On 9 May the Federal Government handed down the 2017 Budget. The scale of the announcements for individuals was nowhere near as momentous as the 2016 Budget. There are, however, a range of measures that will impact individuals. Please note that the Budget announcements are proposals and are not yet law. There may be significant changes to the proposals by the time they are legislated.

Superannuation

Stability and confidence for superannuation is the good news coming out of the 2017 Federal Budget. With super members still working through the wide-reaching and complex superannuation changes of the last Budget (which take effect from 1 July 2017), this Budget’s minimal changes will result in a quieter period for members to ensure they have the correct strategies in place.

The main changes impacting superannuation involves allowing people aged 65 and over to downsize their home and gain exemptions to superannuation caps, a First Home Super Saver Scheme and the rounding up of minor technical changes already announced.

Downsizing the home into Super (effective 1 July 2018)

Individuals aged 65 and over will be able to contribute up to $300,000 into super from the proceeds of the sale of their principal place of residence. This measure will apply to a principal place of residence held for a minimum of 10 years.

These contributions will be treated as non-concessional contributions and 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.

The existing contribution restrictions for people over age 65 and the restrictions on making non-concessional contributions where a person’s total superannuation balance is over $1.6 million will not apply. However, these contributions will not be exempt from the transfer balance cap and will only be able to be used to commence a retirement phase pension where the member has remaining transfer balance cap space. The amount contributed will also be fully assessable under the age pension assets test.

This means even if an individual has a total superannuation balance of $1.6 million or more they will not be restrained from making an after-tax contribution with their house proceeds. This exemption also extends to the annual after-tax contribution limit which is currently $100,000.

First Home Saver Scheme (effective 1 July 2017)

Individuals will be able to make voluntary superannuation contributions in excess of the Super Guarantee, of up to $15,000 per year up to a total of $30,000, to purchase their first home. These voluntary contributions, which will be taxed at 15%, along with deemed earnings, can be withdrawn for a deposit on a person’s first home. Withdrawals will be taxed at marginal tax rates less a 30% tax offset and will be allowed from 1 July 2018.

First home savers will be able to salary sacrifice an amount from their pre-tax income directly into super. Individuals who are self-employed or whose employers do not offer salary sacrifice will be able to claim a tax deduction on personal contributions. However, any pre-tax contributions made under these rules must be within the concessional cap.

First home savers will also be able to make non-concessional contributions under this scheme. However, these contributions will not be taxed when they are withdrawn.

The amount of deemed earnings that can be released under these rules will be calculated based on the 90 day Bank Bill rate plus 3% - currently equivalent to a deemed rate of return of 4.77%.

The Government has confirmed that the ATO will have the primary responsibility for administering the scheme, including:

  • eligibility of the person seeking a release
    calculation of the release amount
    compliance mechanisms to ensure the released monies are used for the intended purpose.

The Government has also confirmed that while the concessional part of a release amount will be included in a person's taxable income, it will not flow through to other income tests used for other purposes, such as for calculation of HECS/HELP repayments, family tax benefit or child care benefit.

The Government has released a Calculator for individuals to work out how they could benefit from the proposal. The Government uses a case study – Michelle and Nick in their Fact Sheet – First Home Super Saver Scheme.

CASE STUDY: BOOSTING MICHELLE AND NICK'S FIRST HOME DEPOSIT

Michelle earns $60,000 a year and wants to buy her first home. Using salary sacrifice, she annually directs $10,000 of pre-tax income into her superannuation account, increasing her balance by $8,500 after the contributions tax has been paid by her fund. After three years, she is able to withdraw $27,380 of contributions and deemed earnings on those contributions. Her withdrawal is taxed at her marginal rate (including Medicare levy) less a 30 per cent offset. After paying $1,620 of withdrawal tax she has $25,760 that she can use for her deposit. Michelle has saved around $6,240 more for a deposit than if she had saved in a standard deposit account. Michelle's partner Nick has the same income and also salary sacrifices $10,000 annually to superannuation over the same period. Together they have $51,520 that they can put towards a deposit, $12,480 more than if they had saved in a standard deposit account.

In this example Michelle & Nick’s take home pay would drop from around $920 per week to around $797 per week each – a decrease in spendable income of $246 per week. This may put saving at the maximum amount, out of reach for most average wage earners.

Another important point is that the release amount is calculated using a deemed rate of return, not the actual return for your Fund. For example if your Super is invested in a Growth option and received a 9% rate of return, the return calculated for release purposes would still only be the deemed rate of around 4.8%.

Non-Arms Length Arrangements (effective 1 July 2018)

The Government has announced it will further tighten the non-arm’s length income rules to ensure expenses that would normally apply in a commercial transaction are included when considering whether the transaction is on a commercial basis.

Integrity of limited recourse borrowing arrangements (effective 1 July 2017)

The Government is proceeding with amendments to the transfer balance cap and total superannuation balance rules for limited recourse borrowing arrangements (LRBAs). The outstanding balance of an LRBA will now be included in a member’s annual total superannuation balance for all new LRBAs once this legislation is passed.

Most super members will have paid out any LRBA prior to commencing pensions, so this should have a limited impact.

Personal Taxation

Medicare Levy Increase (effective 1 July 2019)

The Medicare levy will be increased from 2% to 2.5% of taxable income from 1 July 2019.

The increase will be used to ensure the National Disability Insurance Scheme (NDIS) is fully funded.

The Medicare levy low-income thresholds for singles, families and seniors and pensioners will increase from the 2016/17 financial year.

An increase in Medicare Levy may also result in an increase in many tax rates linked to the top personal tax rate including:

  • fringe benefits tax
  • excess non-concessional contributions tax
  • taxable Employer Termination Payment in excess of whole of income cap and ETP cap
  • no TFN tax on superannuation contributions.

