences on gains and losses from revenue and capital assets. The tax relief will be temporarily extended as the Productivity Commission completes a review into the efficiency and competitiveness of Australia’s superannuation industry.
The government notes that extending this relief will ensure superannuation fund members’ balances are not reduced by tax when superannuation funds merge. It will remove tax as an impediment to mergers and facilitate industry consolidation. Consolidation should lead to better retirement outcomes through reduced costs.
This measure is estimated to have an unquantifiable cost to revenue over the forward estimates period.
4. Refinement of 2016–17 Budget super reforms – limited recourse borrowing arrangements and non-arm’s length arrangements
The Budget papers include two refinements to the superannuation reforms announced in last year’s Budget, relating to the use of use of limited recourse borrowing arrangements (LRBAs) and non-arm’s length arrangements.
- From 1 July 2017, the use of LRBAs will be included in a member’s total superannuation balance and transfer balance cap.
LRBAs can be used to circumvent contribution caps and effectively transfer growth in assets from the accumulation phase to the retirement phase that is not captured by the transfer balance cap. The outstanding balance of a LRBA will now be included in a member’s annual total superannuation balance and the repayment of the principal and interest of a LRBA from a member’s accumulation account will be a credit in the member’s transfer balance account.
The measure was announced by the Minister in late March (see ASFA Action issue 622) and is estimated to have a gain to revenue of $4 million over the forward estimates period.
- From 1 July 2018, the law will be amended to reduce opportunities for members to use related party transactions on non-commercial terms to increase superannuation savings.
The non-arm’s length income provisions will be amended to ensure expenses that would normally apply in a commercial transaction are included when considering whether the transaction is on a commercial basis.
This measure is estimated to have a gain to revenue of $20 million over the forward estimates period.
5. Small business capital gains tax retirement concessions refined
The government will amend the small business capital gains tax (CGT) concessions—including the retirement concessions—to ensure they can only be accessed in relation to assets used in a small business or ownership interests in a small business.
An existing package of small business CGT concessions assists owners of small businesses by providing relief from CGT on assets related to their business, including by allowing small business owners to contribute to their retirement savings through the sale of the business. However, the government has identified that some taxpayers are able to access these concessions for assets which are unrelated to their small business, for instance, through arranging their affairs so that their ownership interests in larger businesses do not count towards the tests for determining eligibility for the concessions.
The small business CGT concessions will continue to be available to small business taxpayers with aggregated turnover of less than $2 million or business assets less than $6 million.
The amendments will apply from 1 July 2017 and are estimated to have an unquantifiable gain to revenue over the forward estimates period.
6. Medicare levy to increase
The government will increase the Medicare levy by half a percentage point from 2.0 to 2.5 per cent of taxable income – with effect from 1 July 2019. The increase is to ensure that the National Disability Insurance Scheme is fully funded.
This will impact the rates at which superannuation funds must withhold Pay As You Go tax from members’ benefit payments.
7. Funding for Treasury, legislative drafting and the regulators
The Department of the Treasury will receive $29.5 million over two years from 2017–18, (including $6.2 million in capital) to build capability to better support the government on issues including taxation policy and forecasting of revenue, macroeconomic modelling and foreign investment.
7.2 Legislative drafting
The government will provide $16.9 million to the Department of the Treasury and $5.2 million to the Office of Parliamentary Counsel over four years from 2017–18 to ensure dedicated drafting resources are available to progress financial services and taxation reform legislation.
7.3.1 Extension and finalisation of the ASIC industry funding model
Last year’s Budget confirmed the introduction of an industry funding model or ‘user pays’ for ASIC with effect from 2017–18. This year’s Budget papers contain details of amendments to extend and finalise the funding model.
Following several rounds of consultation, bills to implement the framework for the proposed model are currently before Parliament and draft regulations have been released for consultation outlining the mechanisms that will be used to calculate the annual levies payable by each class of regulated entity, including APRA-regulated superannuation entities.
The Budget papers indicate that the government will recover an additional $112.6 million over the forward estimates period from all ASIC-regulated entities, through the annual levies to be imposed under the new funding model. This is intended to ensure that all of ASIC’s regulatory costs are recovered from those entities that create the need for regulation.
As potentially relevant to superannuation and retirement incomes, the additional activities to be cost-recovered under the funding model include the promotion of financial literacy and activities funded by ASIC’s Enforcement Special Account.
7.3.2 Improving financial literacy
ASIC will receive additional funding of $16 million over four years from 2017–18 to broaden its financial literacy program.
The funding is intended to assist ASIC in promoting investor and consumer confidence, trust and participation in the financial system, by the provision of impartial information, tools and guidance.
The additional funding will be partially offset by an increase of $12 million over three years from 2018–19 in the statutory levy amount recovered from entities regulated by ASIC.
ASIC will receive additional funding of $28.6 million over four years from 2017–18 (including $2.3 million in capital) to undertake new regulatory activities to support a stable, efficient and competitive financial system.
The Budget papers indicate that this funding is intended to assist APRA in protecting the financial interests of depositors, insurance policyholders and superannuation fund members including by responding to new financial system activities and products.
The additional funding amount will be recouped via a $26.8 million increase over four years from 2017–18 in the annual financial institutions supervisory levies collected by APRA, while the capital component wil be met from within APRA’s existing resources.
The Budget papers also provide for an adjustment in the financial institutions supervisory levy collected annually to reflect the cessation of the SCT by 1 July 2020 (see 2.1 above).
The ATO has not received any specific increase to its funding in relation to superannuation, other than to administer the first home super saver scheme (see 1.2 above).
7.6 Australian Competition and Consumer Commission (ACCC)
The ACCC will receive $13.2 million over four years from 2017–18 to establish a unit to undertake regular inquiries into specific financial system competition issues.
This implements a recommendation of the House of Representatives Standing Committee on Economics report, Review of the Four Major Banks (often referred to as the Coleman Report), but appears to have the potential to extend beyond banking to financial services more broadly.
The cost of the additional funding to the ACCC is offset by an increase in the APRA financial institutions supervisory levies of $13.2 million over four years from 2017–18.
The Budget also contains a number of more general measures that are of interest and more details can be found here.