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(PROPOSED CHANGES) Superannuation changes – Federal Budget 2018/19

Changes to superannuation were announced in the Federal Budget on 8 May 2018. These super changes are not yet law but it is well worth considering how your plans might be affected. The proposed changes include:

Superannuation proposed changes

Fees

A cap on admin and investment fees on low balance super accounts (with less than $6,000) at 3% to prevent low super balances from being eroded by fees. This may see fees reduce for some fund members. A ban on all super fund exit fees. According to APRA, super members lost approximately $52m in exit fees in 2016/17.

Insurance

Insurance within super to be opt-in rather than default for members under 25, members with balances of less than $6,000 and members whose accounts have not received a contribution in 13 months and are inactive. A number of Industry SuperFunds have already taken steps to change insurance coverage for younger members. It will be important to ensure no workers are left without insurance, such as new entrants to the workforce, women on extended maternity leave or low balance workers in high risk jobs. This change is likely to impact the insurance arrangements within super and is proposed to take effect from 1 July 2019.

Auto-consolidation

All super accounts that have not received a contribution for 13 months, with balances below $6,000, to be classified as inactive and transferred to the ATO and for the ATO to attempt to proactively reunite those accounts with a member’s active account. Accounts not auto-consolidated will go to consolidated revenue until validly claimed. These changes may have implications for seasonal and other irregular workers. You will be able to inform your fund that whilst you are not making contributions you wish your monies to remain in your fund. You can currently seek to consolidate your super, for more information click here. The measure starts 1 July 2019.

ATO to monitor ‘Notice of Intent’ requirements

Tightening rules for tax deductions on personal contributions to ensure super fund members who receive a tax deduction on personal super contributions are completing ‘Notice of Intent’ forms. The measure commences on 1 July 2018.

 

Additional recommendations

Allowing retirees to work more

The Pension Work Bonus to increase to $300 per fortnight (an additional $50). This allows pensioners to earn up to $300 each fortnight without reducing their Age Pension payments. The measure also extends coverage to self-employed members. Commences 1 July 2019.

 

Allowing retirees to make voluntary contributions in the first year of retirement

Retirees aged between 65 and 74 with a superannuation balance below $300,000 will be allowed to make voluntary super contributions for the first year that they no longer meet the work test requirements.

 

Retirement income products

A new retirement income framework, requiring super funds to offer whole of life products and to provide standardised information. The age pension means test rules will also be changed.

 

Pension Loan Scheme

Expansion of the Pension Loan Scheme to allow Aged Pensioners to boost their income with a loan from the government against the equity in your home. $11,799 for singles or $17,787 for couples per year can be paid in fortnightly payments to supplement existing income. These payments are a loan with the government, attract interest and need to be repaid from sale proceeds of your house or can be repaid at any time.

 

High income earners

High income earners (individuals who earn more than $263,157 a year) with multiple employers will be able to make wages from certain companies exempt from the Superannuation Guarantee (SG) to avoid breaching the Concessional Contributions Cap.

 

Self managed super funds

The maximum number of trustees allowed in a self-managed super fund will be raised from four to six, and from July next year the government will allow funds with “a history of good record-keeping and compliance” to obtain an audit once every three years instead of annually.

 

No change to legislated SG Increase

The Budget did not make any changes to the legislated increase in the SG beginning with an increase from 9.5 per cent to 10 per cent on 1 July 2021.

 

The government has previously proposed the following changes which have not yet been legislated:

 

Unpaid Super

On September 14th 2017 the Federal Government introduced a bill that will seek to close a legal loophole that allows employers to shortchange employees who make extra salary sacrifice super contributions.

 

Closing this loophole is a welcome step that shows progress is being made to tackle widespread Super Guarantee non-compliance, but a more comprehensive approach is necessary given the salary sacrifice changes will only help one in ten of those affected by unpaid superannuation.

 

Allowing older Australians to contribute downsizing proceeds into superannuation From 1 July 2018, individuals aged 65 and over will be able to make a non‑concessional contribution of up to $300,000 in proceeds from the sale of a principal residence, held for at least 10 years, into their superannuation. These new contributions will be in addition to any other voluntary contributions that people are able to make under the existing contribution rules and concessional and non-concessional caps.

