SMSF Association Budget Update

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1 SMSF Association Budget Update Published on Tuesday, 12 May 2015 Jordan George, SMSF Association Senior Manager, Technical & Policy Tonight, the Government delivered the Federal Budget, its second in its current term in government. As expected, the Budget was relatively benign to most with a emphasis on growing jobs and supporting small businesses ($5.5 billion package), a families support package with focus on child care ($4.4 billion package), ensuring fair tax and social security settings, and over the medium term, establishing a path back to a balanced Budget. The Government is predicting a Budget deficit of $35.1 billion in (2.1% of GDP) with no surplus predicted in the Government's medium term projections but with the Budget deficit reduced to $6.9 billion by The superannuation system or the taxation of superannuation was barely mentioned in the 2015 Budget Papers with the Government sticking to its pledge for "no unexpected, detrimental changes" to the superannuation system in its first term of Government. All eyes will be on the Government's response to the Financial System Inquiry final report and its tax white paper process for larger expected changes to superannuation, including the Government's mooted changes to limited recourse borrowing arrangements. While superannuation was unscathed for the second year running, focus remained on the Age Pension and its means testing. As flagged before the Budget the assets test thresholds have been increased, as has the tapering rate for the asset test being increased from $1 per $1000 over the asset test threshold to $3 per $1000 over the assets test threshold. A surprise measure was a move to include a larger proportion of a superannuant's defined benefit income into account to the pension income test by capping the amount that can be excluded from the pension income test to 10%. At the same time, the Government dumped some of the Budget's unpopular social security measures. Indexing the pension to the Consumer Price Index instead of Male Total Average Weekly Earnings, resetting the income test deeming rate thresholds to $30,000 for singles and $50,000 for couples from 20 September 2017 and freezing indexation of pension eligibility thresholds have all been abandoned. Key Retirement Income Measures 1. Social security assets test rebalance asset test thresholds and taper rate The Government will achieve savings of $2.4 billion over five years by increasing the asset test thresholds and the withdrawal rate at which pensions are reduced once the threshold is exceeded. The assets test threshold for homeowners is increased to $289,500 for singles and to $451,500 for couples and the tapering rate was increased from $1.50 per $1000 over the asset test threshold to $3.00 per $1000 over the assets test threshold.

2 Pensioners who lose their pension entitlement on 1 January 2017 as a result of these changes will automatically be issued with a Commonwealth Seniors Health Card or a Health Care Card for those under Age Pension age. This measure signifies the Government's shift to a policy of maintaining a sustainable Age Pension by implementing tighter means testing arrangements. These changes will have a significant impact for SMSF trustees that have an average sized balance of retirement savings outside their family home, especially those with assets around the value of the assets testing thresholds. While the intent of the measure is understandable, there is a concern that the proposed changes could provide an incentive to shift wealth out of means tested assets into untested assets such as a retiree's dwelling to capitalise on the available Age Pension. 2. Social security income test define benefit income testing From 1 January 2016 the level of income from defined benefit superannuation that can be excluded from the pension income test will be capped at 10%. The Government estimates that around 65% of income support recipients with payments from defined benefit superannuation have deductible amounts of 10% or less. This is expected to raise $465 million over the forward estimates. This measure tightens a loophole which allowed superannuants with defined benefit superannuation to access the Age Pension, even when they had significant defined benefit income streams. It will be interesting to see the detail of which defined benefit pensions will be impacted by this measure. 3. Relaxing criteria for the release of superannuation for terminal medical conditions From 1 July 2015, the Government will extend access to superannuation for people with a terminal medical condition. Currently, patients must have two medical practitioners (including a specialist) certify that they are likely to die within one year to gain unrestricted tax free access to their superannuation balance. The Government will change this period to two years giving terminally ill patients earlier access to their superannuation. This is a sensible, compassionate measure to assist people with a terminal illness access their superannuation in a timelier manner. 4. Not proceeding with indexing the Age Pension to CPI The Government will not proceed with the Budget measure Index Pension and Pension Equivalent Payments by the Consumer Price Index. Pension and pension equivalent payment rates will continue to be indexed under current arrangements by the higher of the increases in the Consumer Price Index (CPI) or the Pensioner and Beneficiary Living Cost Index (PBLCI) and benchmarked against Male Total Average Weekly Earnings (MTAWE). This decision not to proceed with this controversial Budget measure will ensure the value of the Age Pension is maintained over time. It signifies that the Government has shifted focus to tighter means testing for the Age Pension to reduce their expenditure on aged income support.

3 5. Not proceeding with elements of the measure to maintain eligibility thresholds for Australian Government payments for three years The Government will not proceed with elements of the Budget measure Maintain eligibility thresholds for Australian Government payments for three years that relate to the pension income test free areas and deeming thresholds. The pension income test free areas and deeming thresholds will continue to be indexed annually by the Consumer Price Index. 6. Not proceeding with the measure to reset the income test deeming rate The Government will not proceed with the Budget measure to reset the deeming thresholds used in the pension assets test to $30,000 for singles (down from $48,000) and $50,000 for couples (down from $79,600) from 20 September Similar to abandoning the measure to index the Age Pension to CPI, abandoning these two measures on freezing pension related thresholds signifies a change in Government direction on making the Age Pension sustainable via tighter means testing. 7. Lost and unclaimed superannuation The Government will implement a package of measures that will reduce red tape for superannuation funds and individuals by removing redundant reporting obligations and by streamlining lost and unclaimed superannuation administrative arrangements from 1 July We support removing red-tape from the superannuation system and look forward to seeing the detail of these changes. Non-retirement income measures that may be of interest to SMSF Association members 8. Commonwealth Penalty Units The Government will increase the value of all Commonwealth penalty units from $170 to $180, with effect from 31 July This increase is broadly consistent with inflation since the value was last adjusted in December This will mean that the penalties under the SMSF administrative penalty regime will increase as follows: 5 penalty units: $850 increased to $ penalty units: $1700 increased to $ penalty units: $3400 increased to $ penalty units: $10,200 increased to $10, Small Business Tax immediate deductibility for professional expenses The Government will allow businesses to immediately deduct a range of professional expenses associated with starting a new business, such as professional, legal and accounting advice from the income year.

