Superannuation Changes in the 2015/2016 Federal Budget
The Federal Budget contains no detrimental changes to superannuation, as expected – in fact, there were only a few minor changes which are listed below.
Federal Budget Proposals
Social Security Income Test
- The social security income test for individuals in receipt of a defined benefit pension from superannuation will be amended with effect from 1 January 2016 to exclude a maximum of 10% of actual pension payments drawn from assessment.
Social security assets test
- From 1 January 2017, the social security assets free area thresholds will be increased from $202,000 to $250,000 for single home owners and from $286,500 to $375,000 for members of a couple. The thresholds for pensioners who do not own their own home will be $200,000 higher than those above (ie, $450,000 (single) and $575,000 (couple)).
- In addition, the ‘taper rate’ for assets in excess of the thresholds will be increased from $1.50 for each $1,000 of assets over the relevant threshold to $3 (ie, this is the rate that applied prior to September 2007).
- In order to qualify for a part pension, the maximum value of assets that can be held (excluding the home) will be reduced:
- From up to $1.15m (couples) to $823,000; and
- From up to $775,000 (singles) to $547,000
where both the lower and higher threshold will be increased by $200,000 for pensioners who do not own their own home.
- In effect, the full pension will be payable to more people (because more will fall within these limits) but it will also phase out more quickly (meaning fewer people will receive a part pension).
2014/15 Budget proposals that won’t proceed
- Indexation of pension payments by sole reference to the Consumer Price Index from 20 September 2017.
- Resetting the social security income test deeming thresholds from 20 September 2017:
- pausing indexation of the:
- deeming thresholds for all income support payments (as outlined immediately above); and
- income test free areas for all pensioners (other than Parenting Payment Single) for 3 years from 1 July 2017.
Value of penalty units to increase
- And finally, with effect from 31 July 2015, the Government will increase the value of all Commonwealth penalty units from $170 to $180 in order to broadly adjust for inflation since the latest increase in December 2012. In future years, the value of penalty units will be indexed to inflation every 3 years commencing on 1 July 2018.
Terminal medical condition
The SIS Regulations will be amended with effect from 1 July 2015 to enable individuals who suffer from a terminal illness or injury to access their superannuation if they are likely to die from that illness or injury within 24 months (currently 12 months). Presumably the Income Tax Regulations will also be amended along similar lines to ensure that lump sums drawn within the 24 month period can be accessed ‘tax free’.
Unlike the “permanent incapacity” condition of release, terminally ill clients can access their super whilst still working and even if they are expected to continue working for some time throughout their illness.
Pensions don’t get any special tax treatment. The taxable component is taxed as normal assessable income. The 15% tax offset that we normally associate with pension payments doesn’t apply unless the client happens to be over preservation age or the benefit meets the “disability superannuation benefit” criteria. Importantly though, pensions can still be started once the terminal medical condition rule is met regardless of the client’s age, work status or future work intentions. The fund’s investment income is treated as exempt current pension income (ie, tax free) in the usual way for pensions.
If pension payments don’t receive special tax treatment, why would a terminally ill client ever start one?
The ability to start a pension can be extremely useful even with no special tax rules. For example, if paying out the benefit as a lump sum will result in large capital gains, the client might start a pension first before realising the assets and then ensure that the actual payments are classified as lump sums.
Given the significant difference in tax treatment, ie:
- pension payments are taxed (albeit a 15% tax offset will apply if the disability superannuation benefit criteria are met); while
- lump sums are not
it would actually make sense to ensure that ALL payments from any pension established for a terminally ill client were treated as lump sums (and therefore tax free).
What happens if the client dies during the certificate period?
In most cases only the spouse and minor children can start a pension with any balance remaining in super, not adult children. Where a pension is allowable, it receives the usual 15% tax offset that applies to pensions payable as a result of someone else’s death regardless of the spouse’s age, work status etc. If either the spouse or the deceased is over 60, pension payments are tax free.
The spouse and other “dependants” (for tax purposes) can receive a tax free lump sum while others (most notably independent adult children) must pay 15% / 30% tax (+ levies if applicable) on the taxable component.
What happens if the client doesn’t die as expected within the 12 (soon to be 24) months?
There’s no requirement to pay back any benefits, pay additional tax etc. Any remaining account balance is not reclassified as “preserved” and any pensions which have already started can continue. What does change, however, is the tax treatment of any lump sums drawn from that balance. Any lump sums taken after the certificates have expired are not tax free – they are subject to the usual benefit payment rules. If the client is under their preservation age, for example, the taxable component is taxed at 20% (+ levies).
Can a terminally ill client continue to contribute to super?
Yes. The ability to take money out doesn’t prevent the client from putting more money in. The usual conditions such as contribution limits apply.
So what are the traps?
As soon as the terminal medical condition criteria are met, the money can’t be ‘rolled over’ from one fund to another. Movements between funds will be classified as a non-concessional contribution by the receiving fund with all the attendant excess contribution risks.
Why might a terminally ill client be concerned about rolling over? Because:
- While they might intend to draw some of their super as a lump sum during their illness, they may anticipate leaving a significant part of their balance intact for their spouse to draw as a pension after their death.
- A pension which starts during the certificate period can’t be unwound / taken back to accumulation phase (because this requires an internal rollover) during that period.
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