 

Merging of the Superannuation Complaints Tribunal and other financial complaint services into a single complaints Authority

The government has proposed merging of the Superannuation Complaints Tribunal with the Financial Ombudsman Service and the Credit and Investment Ombudsman into a single Financial Complaints Authority. The new body will deal with all financial disputes, including superannuation, and provide binding dispute resolution, and will be funded by industry.

 

Super fund governance On September 14th 2017 the Federal Government introduced a bill to make changes to the requirements of super fund board members. This includes mandating one-third independent directors on boards, an independent chair and would require funds to explain why they do not have a majority of independent directors on their boards.

 

Industry SuperFunds equal representative model of employer and member representatives on boards has been a proven success delivering strong returns to members. These proposed legislative changes will seek to dismantle this successful model. Industry SuperFunds oppose this change.

 

Imputation credit changes

The Federal Opposition have announced a proposal to cease refunding unused imputation credits. This has resulted in widespread media commentary on the impact on retirees. See our explainer on the issue and how fine-tuning the policy could reduce or remove the impact on pensioners with small and moderate parcels of shares.

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Taking a Super Pension

Once you’ve retired, theoretically speaking you may never need to work another day again, so why should you have to worry about budgeting your pension? Taking a super pension can help make managing your super easier as it provides you with a regular and reliable income.

How does a super pension work?

A super pension provides you with steady payments, while usually still allowing you to make a lump sum withdrawal if you need to. One of the advantages of a super pension is that many kinds allow you to keep your money invested within the super system. Further, according to the Australian Taxation Office if you start a super pension while qualifying for a condition of release, like reaching 65 years old and retiring, the earnings your investments make will typically be tax exempt.

The exact amount is determined by your age and circumstances, but the chart below shows the general rules. However, there is no maximum withdrawal limit.

You can schedule your pension payments as frequently as you like – annually, half-yearly, quarterly or monthly – meaning that you can use what works best for you. Additionally, any remaining money in your pension account when you die will be paid to you nominated beneficiary.

Super pension rules

Note though, that the amount you withdraw can have an impact on any Age Pension entitlements you have. An account-based pension provides you with both an asset and an income for the purposes of the Age Pension test, potentially reducing the amount of the Age Pension you can receive.

 

You should also remember that there is a transfer balance cap of $1.6 million that you can move to an account-based pension. Amounts in excess of this must remain in the accumulation phase of super.

Consider a transition to retirement pension

If an account-based pension doesn’t suit your needs, particularly if you haven’t yet reached a condition of release, you could consider a transition to retirement pension (TTR). This allows you to access some of your super while continuing to work. To be eligible for a TTR pension, you must have reached your preservation age, 60 for most people, but you don’t need to have retired.

 

A TTR pension can help to ease you into retirement, while allowing you to still earn super guarantee payments. However, you must withdraw between 4% and 10% of your pension fund balance each year, and you cannot withdraw a lump sum payment.

If a super pension sounds like it suits your needs, your first task should be to look around at the products on offer.

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What is a Superannuation Proceeds Trust and How Does it Work?

Issues of tax and inheritance can rear their head if you pass away without effective estate planning provisions in place; in some cases superannuation proceeds trust can be implemented to sort these matters out.

If you want your superannuation benefit held in a trust rather than being paid directly to a specific person or people, one option may be to set up a superannuation proceeds trust in your will.

What is superannuation proceeds trust?

A superannuation proceeds trust is a type of testamentary trust established solely to receive superannuation proceeds on the death of a fund member. The trust can be established by your will or in some cases, by deed after your death.

A superannuation proceeds trust is similar in operation to other trusts set up in a will, with one significant difference; to be tax-effective, the beneficiaries are limited to persons who were your death benefit dependants as defined by the tax laws. As explained on the ATO website, this list is slightly different to the meaning of ‘dependant’ under the super rules, and includes the following people:

  • your de facto or legal spouse;
  • your former de facto or legal spouse (if you have one);
  • your child aged under 18 years;
  • someone who was in an “interdependency relationship” with you;
  • or someone financially dependent on you just before your death.