4 10. Small Business Tax CGT roll over relief for change of entity structure The Government will allow small businesses to change legal structure without attracting a CGT liability. This measure will be available for businesses that change entity type from the income year. CGT roll over relief is currently available for individuals who incorporate but all other entity type changes have the potential to trigger a CGT liability 11. Small Business Tax expanding accelerated depreciation The Government will expand accelerated depreciation for small businesses by allowing them to immediately deduct assets they start to use or install ready for use, provided the asset costs less than $20,000. This will apply for assets acquired and installed ready for use between 7.30pm (AEST) 12 May 2015 and 30 June Small Business Tax tax cuts for small business The Government will deliver a tax cut to all small businesses through a 1.5 percentage point tax cut for small companies and a five per cent tax discount on income from unincorporated small business activity. These tax cuts will be available from the income year 13. Statutory Remedial Power for the Commissioner of Taxation The Government will provide the Commissioner of Taxation with a power to make a legislative instrument to modify the operation of the tax law to ensure that the law's purpose or object is achieved. 14. Personal Income Tax Medicare low income thresholds The Government will increase the Medicare levy low income thresholds for singles, families and single seniors and pensioners from the income year, to take account of movements in the Consumer Price Index so that low income taxpayers generally continue to be exempted from paying the Medicare levy. The threshold for singles will be increased to $20,896. For couples with no children, the threshold will be increased to $35,261 and the additional amount of threshold for each dependent child or student will be increased to $3,238. For single seniors and pensioners, the threshold will be increased to $33,044. This measure is estimated to have a cost to revenue of $231.0 million over the forward estimates period. 15. Personal Income Tax modernising work related car expense deductions The Government will modernise the methods of calculating work related car expense deductions from the income year. The '12 per cent of original value method' and the 'one third of actual expenses method', which are used by less than two per cent of those who claim work related car expenses, will be removed. The 'cents per kilometre method', will be modernised by replacing the three current rates based on engine size with one rate set at 66 cents per kilometre to apply for all motor vehicles, with the Commissioner of Taxation responsible for updating the rate in following years. The 'logbook method' of calculating expenses will be retained. These changes will not affect leasing and salary sacrifice arrangements. 16. GST applying to digital products and services imported by consumers The application of the GST will be extended to cross border supplies of digital products and services imported by consumers from 1 July Introducing a cap for salary sacrifice meal entertainment and entertainment facility expenses The Government will introduce a separate single grossed up cap of $5,000 for salary sacrificed meal entertainment and entertainment facility leasing expenses (meal entertainment benefits) for employees. 18. Serious financial crime taskforce addressing financial and tax fraud

5 The Government will provide $127.6 million over four years to a Serious Financial Crime taskforce for investigations and prosecutions that will address superannuation and investment fraud, identity crime and tax evasion. The aim of the taskforce is to maintain integrity and community confidence in Australian financial markets and regulatory systems. 19. Reversal of Banking and Life Insurance unclaimed provisions The Government will restore the time before unclaimed money in savings accounts and life insurance policies are transferred to the government from three years to seven years, reversing the changes made by the previous government in Children's bank accounts will also be exempt to ensure funds put aside in these accounts will never be transferred to the government. The Government will also make changes to protect the privacy of individuals that do have genuinely inactive accounts transferred to the Australian Securities and Investment Commission (ASIC) to address concerns around identity theft and to stop unscrupulous people preying on vulnerable Australians.

6 All quiet on the superannuation front : Budget Published on Tuesday, 12 May 2015 The Federal Government has again made good on its promise not to make any detrimental, unexpected changes to superannuation in its first term of office. In the Budget, handed down tonight by Treasurer Joe Hockey, there were only minor budget measures regarding unclaimed superannuation and conditions of release for terminal illnesses featuring in the superannuation space. The SMSF Association CEO/Managing Director Andrea Slattery welcomed the stability this brought for the more one million SMSF trustees and members, noting that such stability helps maintain confidence and trust in Australia's world class retirement income system. "We have been active in advocating for Governments to stop tinkering with the superannuation system and it is pleasing to see the Coalition Government is heeding this advice. "The stability to superannuation in the current Budget cycle allows SMSF trustees to take a deep breath and assess their long term strategies without having to confront constant regulatory change." However, as flagged before the Budget, the social security side of retirement income has been the Government's focus with changes to means testing of the age pension to make the age pension more sustainable. "Trustees need to consider these changes and should consult with their professional advisors to ensure their SMSF investments and strategy are on the right footing to have a sustainable retirement income," she said. All eyes will now turn to the Government's long awaited response to David Murray's Financial System Inquiry report and the ongoing tax white paper program, where more significant changes to the superannuation system may be expected. About the SMSF Association The SMSF Association is the authoritative voice for the self managed superannuation fund sector. The Association, which represents professionals providing a range of services across various disciplines in the complex area of SMSFs, is an advocate for the highest professional standards and competence to ensure SMSF trustees always receive the best possible advice.

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