Certain lump sum payments from superannuation also attract Medicare levy and hence may be affected by this change:

  • lump sum super benefits for people under preservation age (i.e. disability benefits)
  • lump sum super benefits for people between preservation age and age 60 in excess of the low rate cap
  • lump sum death benefits paid to non-dependants directly from the super fund.

Social Security

Pensioner Concession Card Reinstatement (effective 1 July 2017)

Pensioners who lost entitlement to their Pensioner Concession Card due to the assets test changes on 1 January 2017 will have their card reinstated.

The Pensioner Concession Card will be reinstated to about 92,300 former pension recipients and will provide access to discounts and concessions offered by states, territories and private providers.

The card will be automatically reissued over time with an ongoing income and assets test exemption.

Many individuals were cut off Age Pension benefits on the 1 January 2017 due to the harsher asset test limits introduced at that time. While these people were issued with a Health Care Card and the Commonwealth Seniors Health Care Card, they lost access to a range of discounts and benefits when compared to the Pensioner Concession Card. For example many local councils moved to immediately cease the discount on Rates, once clients were cut off the Pensioner Concession Card. Reissuing the Card, will mean that these individuals will be able to regain access to important discounts, including their Rates.

Clients who have their Pensioner Concession Card reinstated will gain access to a wider range of concessions such as subsidised hearing services. They will also retain the Commonwealth Seniors Health Card which will ensure they continue to receive the Energy Supplement.

Increasing Pension Residence Requirements (effective 1 July 2018)

Residence requirements for Age Pension and Disability Support Pension are increasing.

Currently, to qualify for a pension, a client must have at least 10 years residence in Australia with at least five years of those years continuous residence.

Under the changes, a person will be required to have at least 15 years residence in Australia unless they have either:

  • 10 years continuous Australian residence, with five years during their working life (16 years of age to Age Pension age), or
  • 10 years continuous residence and not have been in receipt of an activity tested income support payment for cumulative periods greater than five years.

Existing exemptions to residency requirements will be maintained for Humanitarian entrants and for those whose inability to work happened while they were an Australian resident.

This measure may impact those with less than 15 years residence in Australia that do not also have five years of residence between age 16 and Age Pension age . The Government has stated this measure will impact around 2,390 people on average per year.

Working Age Payment (effective 20 March 2020)

A new Jobseeker Payment will replace seven current working age payments from 20 March 2020.

The Jobseeker Payment will replace Newstart Allowance, Sickness Allowance, Wife Pension, Partner Allowance, Bereavement Allowance, Widow B Pension and Widow Allowance.

Payments such as Wife Pension, Partner Allowance and Widow B Pension were already closed to new entrants. When these payments cease most recipients will transfer to Age Pension.

Widow Allowance, which is a payment available to women born before 1 July 1955 will be closed to new entrants from 1 January 2018. New entrants that would have been eligible for Widow Allowance from 1 January 2018 may be entitled to receive Newstart Allowance.

Bereavement Allowance will be closed to new recipients from 20 March 2020 however newly bereaved people will receive a triple payment of Jobseeker Payment in the first fortnight.

New Mutual Obligations (effective 20 September 2018)

Job seekers and parents who receive working age income support will have increased activity test requirements from 20 September 2018.

The new activity test requirements are:

  • Age 30 to 49: 50 hours per fortnight (increased from 30 hours per fortnight).
  • Age 55 to 59: current 30 hours per fortnight activity test requirement will no longer be able to be met through volunteer work alone. Instead, recipients will only be able to meet half (15 hours) of the annual activity requirement of 30 hours per fortnight through volunteering.
  • Age 60 to Age Pension Age: currently there is a 30 hours per fortnight activity test requirement. From 20 September 2018, the requirement will be 10 hours per fortnight which can be met with volunteering.

Currently many Newstart Allowance recipients age 55 to 59 meet the activity test requirement through voluntary work. The new activity test requirements will require these clients to undertake activity test (looking for work) activities for at least 15 hours per week.

Liquid Assets Waiting Period Increased (effective 20 September 2018)

The maximum length of the Liquid Assets Waiting Period will increase from 13 weeks to 26 weeks.

Single clients (without dependants) with liquid assets exceeding $18,000 or couples with liquid assets exceeding $36,000 will serve the maximum waiting period of 26 weeks.

While the maximum duration of the Liquid Assets Waiting Period has doubled from 13 to 26 weeks, the calculation method has remained largely unchanged under this measure.

For example, the current lower threshold of $5,499 for singles (without dependants) and $10,999 for couples remains unchanged. Also the divisor of $500 for singles (without dependants) and $1,000 for couples remains unchanged.

Energy Assistance Payment (effective 20 June 2017)

A one-off Energy Assistance Payment of $75 for single recipients and $125 per couple will be paid to those eligible for qualifying payments on 20 June 2017.

Qualifying payments include the Age Pension, Disability Support Pension, Parenting Payment Single, the Veterans’ Service Pension and the Veterans’ Income Support Supplement, Veterans’ disability payments, War Widow(er)s Pension, and permanent impairment payments under the Military Rehabilitation and Compensation Act 2004 (including dependent partners) and the Safety, Rehabilitation and Compensation Act 1988.

Family Tax Benefit (effective 1 July 2017)

As previously announced, Family Tax Benefit (FTB) rates will not be indexed for two years from 1 July 2017. This applies to the standard, base rate and approved care organisation rate of FTB Part A and the maximum rate of FTB Part B.

Child Care Subsidy (effective 1 July 2018)

A new upper income threshold will apply to child care subsidy.

From 1 July 2018, families with income above $350,000 per annum will not be eligible for child care subsidy.

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