Under the super laws, a super fund trustee generally has discretion to decide when and to whom to pay a death benefit. To create a superannuation proceeds trust, you will usually have to create a valid binding death benefit nomination in favour of your legal personal representative. This means your superannuation fund trustee must pay your death benefit into your estate, where it will be used to create the superannuation proceeds trust. Your will should contain special provisions and clauses to allow this to happen. It’s really important to get good legal advice if this is something you want to do, so your plans don’t have any unintended consequences such as increased tax or potential beneficiaries missing out on receiving a payment.

If you don’t have provisions in your will, it can still be possible to create a superannuation proceeds trust by deed, but the rule are much more complex. For example, not every super fund’s trust deed supports the establishment of a superannuation proceeds trust in this manner. There are additional restrictions under the superannuation and tax laws that apply to a superannuation proceeds trust created by deed that don’t apply to one created under a will. Navigating these rules can cause much more stress for your family compared to having the right provisions in place in your will before your death.

You should also check with your super fund about their approach to superannuation proceeds trust, and whether your super fund is providing you with the most value possible.

 

Why might you choose to use a superannuation proceeds trust?

Superannuation proceed trusts can be useful in several situations, many of which are to do with tax and the degree of control over when and to whom a death benefit is paid.

Taxation

As mentioned above, if beneficiaries of a superannuation proceeds trust are your death benefit dependants, as defined by the tax laws, the ATO states that they are generally eligible to receive payments from the trust tax-free. This is regardless of the number of individuals who end up benefitting from the trust.

 

This generally results in a similar tax treatment as if the beneficiaries had been paid the death benefit directly, but with a number of other benefits. For example, a former spouse may receive a tax-free death benefit from a superannuation proceeds trust, but cannot be paid directly by a superannuation fund under the superannuation laws unless they meet another definition of dependant. As with any testamentary trust, utilising a superannuation proceeds trust may help to minimise tax payable by minor beneficiaries. The ATO advises that a minor can be taxed at a rate as high as 66 cents on the dollar on some income; however income payments made to minors from a superannuation proceeds trust is treated as ‘excepted income’, meaning it will generally be taxed at adult marginal tax rates.

 

It’s a good idea to seek advice from a tax specialist about the considerations for your specific situation, because there are many factors that need to be taken into account.

Protection from creditors

If superannuation death benefits are paid directly from a super fund trustee to a beneficiary, this can potentially expose the payment to recovery by any creditors the beneficiary owes money to.

Placing your superannuation death benefit in a superannuation proceeds trust can provide your beneficiaries with some degree of protection. Broadly speaking, creditors can’t make a claim for a beneficiary’s share held by the trust. This can be useful if, for example, one of the trust’s beneficiaries is in a high-risk occupation or financially exposed to a large degree. Similarly, if a beneficiary went through a divorce or similar relationship issues, their share of the benefit held by the trust would generally remain protected from and inaccessible to the other party.

Longevity and flexibility

There are several reasons why you may not want one or more of your tax dependants to receive their share of your superannuation death benefit immediately after your death. These reasons could include, but are not limited to:

  • Perceived immaturity
  • Vulnerability, for example as the result of a disability or undue influence from others
  • Wanting the benefit to be paid at a significant point in your beneficiary’s life (e.g. their 21st birthday)
  • Wanting the dependant’s share of the benefit to accumulate in value before being paid to them.

In most Australian jurisdictions, a superannuation proceeds trust can exist for up to 80 years – the exception is South Australia, in which a superannuation proceeds trust can exist in perpetuity. This means that the trustee can choose to delay the point at which the death benefit is paid to beneficiaries by up to 80 years following your death, although in most cases they would probably not choose to delay distribution for that long.

At the end of the day, estate planning and trusts can be tricky legal instruments and shouldn’t be set up or arranged for without consultation with professionals such as a solicitor, accountant and financial adviser, and of course, your dependants. And as mentioned, the first step in considering where your superannuation will go when you pass away should be ensuring that you’re with the right super fund to begin with.

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